Knoll, Inc.
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Operator:]

Good morning, everyone, and welcome to Knoll Inc., First Quarter 2019 Conference Call. This call is being recorded. This call is also being webcast. Presentation slides accompany the webcast. In addition, this call may offer statements that are forward-looking, including without limitation, statements regarding Knoll's future outlook for the industry and economy and expectations with respect to future leverage. These forward-looking statements are based largely on the company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the company's control. Actual results may differ materially from the forward-looking statements as a result of many factors, including the factors and risks identified and described in the Knoll's annual report on Form 10-K and its other filings with Securities and Exchange Commission. The call today will also include references to non-GAAP financial measures. Reconciliations of measures to the most comparable GAAP financial measures are included in the presentation slides that will accompany the webcast. Now let me turn the call over to Andrew Cogan, Chairman and Chief Executive Officer of Knoll. Please begin.

[Andrew Cogan:]

Thank you. Good morning everybody and welcome to our first quarter 2019 earnings call. We began 2019 with a bang, as we delivered 12% top line growth driven by just over 9% growth in Office and 17% growth in our Lifestyle segment. Gross margins improved by 90 basis points, adjusted operating margins by 80 basis points and adjusted EBITDA increased by just under $5 million to 12.5% of sales. Adjusted EPS grew from $0.38 to $0.41. Our strategy diversify our sources of revenue into higher margin Lifestyle categories with both residential and crossover workplace applicability combined with efforts to improve the profitability of our Office segment is continuing to deliver strong top line growth, margin expansion and EPS growth. Furthermore, it has positioned us to meaningfully benefit from the trends towards more social and hospitality based workplaces as evidenced by the accelerating penetration of ancillary spaces we saw this quarter. With last year's acquisition of Muuto, we believe we now have a well balanced portfolio that will continue to offer superior returns compared to pure play residential and our Office competitors for a few reasons. First and foremost, as the workplace continues to become more residential, those with expertise in living spaces bring a broader portfolio of choices to workplace clients. This is something our more workplace focused competitors can't do. Second, though as more residentially oriented competitors don't have the workplace clients installed base, contract dealer and our commercial architect and designer relationships to leverage to drive resimercial and ancillary penetration. And third, with our DNA, and portfolio rooted in both stand-alone residential and workplace categories, we can benefit from whichever market segments may be growing faster versus being solely dependent on how any single category is performing. This diversification is meaningful and I believe significantly underappreciated asset of our business. And it makes it all the more befuddling to see our share price often react more extremely to others less diversified results than our own. Let's look exactly at what this meant in Q2, on the workplace side, we experienced 14% growth driven by over 30% growth in the sales of Lifestyle products to workplace clients. This growth was led by over a 100% increase in Muuto’s North America sales, plus increased ancillary penetration by KnollStudio, Spinneybeck FilzFelt and even HOLLY HUNT. Combined with 9% growth in our reported Office segment led by continued strength in height adjustable tables, DatesWeiser in Rockwell Unscripted, you get the 14% workplace result. Lifestyle products as a percent of total workplace sales increased from 22% last year to 25% in Q1, further proof of our share gains and accelerating traction in ancillary spaces. And we believe that increasing ancillary capture rates are helping to contribute to improving trends in average order size, 14% workplace growth was well above reported industry data. Put it in another way, without the benefit of our growing Lifestyle portfolio, our workplace business would've grown 500 basis points slower than it did. Inversely, looking at our Lifestyle segment, we reported a strong 17% year-over-year topline improvement. Within Lifestyle, growth was led by very strong year-over-year growth in total Muuto sales and double digit growth in KnollStudio and Spinneybeck FilzFelt. When you break apart the Lifestyle performance by pure play residential sales growth versus workplace residential sales growth, you see the benefits of diversified markets versus pure play residential players. In Q1 our residential sales grew approximately 5% as we saw some of the similar high-end residential headwinds that others have reported. However, with over 30% growth we've experienced in workplace applications of our Lifestyle brands, we delivered 1,200 basis points of better growth than we would have delivered as a pure play residential supplier. Today our Lifestyle products are split roughly 50-50 between residential and workplace applications. Further proof of the competitive advantages of our portfolio that includes both robust residential and Office products and the blurring of the boundaries between the different spheres was clear when I attended Salone del Mobile in Milano earlier this month. Traditionally a residential show, this year we had more meaningful workplace client engagements in dealer visitors than ever before, seeking out new erstwhile residential designs for workplace settings. This was true both at the fairgrounds where KnollStudio and Muuto separately participated. And in the city where Knoll celebrated the 100th anniversary of the founding of the Bauhaus and Muuto collaborated in a Google Design Studio exhibition exploring neuroaesthetics, which studies how a person reacts to a physical environment, be it a home or a workplace. We had lines over two hours long, as word of mouth spread about the impactful experience of this Muuto in Google collaboration. The opening of our new Lifestyle 30,000 square foot flagship space this coming June in Chicago during what we are calling Knoll Design Days and what others refer to as NeoCon will allow us to viscerally demonstrate the strengths of our constellation of design-driven brands to clients, dealers and architects and designers looking for inspiration and direction as to where the resimercial workspace of the future is headed. And we hope all of you will join us there too. Looking ahead to the balance of the year. On the workplace side, we’re encouraged by the accelerating growth in both the total funnel of awarded projects and pipeline activity as well as the double-digit increase in the total number of projects we are tracking. Year-to-date growth has been relatively broad based both geographically and across key verticals and we would expect that to continue. Residentially, we expect more Muuto growth, but as you saw in Q1, we can more than leverage our workplace position to drive continued Lifestyle growth. Muuto is just, just scratching the surface of its North America potential. And we have an exciting pipeline of new products in the Office and ancillary spaces launching later this year to continue to excite our clients. We feel inflation has peaked and while we will continue investing in the select expansion of our salesforce new visualization capabilities, IT infrastructure and showrooms. We feel good about our ability to continue to deliver improve profits. Now, let me turn the call over to Charles to walk you through our results in more details. Charles?

[Charles Rayfield:]

Thank you, Andrew. As Andrew discussed, we’ve had great success with our strategic initiatives evidenced by strong top line performance year-over-year for the first quarter. I’d like to walk through some additional details relating to margins, operating expenditures and key financial metrics. Gross margin expanded during the first quarter by 90 basis points due primarily with a fixed cost leverage and our manufacturing facilities from higher volume, accelerating continuous improvement activities and positive impacts and price realization in foreign currency. These positive drivers were offset partially by inflation and transportation and commodity input costs. We believe the Q1 represents peak inflation which we expect to ease over the balance of the year. We continue to focus on lean initiative to drive our continuous improvement activities. Total adjusted operating expenses increased $10 million in Q1 2019, compared to the prior year, driven primarily by increased information technology spending, showroom investments, in incremental volume and incentive related expenditures. Earlier this month, we deployed the second phase of our ERP implementation successfully going live with the order management functions to control the front end of our business, including order entry and customer service. I’m very pleased to report we experienced minimal disruption and it will make us meaningfully easier to do business with for our dealers. Adjusted operating expenses exclude $2.1 million of amortization of intangible assets related to our acquisitions of the Muuto, HOLLY HUNT, and Edelman businesses. Acquisition related expenses is $0.3 million and $0.1 million of restructuring charges. Acquisition related expenses include retention agreements for key Muuto employees and integration related costs. The restructuring charges were related to our supply chain optimization initiative. Adjusted EBITDA margins increased to 12.5% in the first quarter of 2019 and 12.4% in 2018. The increase in adjusted EBITDA margin was due primarily to gross margin improvements offset by an increase in operating expenses and a decrease in other income. From a segment perspective, adjusted EBITDA for the Office segment increased 110 basis points, 9% in Q1 2018 to 10.1% in Q1 2019. The increase was primarily driven by sales volume growth and continuous improvement initiatives. As a result of an organizational realignment during Q1 2019, DatesWeiser has been repositioned as part of the Office segment. We believe that this move affords greater synergies in both our selling and manufacturing capabilities. Adjusted EBITDA for the Lifestyle segment decreased 190 basis points from 21.2% in Q1 2018 to 19.3% in Q1 2019. The decrease in adjusted EBITDA margin was mainly due to mix shift amongst our various Lifestyle businesses, additional investment spending and product launches and showrooms. However, we expect the full year Lifestyle margins will be in the low 20s moving forward as we benefit from Q1 price increases. Interest expense was down $0.3 million from a year ago due primarily to debt extinguishment costs in the prior year of $1.4 million that were partially offset by increased debt levels and higher interest rates. The effective tax rate for the quarter was 26.6% down from 27.1% in Q1 2018. The mix of pretax income and the varying effective tax rates in the countries and states in which we operate directly affects our consolidated effective tax rate. Adjusted net earnings for the quarter of 2019 with $19.9 million up from $18.7 million for the same period in 2018. Adjusted net earnings is exclusive of the $1.9 million of tax effective net earnings adjustments that were previously discussed that were related to amortization from acquisitions, restructuring charges, acquisition related expenses, and a pension settlement charge. Adjusted diluted earnings per share with $0.41 and $0.38 for the first quarter of 2019 and 2018 respectively. Regarding our balance sheet and cash flow, cash and cash equivalents were approximately $2.4 million at the end of the quarter and our outstanding debt balance was approximately $465 million. Consistent with our track record of levering up for strategic acquisitions and then quickly delevering as we realize the benefit of those acquisitions with increased cash flow. We have decreased our leverage from 3.12 times at the time of the Muuto acquisition in the first quarter of 2018 to 2.58 times at the end of the quarter of 2019. Cash provided by operating activities was $19.1 million in the quarter, largely offset by investments from capital expenditures of $9.2 million and cash used in financing activities of $9.1 million. Capital expenditures related primarily to our information technology infrastructure and showroom investments and cash used in financing activities in the quarter was primarily related to the payment of dividends of $7.8 million. As we entered the second quarter backlog is up sequentially and we expect our leverage ratio to continue to improve throughout the remainder of 2019, as we grow adjusted EBITDA and use free cash flow to pay down debt. Thank you. We’ll now take any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Greg Burns with Sidoti. Your line is open.

[Greg Burns:]

Good morning. I just want to maybe dig into the momentum you're seeing in a little bit, could you just talk about, maybe the absolute growth you saw in the Muuto business, I know you mentioned doubling in North America, but just as a whole, what kind of growth they did this quarter and in last quarter you gave some data points around order growth and backlog growth in Muuto. Is there anything you could maybe share with us on that front to give us confidence in the outlook for growth this year from Muuto? Thank you.

[Andrew Cogan:]

Sure. Greg. Thank you. Yes. We are exceptionally pleased with how Muuto is playing out. It's playing out exactly as we anticipated; we saw a tremendous opportunity and we're really able to pounce on the acquisition, because we thought it would be transformational not just for Muuto but also for Knoll and our clients. And that thesis is 100% playing out. In the first quarter Muuto organically, so Muuto compared to Muuto a year ago was up about 40% in shipments and even more in orders. When we kind of peel that onion a little bit and looked at, the North American performance was really exciting and as I mentioned Muuto in North America more than doubled from what they did a year ago. The primary growth driver has really been our Knoll distribution channel that has really embraced this product, not only ours, dealers are trying to sell that day-to-day, but we're now just beginning to start to see the benefit of some of the larger projects that Muuto is now participating in. And these are projects where we have to use our several hundred thousand dollars not $5,000 or $10,000. So those are accelerating, we are winning more of those. And I think this coming June at Knoll Design Days, we'll have the floor really primarily dedicated to Muuto and how it plays with Knoll and I think you'll see some very significant new product that make Muuto even more relevant in the workplace setting where we're getting that growth. All of this is without really yet any work on the entire Muuto consumer opportunity, which I think we believe could be as large as the workplace opportunity, but we've prioritized that as secondary to what we're doing to continue to leverage in the short term our contract relationship. So, we said when we acquired Muuto we are going to take the $75 million business and double it to $150 million in three or four years and we are absolutely on track to do that with very strong margin, lots of cash generation and really great, great design work.

[Greg Burns:]

Okay, great. Thanks. And then in terms of the DatesWeiser, you're just looking at the reconstituted financials it looks like that's operating at a break even to a small loss, can you maybe just talk about your outlook for that business maybe getting it back to profitability?

[Andrew Cogan:]

No, no, no, DatesWeiser had a very strong first quarter. The business is up significantly. The gross margins tend to be in line with our Office business, but we're well into the double digit levels of profitability now and whereas in 2018 it was pretty neutral from an EBITDA standpoint. They generated north of mid-teen EBIDTA margins in the first quarter. The business was up over 50% year-over-year and again, it's very similar to Muuto. When we acquire a business, we get exceeded in our distribution network. We bring our salesforce on board with it and they become enthusiastic and trained on the product, we can then drive it through our existing client relationships. So again, we're seeing increasing geographic participation in DatesWeiser's activity. So prior it was – they did business in a pocket of market. I think we've more than doubled the number of markets they're participating in and now that they've gotten above a certain level and they're really leveraging their fixed costs very effectively to generate the mid-teens EBITDA margin. So we're really pleased and I think the outlook continues to be really solid and it's enhanced our entire wood story. So when I look at our growth across Knoll, we’ve made a big investment in a couple of years ago in wood finishing in our plant in Toronto, which is now really driving the growth of those wood products and then you add DatesWeiser at the higher-end. It's very exciting, the capability we're bolting in wood and then this coming June at Design Days, you'll see a whole incremental addition to our wood capability that we're organically doing. So we're building a real time – we've had a power house there, but now with DatesWeiser in, and our new finishing in Toronto and the work on new products we're doing, we're building a powerhouse capability there. And what I love about it is that you've got Muuto with the affordable luxury into the market and in the workplace then. Then you've got DatesWeiser in the upper-end in these conference and meeting areas. So we're really broadening the playing field that we can go after. And I think that's why we're doing better than the market, one of the reason.

[Greg Burns:]

Okay, great. Thanks for that. I'll hope back in the queue.

[Operator:]

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

[Budd Bugatch:]

Good Morning Andrew. Good Morning Charles. Talk a little bit more about Muuto in North America if you would. Can we get a feel for maybe the percentage now of Muuto that is North America? I know you've talked about doubling, but can you maybe put some numbers on that?

[Andrew Cogan:]

I think North America represents now about one-third of Muuto’s business, a quarter to one-third of Muuto business. And so it is the fastest growing, I mean geography again you've got a business growing about 40% and North America piece grew over 100%. I think what's exciting – but I don't mean we're done, but seeing it grow within our dealers and within our corporate relationships and what's happening with Muuto is, their parts of an office or their hospitality settings that our clients are doing, that in the past, we have a great lineup with KnollStudio, but we could never kind of get to the price points or even some of the functional categories that Muuto is now able to fill. So we can take these great relationships we've had and again, cover more where our clients spend is. So I can give you one example, we have one of our large entertainment clients we've been doing, we do millions of dollars with a year, but we never did anything in some of the cafeterias as an example. We'll do a couple of million dollars over the next two or three years in their cafeterias. There are a variety of hospitality settings where we have clients that we've done corporate work for, but we haven't been able to move over into some of their hospitality applications. Now with Muuto products, we're able to do that. And so what's exciting is when you look at the pipeline of what Muuto is developing, and again, but – you'll see this at Knoll Design Days, it's expanding both in terms of the workplace. So we're able to bring our workplace insights to Muuto, they have an exceptional design effort and team there. And they're able to take those insights, turn them into product very quickly and again, you'll see amazing amount of new product work with Muuto. We've only been together for about 15 months now and that product now is coming to market, in addition to broadening out Muuto’s capability in hospitality, other lifestyle and ultimately even more residential category. So, it's working very much as we had hoped.

[Budd Bugatch:]

Okay. And this is probably not appropriate for an earnings call, but I mean there is a philosophical change here because Knoll is always been in the high price spread and we recognize that when you moved into Muuto, as you said as you quote “affordable luxury”, I worry a little bit about the standards and maybe confusing your ultimate customer, but I want to talk about that.

[Andrew Cogan:]

No, I think that's actually a very appropriate for an earnings call. And I can tell you I don't see any evidence of that happening for a couple of reasons. One, Muuto is completely consistent from integrity of design and a quality standpoint with what we do as a brand. And when I compare it to some of the other ancillary brands out there and actually we had one interesting story where someone we know they were doing an assessment of ancillary product for a pretty visible project, they had all the products lined up in the room and there was Muuto and Knoll, I won't mention some of the other brands and after like a couple of hours someone leaned back in one of the other chairs and it completely shattered and thankfully no one was hurt and it wasn't our product. But that's an exact example of the BIFMA level quality of Muuto’s design is totally consistent with what we're doing and not with a lot of the other ancillary players you see there, number one. So I think the quality is consistent. The other thing Budd is that, while we are marketing Muuto with Knoll and our sales team, particularly in North America and in Europe and Asia, Muuto is really continuing to do very well on their own. But North America we're marketing it together but we're keeping very distinct brand identity. And I think this will be helpful Budd when you come and visit Knoll Design Days because what you'll see is we really have a separate floor for Muuto that has a somewhat different identity. So we're not creating this like mush of products. Muuto has a specific identity, Knoll and KnollStudio, there’s great new KnollStudio things we talked about going higher-end with DatesWeiser with our wood enhancements. So I think there's absolutely nothing consistent[ph], Florence Knoll talked about this between great design and affordability and as long as you're consistent in that way, I think our brand is becoming – the Knoll brand and our constellation is becoming more relevant and perceived as relevant by a whole other generation. Now with Muuto that we on our own wouldn't and Muuto on their own never would have been. So I think it's completely consistent Budd and I think you'll really see that in Chicago this time round.

[Budd Bugatch:]

Okay. One more thing for me, it's still an inventory investment strategy for the U.S. over the North America market. Is that right? When you looked at the balance sheet last year between the end of the year and first quarter, it looks like $18 million delta in finished goods. Is that about the inventory investments that we're looking at for Muuto?

[Andrew Cogan:]

Yes. So some of it was related to HOLLY HUNT and some of their expansion in outdoor furniture, et cetera, but largely it was from Muuto. We'll still have a little bit more growth as we continue to expand Muuto, but largely Muuto.

[Charles Rayfield:]

Budd, we're doing two things here. One is given the ramp up in volume, we've had to take more warehouse space and we put more products in the warehouse, because the demand is just there. I think when we win these large projects, we need that. The second thing we're doing is we are building a domestic – North American supply chain from Muuto, so we'll able to do COMs and more kind of customization and that's coming online very effectively in the back half the year and that will relieve some of the need to inventory as much as we do because we will be all do more in shorter lead times here in North America.

[Budd Bugatch:]

Okay. And just last from me, just quantification, maybe you can quantify the percentage of that backlog? Give us some feel as to how that's going to flow into revenues for the rest of the year and what kind of revenue growth we should see balance of the year?

[Andrew Cogan:]

I mean I think in terms of the balance of the year, we are still confident, we should continue to outperform in the industry, not only it’s our core workplace business, our core Office business doing – doing – growing, at last I thought 2X BIFMA, but we have then that 30% growth in the Lifestyle piece in the workplace portion of our Lifestyle business. So I would expect us to continue to outperform the industry in terms of backlog and all of that. I'm not going to get too specific, but I can't tell you that orders growth exceeded shipment growth in the first quarter and we sequentially built backlog, which is unusual because normally we kind of bleed-off back log in the first quarter. So this year we built backlog. So, I think it’s encouraging.

[Budd Bugatch:]

Good. Congratulations Andrew. You didn't put a number in that entire [indiscernible].

[Andrew Cogan:]

Thank you.

[Andrew Cogan:]

Thank you, Budd.

[Operator:]

Thank you. And our next question comes from Steven Ramsey of Thompson Research. Your line is open.

[Steven Ramsey:]

Good morning. Can you maybe discuss on the robust project pipeline, how much of that is attributable to Muuto? How much of that is Rockwell? Or any other standouts by brand in the project pipeline and also if the pipeline gives you optimism on margin expansion in the next few quarters on a year-over-year basis?

[Charles Rayfield:]

Well, I mean the pipeline it's our entire workplace portfolio. Again, Muuto is still a pretty small piece of our workplace portfolio. So I would not attribute a ton of it to Muuto that certainly helps in everything. And again, as we get it – as we broaden the acceptance of Muuto, it will become a bigger part of the pipeline. But right now, it’s a pretty small part of the pipeline. I mean, really, frankly, the core workplace business is doing well. So we’ve seen this year strong orders growth with Rockwell Unscripted. We’ve seen strong performance with our wood products, height adjustable tables have been very strong and we’re particularly excited by some of the acceleration we are now seeing in our seating products where new introductions, like Ollo that now we're just now hitting our dealers this quarter, are also starting to resonate. So I’d say it’s pretty broad based. Even legacy products were up nicely, mid single digits. Our newer platforms, which now are well over half of our revenue are up double digits. So I’d say it’s pretty broad based. So that would be how I would characterize it. And in terms of the margin impact, again, the mix is – the greater the mix is of newer platforms, those tend to have higher gross margins. And so as we see more of that in the backlog, that should be supportive of gross margin improvement as we move through the year. And I think we mentioned on our last call a February price increase and that should start to flow through in the second and third quarters. So, we think margin should continue to improve as we move through the year.

[Steven Ramsey:]

Excellent. And along with that on Rockwell Unscripted margins, we’re a few years into that launch. Are they – where you thought they would be? And is Rockwell leading to additional sales of products outside of this line whenever that goes into a customer workplace?

[Andrew Cogan:]

Yes, absolutely. I mean, Rockwell is – again, we had very strong orders growth in Rockwell in the first quarter, which we’re very pleased with. It’s six different categories of products. It creates an architectural setting that we can drop other products into. And I think one of the things you'll see, Steven if you’re at Knoll Design Day, is that the way we use Rockwell's architecture to integrate other products from KnollStudio, from Office and frankly from Muuto and everything. So, it does become that architectural kind of spine that the other products can drop into. And – so yes, very, very effective.

[Steven Ramsey:]

Excellent. And the last question again on Muuto, you guys have sort of discussed, doubling this business and it being, I think, you said around $150 million of North America sales sort of is at that level or at the doubling stage. I mean, is that sort of a place you get to and it stops growing at 40%, 60%, or 100%? Or is there a range of sales where you sort of consider the maturity stage and growth still at solid levels? Can you maybe discuss the ceiling on the business?

[Andrew Cogan:]

Sure. First of all, growing to the $150 million is a global Muuto number, not a North America number. So the business was about $75 million when we acquired it, and we talked about $150 million total goal over the next three or four years. In terms of your question and everything, I would say this, the plan to get Muuto up to the $150 million is primarily predicated on this workplace expansion that we’re doing as well as Muuto leveraging its presence in Europe and growing in Asia. What really we haven't factored in yet is what the consumer impact of Muuto can be. So we’re spending this year doing a lot of the IT infrastructure and backbone, but Muuto was not – the Muuto brand is not well known in America. It’s just – we’re just scratching the surface of it. And we think there's a significant consumer opportunity both on the B2C side as well as through a handful of stand-alone Muuto flagship opportunities, plus Muuto’s product portfolio is also just scratching the surface of what it can be. We have a major push into – you saw at Salone, a beginning of a push into outdoor, does it tremendous outdoor push with Muuto. There’s a tremendous residential push with Muuto. You’ll see some of the new Muuto workplace products at Knoll Design Day, and there’s a tremendous workplace push with Muuto. We have a huge opportunity in accessories. So I wouldn’t view $150 million as a ceiling at all. It’s just where we’d like to get to. And then beyond that, I frankly think this is just one of those things that can be even bigger than that. And so in terms of the growth rates, yes, I don’t expect them to keep growing at 100% North America and 40% around the world. But they should certainly be multiples of our overall growth, right, particularly as we get those products to better penetrate the market. But again, just scratching the surface here.

[Steven Ramsey:]

Very helpful. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Matt McCall of Seaport Global. Your line is open.

[Matt McCall:]

Thank you. Good morning guys.

[Andrew Cogan:]

Hey Matt.

[Matt McCall:]

So maybe, Charles, to start with, I think, you said that you expect the inflation to have peaked in Q1. Can you just talk about the inflationary pressures you saw? Was it – was there a price cost drag that you experienced in Q1? And how should we think about price relative to cost in Q2 versus – through Q4 this year?

[Charles Rayfield:]

Yes, sure, Matt. So we do think that commodity price and transportation price likely peaked in the first quarter. We expect this to dissipate as we go through the year. So there still will be some year-over-year cost increases from that in the second quarter should become less and less as we go throughout the year. So far in the first quarter, our continuous improvement and price realization largely offset those commodity costs and input cost increases. And we had a little bit of additional impact on a net income basis from FX. But we do largely expect this to be sort of a peak of it, and it will continue to go down as we go through the year.

[Matt McCall:]

So you largely offset it in Q1? Does it flip to neutral? Does it flip to a benefit in the remaining quarters or should we just assume neutral?

[Charles Rayfield:]

I don’t think certainly in Q2, I think you still have some year-over-year impact may go to neutral as we hit the back half of the year or potentially a bit of a benefit.

[Matt McCall:]

Okay. And then maybe talk about the segment gross margin opportunities. You talked about ERP and Office and there was a little bit of fluctuation. I think you said that you expect EBITDA margin to be back in the low 20s, but I guess two part question, what impacted Lifestyle margins in the quarter and then when you talk about Office margins, do you have any visible milestones that you see as providing a gross margin boost as you move forward and kind of hit some of these thresholds and maybe that turns into a bit of a step function for Office gross margins.

[Charles Rayfield:]

Sure. Starting with your first question, Lifestyle, it was largely affected by mostly mix shift. We had more furniture sales and covering sales in the quarter year-over-year. Also some incremental investments around PD marketing, et cetera. For – and we do expect the margins to be back up in the 20s, as we go throughout the year on more of a full year basis. Looking forward to Office, I would say on a total company-wide basis, our next milestone is getting our consolidated EBITDA margins up to 15%. We’ve talked a lot about some of the costs reduction initiatives that we’ve had. Obviously, we had a price increase that came into effect in March and we’ll start to see some benefits of that as we go throughout the year. But when you look at some of the longer-term initiatives that we have in place, I have talked a lot about some of our continuous improvement initiatives. We expect to get maybe $10 million to $12 million a year out of that. We’ve also about some longer multiyear goals there, where we might expect to get another $10 million to $15 million maybe in the 2020, 2021 timeframe. So maybe in that year maybe double the impact. So we’ll continue to focus on that as we go throughout the year. And actually really great news in the first quarter we had our largest [indiscernible] realization in the first quarter from continuous improvement activities. So continue to do a lot on that front. Andrew, do you have anything to add?

[Matt McCall:]

Okay. Then that is very helpful. I may have kind of already asked this, but SG&A was – we had modeled something quite a bit lower in dollar terms. Is it just bad modeling? Or did you spend a little bit more than you planned? Same kind of question, I mean was it – if you did, what did you spend it on? And if not, what's the outlook as we move through the year?

[Charles Rayfield:]

Sure. Let's take a step back. So year-over-year, we were up about $10 million in OpEx. Part of that was from additional three weeks of Muuto that we didn't have in the prior year. And the other components were really around volume-based expenses, volume-based costs for incentives and commissions, et cetera and some additional spending around strategic investments. We might expect throughout the year that our OpEx, as a percentage of revenue, will be around 28% on a full year basis. So I think there probably is some additional spending there but not out of the norm.

[Matt McCall:]

Okay. Maybe expanding on that a little bit, that will be about 90 basis points year-over-year, How much of that is – is there any – what's that tied to?

[Charles Rayfield:]

Yes, so obviously, probably a third to half of that's really volume related. So as we continue to expand sales in some of our structures and programs, you're going to have some additional expenses related to that. And then around strategic investments, some of that is the ERP go-live, which we mentioned. So there's going to be some additional costs related to that and consolidation of IT infrastructure, also some additional product development initiatives and some additional marketing activities. For example, we attended the Salone Fair in Germany this year. We have not been there in the prior year. That also contributed some additional marketing expenses.

[Charles Rayfield:]

Okay. Go.

[Andrew Cogan:]

Matt, yes, I think just to follow up on what Charles said. I think 28% in the year on an average is not a bad number. We really are going to continue to invest in growing the business. One of the incremental investments on the SG&A side is, about two years ago, we made a step-level change in our sales force coverage. Now that we have a broader range of ancillary and Lifestyle products that cross over into the workplace and we're increasingly focused on penetration of our dealers and capturing share within our dealers, we are going to be deploying more dedicated sales resources into our highest potential dealers. So whereas we kind of paused last year on head count. We'll be layering in some additional head count. And then we basically told our team, let's flood the market with Muuto products. So we've given them almost a carte blanche, in terms of incremental sampling to get the product out there and to maximize the exposure. And so we're really leaning heavily into the investments we made. And then the opening of our new Fulton market, Knoll Design Day flagship showroom is also an incremental investment, particularly in Q2. So layer that altogether, I think they're smart growth-oriented investments and I think right now when you look on our top line, you can see – we're getting a fair New England return on those investments.

[Matt McCall:]

Okay. Yes, I agree. So I guess, the follow up would be EBITDA margin, EBIT margin, you’ve talked more about EBITDA, you still expect EBITDA margin expansion this year, given the elevated spend on some of those new growth initiatives?

[Andrew Cogan:]

We do. And again, I think, as Charles said, because the inflation headwinds will still be with us in the second quarter, but then they will start – we had some very smart colors and other hedges in place that mitigated inflation last year. So we got the carryover effect in the first half. We won't have our price increase really kicking in until the back half. So I would expect you won't see as much margin improvement in the first half, but then we would expect to see accelerating EBITDA margin improvement in the back half. We target 50 to 100 basis points annually. I think last year, we were about 70 basis points. I don't know that will be that high this year, but our goal is to continue to improve margins as much as we can and have a balanced approach to growth investments on the OpEx side and then increasing margins on the bottom line and a nice mixture of both.

[Matt McCall:]

Okay, thank you, Andrew. Great quarter.

[Andrew Cogan:]

Thanks.

[Operator:]

Thank you. And at this time, I have no other questions in the queue. I would like to turn the call back to Mr. Andrew Cogan for closing remarks.

[Andrew Cogan:]

Great. I want to thank everyone for their participation and the good discussion this morning. And in closing, I want to personally extend an invitation to all of you on this call to come visit us in Chicago for our inaugural Knoll Design Day celebration, June 10 to 12 at our brand-new flagship Fulton Market showroom. We'll be open daily from 8

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. You may now disconnect. Everyone have a wonderful day.