Knoll, Inc.
Q3 2019 Earnings Call Transcript

Published: 24 Oct 2019

[Operator:]

Good morning, everyone, and welcome to the Knoll Inc. Third 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 long term revenue and profitability growth goals, future outlook for the industry and economy, ability to integrate acquired businesses 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 as described in Knoll's Annual Report on form 10-K and its other filings with the Securities and Exchange Commission. The call today will also include references to non-GAAP financial measures. Reconciliations of these 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, the Chairman and CEO of Knoll.

[Andrew Cogan:]

Thank you and good morning everyone and welcome to our third quarter earnings call. It was a very balanced quarter performance between our office and lifestyle statement as we continued to deliver strong growth and margin expansion.With overall top-line growth just under 9% led by further share gains in the workplace from both organic investments and past acquisitions like Muuto, coupled with progress on our lean initiatives and continuous improvement work in our office segment, we delivered 190 basis points of gross margin improvement, 30 basis points of adjusted EBITDA margin expansion to 14.7% of sales and 15% growth in adjusted earnings per share. These were the strongest margin in over five years and the best adjusted EBITDA margin since the fourth quarter of 2016.On the workplace front, we grew 11% driven by 16% growth in the sales of lifestyle products to both commercial and government workplace clients as we continue to ride the trend towards more residential and hospitality based workplaces. This growth was led by Muuto, KnollStudio, and Spinneybeck FilzFelt, combined with 9% growth in our office segment led by continued strength and height adjustable tables, dates wise our conference and meeting tables in Rockwell unscripted, you get the 11% workplace result.Lifestyle products as a percent of total workplace increased over 25% and 24% a year ago. As we continue to roll out our new 3D visualization tools and increase the breadth of our offer included here, it will become increasingly easy for our dealers to present an all no solution to perspective clients. Prior to the Muuto acquisition 2018, we spent a fair amount of time looking at where we believe the greatest opportunity was for an old to increase our participation and the resimercialization of the workplace and the growth of ancillary and hospitality based products as a share of the total workplace footprint.We enhanced KnollStudio offering and initiated organic product development initiatives like Rockwell Unscripted to target this emerging area of the workplace. We're seeing great traction here as Rockwell continues to deliver strong year-over-year growth. Additionally, we look outside Knoll for a high-impact contract quality acquisition that we could move through our existing channels and client relationships to amplify and exponentially accelerate our growth. Muuto has done that and frankly even more for us as you can see in the results we've reported this year and particularly this quarter as Muuto delivered yet another record quarter of sales and EBITDA performance.In the third quarter, Muuto continued store growth in North America sales increased by 100% driven by even great growth and acceptance by our dealer partners and clients. Today North America represents approximately 35% of Muuto's total volume up from 25% at the time of the acquisition and we still believe we're just scratching, just scratching the surface of both the workplace and consumer potential of this millennial affordable luxury brand. As we've invested in further training, sampling inventory new products the results of our investment have been heartening to see.Thinking regarding fully was similar. Looking broadly at the $18 billion market, we continue to believe that the contract dealer channel that targets mid to large sized businesses and architects and designers represents the largest and deepest market opportunity for further growth in share gain as we have successfully achieved the past couple of years. However, looking out we do see an opportunity within the home office and small business channel to target an underserved segment of the market that values design but wants to transact online and directly without an intermediary.Today we don't serve what we estimate to be a $2 billion market segment. With digitally native fully, we can now reach an audience outside of our current distribution and by enhancing their offer with a limited selection of Knoll products while simultaneously leveraging for these portfolio of ergonomic and height-adjustable table solutions across our existing channels. We believe we can achieve meaningful synergies.This scalable profitable and socially conscious B-corp opportunity will be nicely accretive and another level of profitable growth in the years ahead. And as we prepare for a direct-to-consumer push for Muuto and think about scaling our own e-commerce efforts there are meaningful learnings from Fully that we can share across the Knoll constellation.On the lifestyle front sales grew just over 8% and continue to represent approximately 40% of our revenue. Within lifestyle those businesses with the greatest exposure to the resimercialization of the workplace perform best that we did see stabilization of residential demand of the quarter as Holly Hunt return to growth.Lifestyle margins were flat year-over-year at just under a strong 22%. We are pleased to participate in one of this year's highest profile projects with the completion of the TWA hotel at JFK Airport in Eero Saarinen iconic TWA flight center. This multi-million dollar Knoll project was recently featured on the September cover of interior design magazine and it's full of KnollStudio, Muuto, KnollTextiles and Spinneybeck Filzfelt products in the public areas, restaurants, hotel room and even the outdoor pool area.These kind of projects are emblematic of Knoll' unique cultural position which enhances our entire brand proposition and commitment to the best enduring modern design and quality. We hosted our biannual leadership team meeting there in July and I encourage each of you to visit if you find yourself out at JFK.Looking towards 2020, mock-ups and our funnel activity continue to grow in both dollars an absolute number of projects as we target a broader set of opportunities within the workplace. Furthermore, while the positive secular trends driving demand including the warfare talent and focus on employee wellness remain intact. We will continue to monitor the macro condition and if necessary adjust the pace of our activities accordingly without sacrificing the mid-term, long-term opportunity in front of us.Additionally, our work to rationalize our broader industrial footprint, building on our lean initiative continues to progress and we'll look forward to updating you in the new year as our plans here at Coalesce.Now let me turn the call over to Charles to walk you through our results in more details. Charles?

[Charles Rayfield:]

Thank you, Andrew. In addition to the sales growth as Andrew discussed, gross margin expanded during the third quarter by 190 basis points due primarily to fixed cost leverage in our manufacturing facilities from higher volume absorption as well as continuous improvement activities, price realization and favorable product mix. These positive drivers were partially offset by year-over-year inflation in commodity costs and tariffs. While commodity costs had a negative impact in the third quarter sequentially these costs have continued to dissipate as expected. This is the lowest level of inflation that we've seen in two years for both commodities and transportation. The impact of tariffs was minimal due to ongoing mitigation activities around sourcing of the products impacted by tariffs currently in effect.Total adjusted operating expenses increased $14.8 million driven primarily by incremental volume related expenditures, increased information technology spending, showroom investments and product development initiatives. We will continue to invest in strategic initiatives to drive future growth but expect to be able to leverage our SG&A infrastructure in the future as we realize the return on these investments.Adjusted operating expenses exclude $2.1 million of amortization of intangible assets related to our acquisitions of the Muuto, Holly Heim and Edelman businesses, $0.5 million of debt refinancing fees, $0.3 million of transaction related expenses in connection with a fully acquisition and restructuring expenses of $0.1 million.Adjusted EBITDA margin increased to 14.7% in the third quarter of 2019 from 14.4% in 2018. The increase in adjusted EBITDA margin was due primarily to gross margin improvements offset by increased strategic operating expense investments that we believe will strengthen our position for future growth.From a segments perspective, adjusted EBITDA for the office segment increased 40 basis points from 11.6% in Q3 of 2018 to 12% in Q3 of 2019. The increase that's primarily driven by sales volume growth and continuous improvement initiatives that were partially offset by increased operating expenses. Adjusted EBITDA for the lifestyle segment decreased 10 basis points from 21.9% in Q3 of 2018 to 21.8% in Q3 of 2019. The decrease in adjusted EBITDA margin was mainly due to increased operating expenses related to investment spending in sales force, marketing and new product initiatives partially offset by favorable mix within the lifestyle segments.Interest expense in the quarter was up $0.5 million compared to Q3 of 2018 due primarily to higher average outstanding debt levels from the fully acquisition partially offset by lower interest rates. In the third quarter, the company completed an amendment and extension of its credit facility. The maturity date was extended to August 2024 and reduced the pricing of borrowings under its term loan and revolving credit facility.At current leverage, the amended facility reduces our interest rate by 25 basis points. All other terms remain consistent. In connection with the amendment and extension of the credit facility, the company recognized the $0.40 million loss on extinguishment of debt from the write-off of deferred financing fees.Adjusted net earnings for the third quarter of 2019 was $27.4 million up from $23.7 million for the same period in 2018. Adjusted net earnings are exclusive of the $8.9 million of tax affected net earnings adjustments that were previously discussed. Adjusted diluted earnings per share was $0.55 and $0.48 for the third quarter of 2019 and 2018 respectively.Cash and cash equivalents were approximately $8.3 million at the end of the quarter and our outstanding debt balance was approximately $460 million. Cash provided by operating activities was $42.2 million in the quarter largely offset by investments from capital expenditures of $10.5 million. Capital expenditures during Q3 related primarily to our showroom and information technology infrastructure. In addition to capital expenditures we used $35 million for the acquisition of Fully. Cash provided by financing activities was $4.7 billion and was primarily related to proceeds received from our revolving credit facility offset by debt payments and the payment of dividends of $8.4 million. In spite of the additional cash expenditures related to the business acquisition this quarter revenue was reduced to 2.33x at the end of Q3, 2019 from 2.42x in Q2, 2019.Reducing our leverage will remain a primary use of available free cash to the remainder of the year and into 2020. As we've outlined in prior communications and as Andrew has touched on it in his remarks, one of our primary strategy is centered around sales penetration into underserved ancillary markets. In addition to growth in our core system's seating and storage business in the office segment, we continue to benefit from strong growth and workplace ancillary sales.Our track record of successful acquisitions continues to be favorable from Filzfelt to Holly Hunt to Muuto while a different strategic focus, we expect Fully to continue this trend and deliver value to our shareholders.As a final note, we began partnering with say.com in Q2 and have again partnered with Say to provide Knoll shareholders a platform to directly engage in the quarterly earnings call. We'll begin our Q&A portion of this call by answering a question we received on say.com and the question is as follows.What do you see as the biggest trends in office furniture over the next five years and how is Knoll positioned today to capitalize on these trends? Andrew.

[Andrew Cogan:]

Thank you, Charles and thank you, Say. Looking out, I think there are a few trends we’re focused on taking advantage of. First and foremost, we expect the office to maintain its primacy. It's a place for businesses, to bring employees together, to collaborate innovate and gather. They'll be doing so in environments that appeal to a multi-generational and increasingly diverse workforce that will demand a greater variety in the settings in which they work, moving from individual to group to virtual many times within the same day. They will want settings that promote wellness or produce an environmentally responsible manner and adjust to their varying levels of need for focus and privacy. Importantly they'll seek out more experiential settings that bring together the best of residential, hospitality and traditional workplace design.Our newly open five ship space in Fulton market which was just named one the 12 coolest offices in Chicago by Crane Chicago embodies all these trends. Our product development pipeline is full of enhancements and new platforms that will keep us in the leading edge of this change and leverages the breadth of the capabilities our constellation of design driven brands from Knoll to Muuto to Spinneybeck FilzFelt bring to the challenge of creating inspired workplaces that help our clients attract and retain great talent.Second, we see our more complex clients looking to work with a partner who can help them create a total workplace that's rapidly and specifically tailored to their individual needs and culture, Knoll has always prided ourselves on our extensive custom product development capability that allows us to modify our standard solutions to make specific client requirements as well as develop non-standard solution that respond to very specific conditions or requirements. This is a real competitive advantage for us.When coupled with our investments and new visualization capabilities we and our dealer partners can work with clients and architects to co-create in real time holistic workplaces and turn those rapidly into renderings and then orders.Third, at the other end of the spectrum we believe an increasingly more and more businesses particularly smaller ones will want to procure their office furniture directly online. Well, this is a small segment of the market today it's one of the reasons we were excited to add the digitally native fully business to our constellation of design driven brands this past quarter. It does not disrupt our current dealer relationships and allows it to capitalize on the growing B2B and B2C digital commerce trends while simultaneously leveraging full ease product portfolio across channels increasing the breadth of ergonomic design available to our existing clients and dealers and we can offer some of our simplest products to fully online clients too.Operator, I think, we will open up the lines to questions now.

[Operator:]

[Operator Instructions] Your first question comes from Gregory Burns with Sidoti & Company.

[Gregory Burns:]

Can you just let us know how much Fully contributed to revenue this quarter and what the outlook for the fourth quarter is? Thanks.

[Andrew Cogan:]

Sure. Thanks Fully will be worth, as we said in the release and we announce it. Fully right now is running at a $50 million – $55 million pace so call it $12 million to $15 million of revenue in quarter and we basically had one month of Fully activity in the third quarter.

[Gregory Burns:]

Thanks. And then, in terms of the gross margin, it sounds like some of the inflationary headwinds in field and transportation are now turning in your favor very strong gross margin performance this quarter. Do you see room for further expansion from here? Thanks.

[Charles Rayfield:]

Yes. Thanks Gregg. So to your points, transportation was relatively flat this quarter year-over-year. We still saw some commodity year-over-year inflation, but certainly think that and as we've noted on previous communications we've seen that dissipate. Q1 was peak inflation that's continue to come down from Q1 sequentially to where we're at now. Still a bit of a headwind for this quarter but expect that to turn as we finish out the year and go into 2020. I think as well the two biggest drivers for margin this quarter were volume and continuous improvement initiatives and to that end, we will continue with our continuous improvement and lead initiatives as we go through the remainder of the year and in the next year.So, I think we're probably maybe about the midway point with those activities and as we talked about previously we think there's a greater opportunity over the next couple of years for additional fixed cost reductions but certainly as we close out the year we expect to get a little bit more of a benefit in the gross margin line from the settling of commodities and transportation costs that we didn't necessarily see earlier in the year in and last year.

[Andrew Cogan:]

Gregg, I would just add to Charles's response that I think we're really pleased with the margin trajectory particularly in our office business and if you go back to early 2017, we've improved gross margins in the office segment by 400 basis points, EBITDA by 300 basis points and as Charles said, I think we're just at the midpoint of that kind of margin improvement and then when you couple all the initiatives in terms of lean that we've been working on and continuous improvement and bundle that with what we now see is we start looking to next year should be meaningful deflation particularly in commodities like steel that gives us, I think good confidence that we'll continue to see 100, 200 basis point improvement in our office margins on a constant volume basis as we move forward.

[Gregory Burns:]

Great and then in terms of Muuto are you still on track? What's the timeframe in terms of launching the consumer part of that business in North America? Thanks.

[Andrew Cogan:]

Yes. I know that's been kind of a bit of a moving target. I think right now our best guess would be sometime in the first half of 2021 and the reason we've kind of moved it out from say the back half of 2020 into the front half of 2021 is, we're just I wouldn't say overwhelmed, but we're incredibly busy with the success of what we've had ramping into the contract market and we see opportunity continue to accelerate that. So we've been investing a lot more time and IT resources on making Muuto easier to do business with, enhancing our in-stock capability starting now to grading more of our own textiles, localizing our manufacturing and as I mean again our dealer business, Knoll dealers generally grew over a 100% this past quarter, another record corridor and the businesses continue to perform well as we start the fourth.So we've just put all our focus and attention on that and so it means we've had to kind of de-prioritize the direct-to-consumer launch but I feel good that'll happen 2021 and I also feel that we're going to get a lot of learning and actually how to operate a real B2C business from the Fully acquisition. So that's the timing today.

[Gregory Burns:]

Great, thank you.

[Operator:]

Thank you. Your next question comes from Matthew McCall with Seaport Global Securities.

[Matthew McCall:]

Thank you. Good morning everybody.

[Andrew Cogan:]

Good morning.

[Matthew McCall:]

So maybe, I want to follow up on that gross margin, the gross margin questions. I just want to make sure I heard you right Andrew, when you talked about maybe the margin improvement as far as at the midpoint, were you trying to say that you've seen 300 basis points of gross margin expansion last few years and you've got it another 300 you think in office overall at that, is that the point you are trying to make?

[Andrew Cogan:]

I think that's entirely possible. You're going to need to have the deflation that we're expecting to layer into that. We're going to need to continue our tariff mitigation efforts which have been successful in offsetting about 50% of the tariff headwind. But, I think there is a path to that kind of improvement over the next 2-3 years. Yes.

[Matthew McCall:]

And just to make sure we're talking about the right starting point from here. We've seen some nice, I guess seasonal bill this year. It sounds like commodities obviously helped but we've seen that nice seasonal bill we're now over 39, almost 39.5 the quarter. Are we talking about kind of from that 39.5, 300 basis points with that market is to the right?

[Andrew Cogan:]

No Matt, I was specifically talking about the office segment here.

[Matthew McCall:]

Oh, I'm sorry, yes. Alright so well, and same thing with this question, what's the starting point?

[Andrew Cogan:]

So, well you know you have --. Well okay, the starting point in the office business and I can grab that today is that let's see the office segment you know gross margins they're somewhere around while we report the EBITDA over there about 12%, there in the most recent quarter.I think we can get them up to 13%, 14%, in the office segment. And basically office is 60% of our revenue, 60% - 65% of our revenue. So, take 2/3rds of that, I think we can move Knoll over 40% gross margin with the mix and initiative we're taking over the next couple of years.But again, I think we can get office some 12% to 13% plus EBITDA margins and that would move us up probably into double-digit operating margin which is what we've always talked about consistently delivering and which is where we see others. So, there's no reason we shouldn’t be able to get there.I think there's a lot of margin upside remaining in our office business.

[Matthew McCall:]

And then when you think about, I think Charles' reference to a couple of things. When we take what the main drivers of that I mean you talk about deflation but we think outside just commodities. Can you talk a little bit about mix, can you talk about fixed cost, can you talk about some of these other drivers that you may be able to use to get there?

[Charles Rayfield:]

Yes, and --.

[Andrew Cogan:]

Well listen, I mean --. Burn it, Charles.

[Charles Rayfield:]

I was just going to say, I mean I think yes we had several things going for us this quarter. I'd mentioned volume and continuous improvement activities. We also had positive benefits from price realization and to a lesser degree product mix but still was positive. And that was offset to a lesser degree by inflation and some other miscellaneous items that came through.In terms of what we can control, obviously we can control continuous improvement which we noted that will continue to focus on. In terms of tariffs, we'll continue with our mitigation activities. As Andrew mentioned, we had great success reducing the impact to our business.We do have some tariff impacts this particular quarter. We'll continue to try to mitigate those as we go forward to the end of the year and into next year but continue to expect to have that have an impact in the fourth quarter. But then, yes from price realization perspective, that's something that's been positive but we'll have to see how it goes into 2020.

[Matthew McCall:]

Okay. And then, Andrew you talked about residential stabilization I think specifically brought up Holly Hunt but when you think about the addition of Holly maybe some stabilization and some benefit from the residential business.If I think about just no specific opportunities outside of just any typical drivers. How do you look at kind of offsetting growth, should we see any typical solve that's with some of the macro indicators. How can you offset that with some of these Knoll specific drivers?

[Andrew Cogan:]

Well listen, I think we have a lot of drivers that are leading to significantly better than the industry performance. And I mean, you take Muuto as an example. I mean that again we still think we're in the early innings of where Muuto can be. Muuto is generating 200 basis points to 300 basis points of incremental growth at the Knoll, Inc. level.So, I think that's significant. I look in our office business, our adjustable tables, Rockwell Unscripted, those businesses are growing, growing super strong. So, I mean I look at those drivers, then we're gaining share within our dealers. So, in the past we've kind of in the last year to be really accelerate is we're capturing, I mean, we're broadening our playing field.So, I know people are thinking about what the macro pictures but regardless of the macro picture, I expect us to continue to gain share over the next few years. And there is significant opportunity within our dealer channel to gain market share. Each point of dealer share, each point of share gain our dealers were $15 million, $20 million, and we gained three or four points in the last year.And I think we can continue to gaining share at that kind of pace. So, we're not counting on a macro thing together. It's there all there, I think the macro background remains supportive but I think we have some very Knoll specific initiatives that will allow us to continue to perform as we have this year meaningfully better than the industry.

[Matthew McCall:]

And then, the only thing he didn’t mention there was the resi side of business, maybe --.

[Andrew Cogan:]

Yes. I mean the resi side's been yes and the resi sides been a little slower this year. And that will be a little bit count on how that where that resi business kind of plays out. I do think as we build more of a direct to consumer offers and that's where some of the fully initiatives expanding our own e-commerce efforts, getting Muuto into B2C.There's a tremendous opportunity there and that will come in '21 and beyond. So, I think we got a really robust platform and I really like that constellation of brand, we've assembled them frankly the team we have leading those is the strongest leadership team I've had the privilege of working with here in Knoll.

[Matthew McCall:]

Thank you, Andrew.

[Andrew Cogan:]

Thanks, Matt.

[Operator:]

[Operator instruction] Your next question comes from Bobby Griffin with Raymond James.

[Bobby Griffin:]

Good morning, Andrew and Charles. Thanks for taking my questions and congrats on a good quarter.

[Andrew Cogan:]

Thanks, Bobby.

[Bobby Griffin:]

So, I guess first Andrew, I just want to maybe see if you would expand a little bit on what you're seeing today in the office environment from an industry perspective. There's been a lot of commentary about some of the weakening data points that we on the south had published about it, we see in the news.Are you seeing anything different from larger customers to smaller customers or project size that would give you any type of worry about the overall environment?

[Andrew Cogan:]

Well, first let me say this. We're continuing to see order growth and I'll comment a little bit on more on the funnel, but quite constructive. Look listen, I think it's clearly demand has probably downshifted from the first half of the year. You see it in a bit more number.It's into a kind of mid to low single digit kind of growth environment. But in spite of that you got BISMA to 2.2% forecast for next year. I think the overall drivers remained fundamentally solid, pricing is supportive which is again I think reinforces the point-of-view this is a growth environment.Inflation is receding and so you're seeing actually our bottom line margins now or expanding at a faster clip than they were in the first half of this year. And then as I mentioned in one of my early and it was we have growth drivers that are still very much in their infancy.So, if I take if I look at BISMA as a starting point. Now 2.2% is down from this year is 6% and that probably corresponds to some weakness in the recent data like that, August ABI and corporate CapEx and some of that data. But you know the September ABI released yesterday.Well, it was slightly negative, did improve versus prior year and actually the project increase and the design contracts rebounded very strongly which we think is more indicative of where things are going. So, listen I think on aspectual level, the pieces for growth, the competition for talent, the resimercialization of the work place.The increased focus of wellness and that impact on ergonomic seating and tables is going to continue to drive workplace growth. Office space absorption, while it's down from the Q1, Q2 rates, remains very strong. I think 19 of the top 20 markets were in positive territory and absorption was up something like 30% over the third quarter.Leasing activity continues to grow and corporate profits and cash flow were strong. So, I think on the macro picture, overall will be happy with that kind of growth environment. And that we can translate it at a faster rate to the bottom line. Then Bobby, when I look at our data, our pipeline looking to 2020 is up low double digits.We're seeing an increase in both the number of opportunities as well as the total dollar value and the total number of opportunities. The awarded pipeline for us for both the balance of this year and next year is meaningfully greater and we're seeing and that kind of is correlating with we're seeing more clients as it and better win rates with those clients.We continue to track better than BISMA year-to-date, 13 out of our 16 regions they're up versus prior year and for us the only real pocket of weakness has been in the Middle East where we're kind of comping against a couple of large projects that didn’t recur this year.But looking to 2020, actually the Middle East pipeline is better. The project sizes have been relatively consistent, so we're not seeing and fighting that headwind. Our share gains are holding and frankly I think accelerating and you can see that with the Muuto data.And then, Muuto continues to knocking out of the park and we're just scratching the surface. So, I think it's you know I don’t think it's a bad environment. And as we will be gone our internal planning for 2020, I think we're quite positive.If we take BISMA's 2.2% as a baseline that we'd expect to outperform, Muuto should be worth another again 200 basis points as we go, you know you get into like 4% to 5% organic growth and then you layer in some of the fully benefit and there may be some chopping just here or there but I think you get to a nice mid-single digit growth outlook for 2020.And then you factor that in with what Charles talked about which is maybe another 30 basis points 40 basis points, maybe 50 basis points depending on where some of these headwinds end up in gross margin.That's a terrific place, it gets us you know we set a mid-term goal of 15% EBITDA margins and I think frankly we could make more progress on the margin journey in 2020 than we were able to in 2019. Even if we do so on a more mid-single growth rate.So, to me that's like a good that's a good environment.

[Bobby Griffin:]

Okay. Yes, that's I appreciate all the detail, it sounds very good and I agree. And it actually leads into my second question around the SG&A side of things. Is there, would the -- did investment time up this quarter where this could almost be the highest type of growth.Investments hit this quarter and then it should kind of maybe wean off a little bit into 2020 to help with that margin expansion story?

[Andrew Cogan:]

I think the way I would, maybe -- the way I might think about those, I think the low 28s is kind of where we're going to run operating spends is going forward. Certainly we can toggle it up and toggle it down depending on what the environment is but I think we're focused really on the growth margin improvements where I think we can make more progress going forward.And I would assume OpEx stays in the low 28s for now.

[Bobby Griffin:]

Okay.

[Andrew Cogan:]

Charles, to you.

[Charles Rayfield:]

Yes, I would agree. I think as we continue to go forward into 2020, we might get a little bit of benefit from the fact that we'll have expect continued sales growth. But we continue to expect it to make these strategic investments due to the opportunities that are ahead of us.So, I agree with everything inside.

[Bobby Griffin:]

Okay, that's helpful. And then I guess lastly from me, Andrew you talked a lot about Muuto and it's very exciting what's going on there. When you look at the opportunity for 2020, is that growth that we are just talking about.Does that include the rollout of the direct to consumer channels and getting that more into kind of the consumer environment or would that just would those be on top of it. And I guess secondly, how big do you kind of think Muuto could be from a consumer perspective in the U.S.?

[Charles Rayfield:]

Okay. Well, first of all, nothing in 2020 that I talked about assumes any Muuto direct to consumer in our part. Muuto does sales to other e-tailors and retailers. So, Muuto does get some we do some wholesale business in the U.S. so, that certainly and that's been growing nicely.Really what I'm talking about 100% with Muuto is just further contract penetration. Again, we -- Muuto we said we thought we could double the business in three of four years, we're right on a path to doubling the business in three or four years.With margins worth of 22%, 23% EBITDA margin. So, I think what we're talking about in our assumptions for 2020 is just further workplace penetration of Muuto sales. And one another thing that's happening now with Muuto, one is kind of success to get success.So, as our dealer starts to see they can do well with it, they dedicate more resources and they lean harder into it. The other thing that started to happen with Muuto in the back half of this year is a lot of the project work, its longer cycle work but we're now starting to get six digit Muuto projects. And we started, we were getting $5000 Muuto project.So, it's or it's smaller. So, it's really exciting to see the penetration within the A&D community within our larger corporate clients, within standards programs and hospitality and corporate setting.So, I think we can get the 200 basis points to 300 basis points of total growth for Knoll and as a percent of Knoll, Inc. for Muuto, surely in the workplace contract hospitality market next year. And then in '21, we'll start to catch the consumer market, what's that worth?That's probably worth another I don’t know if I just swag it right now I'd say that's worth another 100 basis points to 200 basis points of incremental Muuto growth. But we'll have a better estimate on that when we get there.

[Bobby Griffin:]

Okay, that's very helpful. Well, congrats on the quarter and thanks again for taking my questions. Best of luck going into 4Q.

[Charles Rayfield:]

Okay. Thanks, Bobby.

[Andrew Cogan:]

Bobby.

[Operator:]

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Cogan.

[Andrew Cogan:]

Great. Well, thank you everybody for joining us in today's call and we'll look forward to catching up with you in the New Year. Everybody, cheers.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.