August 28, 2018
Dear Fellow Herman Miller Shareholder,
For several years now, we've had a clear vision to transform Herman Miller into a global provider of inspiring designs to help people do great things. We have focused on expanding our addressable markets and creating new channels of distribution to serve our customers. This strategy includes five key priorities, which I will provide an update on shortly. Achieving this vision requires imagination, stretches our resources, and pulls us to constantly re-examine what we do and how we do it. I'm proud that Herman Miller's 8,000 employees continue to respond with the spirit and creativity that have propelled Herman Miller for more than 100 years.
Sales of $2.38 billion for fiscal 2018 marked a record level for the third year in a row and reflected growth across each of our business segments. The organization did a great job of managing operating expenses over the full year, helping to mitigate gross margin pressures. We reported EPS on a GAAP basis of $2.12 for fiscal 2018, and adjusted EPS of $2.30 increased by 6 percent over the prior year. Reflecting the strength of our current financial position and confidence in our growth strategy, we announced a 10 percent dividend increase in July.
Our business and the realities our customers face continue to evolve. The following five key priorities aim to help us create value for both our customers and Herman Miller, and we made meaningful progress on each of them over the past year.
Realize the Living Office
The Living Office is a research-based framework to help our customers design compelling, high-performing work spaces and a critical foundation for setting our innovation agenda and leveraging our dealer eco-system. In the past year, we added significantly to our research into workplace environments, and through a combination of partnerships and a new range of technology-focused work space settings, we are integrating technology more powerfully than ever before. We also launched the Live OS technology platform to improve workplace performance and help achieve wellness goals with real-time data.
Deliver Innovation
Innovation remains at the forefront for Herman Miller. Sales from new products in 2018 reflected 29 percentof total sales for the year, well above our annual target of 20 percent. We launched 46 new products in the past year and announced a number of upcoming launches at the NeoCon industry tradeshow this past June. These launches included Cosm, a performance task chair designed by our long-time design partner in Berlin, Studio 7.5., that won a Best of NeoCon Gold award in the ergonomic seating category for its innovative design. Altogether, our new products have the Herman Miller and dealer sales teams energized and well-positioned for the opportunities ahead.
Leverage our Dealer Eco-system
Strengthening our dealer eco-system remains a focal point. We expanded our product offerings into growing categories like performance seating and enclosures. The seating launches of Cosm, Verus, and Lino expand our leading line-up of seating designs. With the recently announced investment in Maars Living Walls, a global leader in interior wall solutions; the launch of Overlay, a system of sub-architectural, moveable walls; and an alliance with Framery, a provider of high performance soundproof enclosures, we have made a strong push into the enclosures category. The Herman Miller Elements team continues to help our dealers fully understand the breadth of our offering across the Herman Miller group of brands in the fast-growing ancillary space. 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 across all of our group of brands. We'll continue to enhance these tools with new search and visualization features planned for the year ahead.
Scale our Consumer Business
Fiscal 2018 was a year of great progress scaling our Consumer business. Revenues grew by 12 percent over last year, as comparable brand sales increased each quarter and we expanded selling space by 40,000 square feet. Our mix of exclusive modern designs also continues to grow. Finally, our June investment in HAY, a Denmark-based design leader in ancillary furnishings in Europe and Asia, supports our priorities around scaling our Consumer business and the Dealer Eco-System. Active in both the contract and residential furnishing markets, the HAY brand expands our portfolio of leading global brands and allows us to scale the Consumer business by accessing a growing customer base that prizes both industry-leading design and value. Over the course of the coming fiscal year, HAY's goods will be available through our Design Within Reach channels. HAY products will also be integrated into the contract furnishings business across our dealer network as part of the Herman Miller family of brands.
Drive Profit Optimization
We made progress this year on our corporate-wide profit optimization goal, our fifth strategic priority. Given inflationary pressures over the past year, this work, combined with pricing actions we implemented in the third quarter of fiscal 2018 and a planned price increase in January of 2019, is proving to be critical to helping to address those pressures and drive improvements in operating margins. Across three phases of work that are in progress, we are building line of sight toward achieving between $60 million and $90 million of profit optimization, including run rate savings of approximately $30 million that we have generated to date.
Let me provide more perspective on each of the phases. The initial corporate-wide push that we began 18 months ago has generated a run-rate of $23 million of annual savings to date and we believe will realize another $5 million from our recent manufacturing consolidation efforts. In August of 2017, we also began a focused initiative aimed at profit optimization within our Consumer business. We believe we can drive $15 million to $20 million of profit improvement in the Consumer segment as part of our drive to achieve sustained operating margins of 8% to 10% in that business. This includes $2 million of initial benefits realized in the fourth quarter in fiscal 2018. As most of the benefits of the work to date have been offset by increased inflation and discounting, we have recently increased the scope of our efforts to include the North America business. While we are still in the opportunity confirmation stage, we see the potential for $20 million to $40 million of benefit based on the distinct work streams identified to date. All together, these phases will be critical in helping us fund growth initiatives, offset potential inflationary pressures and, ultimately, achieve or exceed our goal of consolidated operating margins of 10 percent by the end of fiscal year 2020.
We made important progress on all five strategic priorities in the past year. As we enter fiscal 2019 with tremendous momentum toward delivering sustainable, profitable growth for our stakeholders, these five priorities will remain a focus for us. At the same time, we will support these priorities with three additional areas that will require our attention, effort and investment.
First, we must increase our efforts and commitment toward building an inclusive and diverse culture. Diverse perspectives, thoughts, and experiences are critical to attracting and keeping the best talent, as well as to understanding the diverse perspectives and needs of our customers. While this is not new to us, we are committed to continuing to grow in this area. We're building intentionality and purpose into everything we do to ensure we're creating systems that afford every person at Herman Miller the opportunity to achieve their full potential.
The second area we are ramping up is modernizing our manufacturing capabilities. The first step is to stabilize our core competencies and bring our capacities in line with market demands. This work is well underway. We're in the process of resetting our footprint in China by consolidating the Dongguan and Ningbo plants, and in the U.S., we have approved nearly $100M in investments to modernize our capabilities. Along with stabilizing our core, we must also further integrate technology with our manufacturing equipment and processes. Increasing computing power, combined with proven manufacturing techniques, will help us redefine what's possible. We'll build the next stage of our lean journey by incorporating automation into all of our thinking.
Last, and a more long-range objective, is “becoming a digital enterprise.” This begins with a shift in perspective. Our information technology teams are moving from a “boxes and wires” focus to helping drive growth as digital business partners. This work will build on the progress we have already made and will happen in four areas. First, we are simplifying and expanding the digital highway in the dealer eco-system. Second, we are expanding our digital service offering with platforms like Live OS. Third, artificial intelligence, data, and visualization tools will help us become better at core competencies like customer service, training, and design. Finally, technology will help us with the modernization of manufacturing.
Considering the wide and deep array of products, capabilities, and brands now available from the Herman Miller Group and a clear set of priorities for the work ahead of us, we're more confident than ever in our future. The diversity of our portfolio and the capabilities we are building within the Herman Miller community will enable us to provide our customers with the most comprehensive solutions to meet their needs in working, living, healing, and learning environments.
On a personal note, as Herman Miller moves with commitment toward the goals mentioned above, a new CEO will see us achieve them. With a career of 29 years and a tenure of 14 years as CEO, my time at Herman Miller has been an inimitable period of wonderful relationships, great personal growth, and tremendous learning. I'm humbled to join the list of Herman Miller leaders, and I'm still awed by the chance I was given to help this great community change and grow. With the announcement of Andrea Owen as CEO of Herman Miller, I am looking forward to working with Andrea through a seamless transition. Herman Miller is only just beginning to scratch the surface of our addressable market opportunity. Andrea's experience driving results as a seasoned leader, coupled with our outstanding leadership team, will take our family of brands to the next level.
Thank you for your ongoing support of Herman Miller. I wish this community called Herman Miller only the best in the future.
Sincerely,
Brian C. Walker
Retired President and Chief Executive Officer (as of August 21, 2018)