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Herman Miller, Inc. (NASDAQ:MLHR)
Q4 2018 Earnings Conference Call
July 3, 2018, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Welcome to the Herman Miller, Inc. fourth third quarter fiscal year 2018 earnings results conference call. This call is being recorded. This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the company's reports on Forms 10-K and 10-Q and other reports filed with the Securities and Exchange Commission.

Today's presentation will be hosted by Mr. Brian Walker, President and CEO; Mr. Jeff Stutz, Executive Vice President and CFO; and Mr. Kevin Veltman, Vice President, Investor Relations and Treasurer. Mr. Walker will open the call with brief remarks followed by a more detailed presentation of the financials by Mr. Stutz and Mr. Veltman. We will then open the call to your questions. We will limit today's call to 60 minutes and ask that callers limit their questions to allow time for all to participate. At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead.

Brian C. Walker -- President and Chief Executive Officer

Good morning and thank you for joining us. I'll begin the call today with a brief overview of our results for the quarter and full year. After that, I'll provide a review of our five key priorities for the business. I'll close with an overview of the current economic backdrop, before I turn the call over to Jeff and Kevin to provide a more detailed picture of our financial results.

Sales of $618 million for the quarter were a record and represents growth of 7% over the same period last year. The segment level, our international and consumer businesses, also achieved their highest ever sales for a quarterly period in both segments, along with the specialty group, posted double-digit growth over last year.

Order growth at the consolidated level of 9% was broad-based across all of our business segments. Our international business delivered another period of impressive organic growth, posting a year-over-year increase of 20%. This was complemented by 12% order growth in both our consumer and specialty segments. Perhaps most encouraging was the improved momentum we saw this quarter in the North America contract business, which delivered organic order growth of 4%. We reported earnings per share on a GAAP basis of $0.53 for the quarter. On adjusted basis, which includes certain restructuring and other special charges for the quarter, we reported earnings per share of $0.66, an amount well ahead of our expectations coming into the quarter, driven by the above forecast top line.

For the full fiscal year, net sales of $2.38 billion were a record and reflected growth across each of our business segments. The organization did a great job of managing operating expenses over the full year, which helped to mitigate gross margin pressures. We also benefited from lower U.S. statutory tax rates that went into effect in the third quarter. We reported full-year earnings per share on a GAAP basis of $2.12, compared to $2.05 last year. Adjusted earnings per share of $2.30 increased 6% over Fiscal 2017.

Reflecting the strength of our current financial position, yesterday we announced a 10% increase in our quarterly shareholder dividend. This marks the seventh dividend increase in the past six years. It's a move that reflects the confidence of our management team and Board of Directors and our growth strategy, multichannel distribution model, and leading design and innovation capability.

We've discussed with you before the five strategic priorities that have guided our business over the past two years. We've made meaningful progress in each of these areas this year as a result of the tremendous effort from our employee owners around the world. As a reminder, these five priories are: realizing our vision for the living office; delivering on our new product innovation agenda; leveraging our deal ecosystem; scaling our consumer business; and driving profit optimization. Let me spend a few minutes highlighting our progress in each of these areas.

Our living office framework for helping our customers design compelling, high-performing workspaces is a critical foundation for setting our innovation agenda and leveraging our dealer ecosystem. In the past year, we added significantly to our research into workplace environments with a number of studies demonstrating the meaningful impact that applying living office concepts can have for our concepts. We also launched a new live OS technology platform that provides real-time data insights to help individuals and organizations improve workspace performance and achieve wellness goals.

Regarding our drive for innovation, 2018 was an active year for new product launches. New products introduced over the past four years accounted for 29% of total sales for the year, well above our annual target of 20%. This quarter, we announced the upcoming launch of Cosm, a great new addition to our leading performance seating lineup that will be available for order by the end of July. We were pleased to be recognized at the recent NeoCon industry show with a Best of NeoCon Gold award in the ergonomic seating category for Cosm. This is just one launch from a robust pipeline of new contract furnishing launches, 46 in total for last year. Plus a number of upcoming launches that we shared at NeoCon. All together, our new products have the Herman Miller and dealer sales teams energized and well positioned for the opportunities ahead.

I'll begin the discussion of leveraging our dealer ecosystem with a recent announcement of our planned investment in Maars Living Walls, a global leader in interior wall solutions focused on design, acoustics, and fireproofing. Now more than ever, customers are demanding flexible environments in modular solutions for their open spaces. Maars products will be a key part of our offering in the fast-growing enclosures category. In addition to our 48% equity stake in Maars, members of the Maars management team and select Herman Miller dealers have partnered in this investment.

In addition to Maars, we've also expanded our enclosures offering with two new product lines and an exciting alliance partnerships. Prospects is a recently launched line of freestanding furnishings that help create a sense of privacy in thoughtful space delineation. The next product, called Overlay, is a soon-to-be-launched system of sub-architectural, movable wall and ceiling elements which can be used to create flexible, free-standing rooms.

In addition to these new products, we recently entered into an alliance partnership with an innovative company called Framery. Based in Finland, Framery creates beautifully designed, high-performance, soundproof enclosures, offering customers elegant and cost-effective solutions for acoustic privacy in open-plan office environments.

Beyond these initiatives, Fiscal 2018 was a year of accomplishment in several other areas of our dealer ecosystem effort. The Herman Miller Elements team is helping our dealers fully understand the breadth of our offering across the Herman Miller group of brands in the fast-growing, ancillary space. In addition to the Cosm chair launch that I mentioned earlier, we also expanded our range of performance seating options with the recently launched Verus task chair, an upcoming line of chairs that provides two distinct aesthetic options that have comfort, quality, and accessible price points in common.

To further support our dealers, we've made significant progress this year enhancing our digital tools to make it as easy as possible for dealers to order, specify, and visualize the entire product offering of the Herman Miller group of brands. We'll continue to enhance these tools with new search and visualization features planned for the year ahead.

Finally, our recent investment to acquire a 33% interest in Hay supports our priority to scale our consumer business and is another building block in our dealer ecosystem. Hay is a Denmark-based leader in ancillary furnishings in Europe and Asia, and active in both the contract and residential furnishings markets. This transaction expands our portfolio of leading global brands and allows us to scale the consumer business by accessing a growing customer base that prioritizes both industry leading design and value and helps us in our efforts to target the segment we call "HENRY," high-earners, not rich yet, with Hay's portfolio of authentic, modern designs. We also acquired the rights to the Hay brand in North America.

In the first year, we plan to launch an online store, open four Hay retail locations in North America, and make an assortment of Hay products available in Design Within Reach studios. Hay products will also be integrated across our contract furnishings dealer network. Given only 44% of Hay's revenues come from North America today, we see great opportunity to bring this fast-growing design brand through our multichannel distribution.

Jeff will impact the financial elements of the Maars of Hay transactions further in a few minutes. In addition to this important investment for the future, Fiscal 2018 was a year of great progress for our consumer business. Revenues in this business grew by 12% over last year, as we grew comparable brand sales each quarter and expanded on selling square footage by 40,000 square feet. We also continue to expand our mix of exclusive products designed by modern design leaders exclusively for Herman Miller and Design Within Reach.

Finally, we made great progress this year on our corporatewide profit optimization goal, our fifth strategic priority. Given inflationary pressures over the past year, this work is proving to be critical and we have a number of actions we are focused on. While I'll share more specific details in a moment, let me start with an overview of the impact of this initiative and how it is and will help us address inflationary pressures and drive improvements in operating margins.

Across the three phases of work that is in process, we are building line of sight toward achieving between $60 and $90 million of profit optimization. Today, we have realized approximately $30 million of those annualized benefits. Unfortunately, most of the benefits realized to this point have been offset by inflationary pressures and increased discounting. Therefore, as we discussed in the third quarter, we have increased the scope of our efforts in the North America business. Combined with pricing actions we implemented in Q3 and a planned increase in January 2019, we are confident we can both offset the emergent inflationary pressures and achieve the consolidated operating margin goal we established for Fiscal 2020.

The actions to achieve these benefits [inaudible] stage of development and implementation. So, we'll see the benefits begin to ramp into the results over the next six to eight quarters. To be clear, this will not be an even distribution, as the work we started this past quarter is significant When we first announced this priority 18 months ago, we established a target goal for gross annual cost savings of $25 to $35 million by Fiscal 2020.

For the initial phase of this work, our rationale for pursuing these initiatives was three-fold. First, to provide an offset to potential inflationary pressures facing our business. Second, free up operating headroom necessary to fund strategic growth investments, and third, improve operating leverage on our path to achieving our 10% operating margin goal at a consolidated level. Today, we have achieved approximately $23 million of the actions we originally identified. We believe $5 million is yet to be realized from our manufacturing consolidation efforts in Asia and the U.K. These actions are under way and we expect to have them completed by the end of this fiscal year.

In Aug of last year, we began work on a focused initiative within our consumer business, utilizing help from a third-party consulting firm. We have continued to refine this work and our estimates each quarter. We now believe the ultimate benefits will range between $15 and $20 million of profit improvement for our consumer segment. This past quarter, we estimate that this work enhanced profitability in this segment, excluding any fees paid to the consulting firm, by $2 million.

With year-over-year operating margin expansion of 450 basis points in Q4 to 8.4% of net sales, our fourth quarter consumer results highlight that this initiative is beginning to gain traction. Ultimately, we believe this initiative is a critical element in our drive to achieve sustained operating margin in this segment of 8 to 10%. With full-year operating margin of approximately 4% this year, we still have work to do, but the trend line for this is positive and our recent performance adds to our confidence that we are on track toward achieving this goal. The action plans for this work have been fully developed and are in varying stages of implementation, so the benefits will feather in over the next few quarters.

Finally, as we discussed during the Q3 investor call, in April we formally kicked off a third optimization project. This one focused on our North American contract business. We've engaged the same third-party consulting firm to help assist in this effort, which consists of distinct work strains focused on a range of aspects, including pricing strategy, supply chain, logistics, and reducing complexity. While still in the opportunity confirmation stage, we have growing confidence that we can drive significant improvement in the operating performance of this business and our working target is to achieve between $20 and $40 million of annual benefit. Of course, it will take some time before we begin to generate benefits from this initiative. Our best estimate is we will see some benefits in the fourth quarter of Fiscal 2019, with the majority to come in Fiscal 2020. Of course, we will be looking for quick wins and we'll keep you updated each quarter on our progress.

In summary, we are aggressively pursuing profit optimization to offset inflationary pressures and drive our profitability goals. Our best estimate at this point is additional inflationary cost pressures primarily related to steel will impact our annual results by $15 to $20 million when fully absorbed. Jeff will provide further perspective on the impact over the next two quarters when he discusses our Q1 outlook. In addition to these profit optimization actions, we plan to implement an additional price increase in January 2019. We explored accelerating the price increase to earlier in the fiscal year but concluded this would delay the implementation of the more structural actions contained in our profit optimization plans.

Having said that, we will be implementing tactical pricing actions that don't require list price change and recognition of the higher input costs, and we will continue to train our sales professionals and dealers in how to best position our ever-broadening range of price points and solutions to maximize our collective competitiveness and profitability.

Let me now provide some context on the current macroeconomic backdrop which remains generally positive and supportive of future growth. In the North American contract space, macroeconomic indicators including GDP growth, low unemployment, competence measures, service sector employment, and architectural billings continue to be supportive. The new U.S. federal tax regulations have the potential to be an industry tailwind to higher employment levels and increased investment spending. The ability to immediately deduct capital expenditures for furnishings over the next five years is a meaningful benefit to our customers as well.

On the consumer front in North America, supportive consumer sentiment, low unemployment, relatively low interest rates, and limited unsold home inventory make for a generally positive backdrop. In the L.A. regions, while stable overall, there are still pockets of political uncertainty and we continue watching the recent U.S. actions related to tariffs and the responses from other nations. As a result, we have proactively developed and continue to refine contingency plans.

Before I turn things over to Jeff, let me provide a brief update regard my upcoming retirement. Over the past few months, the Board has been working with an executive search firm to identify and evaluate potential external candidates. In addition, it has been working with a firm we use for internal leadership development to evaluate potential internal candidates. At this point, we are still anticipating a final decision around the first part of August. Whoever the new CEO is, he or she will step into a healthy and focused organization, with strong business momentum that is intent on leveraging our global, multichannel business platform for sustainable, profitable growth.

With that overview, I'll turn the call over to Jeff to provide more detail on the financial results for the quarter.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Thanks, Brian. Good morning, everyone. Before we take a closer look at our consolidated results for the quarter, let me take a few moments to provide some additional information on the Maars and Hay transactions. On June 6th, we announced our intent to acquire an ownership position in Maars Living Walls, a global designer and manufacturer of modular wall systems. The transaction, which we expect will close later this month, will give us a 48% equity interest in Maars for a cash investment of approximately $6 million. Revenue from Maars in the most recently completed fiscal year total approximately $65 million. We expect to reflect our share of Maars operating results within equity earnings from nonconsolidated affiliates going forward.

On a GAAP basis, this transaction is expected to be approximately $0.01 dilutive to earnings per share in Fiscal 2019. On an adjusted basis, which excludes the estimated impact of certain purchase accounting adjustments, the transaction is expected to be approximately break-even to earnings per share in Fiscal 2019. As we look forward, we estimate this Maars investment will be $0.03 to $0.06 accretive to earnings per share in Year 5, and that's based on our initial ownership percentage.

Closely on the heels of the Maars announcement on June 7th, we acquired a 33% equity interest in Hay through a cash investment of approximately $66 million. Revenue for Hay in the most recently completed fiscal year total approximately $155 million, and the business has grown at a rate of 14% per year over the past four years. Hay's existing business reflects a revenue mix of approximately 60% consumer, 40% contract. We expect to reflect our share of Hay operating results within equity earnings from nonconsolidated affiliates going forward.

On a GAAP basis, this equity investment is expected to be approximately $0.02 to $0.04 accretive to earnings per share in Fiscal 2019. On an adjusted basis, excluding the estimated impact of purchase accounting adjustments, the transaction is expected to be accretive by $0.04 to $0.06 per share in Fiscal 2019.

In addition to the equity investment in Hay, we also acquired the North American licensing rights for our cash investment of approximately $5 million. This grants us access to the full Hay design catalog for our consumer and contract channels in North America. The earnings-per-share contribution from the North American licensing rights is expected to be break-even in the first year, as we focus on building out the Hay footprint in North America. Looking ahead, we expect that the Hay North America business can grow to $75 to $100 million of revenue, at 12 to 14% EBITDA margins. This would be accretive to earnings per share in Year 5 by between $0.11 and $0.14 per share, and in total, the combined equity investment and North America licensing rights are expected to be accretive to earnings per share by between $0.24 and $0.29 in Year 5.

We are energized by the addition of Maars and Hay to the Herman Miller group of brands and the strategic fit they provide as we scale our consumer business and leverage our dealer ecosystem. With that, now moving on to our consolidated results for the quarter.

Consolidated net sales in the fourth quarter of $618 million were 7% above the same quarter last year. Orders in the period of $621 million represented year-over-year growth for approximately 9%. Within the North America segment, sales were $309 million in the fourth quarter, representing a decrease of 4% from the same quarter a year ago on a reported basis and a 3% decline on an organic basis. New orders in this segment were $324 million for the quarter, reflecting an increase of about 4%. The order growth in North America was broad-based across small, medium, and large project sizes, with the strongest sectors being energy, computer equipment, and financial services. This is partially offset by lower demand levels in wholesale, retail, and communications.

Our ELA segment reported sales of $125 million in the fourth quarter, an increase of 35% compared to last year on a GAAP basis, and up 30% organically. New orders totaled $111 million, which is 23% higher than last year on a reported basis and 20% up on an organic basis. The strong year-over-year order growth was broad-based across all regions, with notable strength in the U.K., Continental Europe, Mexico, Australia, India, and the Middle East.

Sales in the fourth quarter within our specialty segment were $83 million, an increase of 13% from the same quarter last year. New orders for the quarter of $85 million were 12% higher than the year-ago period. Encouragingly, the increase in orders this quarter was driven by higher demand levels in all four component businesses comprising the specialty segment. The consumer business reported sales in the quarter of $100 million, an increase of 11% to last year, driven by strong growth across our studio, catalog, outlet, e-commerce, and contract channels. New orders in the quarter of $102 million were 12% above the same quarter a year ago. Design Within Reach comparable brand sales for the quarter were also 12% higher than last year.

As Brian mentioned, the consumer team has done an excellent job implementing its strategy around scaling the consumer business this year and its profit optimization work began gaining traction this quarter, as evidenced by operating margins of 8.4% for the quarter.

Related to the impact of foreign exchange rates on our top line, we continued to experience a tailwind from the weakening of the U.S. dollars. We estimate the translation impact from year-over-year changes in currency rates had a favorable impact on consolidated net sales of $7 million for the quarter. Consolidated gross margin in the fourth quarter was 36.9%, which is 140 basis points below the same quarter last year. Included in cost of sales for the quarter was special charges totaling approximately $1.5 million related to increased freight and distribution expenses directly associated with the consolidation of our manufacturing operations in China. Exclusive of these costs, adjusted gross margin was 37.2% for the quarter.

As discussed earlier, we continued to experience a competitive pricing environment and increased commodity costs in areas such as steel, packaging, and plastics. Brian provided an overview of the range of actions that we are pursuing to mitigate these pressures. We also experienced less production leverage in our North America manufacturing operations during the quarter when compared to last year.

Operating expenses for the quarter were $184 million, compared to $162 million in the same quarter a year ago. This amount includes approximately $6 million in special charges during the quarter, primarily associated with the planned CEO transition that we announced in February, transition costs related to the China facility consolidation, and consulting fees supporting our profit enhancement initiatives. Excluding these special charges, the increase of $16 million was driven primarily by higher variable selling costs and incentive compensation levels, as well as higher occupancy and staffing costs related to new DWR studios put in place this year.

Restructuring actions involving workforce reductions that were announced in the fourth quarter related to the consolidation of facilities in China doesn't the U.K. These costs, which total approximately $4 million, primarily related to recognition of moving costs, severance, and outplacement expenses.

On a GAAP basis, we reported operating earnings of $40 million this quarter, compared to operating earnings of $50 million in the same quarter a year ago. Excluding restructuring and other special charges, adjusted operating earnings this quarter were $52 million or 8.4% of sales. By comparison, we reported adjusted operating income of $59 million or 10.2% of sales in the fourth quarter of last year.

The effective tax rate in the fourth quarter was 18.3%. This rate included both ongoing and one-time impacts of the Tax Cuts and Jobs Act on our U.S. tax rate. Excluding a 150 basis points impact this quarter from adjusting the initial estimates recorded in the third quarter related to one-time elements of the new tax law, the effective tax rate was around 19.8%. This normalized rate reflects the impact of a lower ongoing U.S. tax rate, federal and state tax provision to return adjustments, a better-than-expected mix of income from low-tax jurisdictions, and benefits from R&D credit planning.

Finally, net earnings in the fourth quarter totaled $31 million or $0.53 per share on a diluted basis, compared to $33 million or $0.55 per share in the same quarter last year. Excluding the impact of restructuring and other special charges, adjusted diluted earnings per share this quarter totaled $0.66, compared to adjusted earnings of $0.64 in the fourth quarter of last year.

With that brief overview, I'll now turn the call over to Kevin to provide an update on our cash flow and balance sheet.

Kevin Veltman -- Vice President, Investor Relations and Treasurer

Thanks, Jeff. We ended the quarter with total cash and cash equivalents of $204 million, which reflected an increase of $11 million from last quarter. I would note that will use $77 million of this cash in the first quarter of Fiscal 2019 for the Hay and Maars equity investments that Brian and Jeff discussed earlier.

Cash flows from operations in the fourth quarter of $56 million compared to $80 million generated in the same quarter of last year. The amount was lower primarily driven by changes in working capital from higher accounts receivable and pre-paid expense levels compared to last year. For the full fiscal year, cash flows from operations were $167 million, compared to $202 million in the prior fiscal year.

Capital expenditures were $20 million in the quarter, and $71 million for the full-year. Looking ahead to Fiscal 2019, we anticipate capital expenditures of $90 million to $100 million for the full fiscal year. This includes an estimated $5 to $7 million related to the buildout of the Hay North America footprint next year. Cash dividends paid in the quarter were $11 million and $42 million for the full-year. The dividend increase that we announced yesterday increases our expected annual payout level to approximately $47 million. We also returned cash to shareholders through the repurchase of $16 million of shares during the quarter and $46 million for the full year.

We remain in compliance with all debt covenants and as of quarter end, our gross debt to EBITDA ratio was approximately 1:1. The available capacity on our bank credit facility stood at $167 million at the end of the quarter. Given our current cash balances, ongoing cash flows from operations, and our total borrowing capacity, we remain well positioned to meet the financing needs of the business moving forward.

With that, I'll turn the call back over to Jeff to cover our sales and earnings guidance for the first quarter of 2019.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

With respect to the forecast, we anticipate sales in the first quarter of Fiscal 2019 to range between $610 million and $630 million. Now, this forecast includes the impact of adopting the new accounting standard for revenue recognition. Upon adoption at the start of Fiscal 2019, we will begin recording certain dealer payments as expense within cost of goods sold that were previously classified as a reduction in net sales. This change will effectively increase our reported net sales going forward.

Now, it's important to note that while this classification change will have zero impact on reported gross profit dollars, the change in net sales will result in a roughly 60 basis point reduction in gross margin percentage at the consolidated level. This is an important point of emphasis for your modeling going forward, given the impact on year-over-year comparability of gross margin percentages. The data supplement included with last night's earnings release provides a comparative breakdown of the Fiscal 2018 amounts impacted by this change in accounting standards. This will assist you in adjusting last year's reported numbers to a comparable basis with the new method that will be applied going forward.

You should also note that we will include the impact of this change in determining organic sales and order calculations in future periods. With that in mind, our midpoint revenue forecast for the upcoming first quarter implies an organic increase of 6% compared to the same quarter last fiscal year.

We expect consolidated gross margin in the first quarter to range between 36.25% and 37.25%. Considering the impact of the accounting classification that I just described, the midpoint of this gross margin forecast is roughly in line with our performance in the first quarter of last fiscal year. This estimate reflects our latest view on commodities, the impact of our profit optimization work to help offset these pressures, and the seasonality that we see in the summer from the consumer business.

To provide more context on the magnitude of the inflationary pressures, we estimate that the first quarter of Fiscal 2019 will have sequential pressure of approximately $2 to $3 million. We estimate that the second quarter will have an additional $1 million impact of sequential pressure from our steel pricing from supplier, which lagged market pricing.

The near-term pricing actions and our profit optimization work that Brian laid out is helping mitigate these pressures. By the second half of the fiscal year, we expect to more than offset these pressures and potentially see additive benefits as we work toward our Fiscal 2020 target for consolidated operating margins at or above 10%.

Operating expenses in the fourth quarter are expected to range between $175 and $179 million. We anticipate earnings per share to be between $0.63 and $0.67 for the period. This assumes an effective tax rate in the quarter of 21% to 23%. Now with that, I'll turn the call back over to the operator and we'll take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * followed by the 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the # key. As a reminder, we do ask that if callers limit their questions to allow time for all to participate and to prevent any background noise, we also ask that you please place your line on mute once your question has been stated. Thank you.

Our first question will come from Matt McCall with Seaport Global. Your line is now open.

Matt McCall -- Seaport Global -- Analyst

Thank you. Good morning, everybody. Great quarter. Great reaction here. So, maybe I'll start with the profit enhancement initiatives. Appreciate the detail. I wasn't able to maybe understand it completely. Can you maybe look at it this way? What was the net impact of the profit enhancements? Because I think you said in addition to what you're doing to help profitability, you're seeing small inflation, you're investing, and obviously you're working toward that goal, but can you talk about the net impact in '18 and then what you expect from these initiatives net of those offsets in '19 and '20?

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Matt, this is Jeff. Let me start maybe take these in reverse order and look forward. I think Brian's opening comments laid out the expectation that based on everything we can see today, which is imperfect, as you know, but based on current steel pricing, the price we paid on average in the fourth quarter, and our expectation for other commodity input cost inflation, we expect somewhere between $15 to $20 million of annualized inflation impact going forward. Roughly speaking, somewhere around that order. Maybe toward the lower end of that range in Fiscal '19 because some of that will ramp in.

Now, we expect that by the time we get the remaining profit optimization efforts put in place, we'll be somewhere net, which by the way is $30 to $60 million was the range that we give of incremental benefit yet from the various initiatives we have in place, that gives you something on the order of $15 to $40 million of net benefit after the impact of inflation. That's just on an annualize basis, based on everything that we can see right now. Admittedly, that's a pretty wide range, but you can understand the most recent project optimization effort within North America has just kicked off, but we're gaining line of sight to the benefits there. That's a go-forward basis.

If you look at FY18 impacts, really we've, I think Brian said it in his opening comments, the $30 million of run-rate savings that we have implemented thus far or to date comes mainly from two areas. 18 months ago we announced this cost-reduction program. That goal was to achieve $25 to $35 million of gross annual savings. We estimates that we're at a run rate of about $23 million today. Then the second project related specifically to our consumer business, and we estimate that's at about an $8 million annualized run rate today. So, we think we've captured about $30 million to date.

Unfortunately, all of that to date has really gone toward offsetting the impact of discounting pressure and commodity. So, we haven't been able to net any net benefit to the bottom line as yet, which is why we're continuing to consider this a corporate priority. Let me pause.

Brian C. Walker -- President and Chief Executive Officer

Hey, Jeff. Just a point of clarity, Matt. We didn't get a full $30 million in Fiscal '18 either. That was a run rate in the fourth quarter. Just to be clear. I don't know Jeff if you know that number off the top of your head. I'm going to guess it's more like $15 to $20 million in the year.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

It was incremental.

Brian C. Walker -- President and Chief Executive Officer

You took the total year. But you know what's happened with commodities and pricing. You can see it if you just look at the operating margin line. Despite the fact that we went out and did that work, operating margins haven't moved. That would tell you that's where you're seeing the offset. Does that make sense?

Matt McCall -- Seaport Global -- Analyst

Okay. Yeah, it does. So the $15 to $20 million, that ends up being what was offset by the inflation that you saw this year, and the discounting that you saw this year?

Brian C. Walker -- President and Chief Executive Officer

Yeah, hold on. I know this can get confusing. So, let's just try to make this really simple. The total program of the three elements that we talked about, what we originally kicked off, what we did with the work around the consumer business and what we expect from this new tranche work, we think the total of all of those things is $60 to $90 million. When fully implemented. Is that clear?

Matt McCall -- Seaport Global -- Analyst

It is, yes.

Brian C. Walker -- President and Chief Executive Officer

Okay. So, if you look at the first $30 million of that, what we said is hey, look, that's gone, largely already to offset inflation and pricing on an annualized run rate. So we kind of go, hey, we have $30 to $60 million from this point forward to go get that could be net positive. However, as Jeff mentioned, we're still seeing inflation run up, which we think is another $15 to $20 million. So if you look at it, if you get out a year-ish, what you out to be able to do is say hey, I started with $60 to $90 million, $30 million of that $60 to $90 million, that's been eaten up by inflation already, right? That gives us $30 to $60 million. We think we have $15 to $20 million of additional inflationary pressure, so when you get all done, what you're going to see drop through, it's $15 to $40 million net benefit. Does that make sense?

Matt McCall -- Seaport Global -- Analyst

It does. So, is the timing of that 12 months or does it stretch out into next year? I know you said at one point you're going to see some benefit in Q4, but I wasn't sure, I don't remember what that was about.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Yeah, Matt, let me try to clarify that. Our guide for Q1 obviously contemplates this. But we expect that inflationary pressure, the $15 to $20 million of incremental impact will layer itself in such that we start to feel $2 to $3 million of it in Q1, somewhere between $3 and $4 million in the second quarter, and then by the time we get to the second half, we should be at kind of a run rate of that $15 to $20 million incremental impact.

Of the three optimization projects that we have in place though, we think even beginning in Q1, we can largely offset the initial impact of this inflation, so we think we've got that covered. But it won't be until the second half of Fiscal 2019 that we start to really feel the positive, incremental positive impact of these programs that we think will more than offset the inflationary pressures. By the time we get to the end of FY19, and this is where it gets cloudy because it's early days on the latest program, but we have growing confidence that we will be able to drive a net positive benefit based on the inflationary exposure that we see today.

Matt McCall -- Seaport Global -- Analyst

Excellent, OK. All right.

Brian C. Walker -- President and Chief Executive Officer

To be clear, that does have an assumption in the way Jeff just laid that out, that we'll continue to gain some benefit in the price increase we announced in February, and of course, we're going to do other pricing in January, Matt. So, there is a lot of moving parts to all this. I think the net thing you guys should way away with is we feel really good that we've been on this journey on profit optimization for 12 to 18 months and we're a bit ahead of the curve.

Unfortunately, the first round of things we did have not turned into as much benefit as we had hoped. On the other hand, we feel really good about the work we're seeing in the consumer business and you can see it in the fourth quarter. And the work that we've begun in April is really gaining good traction enough for us to feel confident that we don't need to pull forward a price increase today as much as continue down the path on these things and let the additional price increase fall in what I would describe a more normalized period.

To be frank, some of our smaller business units, such as Geiger, will do some price increases sooner than January, but in the big scheme, the largest business, that won't be until January. So, what we're feeling is you never know where this cost inflation is going to end with all the discussions going on. We feel like we've got the plans in place to handle it and enable us to still achieve the goals that we set out for you folks 12 months ago, 18 months ago. We don't think we need to back off from our profit goals. We feel good that the impact that's happening both in the consumer business is real and we think we have some good work in front of us in the North America business.

I think the way this will play out is much like it has the consumer business, where we announced it, we said we're working on this, we'll come back and give you numbers. We then refined it a quarter later in terms of timing. I think that's exactly how this will be. When we get to the end of the first quarter, I think we're going to have a much better understand of the way the timing is. I think the gross number we're feeling good about, as we get to the end of the first quarter, we'll have a better plan for implementation. That will help us know how that's going to feather into the results.

Matt McCall -- Seaport Global -- Analyst

Okay, very helpful. I want to ask about the consumer segment. You get an 8.4% margin. It sounds like there was some benefit from some of these initiatives. If I heard you correctly, I think you said that the targeted margin there was 8 to 10%, and I'm working off my memory here, but I thought we had talked about a 10% number in the past. Has something shifted or am I remembering incorrectly?

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

No, Matt. The 10% or greater goal right now is for the consolidated group. We've been pretty consistent with an 8 to 10% target for the consumer segment. Partly because, again, we kicked off this profit optimization work within the consumer segment about a year ago August. As we were in the early -- kind of like we are right now with the North American project, because we were in the early phases of that -- we had growing confidence, but there's enough uncertainty that we were wanting to make sure we give a range.

Obviously, we achieved that level of profitability in the fourth quarter. That target is really intended to be a sustainable level of profitability in the business. Albeit, there's always going to be quarters where you have seasonality. So, we achieved it one quarter here. We're not done. We've got more work to do. By 8 to 10% we still say is a reasonable range and we're hoping to hit the upper end of that, obviously.

Brian C. Walker -- President and Chief Executive Officer

Matt, the other thing you may remember on the consumer business, is we talked about getting to double-digit EBITDA margin. If we get to 8 to 10% operating, we will get to that kind of 10% EBITDA margin.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

More like 11 to 13%.

Brian C. Walker -- President and Chief Executive Officer

The issue is, you've got a fair amount of D&A in that business from the acquisition. I think that may be where some of your confusion comes from. I'm just echoing Jeff's comments that we have, based on what we saw in the fourth quarter, growing confidence that kind of level of an annual rate is doable. We have more work. The plans are in place. They just have to get through their implementation phase. We have seen a lot of improvement in the maturity of stores. Meaning before, we talked about a lot of drag from immature stores. I would say we're feeling way more confident about that than we were a year ago. We've seen virtually all of our stores, maybe bar one, getting to the point of we're seeing four-wall EBITDA profitability.

We're feeling good. You will see the operating profit in that segment likely be lower in the first quarter than the fourth. That is the typical seasonality because that is a lower quarter for sales of Herman Miller products because there isn't a Herman Miller sale in that quarter. It's a little bit less in promotional activity. So, if you remember, the big quarters in that business tend to be Q2 and Q4. Just keep that in mind as you think about it.

Matt McCall -- Seaport Global -- Analyst

Okay. I apologize. I must make one more. The ELA segment, very strong. I know you talked about some of the macro. I'm just curious about more detail as to what's driving that strength and what the growth rate that you're assuming as we move out to Q1 and then beyond looks like? The strength was very surprising to me. I'm just curious as to what's driving it.

Brian C. Walker -- President and Chief Executive Officer

First, and it there's nothing we can do here but congratulate Andy Lock and his team for a really great quarter and year. They really did a great job. I would say to you, Matt, certainly it's been stronger than we would have even forecasted ourselves. I think there are three drivers. (A) I think we're in the right markets. We're in markets that have stronger secular growth patterns. Whether that's Asia, Latin America, even parts of Europe that we're in that have been good. It's been broad based. There's no one region, although clearly Latin America probably led the way for the quarter, if not the year.

But it's been pretty broad and, in fact, not from an orders perspective as much as on the revenue side, we had a little bit of negative impact this year, this quarter in Asia because of the plant relocation. So, No. 1, we're in the right kind of markets. No. 2, Andy and his team have done a terrific job of making sure we have the right people and the right products and the right distribution partners to win in those markets. Then I'd say No. 3, I think we did a good job over about a 10-year horizon of putting operational places close enough to the customer that we can meet the requirements of the customers for service and delivery.

I think it's the combination of those three things. I don't think it's any one thing. I do think it's a good mix of global products and locally designed products that are tailored to that market that have helped. So, I think you've got a good economy in those places, you've got a good setup for where we're at, and then you have good folks. I would say there's more work from a what-do-we-see-going-forward, certainly we think the work that we have under way in China to consolidate manufacturing, as well as in the U.K., is going to continue to give us some upside in that business from a profitability standpoint.

I would also, having just gotten back from China a few weeks ago, would say it's going to give us a great position in Asia and in China for servicing customers when we get that new factory fully implemented at the end of this year. There's no way you would forecast growth rates for continuing at the rate we have this past quarter, but I would say right now, while we are nervous about all of the political things going on around the globe and tariffs, and the elections last night in Mexico. All those things certainly make you cautious, if you will, about where this is going to go. On the other hand, I would also say we have no signs that the business is backing up at all in the face of those things.

Again, will we expect those kind of growth rates? Probably not. On the other hand, I'd also say the business continues to look strong today.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Matt, this is Jeff. I might just add a little more color. Our Q1 guide for revenue implies, we're still implying a double-digit percentage growth for the ELA segments. But as you get into Q2, I think we're up against tougher comps. I think we did 16% growth in the year-ago quarter for Q2 and then as you get into Q3 and Q4, 20%+ growth rate. So certainly the comps will get much tougher. To Brian's point, really probably too much to expect to continue at those percentage growth levels. But structurally, that business seems very well positioned to move forward with some good momentum.

Matt McCall -- Seaport Global -- Analyst

Okay. Thank you all.

Operator

Thank you. Our next question comes from Budd Bugatch with Raymond James. Your line is open.

Katherine West -- Raymond James -- Analyst

Hi, this is Katherine West on the line for Budd. I just wanted to talk about the consumer segment more. Obviously, a lot of improvement there. Can you talk about what exactly gained traction to drive profitability in the segment and where you feel you have room to run?

Brian C. Walker -- President and Chief Executive Officer

Well, first of all, the work that we did around profit optimization in that business covered a lot of different things. Pricing -- the team's done a really good job on the pricing side of getting some of those things put in place. That is looking at pricing across the assortment. I think they've done a nice job of getting those things in place. It's been a fair amount of work on the supply chain. We've started to see some of those benefits, although those have room to run around them.

Certainly, by looking at some of our promotional activities, frequency of promotions, where they play out is another area. There are two or three, four work strains that the team is working on. If you look at Q4, again we would estimate that we were $2 million of benefit from that work. That's about an $8 million run rate. We think in the end that work is going to be $15 to $20 million on an annual basis. So, we have a fair amount of runway on that. I'd also say the profitability is not coming just from that work. It's good top line growth, which we continue to see momentum on; stores maturing, which we still have work to do there; and growth in e-commerce and some of those areas.

The other thing that will start to help us more longer term, rather than the short run, the acquisition of Hay will give us new price points. It should broaden the market we can get to at attractive price points and margins for us, as well as the ability to get further leverage out of the investments we've made in things like e-commerce infrastructure and some of those things that will play strongly for us in the long-run.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Katherine, this is Jeff. Two other things come to mind that I think are worth noting. You'll recall from some of our past commentary, one of the profit or value drivers that we saw in the acquisition of DWR was our long-term objective of shifting the mix of products from that business to what we call a higher content of exclusive designs. Included in that is Herman Miller-branded product. In total, we've actually continued to move the needle there and the overall mix of that business has shifted closer to our overall goal. We talked about moving from around 60% exclusive product mix to 70%. So, we're moving the needle in the right direction on that front.

We often don't talk about leverage in this business. But you'll appreciate that over the course of the last 12 to 18 months, the team has put in place some infrastructure to support growth in the contract channel within the consumer segment and some of the other infrastructure investments around website and so forth. Now, we're starting to see some version of leverage against those fixed investments as well. So, a benefit from that.

Katherine West -- Raymond James -- Analyst

Just a follow-up question. Are you expecting to open up any more studios throughout the year or what's your plan there?

Brian C. Walker -- President and Chief Executive Officer

We are. We've ended the fiscal year at 32. If our plans hold throughout the course of FY19, we should end the year somewhere closer to 37 stores in total. Two of which will be in place at the end of Q1.

Kevin Veltman -- Vice President, Investor Relations and Treasurer

Katherine, this is Kevin. That would be about 50,000 of incremental selling square footage for next year.

Katherine West -- Raymond James -- Analyst

Okay. A follow-up question while changing gears, so you mentioned being able to change pricing without changing the list price. Does that just mean less discounting intending to combat some of the cost inflation?

Brian C. Walker -- President and Chief Executive Officer

Katherine, this is Brian. For sure, much of the business, as you know, is driven by projects. So, you can adjust sort of what I would call your situational or tactical pricing as you go along. That's one lever. The second lever that we can do is we have been on a very deliberate effort around building a good, better, best portfolio of product. We can do a better job of managing how the offer gets taken to both our dealers and our customers to make sure when a customer needs a value-priced solution we can actually work them down the value curve of the product without just giving up discounting. There are a number of levers like that which we believe we can pull in the interim. They don't have quite the same impact as a price increase or the broad base, but we think that is just part of the things we need to do as we manage our way through that process.

Katherine West -- Raymond James -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is open.

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning, guys. This is Steven Ramsey on for Kathryn. Looking at the specialty segment, nice return to sales growth there, the second straight quarter of growth, which is good to see. What about margins in that segment based on the growth and how do you look at this in 2019? Are the consultants helping with this segment at all?

Brian C. Walker -- President and Chief Executive Officer

Steven, it's Brian. We do not have the consultants focused on the specialty segment. I think if you look underneath the specialty segment, you really have four components to it. You have Maharam, Geiger, The Collection, and Nemschoff. Three of those four components, the margins are, in our view, in pretty good shape. Maharam is above the corporate average. Geiger is slightly below the corporate average, but very healthy. The Collection is at or above the corporate average. The place that we have work to do, to be frank, in that business from a margin perspective, is in Nemschoff. The margins are significantly lower there. I think that is a project that to get that business where it needs to be is going to take us at least another 12 months.

Steve Gane, who runs the specialty group, who was responsible for the turnaround of Geiger and the creation of The Collection business is on task with this. That's why we moved Nemschoff, so that we could leverage the great resources, including people, that he had developed as part of the Geiger turnaround. We're quite confident that Steve has done a really good job of (a) picking the right people. We have an entire new team at Nemschoff; (b) he's done a job with the team of outlining the levers that they need to pull. One of them was getting new products that have structurally better margins. We were very happy at NeoCon that they did one of the largest new product launches they've ever done, at least in a singular family of products.

We're very hopeful that those products are going to carry structurally higher margins. I'd also say it's been a bit of a struggle operationally there. We have a new ops lead, who I think has done a terrific job. In some way, you have to look at Nemschoff behind the scenes and say what things are pointing in the right direction? We're starting to see order growth. We're seeing quality measures get significantly better. Dealer satisfaction is increasing greatly and we're beginning to get the new product engine going. I think we've got a lot of the underneath things pointed in the right direction, but it will be probably another 12 months before we see a full turnaround, maybe even 18 months before we're there and feeling really confident about that.

The second element, I would say, for the specialty segment profitability in the long run, while Maharam has had very good profitability, it's not had as much growth as we would like to see in that business. With this very strong structural margin, we'd like to have faster growth. The team there has done a really nice job of putting in place a number of things -- new product categories such as rugs and leather, new price points to give them a bigger spread, a revitalization in the wall covering segment, which they had really atrophied in a bit, and a significant investment in new selling resources. We think those things are going to begin to get the growth engine at Maharam moving.

With its margin structure, if we get growth in that business, that will also help out the overall specialty segment margins. I will say we saw the early signs of that in the fourth quarter from an orders perspective, it just has yet to come through into the revenue book, but we'd expect to see that as we get in the next fiscal year. I think Nemschoff, Maharam growth are two keys. Certainly once we get the work done in the North American business, it's likely we will learn things there that we will apply as well to the specialty segment. I would expect we'll see some bleed-over.

What has been really important on this profit optimization work though, is letting the business unit owners own the work, the goals, and to let it be contained by their team, so they can own that, not the consultants, but for them to own it and going it one segment at a time, to be frank, and not disrupting the entire business has proven to be, I think, the right formula. We won't be applying it to the specialty business, but although trust, we have a fair amount of work going on, particularly within Nemschoff and Maharam on some things that I think are going to help in that segment as well.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. So, for 2019, just kind of broadly thinking on a full-year basis, is it fair to think that there is still improved, maybe top line growth rates relative to 2018 and then maybe modest margin expansion?

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

You're talking in the specialty segment specifically?

Steven Ramsey -- Thompson Research Group -- Analyst

Yes, sir.

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Absolutely. That's our intention is that's going to be one of the drivers to hopefully stay in profit goals in FY20 and we need to make traction in '19 to get there. So, yes, that's the intention.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. That does it for me. Thanks.

Operator

Thank you. Our next question comes from Greg Burns with Sidoti and Company. Your line is open.

Greg Burns -- Sidoti and Company -- Analyst

Good morning. When you talk about turning the Hay North America to a $75 to $100 million business, what kind of timeframe are we looking at to achieve that type of level? When we look at the revenue slit for Hay, about 60/40 consumer/contract is that the type of revenue split that you're looking for that business to do in North America or is your focus going to be primarily in one market like retail initially and then maybe grow the contract or is it going to grow in tandem? Thank you.

Brian C. Walker -- President and Chief Executive Officer

Greg, that's a five-year growth horizon that we felt pretty confident in, given where we see Hay in other markets. I think that revenue split is going to be fairly consistent. Our gut would be in North America we will see that the early investments and ramp will be on the consumer side. To be frank, that's partially because we already have an infrastructure on the consumer side where we have been selling some Hay products already. So, we have a way to go about that.

Also, on the consumer business, we can work primarily from an inventory position to serve customers. So, we now how to meter that in on the contract side. To get where we need to be, we will launch Hay contract on the DWR side, meaning selling what we do in hospitality and those kind of things. The real question on the contract side of Hay in North America will be getting a source of supply initiated so that we can make the more fast requirements for lead times, as well as customization. That's going to take a little bit of time to get in place. That will be the driver of why you'll see one ramp slightly faster than the other.

Greg Burns -- Sidoti and Company -- Analyst

Okay. Thanks. Then, in terms of the store count, the openings you mentioned before, getting to 37. Does that include, is that DWR and Hay or is that just DWR and then there's some additional Hay stores you'll be opening on top of that?

Brian C. Walker -- President and Chief Executive Officer

That is just DWR. One of the things we have an advantage in a couple of locations with Hay, we will be able to put Hay stores inside of what are already existing DWR locations, where we have more space than was needed. So, we'll be able to open an additional door there. We also are looking at a couple locations where we'll do a shop-in-shop. So, that will be a combination on the Hay side in those first four and I don't know if we'll get all four of those done next fiscal year, but certainly we're trying to ramp those in as quickly as possible.

Greg Burns -- Sidoti and Company -- Analyst

All right. Thank you.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Mr. Brian Walker for closing remarks.

Brian C. Walker -- President and Chief Executive Officer

Thank you all for joining us today. I know we had a lot to throw at you. I hope it was helpful to you. As you continue to think about Herman Miller and the progress we're making, we're really thankful for the great work of our employee owners across the globe, both in the quarter and for the fiscal year. We wish you all a great Fourth of July holiday. Thank you soon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 64 minutes

Call participants:

Brian C. Walker -- Chief Executive Officer

Jeffrey M. Stutz -- Executive Vice President and Chief Financial Officer

Kevin Veltman -- Vice President, Investor Relations and Treasurer

Matt McCall -- Seaport Global -- Analyst

Katherine West -- Raymond James -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Greg Burns -- Sidoti and Company -- Analyst

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