Knoll, Inc.
Q3 2013 Earnings Call Transcript

Published: 16 Oct 2013

[Operator:]

Good morning, everyone, and welcome to the Knoll, Inc. third quarter 2013 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. 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 could 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 accompany the webcast. Now, let me turn over to Andrew Cogan, the CEO of Knoll.

[Andrew Cogan:]

Good morning, everybody. Before we get into the results, I want to introduce you to Craig Spray, our new Senior Vice President and Chief Financial Officer. Craig brings to Knoll broad management and financial expertise in multi-channel manufacturing and design businesses. Craig welcome.

[Craig Spray:]

Thank you, Andrew. I am excited to be part of the Knoll team, particularly as we are in the midst of an ambitious multi-year strategy to grow and diversify our customer base and expand our level of profitability. I look forward to getting to know all of you on the call better in the years ahead. Andrew?

[Andrew Cogan:]

Thank you, Craig. While only in his fourth week with us, Craig has already demonstrated the leadership skills and intellectual curiosity that attracted us to him. I look forward to you all getting to know Craig in the years ahead. While Craig has proven to be a quick study, we ask Barry to lead the financial portion of this call for what will be his last time. Now the headline story in the quarter was the strong top and bottom line performance of our Studio and Coverings segments, as our investments in growing these businesses gained traction. On the Office side continued declines in our federal government sales pressured that segment. Excluding these government headwinds at the Knoll, Inc. level, we grew sales just over 3%. In the European and North American Studio segment, our consumer focus drove 14% shipment growth year-over-year. In Europe, we are very much seeing the fruits of our investments in expanding and strengthening our residential dealer network exemplified by our return to Salone del Mobile last April. Our brand building activities and expanded selling capabilities are driving dealer engagement. Helping too in Europe is a rebound in office furniture demand particularly in the U.K. and Italy. In the North American Studio segment, consumer growth both through our residential dealer partners and our incipient direct-to-consumer efforts drove the top line. Our revamped website continues to garner great feedback and visitors are running approximately a quarter of million visitors a month, a 45% increase from a year ago before we re-launched the site. We are using the retail shop below our new showroom in midtown Manhattan to drive commerce and raise our visibility while hosting special launches and events. Currently the shop is dedicated to the launch of our David Adjaye collection. For those of you who didn’t see the cover story on Knoll and David’s work for us in the Financial Times, How To Spend It magazine or read the profile on David in the New Yorker, he is a young Ghanaian-born architect who is designing the Smithsonian’s new Museum of African American History in Washington D.C. David’s collection for Knoll is part of our 75th anniversary celebration and feature some of the most important new Studio pieces since our work with Frank Gehry 20 years ago. David’s pieces range from an innovative plastic chair that retails for $300 to a limited edition cast bronze coffee table for $50,000. Our Studio consumer candles generated higher levels of growth in operating margins, so as these become a bigger part of the Studio mix our margins grow. In the third quarter, Studio generated a 14% operating margin even though increased investment spending offset most of the incremental gross margin dollars. In the Coverings segment, each of various businesses contributed 7% top line and 38% bottom line improvement as we are beginning to effectively lever our operating cost structure. Operating margins exceeded 21%, a 120 basis points improvement year-over-year. A significant expansion of our sales capability coupled with strong designer response to recent introductions drove KnollTextiles growth. At Spinneybeck and Edelman, new categories like felt and architectural products and commissions drove the growth. While heartened by the performance of these segments, our Office business continued to be challenged by lackluster industry growth and declining federal government demand. But I don't want these challenges to color some very encouraging progress the office team is making on both the front and back ends of the business. First, leading indicators in activity, as measured by mockups and client visit, spiked up as we move through the quarter. Our pool of business continue to grow and we’re having great success with our global account focus, which is yielding better penetration of our existing accounts and helping us capture competitively held accounts. Our day-to-day dealer driven Knoll Essentials program which targets mid-to-small size clients grew 28% in the quarter and should set an all time record this year and, our seating and KnollExtra product lines continue to grow faster year-to-date than the market and we have some very exciting introductions scheduled in these spaces for 2014. On the supply chain transformation front, we continue to put in place the investments and make the changes to our footprint that should drive margins higher next year. This quarter we finalized plans for the consolidation of several East Coast warehouses and distribution centers into a single facility which will be operational in the first quarter of next year. Not only it will save money, but it will improve service levels as well. We are about a third of the way through our wood and laminate modernization and rationalization. To-date about $8 million of capital has been deployed and we would expect to see a meaningful return on this investment next year as well. Lastly, our strategic sourcing efforts continue as we work through many different make buy scenarios. Obviously while we're not satisfied with the current level of profitability in the Office segment, I do believe it will bottom out in 2013 and I am confident that it’ll improve as expected in 2014 and beyond. Now for the last time, let me turn the call over to Barry to walk you through our results in more detail. Barry?

[Barry McCabe:]

Thank you, Andrew. Let me apologize upfront in that I have cold so bear with me as we go through the script. Third quarter sales decreased 1.3% below a year ago due primarily to less U.S. government sales as a result of overall reductions in spending and timing due to the ongoing budget and debt ceiling impasses in Washington. Sequentially sales increased 1.2% over the second quarter as commercial business continues to improve. Our Office segment was impacted by the lower government sales and declined 5.9% year-over-year but still grew 1.6% sequentially. All our leading indicators continue to support future growth in this segment, but we still have to replace the government business with commercial business before we see year-over-year growth. Both the Studio and Covering segments grew year-on-year and Studio grew sequentially over the second quarter. As Andrew discussed previously, we're pleased with the progress we're making in these segments and the returns we're seeing from our investments. Gross profit, as a percent of sales, decreased 40 basis points from a year ago, primarily as a result of the lower sales and the resulting impact on fixed cost absorption in the Office segment. Sequentially gross profit percent improved 80 basis points as we continue to see continuous improvements in our factories and the incremental gross profit contribution from the higher sales in Studio and Coverings segments. Inflation today has not been a factor and the improvements in our factory operations are from annual continuous improvement programs. As to benefits associated with our multi-year supply chain transformation will not be realized until next year and beyond. Operating expenses were $4.6 million higher than a year ago in support of our long-term strategic objectives. The higher rent associated with our new showroom and offices and retail space in New York, our new website, our Modern always ad campaign, our new ERP system, as well as some additional headcount in sales and marketing. Sequential spending from the second quarter was lower as the second quarter included the cost of trade shows in Europe and NeoCon in the U.S. Spending will continue around these levels, but may fluctuate by a couple of million dollars depending on timing and variable compensation related to volume. Operating margin was 7.9%, 280 basis points below a year ago as a result of the lower sales and the increased SG&A spending. Our operating margins did improve to 110 basis points sequentially over the second quarter as a result of the higher sales and improved factory efficiencies. These margins are consistent with our expectations, where we should be at this point in our multi-year program. Interest expense was approximately $1.5 million, $0.2 million below a year ago due primarily to the $20 million reduction in our bank debt from September 2012. Other expense was $2.3 million for the quarter, favourable by approximately $0.5 million compared to a year ago, but unfavourable when compared to the other income in the previous two quarters. This quarter we have foreign exchange losses compared to gains in the first and second quarters related primarily to the Canadian dollar. Our tax rate for the quarter was 35.9% due to the varying rates and mix of earnings in the countries we operate. Earnings per share was $0.18 for the quarter, non-cash charges related to foreign exchange losses decreased earnings per share this quarter approximately $0.03. In the quarter we reduced our bank debt to $183 million, our net leverage ratio is calculated on our bank agreement is 2.03 to 1. We are comfortably in compliance with our bank covenants and at quarter-end have 13.5 million of cash. Capital expenditures were approximately 3.3 million for the quarter. Before turning the call back to Andrew, I would like all of you both analyst and investors to know how much I have enjoyed our meetings and discussions about Knoll and our industry. I look forward over the next few months of introducing Craig to you and ask that you accommodate him as you did me. Andrew?

[Andrew Cogan:]

Thank you, Barry. As we look ahead towards the end of the year we believe the combination of an unexpected delay to a large project in the Middle East that we hope to ship this year compounded by the impact of the government shutdown and the timing of year-end federal government business will result in some expected Q4 business getting shifted into the first half of 2014. This combined with what we do expect to be strong year-end orders momentum as evidenced by improved leading indicators in our office business should set us up for a better 2014, but will challenge us in the current quarter. Now let me open up the lines for your questions.

[Operator:]

(Operator Instructions) First question comes from the line of Budd Bugatch from Raymond James. Go ahead.

[Budd Bugatch:]

Good morning Andrew, good morning Barry, good morning Craig. First Barry, congratulations again and best of wishes to you in your retirement and in other challengers, and Craig welcome to Knoll and to the analyst community that follows Knoll. My question, my first question really concerns the U.S. government percentage of business. Andrew if you could give us a feel of where it is now as a percentage of either office or overall volume and where it was this time last year?

[Andrew Cogan:]

Sure, I think the good news Budd is we continue to wean ourselves or maybe we are weaned off of the government business. So government sales were down about 24% in the quarter, a little less worse as a percentage decline than in the second quarter. And I think right now year-to-date government sales are somewhere around 12% of our revenue, down from 17% or 18% last year and then 22% the year before. So you know pretty strong drop and I continue to believe that short-term I think there will be some additional pressure on the timing of our government business that we are starting to get a point of, as we get into next year, I would expect a rate of decline in the low double-digits not what we have been experiencing this year, so starting to get closer to stabilization. I also would add we are nicely growing our state and local business. So that is encouraging and getting closer to a 50-50 mix between the two.

[Budd Bugatch:]

Okay. The next question talks about the Coverings business, I think you’ve put more feet on the street as I think you called it. Can you talk a little bit about their productivity and how that's progressing, obviously it looks like the volume is starting to come.

[Andrew Cogan:]

No, no I'm very encouraged by what's going on in all 3 of our Coverings businesses, the biggest feet on the street addition has been in the textile business. We’ve opened more points of sales in terms of showrooms, increased the range of SKUs and put more sales people out there and I think we are seeing a nice ramp up of those people.

[Budd Bugatch:]

Okay.

[Andrew Cogan:]

Again I feel like the Covering strategy is starting to gain some traction here.

[Budd Bugatch:]

And you had said previously that you thought it would be year number two before you really, they really are at maturation level in terms of what you would like them to be...

[Andrew Cogan:]

I think based on what we have been doing in the past, it probably takes year 3 to be maturation, but I think you get a meaningful contribution in year two.

[Budd Bugatch:]

Okay. Just on the Mid-East project that’s likely to get delayed, can you give us an order of magnitude of what that might impact the office revenues in the fourth quarter?

[Andrew Cogan:]

Yeah. I think combined I think there is about $20 million that we had believed we would get which now looks like it will go into next year. There was a fire on a job site that pushed that project out a quarter. And then obviously the government business, I mean we have literally on October 1st, we had a final presentation on a very large project scheduled and obviously we haven't been able to do that presentation and the mock-up sitting there. So I just think the variety of those factors combined suggest to me $20 million $25 million that we could have gotten and we won’t get in the fourth.

[Budd Bugatch:]

And you think that going into the first half of next year is how split by quarter would that be?

[Andrew Cogan:]

It’s really hard to tell, but I think the first half.

[Budd Bugatch:]

Okay. Just help me understand the foreign exchange losses, doesn’t look like Canadian dollar was that volatile in the third quarter, or can you, 20 billion, just remind me what the mechanism is for those foreign exchange losses?

[Barry McCabe:]

This is Barry. The foreign exchange that we really experienced is below the line on our inter-company debt with Canada. So when you look at a $0.02 to $0.03 movement on the magnitude of that inter-company debt, it amounted to $0.03 of EPS.

[Budd Bugatch:]

So $0.02 or $0.02 to $0.03 movement will be, so it’s about a penny for each percent of...

[Barry McCabe:]

Yeah. I think if you go back and look at that that’s probably correct.

[Budd Bugatch:]

Okay. And can you quantify that inter-company debt, is that something that you can disclose? How does that work?

[Andrew Cogan:]

Budd it’s more a receivable, in other words when we ship something from our Canadian factory down to the U.S. by the time we then actually pay them for it, You’re subject to the vicissitudes of the currency.

[Budd Bugatch:]

Got you, okay. So that’s what it did vary that much in the quarter. Okay, alright thank you and good luck to all and we’ll talk to you soon.

[Operator:]

Your next question comes from the line of Matt McCall from BB&T Capital Markets. Please proceed.

[Matt McCall:]

First, I guess welcome Craig and Barry thanks for a really good 10 years. I have enjoyed working with you and good luck in retirement. So a couple things. You referenced some of the backend investments, I think you’ve mentioned supply chain specifically. I’d love to hear more details and maybe a refresher on the backend of the business and what you are doing to the backend of the business. And you referenced some expectations of savings hitting next year, I can’t recall if you’ve quantified those and what the benefit could be on the margins as we go forward.

[Andrew Cogan:]

Listen, I think as we have talked about in the past, the strategy to get to north of $1 billion of revenue and let’s call it 12% plus operating margin is multi-faceted. So this is a series of revenue growth and [this is] [ph] across all our segments. And then there is a 200 basis points of gross margin improvement that we are counting on beyond the absorption benefit of the additional volume. And that’s really related to a couple of key areas. The first is kind of modernizing and consolidating operations across our plants. So we have areas where we’re making, we’ve been making [works] [ph] services in multiple locations. Now we are starting to pull those into one or two locations and investing in equipment in those locations that's truly state of the art. So in our factory in Pennsylvania, we've been going through a significant upgrade of our wood manufacturing equipment that allows us to automate and improve both capacity and reduce costs. That program is very much going on. There are other processes across our plants, whether it’s panels or metals, again where things are done in multiple locations. And we are going through a methodical step by step analysis of the best place to locate those to consolidate them and to kind of drive efficiencies of being the best in each of those areas as opposed to doing them in multiple locations. Similarly from a distribution standpoint, the example I talked about, Matt, was where we had multiple distribution locations on the East Coast, some of our different segments had their own locations, those are all getting consolidated; it will save money, it will be more efficient and will improve service. So I think combined we have talked about 100 to 150 basis points annually of gross margin improvement over the next two or three years. And that’s very much what we are working towards in our goal of getting up to a 35%, 36% gross margin, 24%, 25% operating expense level, somewhere in the 2015, 2016 area how to deliver 12% plus operating margin. So that’s kind of the formula.

[Matt McCall:]

Okay. That’s very helpful. So on the spending front, I think Barry you said in the past that both whether it would be on the CapEx side getting machines delivered when we maybe expected them to or on the OpEx side hiring as many people as quickly as you wanted to, you have maybe anticipate not being able to spend as much maybe in this year versus next year or whatever? Can you just give an update on some of those OpEx, CapEx spending budgets, where you stand and what we should expect going forward? I think you said plus or minus a million, but I just want to understand is there anything that’s been delayed and will show up in later quarters?

[Barry McCabe:]

I think if you go back, let’s start with the OpEx, right. Back at the beginning in the year, we said we had two initiatives being on the street more retail space and we thought operating expenses could go up by $25 million to $30 million and we talked about another $30 million being up in capital expenditures. We are spending the money on the OpEx side but based on the volume, we are seeing savings in the variable compensation pieces. So you kind of look at we are going to be favorable against our original forecast on the OpEx, some of that may push into next year. So when I talk about where we were in the second and third quarters, I made the comment that that could fluctuate, primarily if you look at the fourth, by couple of million dollars. So we are behind a little bit on our spending there. In terms of CapEx, we talked about $36 million. We found this. We rearranged our factories as well as the timing on brining some of the equipment and it takes a little longer than we thought it would be, so maybe there is $5 or $6 million of CapEx that will go in the future years so not be spent this year.

[Matt McCall:]

Okay. And then the final question, the encouraging commentary around the leading indicators. I think you talked about markups, I think you said they spiked up in the middle of the year or the middle of the quarter Andrew. Can you talk about the make-up of some of those orders, the size? Are they tied to new construction or is it more people still renovating? Have you seen any changes in the market that call if you to be maybe a little bit more optimistic about what ‘14 could look like for Knoll and the industry?

[Andrew Cogan:]

Sure. I am more optimistic about what ‘14 can look like and I think it's based on a couple of factors Matt. Firstly, we're seeing a meaningful improvement in our pool of business nationally. We're seeing an increase in the number of markups where in the late summer or early fall it really spiked up, step level higher than it's been and then client visits have been very strong. Impart, client visits have been driven by the new space in New York where. people around the country and around the world frankly are coming to New York to see what we have done here. So, we have seen a real improvement in the visits here and frankly an improvement in the local market here as well, which is not a small part of what we do. I would say that the mix is, we're seeing more large projects in the pipeline as we move into ‘14 and as we even start to look at ‘15 now than we had at this time a year ago. So I'm very encouraged by those trends as well. And I do believe by the time we get to the end of the year, that order momentum will manifest itself in a stronger backlog that should position us for, I think more like what the industry is forecasting next year, which is mid single digit growth on the core office business. So, I'm encouraged to see that momentum building.

[Matt McCall:]

So, I'm sorry, one more follow up on the client visits. I know that it's a big, the New York City facility was a big focus for this year. Can you talk about just the incremental benefit it’s been in attracting those customers to see what you're doing, I'm assuming a lot of your customers are showing up in New York anyway. But can you talk about, on a year-to-date basis, we have seen visits up this much and just anything that could add to the color there?

[Andrew Cogan:]

Yeah. No, I don't have the New York statistics purely in front of me, but I can tell you because I mean I work in the showroom and I walk through it every day. There has not been a day in the last two or three months where we’ve not had multiple clients moving throughout the space. I think what has worked so well in New York is it’s not just a furniture showroom, but you come up through this space and you see how we're living and working and using our products in some quite innovative applications. Two weeks ago we had our 20 largest dealers in and they were blown away by what they saw in how we were using our products in New York. So I think it’s really become almost a beta facility to show what we're capable of doing and has the variety of work types. Its appeal to young technology companies in New York and its appeal to older more established financial service companies are law firm. So it seems to have a broad stand of appeal and the success rate in New York when we get people to come in and visit this facility whether they’re from New York or whether they’re national or international clients has been very, very high. And it really has been, I think part of kind of turning the top-line in North America around and building real momentum. So I don’t have specific data to give you but it’s been very busy and it does show in these total metrics that we're talking about.

[Matt McCall:]

Very helpful. Thank you Andrew, and again congratulations Barry.

[Operator:]

Your next question comes from the line of Todd Schwartzman from Sidoti & Company. Please proceed.

[Todd Schwartzman:]

Hi good morning guys. Just to echo the sentiment of others; Craig, welcome; Barry, thanks for everything, wish you all the best in your endeavors. Andrew it sounds like from your commentary just now regarding the fact you’re seeing more large projects in the pipeline as well coupled with your take on forecast for the government business. It sounds as though with all that’s going on in Washington now and of course the shutdown is really a Q3 event. It sounds like you have seen no real impact on government orders let alone any spillover potentially to the private sector demand. Is that a fair assessment?

[Andrew Cogan:]

Not exactly, we haven’t seen any spillover I think in private sector significantly, but we are seeing impact in the government business. And again as I talked about the $20 million to $25 million of fourth quarter business we were counting on, about half of that deferral is a government projects where we were positioned to book and shift those in the forest and for the last three weeks actually nothing has happened on those. So I definitely think that what's going on in Washington will affect our fourth quarter government business both orders and shipments.

[Todd Schwartzman:]

Yes. My question I guess reflected more of your expectation for decelerated year-over-year declines in coming quarters versus what you have seen in the last year or two.

[Andrew Cogan:]

And Todd I do agree with that. I think the rate of decline, I mean, we had $220 million of government business to erode and by the time we get to this year we will have eroded a $100 million of that. So it’s not going to go down to nothing and half of that state and local.

[Todd Schwartzman:]

Okay.

[Andrew Cogan:]

So I do feel the pace of erosion is dissipating.

[Todd Schwartzman:]

Okay. That's helpful. So of that $20 million to $25 million, how much of that directly relates to the fire on the job site that you alluded to?

[Andrew Cogan:]

Approximately half of that.

[Todd Schwartzman:]

Okay. So it’s half that and half just general slowdown?

[Andrew Cogan:]

Well, I think government would be the other half, correct.

[Todd Schwartzman:]

Great, okay. yes, Okay, roughly when did the fire occur?

[Andrew Cogan:]

We found out about the fire in the last quarter.

[Todd Schwartzman:]

Okay.

[Andrew Cogan:]

That was a project that the client anticipated booking and shipping this year and that’s what our internal forecast was based on and we found out as they came back from Ramadan that that would not happen.

[Todd Schwartzman:]

Okay, thank you. On the GSA business, you had talked previously about pricing pressure. Can you speak of that for Q3 as well as what you are seeing now as a contribution to the results there?

[Andrew Cogan:]

Overall I think price was pretty neutral in the third quarter for us.

[Todd Schwartzman:]

Okay, great. That’s all I got. Thanks, guys.

[Operator:]

(Operator Instructions). You next question comes from the line of Josh Borstein from Longbow Research. Please proceed.

[Josh Borstein:]

Barry congrats to you and Craig welcome to you. Thank you for taking my questions. Can you talk a little bit about the Studio segment specifically with reference to Europe you mentioned double-digit growth in Europe. Now can you break that down in terms of what you are seeing there with respect to the residential versus commercial business?

[Andrew Cogan:]

Yeah. The strongest growth was in the residential business in Europe. And that’s where we put a new president over there last September who has got experience in that space. We have made some changes to our sales organization and leadership in that segment over there. And we significantly ramped up our investment in marketing product and visibility. And that seems to be having residence in that market, so really encouraged to see our initiatives start to pay off. That was the biggest driver, but I will say hoping the European result was also a nice improvement in the office part of the business over there. And as I mentioned in my comments particularly in the UK which remember a year ago had the Olympics and everything kind of shutdown, as well as greater success we’re having competing in Italy on the office side.

[Josh Borstein:]

Okay. And was growth positive on the commercial side in Europe?

[Andrew Cogan:]

Yeah.

[Josh Borstein:]

Okay. And just with respect to margins in the Studio segment, I know that they have improved nicely sequentially on a year-over-year basis would you still expect them to be lower just given the investments that you are currently making?

[Andrew Cogan:]

Exactly.

[Josh Borstein:]

And on the commercial side it seems like a lot of other people and best are seeing Europe bottoming, you are seeing some growth there year-over-year. Is there something that you are doing differently that you are seeing the growth while others maybe aren’t seeing it right now?

[Andrew Cogan:]

We are very small over there, so I don’t think we have the kind of magnitude of exposure that others have, we have a pretty lean cost structure and I think that would be the difference.

[Josh Borstein:]

Okay. Thanks. And on the Coverings segment can you talk a little bit about the leading indicators such as the number of orders and request for samples?

[Andrew Cogan:]

We most track that in our textile business and they are running up 25%, 30% over last year. So very strong and I think it's a factor of more feet on the street, making more presentations and then expect me around bring new collections and design work we are doing.

[Josh Borstein:]

Okay, great. And on the GFA business, when do some of the compares get easier for you, I know 2Q and 3Q here were both very difficult comparisons for you, what's that look like in 4Q?

[Andrew Cogan:]

It's another, it's not as bad a comparison as the kind of first and third. But it was still a step level higher than we are operating this year.

[Josh Borstein:]

Okay. And then just one last one from me, you know [X do you say] [ph], could you just give a little bit of color on some of the other end markets out there, particularly the ones that are performing well for you right now?

[Andrew Cogan:]

Yeah, I mean I would say almost all of the other end markets Ryan are doing well. We’ve seen increasing success on the technology front, that's been a real area of focus and I'm very, very pleased how we're doing there. Consumer and retail has been strong as has energy and healthcare. I'd say financial services and legal have been pretty flat. So they are not a headwind, they are not really a tailwind, it's really been in those other areas that we have gotten a benefit.

[Josh Borstein:]

Great, I appreciate it. Thanks and good luck.

[Operator:]

Your next question comes from the line of Budd Bugatch, Raymond James. Go ahead.

[Budd Bugatch:]

Andrew, just one area of questioning on the fourth quarter again. I know that you didn’t expect not to have that volume and you’ve been fairly nimble in the past that at reining in the costs when these kinds of events happened. Anything special that we should think about for the fourth quarter in terms of the way that’s all factored through to earnings and what actions you might have taken to reining some extra costs? I know the strategic spending is not one of them, but I am just curious about some of the other areas of your thoughts?

[Andrew Cogan:]

Yeah. Listen, we've said I think from the beginning of this year that we're committed to our strategic investments. We think it is the best way to position us, Knoll, for long-term success in ‘14 and really in ‘15 and beyond. So we're not kind of taking some of the short-term actions in the past, we would more have aggressively taken. So that decrease in volume will flow through. Now the areas, you’ve got some benefit on variable compensation because obviously if we make less, we won’t be accruing the same kind of incentive payments that we've accrued in the past and you have some variability on commissioning all that. But basically, I think we just kind of, we're never going to take that in volume. We obviously, in the factories make adjustments so that we're staffed appropriately and we protected [as fast] as much in the plants as we can. But I think the important thing Budd is that we're really trying to set ourselves up for ‘14 and ‘15. And well, this is not necessarily helpful for the fourth quarter, I think actually it continues to lay the foundation for the fact that we believe we will end the year with a nice increase in backlog with some good projects, both one and in the pipeline for 2014 that will position us for the kind of success that we’re expecting next year and beyond. So that's kind of our mind set here.

[Budd Bugatch:]

Okay. And so from modeling purposes we are going to slow the volume out of the fourth quarter and into the first half and I guess the basis for projecting next year’s fourth quarter should be this year’s fourth quarter, as if the volume were there, from modeling purposes, does that kind of thought process make sense?

[Andrew Cogan:]

If you are going to flow the volume out of the fourth and into the first half, I wouldn’t double count it again in the fourth quarter when you are (inaudible).

[Budd Bugatch:]

No, I understand it. But your basis of comparisons got to be a little bit higher, higher I would think so.

[Andrew Cogan:]

Okay. I believe we are going to -- let me be clear so there is no confusion. I believe sequentially we’re going to do better in the fourth than we did in the third. However relative to our internal expectations about what we could have done I think between the government shutdown and this issue and it was this Middle East order and shipment, it’s going to get pushed into the first half of the year. I don’t see any of these things impacting business going away. And I think frankly it just helps build a more positive story for 2014. I coupled that with the traction we are getting in Coverings and Studio and I think we are on our way towards the multi-year goals we all have set for ourselves.

[Budd Bugatch:]

Okay. Thank you again.

[Operator:]

Thank you. I would now like to turn the call over to Andrew Cogan, CEO for closing remarks.

[Andrew Cogan:]

Thank you. In closing I want to add my thanks to Barry for all he has done for Knoll and for his pivotal role in making our vision of an independent publicly held company possible. Barry has helped us set standard for financial performance, integrity and transparency that will outlast his time at Knoll. Thank you, Barry. Craig and I look forward to talking with you all in New Year. Take care everybody.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Thank you for joining.