Knoll, Inc.
Q4 2013 Earnings Call Transcript

Published: 5 Feb 2014

[Operator:]

Good morning, everyone. And welcome to the Knoll, Inc. Fourth 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. A year ago we announced an ambitious series of initiative to growing Knoll to over $1 billion of sales, while improving the profitability of our enterprise. These investments were design to leverage our 75-year history that’s helping both businesses and consumers create beautiful high performance workplaces and elegant modern residences. We need to do this we would have to step up our strategic investment to offset the impact of declining government sales on our office segment, while simultaneously investing in the transformation of our supply chain and IT infrastructure to improve the profitability of this segment. At the same time, we want to leverage the global potential and our high design, high margin Studio and Coverings segment, which serve both business and consumer markets to capture the favorable residential demographics and secular interest in modern design. We knew that in the short-term these initiatives will depress our profit but deemed the longer term opportunity worth the shorter term pain. As we report our year end results, I want to place them and the announcement on Monday of our -- most significant acquisition to date in the high design space namely Holly Hunt Enterprises in the context of our broader strategic plan and desire to position Knoll with the go-to resource for high-design workplaces and homes, including the commercial contracts decorated to the trade and direct-to-consumer markets. Let me begin then with the discussion of the rational behind our acquisition of Holly Hunt. Over the past five years we have explored a variety of acquisition opportunities, but none of them have the combination of high design brand quality and value creation potential we see in the Holly Hunt business. Holly Hunt is one of the undisputed leaders in a larger luxury residential furnishing market. This space offers favorable, cyclical and secular characteristics, high margin potential, and a very fragmented competitive landscape. Holly Hunt is highly profitable and scalable and with $94 million of revenue will move us substantively towards our $1 billion target. And we see the potential for some modest revenue and cost synergies. Holly Hunt significantly scales up our presence in the high-end residential market with the business that has significant organic growth potential both domestically and internationally, and gives us a platform for further consolidation of other high design residential brand. Given the structure of our acquisition of the business, it will be immediately accretive about the gap in the cash spaces and the result of the transaction we estimate we will receive future tax benefit with the presence value of approximately $20 million. Like our Co-Founder, Florence Knoll, Holly Hunt is one of the icons of the interior design industry. Starting in 1983 Holly and her team have built a premier showroom resort in brand for luxury furnishings, lighting, textiles and leathered from residential architects and interior designers. Today the majority of Holly Hunt sales consist of designs created and commissioned by Holly Hunt, culturally both company share deep design commitment and reputation for high quality, timeless modern design. In addition to the [enumeration] we had for Holly, we grew to know, respect and appreciate the extremely strong team here assembled. As with our other specialty businesses, we are committed to the operational independence depends of Holly Hunt and its unique brand and cultural identity. Holly Hunt will be report as part of our Studio segment and with this acquisition nearly 40% of our sales will now come from our high-design, high margin Studio and Coverings segment, which again is completely consistent with our longer term desire to balance our sources of revenue and profit. Holly will remain her role as a CEO of Holly Hunt Enterprises reporting to me and David Schutte, our Senior VP and Chief Marketing Officer will join Holly Hunt as their President. Holly Hunt built a strong track of investments and acquisitions in the Studio and Coverings segment. Most recently both FilzFelt and the acquisition of Richard Schultz Design have exceeded our expectation. These acquisitions allowed us to leverage existing front-end sales and distribution networks and backend fulfillment capabilities to generate both top and bottom line growth. While Edelman did not meet all our initial expectations, as the impairment charge we announced today indicate that has been continuously accretive and provide an important learnings in the high-design decorator market without which our acquisition of Holly Hunt wouldn’t have been contemplated. And importantly, these acquisitions have complemented organic investments that in 2013 collectively drove better than industry topline growth in our Studio segment here and in Europe, and top and bottom line growth in our Coverings segment. In Europe under new leadership in essence we launched our KnollStudio business with the powerful presence of Salone del Mobile tradeshow last April in Milan. Coupled with the new vigor in our European product development and new distribution initiatives, our team in spite of obvious market challenges drove solid growth. In North America, our major push into the direct-to-consumer space with the launch of our revamp knoll.com website with its robust e-commerce capabilities and our first ever retail shop below our new showroom and office space at 1330 Avenue of the Americas in New York City which recently won a 2004 AIA Interiors Award helped drive growth in this high margin segment. Similarly, in our Coverings segment significant investments in expanded sales and distribution coverage and new product growth drove growth in our coverings businesses and helped generate improved year-over-year profitability as well. Looking ahead into 2014, I would expect the rate of incremental investments in the Studio and Coverings segment to moderate by midyear allowing better bottom line leverage from further incremental growth. In the Office segment heading into 2013, we did not anticipate that we would face another significant leg down in government sales. When I look at 2013 results, I applaud the significant progress our sales team made in growing our commercial orders significantly faster than the overall market. The combination of a greater focus on multinational accounts with global potential, coupled with expanded sales coverage, products like Antenna Workspaces, our innovated Interpol Power and Space Division solution, the groundbreaking generation family of Work Chairs and our new Anchor storage system all helped to drive growth, particularly with clients seeking new workplace model. In the small to midsize business sector, Knoll Essentials, our dealer marketing program grew double digits and set an all-time record and we made important progress in the transformation of our supply chain and the design of our new ERP system. The restructuring we announced at the end of the year reflects the kind of efficiencies we expect these investments to begin to generate as we move through 2014 and into 2015. While we wish the much delayed cyclical recovery in the commercial space would kick in, as many drivers like improved service sector hiring, increased business confidence, lowered vacancy rates, and improved commercial construction all suggest should be happening, we do feel the trajectory of this recovery should improve as we move through the year. With government sales now down from over 25% in 2010 to approximately 12% of our business in 2013, we are significantly less exposed to downtrends here and are actually hardened to see the rate of decline in our government business in Q4 coming well under the 25% decline we experienced for all of 2013. We are hopeful that with the budget in place, government activity could begin to stabilize. While large commercial project sales sell off in Q4 relatively to the same period year ago, we are encouraged that our funnel activity shows there are incrementally larger opportunities out there for 2014-2015. In the mean time with little market growth is evidenced by the 2013 dismal numbers, we do see some incremental pricing pressure that will challenge some of our margin improvement efforts in the first half of the year until our recently announced price increases and incremental supply chain transformations kick in the mid year. As in 2013 incremental spending on both selective strategic investments and our ERP implementation which would start to go live in late 2014 will also continue to pressure office profitability. Amongst these strategic investments, our new CRM platform, a major Q1 training meeting and a launch of a new family of seating products by the very talented design team behind our generation family of Work Chairs that brings together a level of performance and aesthetic that we believe fills a significant gap in the market. So all-in-all slow start profit-wise so what we hope will be a building an exciting year. Lastly let me comment on the incremental debt leverage we have taken on to fund these acquisitions and initiatives. With the funds going out for Holly Hunt this month, we see leverage coming in just over 3-to-1. Even with the additional $95 million of acquisition debt, our interest cost should only increase by $3 million to $4 million. As we said in the past, we are comfortable operating with leverage between 2 and 3 times trailing EBITDA. While for a couple of quarters we could push above that range, we are expecting that over the course of the year as we see top and bottom line improvement in our businesses, the leverage ratio will come down. While CapEx will stay in the $35 million range, 2013 ended up more like $30 million. We have significant cash relief from the improved performance of our pension assets and expect cash contributions to be down by over $8 million. There is no doubt that the acquisition of Holly Hunt will step level accelerate our high design residential and consumer strategy and open up new sources of revenue that complement our existing office and specialty businesses. Holly Hunt more than doubles our exposure to high margin residential and consumer customers in markets with strong secular growth potential and gives us another significant growth and profit driver to complement the investments we are making in our office business. With the strong management team they have in place, we don’t see anything that will dilute our focus under existing businesses. Now let me turn over the call to Craig to walk you through our year end results and the one-time charges in more detail. Craig?

[Craig Spray:]

Thank you, Andrew. Fourth quarter total sales decreased 7.6%. The Office segment was down 10% as we faced another step level of reduction in government sales and a tough prior year comp. However, sequentially, Knoll, Inc. sales increased 6.4% over the third quarter. As Andrew stated, government sales are now only above 12% of our total sales, so we will have much exposure to this market going forward. In the Studio segment, sales were down 2.4% versus prior year when we had a significant non-recurring international sale. Within Europe, sales were up 4.8% primarily driven by the residential market. Fourth quarter sales in Coverings were about flat as gains in tax sales driven by our recent investment in incremental sales representative and product offset a decline in leather sales to lower margin contract firms or customers. We believe office shipments dropped in 2013 and it’s a likelihood of another staff level reduction in our government sales lessening. Our year-over-year commercial share gains should help us drive topline growth in our Office business. Leading indicators and drivers like, with respect to job growth, corporate profitability, new commercial construction, absorption and vacancy rate are trending in the right direction. And these trends are validated by what we’re seeing in our incoming orders and pool of business. Gross profit as a percentage of sales declined 90 basis points over a year ago to 32.2%. This decline was primarily driven by lower sales and the associated reduction in the fixed cost absorption in our Office segment. The lack of significant market growth has continued to create incremental pricing pressure. As a result, we expect to see some gross margin erosion in early 2014 as we continue to meet competitive discounting in North America office. Office gross margins are expected to drop early in the year and then improve as a combination of recently announced price increases and are slightly in transformation initiative kick in. For full year 2014, we expect that inflation will not be significant and we should benefit from weakening Canadian dollar. As planned and previously communicated, we continue to invest in our strategic initiatives. The major initiatives include new showroom, offices and retail space in New York, our new website, continued development of our new ERP system as well as some additional headcount in sales and marketing. As a result, our operating expenses were $4 million higher than a year ago. Expenses associated with strategic investment initiative will continue to increase in 2014 as we ramp up in cost annualize. Sequential spending in the third quarter was $3.2 million higher and sales and marketing, ERP, timing of variable sales compensation, partially offset by reduced incentive compensation. For the quarter, adjusted operating profit was 6.9%, 430 basis points below a year ago. After adjusting for the one-time Edelman tradename impairment of $8.9 million and restructuring cost of $5.7 million. The lowest sales in our Office segment was primarily responsible for the overall degradation. Operating profit in the Studio segment was down on lower sales. Our Covering segment adjusted operating profit is up significantly on flat sales due to one-time prior year inventory adjustment. Without this one-time adjustment, Coverings operating profit would have been up modestly. As I mentioned earlier, we had a one-time non-cash Edelman tradename impairment of $8.9 million. We purchased Edelman Leather in 2007. Edelman revenue has underperformed revenue projections made at purchase time when the tradename was valued. As a result, the tradename is considered impaired and will be written down by $8.9 million from the current book value of $26.1 million. Edelman remained solidly profitable and accretive to our earnings. Additionally, as an important step towards meeting our committed margin improvement, we are pleased that our supply chain transformation initiative is beginning to create efficiencies. These efficiencies have allowed us to initiate voluntary separation of over 100 associates in U.S., Canada and Europe. We estimate the total restructuring cost to be $5.7 million within approximately one-year payback. Interest expense was $1.4 million, approximately one-tenth of $1 million below a year ago due primarily to reduction in bank debt. Other income was $2.2 million, up 1.7 million from fourth quarter of 2012 termed by foreign exchange gains due to the de-valuation of the Canadian dollar. Adjusted earnings per share was $0.21 for the quarter, excluding the trade name write-down and restructuring one-time item. In the quarter, we reduced our bank debt from $183 million to $173 million. Our net leverage ratio as calculated under our bank agreement is 2.22 to 1, we are comfortably in compliance with our bank covenants and at quarter end had approximately $12 million of cash. Capital expenditures were $8.6 million for the quarter. In 2013, we continue to strengthen our balance sheet as we target the working capital improvement in accounts receivable inventory and accounts payable. With our strong balance sheet, we are well positioned to comfortably fund the Holly Hunt acquisition. As Andrew mentioned, the Holly Hunt acquisition will be immediately accretive and will serve as a highly profitable growth platform. While 2013 shipments were negatively impacted by continued declines in our government business, particularly in our Office segment, we did gain commercial share and continue to pursue our strategic investment, supply chain transformation and IT initiatives. We reduced our bank debt by $20 million and consistent with our strategy completed the Holly Hunt acquisition. Combined these actions positioned to operate for profitable growth in our support of a longer term sales and profitability goals. Now, we’re happy to open up the line to your questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Budd Bugatch from Raymond James. Please proceed.

[Budd Bugatch:]

Good morning, Andrew. Good morning, Craig. I guess my first question is Andrew, last year, I think this time you set out a $1 billion plus 12 plus percent operating margin target for 2015. I don't think at that time acquisitions were contemplated to be a part of that. Can you comment on a, the progress to that and b, how do we think about that in relation to the Holly Hunt acquisition?

[Andrew Cogan:]

Sure. Good morning, Budd. I think acquisitions also were a part of the strategy. They are always something we are looking at in terms of, how to grow and how we continue to evolve and build that kind of Knoll we would like to see build so, but even excluding that I still continue to believe that we are on path towards those goals. Whether it will exactly get there in 2015 or not, I can’t tell you. I think when we set those goals we probably didn’t anticipate the government headwinds would be as extreme as they’ve been. But that said, I think we took our hits down. I don’t expect a lot more degradation in that area. We continue to expect to move our business towards those 10% to 12% margin levels and that’s what we are working towards with a view. The key thing in that is clearly Studio and Coverings that are working very well and very effectively in terms of that goal. So the key challenge and opportunity for us is to drive the Office operating margins higher. And I think we are kind of in this toughing mode in Office and we probably saw some of the trends in terms of demand that we are seeing going forward and Office is where we are affected. But we have all the operating leverage in the world off of that fixed cost space. So, I do believe as we move through the year, you will start to see improvements in the office operating margins and those are what’s pivotal to get us towards that, 10% to 12% operating margin goal next year.

[Budd Bugatch:]

So, I hadn’t heard 10% to 12% before, I heard 12 plus as our operating margin target for 2015. And I didn’t -- you are not telling us if we should ratchet up the revenue expectations to a $1 billion. Is that’s what I’m hearing here?

[Andrew Cogan:]

Again, I think, when we set the $1 billion target, Budd, we really didn’t anticipate some of the additional government headwinds that we have to take. So, anyway what you are talking about $1 billion, our goal is to get north of $1 billion, north of 10% operating margins. And I think we are very much on a path to do that as we get into 2015.

[Budd Bugatch:]

Okay. I got a few more questions if I could. You said, government was down to 12% of your total business, is that for the year or for the quarter, or how would you -- can you give us the numbers for the year and the quarter?

[Andrew Cogan:]

That was for the year.

[Budd Bugatch:]

And how about for the quarter?

[Andrew Cogan:]

I don’t have it specifically for the quarter.

[Budd Bugatch:]

Okay. Can you also tell us what happened with Edelman and is that write-down of all of the trade name value and there is goodwill left? How does that flip between trade name and other intangibles and goodwill?

[Craig Spray:]

No, no, that’s not the entire write-down, Budd. Right now, we have 26.1 on the book, so with the 9 -- 8.9 write-down on the balance will be whatever that math is.

[Budd Bugatch:]

So is it 26.1, that is the goodwill or is that the intangible of the trade name?

[Craig Spray:]

That is just the trade name.

[Budd Bugatch:]

That’s just the trade name, okay. Andrew, how do we think about this year that we are in? You made a little bit of a comment about -- I think the operating margin of Office is getting better in the second half, is that what I understood?

[Andrew Cogan:]

Yeah. We are seeing really nice orders momentum as both. We ended last year and as we went through January and begin this year. So, I’m encouraged that we are going to see some nice topline growth as we move through the year. I think initially as we start the first quarter, there will be some pressure on the Office business primarily as it relates to some price erosion in the first quarter. And I think that’s more a function just of how kind of sluggish industry demand overall has been. But we have a decent price increase going in place next week. It’s on an average of about 4%, and we think the combination of that increase with the pricing trends we are seeing will put us in a more positive price position by the time we get to the back half of the year. So, again, I would expect Office margins to trough early in the year and then start to move up to the 5%, 6% range by the time we get to the back half of the year. To get to the 10% to 12% operating margins in 2015, Budd, we have to get Office operating margins up to about 8% or 9%. And so we need to go from where we were this year, which was in the 3% range. We need to get to 5%, 6% by the end of this year and then 8% or 9% by the end of 2015. If we do that, I feel very confident in our margins in Coverings and Studio and we will get to that 10% to 12% total enterprise operating margin. But it is going to happen on the Office piece. That’s where our focus is.

[Budd Bugatch:]

And the restructuring you did, can you tell us about a little bit what that was and do we have more to look forward to in 2013 -- 2014, pardon me?

[Andrew Cogan:]

Yeah. And that was related to one of the automation that we put in place, particularly as we've consolidated types of operations. For instance now, we're really making all our laminate work surfaces in one location in Pennsylvania. And so bringing those together, instead of doing it in multiple plants, doing them at one plant and then doing them on a equipment that's significantly more automated, means that we have more capacity, we can do it more cost effectively, we can do it on fewer shifts and we do not need as many people to man that equipment and that in essence is what you saw with the restructuring. So that was about half of the restructuring, it was primarily related to some of the reorganization, how we're making our wood work surfaces. And we really will see the full benefit for that program starting in the middle of 2014 as we finish putting in some of the wood transformation equipment. The other half of the restructuring was in Europe, where the team's done a really nice job and simply believe that we have two small locations in Europe. We could operate them with significantly less overheads and fewer people with much greater shared surfaces amongst those plants in Europe. And that's really what we affected over there. In terms of additional restructuring, I think there's a possibility of -- of another $5 million or $6 million at some point later this year as some of these transformations continue. But I don't see anything dramatic.

[Budd Bugatch:]

In Europe, you were able to close the facility, is there a social cost?

[Andrew Cogan:]

No but what we do is we have two small facilities and we had multiple management teams running those and we were able to consolidate them really under one management team in essence.

[Budd Bugatch:]

And so the restructuring is a social cost required to terminate?

[Andrew Cogan:]

Exactly. You got it.

[Budd Bugatch:]

Okay. Thank you very much. Good luck on the year.

[Operator:]

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

[Matt McCall:]

Thank you. Good morning, guys.

[Andrew Cogan:]

Good morning.

[Matt McCall:]

Andrew, the detail you just gave Budd about, kind of, what you need in office to get to your target range, sounds like 10% to 12%. You need 8% to 9% in office. So you've got some benefits that should show up from restructuring and maybe some efficiency gains but what kind of growth -- what kind of growth would that segment need over the next couple of years to get to that number?

[Andrew Cogan:]

Again I think if we could have something in the 5% to 7% growth, we can come through with those numbers. And again you look at the total performance of the enterprise last year and you say, why you know, your sales declined more in than the industry and all that. If I take out government, when we launched, government sales were down 25% last year. Excluding government, in virtually every category, we grew better than this month. So again I feel very confident in the office business. We can deliver 5% to 7% growth over the next couple of years and that coupled with the transformational efforts should get us to the 8% to 9% operating margins. It won't happen this year. I think again this year we're kind of somewhere in between the 2% and 3% we were this year and the 8% or 9% we need to be. So call it 5% to 6% is our expectation for office. And then I'm coupled out with the mix of what we're getting from Studio and Coverings and the additional profit impact from the Holly Hunt and we will be moving up to those levels as we end '14 and head into '15.

[Matt McCall:]

Okay. I want to understand the spending commentary a little bit more. There was a $4 million number. Craig you might have mentioned it. I just didn't understand what you -- $4 million, was that the spending number on a year-over-year basis because I thought it was going to be much, much higher than that?

[Craig Spray:]

Operating expenses were up about $4 million in the fourth quarter versus the third quarter. Overall I think operating expenses were about $225 million for the year. That was up from about $206 million the year before. I think this year we're probably running, excluding Holly Hunt, somewhere around $60 million of operating expenses a quarter. Some quarter it's higher, some quarter its lower, but I think that's probably a good range to use for a $240 million operating expense number.

[Matt McCall:]

And you've mentioned that mid-year you would start to see some of that spending curtailed in Coverings and Studio. Did I understand that correctly, is that a change of pace from previous plans?

[Andrew Cogan:]

No, no, those are completely unplanned. What's happening is you'll start to anniversary cost increases, like additional sales people, product ramp ups and things like that. So you'll have a bigger increase in the first couple of quarters in terms of operating expenses year-over-year. But by the time you get to mid-year, a lot of those costs will already be anniversaring that.

[Matt McCall:]

Got it. Got it. It makes sense, okay. And finally just want to make sure I understood what you were saying about gross margin? When you were talking about pressure, are you talking about pressure relative to what you just did in Q4. I was trying to understand the directional nature of those comments?

[Andrew Cogan:]

Yeah. I think it's relative to really what we did a year ago in Q1. So I think there is some gross margin pressure primarily from the pricing end and primarily in the office end of the business. I think in other areas we'll be improving gross margins. But remember -- I'd point out two other things, one is that we think our list price increase will -- which is not insignificant, will start kicking in by mid-year that will be contributing positively to Office gross margins in particular. And then additionally, we are going to get some benefit from the Canadian dollar. It has depreciated meaningfully from where it was even at just at the end of last year and certainly from where it was a year ago. That's not an insignificant tailwind for us. So I believe the combination of those two factors, really the currency tailwind, the price increase and then midyear, the supply chain transformation is kicking in, should give us substantive bump to our levels of office profitability in the back half of the year.

[Matt McCall:]

And one more just following up on that, you talk about pricing pressure in the industry, but you're also talking about better volume, better older volume, typically don’t -- appear those two comments made back-to-back. Can you help me understand better what's going on from a pricing perspective if demand is actually looking better?

[Andrew Cogan:]

Well, I think when we're looking at price trends year-over-year, in the first half of the last year, Matt, we got to a very slow start and we didn't have that many large projects. We're starting to see a fewer large projects now and that's really where the pricing pressure has been.

[Matt McCall:]

Got it. Thank you, Andrew.

[Andrew Cogan:]

Okay. Thanks, Matt.

[Operator:]

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

[Todd Schwartzman:]

Hi, Andrew. Hi, Craig. Quick question on customer visits may go upside, I don't recall I may have missed it, I don’t recall if you mentioned anything there, anything to highlight?

[Andrew Cogan:]

Yeah, all positive up into the right.

[Todd Schwartzman:]

All positive up into the right. Okay. With respect to lumber, steel, leather costs, what are the trends, what are you forecasting for the rest of the year?

[Andrew Cogan:]

So overall our commodities are somewhat muted in terms of inflation. We don't have a whole lot of inflation coming in and there is some inflation on the leathers you mentioned. But beyond that, we don't see a whole lot year-over-year.

[Todd Schwartzman:]

And on the transport side, did you quantify that or if not, could you just give us some sense of magnitude for Q4 and what you're saying more recently?

[Andrew Cogan:]

I think in general, I mean, we are not seeing any huge changes in transportation cost and stuff like that.

[Todd Schwartzman:]

Okay.

[Andrew Cogan:]

There were some inefficiencies as we ended the year but nothing dramatic.

[Todd Schwartzman:]

Okay. Thanks a lot.

[Operator:]

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

[Josh Borstein:]

Hi, Andrew and Craig. Thanks for taking my questions. Just on the first quarter looking at Office, I know last quarter there were some projects that got pushed to 1Q from 4Q. I think you guys talked about $20 million to $25 million prior to that GSA, part of that being in a project in the Middle East. Can you update us on those projects and maybe frame up some of your expectations for topline revenue in Office in 1Q here?

[Andrew Cogan:]

Well, I think we continued to believe that we -- I think, fourth quarter was kind of a trough in terms of year-over-year volume trend in the Office business. So, I think you will start to see now as we move forward here. As I said, earlier in the call, growth in all our -- growth in all our segments, so I think you'll see office growth. I think you'll see Studio and I think you'll see Coverings growth.

[Josh Borstein:]

Okay. And that growth in Office, Steve, and after you back out, what's going to spill here into 1Q from 4Q?

[Andrew Cogan:]

Yeah.

[Josh Borstein:]

Yeah. Okay. And how do you think about it sequentially in Office? Do you think it's going to be relatively even compared to 4Q because of that push out?

[Andrew Cogan:]

No, I think what we don't want to do is get into too much detail on forecasting or prognosticating by segments. So in general, I think we believe that all the segments will grow next year and certainly in the first quarter.

[Josh Borstein:]

Okay. And then just looking at GSA for the first quarter, is it another difficult comparison for you or I think getting easier now?

[Andrew Cogan:]

I think they’re definitely starting to get easier. So I think we're more in cognizant with that business. It’s kind of stabilized and I don't think that’s going to be the kind of revenue drive that it was in 2013.

[Josh Borstein:]

Okay. And then and you had mentioned you were taking share. At GSA, you're taking share relative to what this numbers are. Why do you think that is when you guys doing right that you're able to take share?

[Andrew Cogan:]

I think we're seeing strong growth in a couple of areas. Firstly, we've made a lot of investments in the seating space in general. And we have some really exceeding things in seating this year. So we’ve seen strong performance in our seating portfolio, number one. Number two, the kind of new workplace model that we’re out there talking about is relates to antenna and a lot of the antenna like product has been exceptionally well received. That's fairly our fastest growing product and category and we're very encouraged there. I mean, when clients are looking for new ways of designing workplace, we are really becoming one of the go-to resource in that area. Antenna interpol all the products around that have been a really compelling offer. And then we're doing very well through our dealers on day-to-day smaller mid-size business, it's more transactional business and that's gone very well with us. So I'd say those are some of our highlights for we're getting really nice growth. So definitely better than industry growth in those areas.

[Josh Borstein:]

Okay, great. And then just one more housekeeping issue. What do you anticipate the interest expense for the year to be in 2014?

[Andrew Cogan:]

I think we're talking about something in the $8 million range or so, $8 million to $9 million.

[Josh Borstein:]

Okay, great. Thank you and good luck.

[Andrew Cogan:]

Thank you.

[Operator:]

Your next question comes from the line of Budd Bugatch of Raymond James. Please proceed sir.

[Budd Bugatch:]

Yeah, just couple of, just housekeeping question. What -- Holly Hunt, will that be included in the Studio segment, is that where that's going to be accounted for?

[Andrew Cogan:]

Exactly.

[Budd Bugatch:]

That will be a separate segment, okay.

[Andrew Cogan:]

Yeah.

[Budd Bugatch:]

And on the -- I just want to make sure I understand on the office side, the breakdown in the fourth quarter year-over-year between government and non-government business. Excluding government, would office have been up or still down?

[Andrew Cogan:]

It would have still been down.

[Budd Bugatch:]

Okay. And Craig maybe you quantify as Andrew doesn’t have that number now, quantify for us off call what percentage of government was in the fourth quarter?

[Craig Spray:]

Well, we can certainly look for that up.

[Budd Bugatch:]

All right. Thank you very much.

[Andrew Cogan:]

I think the good news is that government really has the rate of decline; our government business has really lessened. In fact on the order side, our government business in the fourth quarter was actually up year-over-year. So it’s one of the reasons why we have some confidence that the government number is stabilizing everything. And I think that’s good news in that our government exposure particularly now and even at Holly Hunt on, start to move towards the high single-digit as we move through this year. So, I think we’ve taken our hits there and I think frankly the worst is behind us.

[Budd Bugatch:]

Okay, well, here is when my disconnect comes in. If I think the 12% number tells me that government was about a $103.5 million of your total revenues for the year, is that about the right number?

[Craig Spray:]

I mean, you’re I think within a margin of era, yes.

[Budd Bugatch:]

Okay. And that would mean that the fourth quarter was really kind of stabilized if my numbers previously were right and I understand that. So that let me to worry a little bit more about the non-governmental side of the equation.

[Craig Spray:]

No, listen. I mean, I think that we had some difficult project comps in the fourth quarter of last year to the fourth quarter -- from the fourth quarter of ’13 to the fourth quarter of ’12 on the commercial side. So I think the good news is those were more fourth quarter to fourth quarter related. There were a couple of very large projects in the fourth quarter of ’12 that we did not have repeat on the commercial side in the fourth quarter of ’13. So there was a difficult comp there as well. But again, I think as we move into the first quarter, you’re going to see growth really across all our segments. So that’s why I really believe to some extent the topline comps in Office really dropped in the fourth quarter.

[Andrew Cogan:]

Okay, I mean, that’s what I’m trying to ramp my heads around that and make sure I don’t overstate or understate the case in our own expectations for what we have for you for next year.

[Budd Bugatch:]

Yes.

[Operator:]

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

[Todd Schwartzman:]

Hi guys. Just a quick one on Holly Hunt. Philosophically just looking at the growing shift towards diversifying away from office and looking at that high design, higher margin typically move towards residential settings. Does that stand -- that focus, does that stand from your high concentration within the furniture systems category rather than or maybe in addition to diversifying from office settings per se?

[Andrew Cogan:]

I’m not sure I understand your question, Todd.

[Todd Schwartzman:]

With deals like Holly Hunt, you are growing the specialty business. I think the objective is to do so and to diversify the business, perhaps make subsequent drops, a softer landing if you will, be in high design which brings you that high content, gets you greater margins that helps you be (inaudible). And a part of that seems to be with Holly Hunt is a growing emphasis on res versus non-res type customers. So in general, you’re trying to branch out from office, correct?

[Andrew Cogan:]

Yeah, I know, I think what’s interesting thing is that Knoll’s always had a great tradition of being both B-to-B and B-to-C. If we go back to the 1950s, about 25% of our revenue was in kind of consumer or residential spaces and about 75% at the workplace. When you look at out suggested now for kind of Holly Hunt transaction, you look at our KnollStudio business today. In Europe half of KnollStudio business is residential, a significant chunk of our Studio business in North America’s residential. We will be back to the point where very much like well before in the 1950s where about 80% of our business will be contract related and 20% will be residential. So I think it’s a – frankly I think, our belief is that design is not something you leave at your front door when you go to work, or when you go home at night. And to be kind of a high design luxury lifestyle brand, they can transcend all these environments so we can have great beautifully designed high performance workplaces for corporate clients and we can take those principles and extend them into high design, luxury high margin, high environments for individuals is something that’s in our DNA throughout our history. And so I view this is just building off of that DNA.

[Todd Schwartzman:]

No, I get that, but where I was going with the question Andrew is that when you first launched the generation chair, it was with expanding margins in mind, but also to lessen the emphasis on other product categories and you were kind of underrepresented by seating. And I’m just wondering whether maybe you haven’t gotten to where you wanted to be in this seating/storage and case goes, just the non-systems category where you were and probably to some extent still are over-weighted vis-à-vis different?

[Andrew Cogan:]

Yeah, no, I don’t think this has anything to do with that. I think actually we’re very pleased with the performance in seating in particular. It’s been one of the fastest-growing categories in our portfolio. And I think when you look at some of the things that we’ll be doing this year and next year, there are some very significant things in seating that we’re going to continue to do. We’ve significantly increased our market share in seating over the last two to three years. We’re doing it at better margins and with really innovated product. So I feel very good about what we’re doing in terms of seating. I feel very good about what we’re doing in terms of diversifying our whole office portfolio away from kind of what was a historic dependence on cubicles and workstation. So I think there is a nice diversification going on within the office business, it’s a lot more work on kind of these interstitial spaces between spaces. I think that we see some very meaningful opportunities within the office environment from a product standpoint that we’re going after and that I think you’ll see coming to market over the course of this year.

[Todd Schwartzman:]

Great, that’s very helpful. Thanks.

[Andrew Cogan:]

Thanks.

[Operator:]

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

[Andrew Cogan:]

Well, thank you everyone for joining us on this call. We’re very excited with the moves we’re making that we are going to achieve the strategic objectives we set out a couple of years ago building this high design, high performing, high margin business is the leader on the space. And we’re confident we’re on that path and we look forward to filling you in on April is the end of the first quarter. So have a good day everybody. Thank you.

[Operator:]

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect and have a wonderful day.