Knoll, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Good morning, everyone, and welcome to the Knoll Inc. First Quarter 2018 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, statement regarding Knoll's future outlook for the industry and the economy. 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 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 President and CEO of Knoll.

[Andrew Cogan:]

Good morning, everyone, and welcome to our first quarter earnings call. As today is National Take Your Sons and Daughters to Take Our Daughters and Sons to Work Day I'm happy to have my daughter, Aly Cogan, by my side for this call. Before we get to the results, I want to remind you that this quarter we have tried to simplify our financial reporting and give investors more clarity into our strategies and results by breaking the business into 2 distinct operating segments. The Office segment now includes not only our North American office business, but also our European office business. Historically, about half of Europe's sales have been to global and local corporate client and this business shares similar client types and margins with our Office business in North America. In the first quarter, the Office segment generated about 60% of our sales and 40% of our adjusted EBITDA, with adjusted EBITDA margins in Q1 up 9.1%, up slightly from prior year. Our Lifestyle segment now includes our global KnollStudio business, HOLLY HUNT, Muuto, DatesWeiser and our covering business, including KnollTextiles, Spinneybeck, FilzFelt and Edelman. In total, these unique and proprietary high-design brands generate approximately 40% of our sales and 60% of our profits, with adjusted EBITDA margins of 20.7%. From an end-market standpoint, we estimate approximately 50% of Lifestyle sales are just over 20% of our total sales going to high-design residential end markets. From HOLLY HUNT at the luxury end to KnollStudio's iconic modern designs, now that Muuto's new perspective on affordable luxury, we have a growing and unparalleled collection of residential brands tied together by a commitment to modern designs, but differentiated by the customer segment demographics that each serve. These businesses have great growth prospects, tend to be asset-like from a manufacturing standpoint and have significantly less top and bottom line volatility than our Office segment. In the growing ancillary and resimmercial half of the $18 billion North American workplace market, these Lifestyle businesses also uniquely benefit from the market access and visibility that comes from our corporate client, designer and contract dealer relationships to an extent that independent, unaffiliated brands don't. And most of these Lifestyle brands are able to seemingly crossover into the fastest growing segments of the workplace, education and hospitality markets where the traditional definition of living and working styles is breaking down and merging together. We are supremely well positioned to capitalize on these trends. Looking at our first quarter results, we are very pleased directionally with our strong start to 2018, as the momentum we established in the top line in the fourth quarter of 2017 has continued and is now, as expected, translating to bottom line improvement in our earnings and stabilization in our margins. Our efforts to diversify our sources of revenue, expand our selling capacity and respond to the changing design trends and allocation of space within the workplace is clearly resonating with our clients. From an Office standpoint, sales grew 15%, with growth in both North America and Europe. While these are our easiest shipment comps of the year, we also experienced significantly better than BIFMA orders momentum as well. Hopefully, our legacy product sales are showing signs of stabilization as investments we've made this past year in refreshing our wood-finishing capability are deriving growth in our wood platform, which has offset decline in other panel-based systems. And newer platforms that respond to more open, collaborative and high-performance work styles and expanded price points continue to grow at accelerated rates and in total represents just over half of our incoming orders now. Rockwell Unscripted, which we launched last year to penetrate faster growing ancillary and resimmercial opportunities, exceeded our expectations in 2017 and has continued to grow strongly in 2018. Importantly, Rockwell's become a key part of the Knoll workplace story, has been instrumental in some major headquarter projects that result in meaningful business beyond 2018 as well as give us an entry into competitively held accounts. The addition of more sales headcount has definitely improved our market visibility, and we see these new hires building a funnel north of $100 million. Trends that we previously identified, including an increase in number of opportunities we are tracking, are being accompanied by a continued shrinkage of the average order size. In fact, looking at our funnel's activity, the number of opportunities is up 2x the percentage increase of dollar value of the funnel we are tracking. As we reported in February, we took the important step this year of placing our KnollStudio sellers in North America under the purview of our office regional leaders so we could better coordinate our market visibility and account strategies. This transition has been a smooth one, and we are encouraged as we ended the quarter, we saw a meaningful step-up in our contract dealer penetration with these ancillary KnollStudio designs, all part of our strategy to capture a greater share of our dealers' business. In Lifestyle, the benefits of 2 months of Muuto sales was the largest contributor to growth in this segment. Relative to our expectations, Muuto was tracking exactly where we had expected and continue to deliver the strong double-digit organic growth and favorable adjusted EBITDA margins we would expect from them. Our North American rollout plans are on pace with the plan we laid out back in December and culminate in the national launch at NeoCon this coming June. In the interim, we've been training our sales team on this exciting and deep ancillary brand, developing the specification tools to allow our dealers to easily specify the Muuto product, rolling out displays into our showroom and most importantly expanding the warehouse and inventory level in North America to deliver the most popular Muuto design in 1 to 2 weeks. We've selectively expanding the Muuto sales and customer service team and are already integrating Muuto into bids and existing global accounts. I'd say the response has exceeded our expectations and it's a reminder of how much opportunity exist here. The Muuto leadership team has proven themselves as capable and driven as we have believe they would be, and the cultural fit between the two brands and teams is strong. HOLLY HUNT has continued to grow and expand their sales and margins, and strong double-digit growth in KnollStudio in Europe was offset by slower start of the year in North America. As I mentioned previously, KnollStudio showed better orders momentum towards the end of the quarter. KnollTextiles has continued its nice turnaround, while leather sales remain challenged. The performance of DatesWeiser was another highlight in the quarter and validates the theory, in part behind the Muuto acquisition, that we have a strong sales and distribution network that we can lever to great effect to help drive these ancillary brands and acquisitions. In Q1, DatesWeiser saw their sales grow by over 50% and the business generated a small profit along with a positive swing in adjusted EBITDA. We aren't there yet where we want to be with DatesWeiser, but if we continue with the pace we're on, we will be by the end of the year. And DatesWeiser is helping us better penetrate high-end wood opportunities within both our existing relationships and amongst competitively held accounts. On a consolidated Knoll Inc. basis, while adjusted EBITDA margins at 12.4% were relatively flat with prior year, we are pleased overall that excluding the margin mix benefit we get from Muuto, our gross margins did improve sequentially from what we reported in Q4 as [indiscernible] mix and continuous improvement helped offset accelerating inflation in key commodities and transportation areas. And we are optimistic that in Q2 between actions we have and are continuing to take to improve our costs and the benefit of a full quarter of Muuto's higher margin that both gross and adjusted EBITDA margin will show year-over-year improvement. Furthermore, in response to the unprecedented run-up in steel and aluminum costs, as a result of shortsighted protectionist measures, we've decided we have no choice but to implement a midyear increase on these products -- on those products with the highest metal content. These increases will be effective in Q3 and are on top with the 2% to 3% increase we took in January. Over the next few years, our goal is to sustainably deliver 15% adjusted EBITDA margins as we rationalize our planned footprint, improve our efficiencies, leverage our fixed-cost structure and continue to shift our mix to higher margin businesses and segments. Over time, as an increasing mix of our revenue and profits come from the international and the high-design residentially oriented businesses in our Lifestyle segment, we're building a stronger, differentiate and more sustainably profitable enterprise. Now let me turn the call over to Charles to walk you through our results in more detail. Charles?

[Charles Rayfield:]

Thank you, Andrew. Knoll Inc's. first quarter net sales increased $39.7 million or 15.5% from a year ago. The Office segment was up $23.6 million or 15%. The increase in office sales compared to the prior year was due primarily to strong volume growth in the new workplace platforms in ancillary products in the commercial space. Lifestyle segment sales increased $16.1 million or 16.3%. The increase in Lifestyle was driven primarily by the inclusion of 2 months of sales from Muuto, which was acquired on January 25, 2018 as well as higher sales of DatesWeiser. Gross margin decreased 100 basis points from 37.3% a year ago to 36.3%. This decrease was primarily driven by the Office segment where higher volume and a favorable mix towards new product platforms were offset by commodity and transportation inflation. Total adjusted operating expenses in the first quarter was $83.7 million compared to $75.1 million in 2017. The increase is due primarily to incremental operating expenses from Muuto as well as the expansion of our sales force. Adjusted operating expenses excluded acquisition cost of $1 million related to the Muuto acquisition and $0.5 million of restructuring charges. The restructuring charges were related to an organizational realignment in our manufacturing plants that will result in greater operational efficiency and control. Adjusted EBITDA for the first quarter of 2018 was $36.8 million, up from $32.3 million or 14.1% for the first quarter 2017. The increase in adjusted EBITDA was due primarily to higher sales volume in the Office and Lifestyle segments and the inclusion of 2 months of operations of Muuto. The adjusted EBITDA margin declined slightly to 12.4% in the first quarter of 2018 from 12.6% in 2017. The decline in adjusted EBITDA was due primarily to the decline in gross margin in 2018, offset by lower operating expenses as percentage of sales. Adjusted EBITDA for the Office segment was $16.5 million for the first quarter of 2018 compared to $14.3 million in the first quarter of 2017. Adjusted EBITDA margin for the Office segment was up 10 basis points to 9.1%. Adjusted EBITDA for the Lifestyle segment was $23.8 million for the first quarter of 2018, up $2.9 million from $20.9 million in 2017. Adjusted EBITDA margin was 20.7% in the first quarter of 2018, down from 21.2% in the first quarter of 2017. The 50 basis point decline was due primarily to start-up costs for our recently opened Knoll retail shops in Los Angeles. Adjusted interest expense was up $2.4 million from a year ago, due primarily to increased debt levels as a result of the Muuto acquisition and higher interest rates. Adjusted interest expense excludes a $1.4 million loss on extinguishment of debt in relation to the amendment and extension of the company's credit facility during the first quarter of 2018. The effective tax rate for the quarter was 27.1%, down from 27.2% in Q1 2017. The effective tax rate for the first quarter of 2018 was favorable to the company's average annual historical effective tax rate as a result of the passage of the U.S. Tax Cuts and Jobs Act during the fourth quarter of 2017. The average 5-year historical full year effective tax rate was approximately 37%. The first quarter 2017 effective tax rate was driven down by income tax benefits recognized, stemming from the early adoption of ASU 2016-09, which impacted the tax treatment of divesting of equity awards. The company expects its full year effective tax rate will be between 25% and 26% for fiscal year 2018. The tax rate was also affected by the mix of pretax income and the varying effect of tax rates in the countries and states in which we operate. Adjusted net income for the quarter of 2018 was $17.4 million, up from $15.4 million for the same period in 2017. Adjusted net income is exclusive of the $2.1 million of the tax affected net earnings adjustments that were related to the loss on extinguishment of debt, transaction-related expenses and restructuring charges that were previously described. Adjusted diluted earnings per share was $0.35 and $0.31 for the first quarter of 2018 and 2017, respectively. In regards to our balance sheet and cash flow, cash and cash equivalents were approximately $16.2 million at the end of the quarter. Operating activities provided $5.6 million of cash in the quarter, compared to $3.8 million in the prior year. We use excess cash generated from operating activities to invest in the business, pay dividends and reduce outstanding debt. Investing activities included capital expenditures for the quarter of $8.5 million, compared to $10.7 million in the first quarter of 2017. Capital expenditures related primarily to manufacturing equipment, information technology infrastructure and showroom investments. Investing activities in the first quarter of 2018 also included the purchase of Muuto for approximately $303.7 million. Total cash provided by financing activities was $320.3 million. The company's primary source of cash during the first quarter of 2018 was proceeds from our revolving credit facility, which were utilized to fund the Muuto acquisition. We used cash in financing activities during the first quarter of 2018 to pay dividends of $7.7 million. We concluded the first quarter of 2018 with $527.5 million of debt outstanding, a leverage ratio of 3.1 and remain in compliance with all debt covenants. We expect our leverage ratio will be below 3x by the end of the second quarter. As we look forward to the remainder of 2018, we continue to believe that the core business, exclusive of Muuto, will grow the top line mid-single digits. We expect our EBITDA margin to be up 100 to 150 basis points for the full year compared to 2017. We continue to expect positive fixed-cost absorption and continued efficiency initiatives to provide a positive offset to continued commodities and transportation inflation and potential foreign currency headwinds. As Muuto ramped up to a full quarter of operation, we believe consolidated operating expenses will be between 27% and 28% of sales. ASU 2017-07 became effective on January 1 of this year and as a result we've reclassified $2.1 million of pension-related income from operating expense to other income and expense for the first quarter of 2018. For comparative purposes, we also reclassified $3.4 million of certain pension-related income from operating expense to other income for the first quarter of 2017. This change had no effect on adjusted net income, adjusted EBITDA or adjusted earnings per share. Thank you. We'll now take any questions.

[Operator:]

[Operator Instructions]. Our first question comes from Katherine West.

[Katherine West:]

This is Katherine West on the line for Beryl Bugatch. So I saw that you closed your Muuto acquisition in late January. I know you said it performed as expected, but can you remind us what those expectations were and what you saw in Muuto in the first two months?

[Charles Rayfield:]

So thanks, Katherine. First, I just want to remind everyone, obviously, the office growth in sales and adjusted EBITDA margins were totally organic, so not inclusive of anything from Muuto. In the Lifestyle segment, some of the businesses were up, some were down. The majority of that increase came from the sales for Muuto. EBITDA margins in Lifestyle were up flat and most of that degradation came from start-up costs from the LA showroom.

[Andrew Cogan:]

Katherine -- so it's Andrew. I would say, in general, Muuto has been continuing to grow, 20% plus organically, generating 20% plus adjusted EBITDA margins and that's what we would expect. We're pleased to see the strong continued growth, because we really had no impact on the business yet. And as we begin to -- with our NeoCon launch and start to roll it out, we think will have the impact in the back half of the year. So the front half is just then continuing along exactly as we expected them to.

[Katherine West:]

Okay. And then just a follow-up question. You mentioned that you expect margin expansion in 2018. What does that assume about steel and input inflation in 2018 going forward?

[Charles Rayfield:]

Sure. So we would expect about $10 million of incremental inflation in 2018. Metals are about half of that. Of the remaining half, transportation is the largest component. All in, metals and transportation costs are about 11% of our Office segments sales. We do have some contracts in place for the year to offset some of the inflation costs, but all in, we expect about $10 million between metals and transportation.

[Operator:]

And your next question comes from Greg Burns.

[Gregory Burns:]

The pension-related expenses that are -- that have been reclassified, are those ongoing? Or do they roll off at some point? How should we think about them prospectively?

[Andrew Cogan:]

Yes, so currently its income. When we froze the plans, we did a recalculation, it changed the period in which you take the liabilities over. So we effectively got income and that's been allocated from operating expense down to other income. Depending upon how we fund the plan, it could be a fleeting income components to the extent that we need to fund certain portions. It may remain relatively stable, it's probably not going to go up that certainly much.

[Gregory Burns:]

Okay, thanks. When we think about Muuto, I know the main opportunity this year is the North American contract market, but could you give a sense of maybe some of the longer-term opportunities? Maybe where you see that business potentially expanding in terms of incremental markets or products that they could expand their portfolio with and maybe the opportunity to go direct to the consumer with that business?

[Andrew Cogan:]

Sure, Greg. Thank you. It's Andrew. First of all, I don't think we could be more excited now, kind of, three months into the Muuto acquisition with both the team, the people, the capability and the reaction. In fact, last week, I was at [indiscernible] in Milan, and you could not get into the Muuto booth. It was so packed and crowded. It is so on trend and responsive to what we're hearing, clients and designers around the world, the types of products and the price points that they are clamoring for. So I break the Muuto opportunity in a couple -- down a couple of ways. As we said, when we acquired the business, our belief was we could take a $70 million or $75 million business, 20% plus EBITDA margins, just EBITDA margins, and double it over the next three years. So we're on a path towards $150 million. And you run the math, you get $35 million, $40 million of adjusted margin contribution. And so we feel very much that, that is doable and frankly we would hope to do better. As we break the pieces of that -- of that out, the largest piece is the North America contract piece. It's where we can introduce Muuto to our client relationships. We've already had the chance, and I personally have had the chance to participate in some pretty significant Muuto opportunities where we're clearly seeing that Muuto, together with Rockwell and other things we've done, is allowing us to capture a greater part of our clients' furniture spend and on some larger projects, even some headquarters' project, it's allowing us to, almost in essence, keep others out of that process, because we can meet more of what our clients are requiring than not having to shop around. I've been in meetings with our dealers talking about the opportunity Muuto has. They're excited because in 1 or 2 weeks they can get Muuto product delivered to job in all of these ancillary areas that they often don't worry about specifying till the last moment and they've gone elsewhere. So we feel super encouraged that the core philosophy of doubling Muuto is very much intact. In addition, in Europe, we're starting to see areas where we can coordinate on, kind of, traditional distribution through our dealers as well as in how we go to market. So we're seeing globally lots of opportunities. In Asia, we have relationships that we can introduce Muuto to. So we're really excited about that. In addition, as we move through those channels, we will start to explore the ability -- and again, Muuto sales are half contract-related, that's what we've been focusing on, half residential. On the residential piece, they have separate dealers and distributors. Again, in Europe, we'll try and synergize some of those, but clearly there will be an opportunity online in other ways to start to explore how we take Muuto to market. That's not something we're focused on right now for 2018. We have so much opportunity in just executing the core Muuto plan that that's what the team is focused on.

[Gregory Burns:]

Okay, great, thanks. And I missed the commentary about your outlook for margins for the year. Charles, can you just repeat what you said about your expectations for the gross and EBITDA margin for '18?

[Charles Rayfield:]

Sure. Thanks, Greg. So we expect about 100 to 150 basis points of adjusted EBITDA margin improvement. And just to walk-through in a little bit more detail of some of the components of that are, we'd expect maybe 50 to 75 basis points coming from Muuto. That will largely offset the negative 75 basis points we would expect to experience from continued commodities and transportation inflation. Beyond that, we would expect maybe 30 to 50 basis points of SG&A leverage. And to reiterate, we're expecting operating expenses to be up 27% to 28% for the year and then -- 27% to 28% of sales for the year. And then about 70 to 100 basis points we expect the gross margin improvement coming from continuous improvement activities, which are our Kaizen and various restructuring activities. Price increases, which Andrew talked about, the January price increase and also noted that we've got another one coming in midyear, of which -- the January price increase, we're probably going to start seeing those impact in the second quarter and then the midyear price increase you'll probably see more of those impacts in the fourth quarter. Favorable volume and cost absorption, sales volume continue to increase and then -- which is a very positive note, positive mix impact from higher sales of our newer product platforms where the margins of those have just begun to exceed those of our legacy products.

[Gregory Burns:]

Okay, great. And then in terms of the gross margin, you expect to be roughly flat or up at all this year?

[Charles Rayfield:]

No, I'd say probably 100 to 150 basis points as well gross margin improvement.

[Andrew Cogan:]

Obviously more back-half weighted. And subject to the vagaries of inflation and price realization and all that.

[Operator:]

And your next question comes from Mat McCall.

[Matthew McCall:]

So I'll just follow up on that, Charles. Just to clarify a couple of things. You mentioned the overall margin expectation and that detail was great. The pricing component, what are you assuming for pricing prospective? You mentioned the 2 price increases, I didn't catch the expectations for that nor did I catch the expectations for the volume just getting at the core incremental.

[Charles Rayfield:]

Yes, sure. So volume increases -- yes, we expect topline growth, mid-single digits. And then from a pricing perspective, I think Andrew's noted previously that the price increase in January was about 2% to 3%, and we would expect something similar that somewhere in the midyear price increase.

[Matthew McCall:]

Okay. So let -- but we don't want layer that whole thing in just the way I understand pricing, because [indiscernible] Go ahead, Andrew.

[Andrew Cogan:]

Yes, Matt. A couple of things. Firstly, we again expected core business to grow up mid-single digit that excludes Muuto, so obviously we get another kicker from Muuto and everything. In terms of the price realization, I think we're hopeful that we'll realize 25% of whatever the increases we're putting in place are as we move through the year, and we'll just have to see what happens there.

[Matthew McCall:]

Okay. So the legacy business is flat. You got mid-single digit growth in the core. What kind of assumption do you have for the rest of the year for the -- for your legacy businesses? This is a start of a new trend. I think you said it's bottoming or I'm not -- I think that was the term used -- stabilizing.

[Andrew Cogan:]

I think we're encouraged by a couple of things. One is there's -- the legacy businesses now are just under half of the total office business. Encouragingly, in the first quarter, those businesses kind of were flat year-over-year, so all the growth we got was from the 20% plus in the newer platforms and everything. We have and continue to do a lot of work on the legacy areas to make those products more relevant. And particularly in the first quarter some of the investments we've been making in wood finishing up in our plant in Toronto have had a positive impact on client demand. Within the legacy platform, there is pruning that we're looking at doing of products that are no longer as relevant or no longer generating the kind of margins we need. So there will be some editing there. But in general, the good news is, seems like that business has stabilized, not declining at the double-digit rates it was and that we're now getting the growth from the newer platform flowing through. The other point I'll mention is, the teams have been working really hard on improving profitability of the newer platforms and we're really encouraged that from a gross margin standpoint now, the margins of the newer platforms have also and finally eclipsed the margins we're getting on some of the legacy platform, so where before this mix shift was a headwind, it's now become a margin tailwind, Matt. So I think that's part of the story going forward.

[Matthew McCall:]

Yes, I think that is big news. The -- so is the way to think about legacy this year flattish? Are we still going -- with the pruning and [indiscernible]

[Andrew Cogan:]

I still think it's going to be down. I think it could be down 5% to 10% in legacy and up 10% to 20% in new and then net-net is kind of mid-single digits up.

[Matthew McCall:]

Okay. Awesome. All right. So the -- you talked about an organizational realignment, the plants, and I think there was a charge, but is there -- just more broadly, I don't think as I wrote some of the -- you do talk about productivity savings. Is that included in that 70 to 100 basis points of productivity savings that's going to help gross margin?

[Andrew Cogan:]

That is included in the CI initiatives.

[Matthew McCall:]

Okay. And is there a timing element of that -- to those initiatives? Do we see more back half [indiscernible]

[Andrew Cogan:]

I think it's just during the course of the year. And we are taking an aggressive relook at how -- we obviously we have the 4 core plants in North America, we're looking at a more aggressive look at what shared services across those plants we can have, how do we reduce that overall footprint to make it more efficient? We're looking at greater levels of accountability in terms of the efficiency and productivity improvements and the returns on investments in Kaizen we've made. So I think we're taking a very hands-on look at both the day-to-day operations as well as a higher-level look at what should be happening where and how many where should there be? And again, nothing dramatic tomorrow, but we are looking over that and I'd say over the next 12 to 24 months that at what that footprint should be and how in the short term we maximize and share more across the plants.

[Matthew McCall:]

Would an estimate of utilization help us understand the opportunity at all? I mean, how did we -- you had an estimate…

[Andrew Cogan:]

No. I think it's a little bit less about utilization and more about just what we're doing where. And again, we have operations spread over four sites, you can't really maximize one site if -- can only do so much because that's what it does at that location. So you've got to think about what you're doing where, and we're spending a lot of time thinking about that.

[Matthew McCall:]

Okay. And last question I have, you talked about order growth exceeding BIFMA, can you put any more meat behind that? How strong orders and any color around where you saw the strength?

[Andrew Cogan:]

I mean, I think -- we -- I mean we were very encouraged with the kind of orders' performance we had in the quarter. It was significantly ahead of BISMA, both organically and then, obviously, in total with Muuto.

[Operator:]

And your next question comes from Kathryn Thompson.

[Kathryn Thompson:]

Yes, could you please clarify what steel and aluminum are of your costs of goods sold?

[Charles Rayfield:]

Yes, so I think what we've said is the metals and transportation combined is about 11% of Office sales.

[Kathryn Thompson:]

Okay. Excellent. And then if you could just give us a little bit more color on end markets that are performing better in the segment outside the Lifestyle, but more in your core Office portion?

[Andrew Cogan:]

Sure. I would say government has been strong, financial services have been strong, some of our international segments have been strong and we've had some good tech activity. So I'd call those out as the highlights.

[Kathryn Thompson:]

Okay. I know we've gone back and forth with Muuto in terms of contribution, but, once again, could you clarify with Muuto 2 months into -- 2 months' results in, just reiterate what your expectations are for the full year, both from a top line and from an earnings contribution? Because often when you bring an asset in, you'll find new things that you -- that can marginally change expectations.

[Andrew Cogan:]

Well, again, we acquired Muuto not for the short-term benefit, but for the long-term benefit. And again, we are right on track in terms of our projection that within three years we can double that business. So I'd urge everyone to just, kind of, stay focused on that. In the short term, what I can tell you is this -- is that basically in the first quarter you look at the improvement in our profitability, it was really -- look at the Office business, that was 100% organic. There was no Muuto benefit in the Office business to speak of. In the Lifestyle business, we only had segments, we only had two months of Muuto, so there was some help. And that was really the bulk of the growth in that segment in terms of the top line in Q1. Going into Q2, I think the other Lifestyle businesses will start to kick it up. Again, we saw better performance in KnollStudio towards the end of the quarter, we have some nice projects in that segment. So I think that Muuto thing will become even more additive as you move into Q2 and get a full benefit of Muuto's performance. The other thing I'd point out, in Q1, Muuto really didn't add anything from an EPS standpoint. In Q2, we don't expect Muuto to add much from an EPS standpoint. Because, frankly, we have a step-up in some of the launch and ramp-up costs, and I think when you're all at NeoCon, you'll see how massive Muuto is. I mean, there's 4,000 square feet of our showroom dedicated to the breadth and depth of what Muuto has. This is not a one-trick pony. Muuto is a significant offering with [indiscernible] answers in Greg's question, but with even more opportunity to going into other category they're not in, which we're just not willing to get into the detail of today. As you move into the back half then, I would expect you'll start to see -- we'll start to see real accretion from the Muuto acquisition as we get into Q3 and Q4. Obviously, with the kind of 20% plus adjusted EBITDA margin Muuto generates, within the Lifestyle segment, more Muuto will be even more accretive to how much margin we get from Lifestyle and it will be helpful in Lifestyle, increasing its share of our total revenue and our total profitability, which I think is something quite unique in the world in which we seem to be I think maybe unfairly compared.

[Kathryn Thompson:]

Okay, perfect. And any color on -- we have received feedback from other similarly placed end markets as Knoll that seen a pick up and order and bid activity as the year came to a close and then to 2018? Any color that you can add to that as it relates specifically to your business?

[Andrew Cogan:]

I think it continues to be a lumpy business. We will have one great month, one slow month, one great month. I mean it's kind of all over the board. I'd say, the good news is, generally now, we have put together multiple quarters of better topline performance than BISMA or any industry macro you want to look at, both organically and now with the acquisition of Muuto, so. And in Q1, I think we've started to demonstrate and I realize there was some skepticism about our ability to take that growth and given all the challenges and headwinds out there, turn it into bottom line margin expansion and EPS growth. Well in Q1, we improved the operating -- the margins ticked up, we generated nice EPS growth without a lot of tax help, because last year, frankly, our tax rate in the first quarter was low. So I think you'll see more benefit from that as we move forward. So I think we're delivering on all those things both organically and then we get this added kicker from Muuto, which is the real catalyst that we think is truly unique to us relative to the world in which we live and compete.

[Operator:]

I'd now like to turn the call back over to Andrew Cogan for closing remarks.

[Andrew Cogan:]

Great. Thank you, everyone, for your questions and participation on this call. In closing, I want to acknowledge the 25 years of service by our outgoing Chairman, Burtz Staniar. When Burtz came to Knoll in 1993, we were fledging and unprofitable division of a larger corporation. Thanks to Burtz' leadership, we were able to complete the transition to a highly profitable and independent public company, dedicated to design excellence and innovation. Burtz' committed to this design-driven enterprise, his passion for our people and clients and his sagacity and counsel has been invaluable to me and our team. On behalf of the 3500-plus associates at Knoll, I want to thank Burt for his service and dedication to the cause, he'll be missed by all of us. Thank you, everybody.

[Operator:]

And this concludes today's conference call. You may now disconnect.