Knoll's (KNL) CEO Andrew Cogan on Q4 2015 Results - Earnings Call Transcript

| About: Knoll, Inc. (KNL)

Knoll, Inc. (NYSE:KNL)

Q4 2015 Earnings Conference Call

February 12, 2016 10:00 AM ET

Executives

Andrew Cogan - Chief Executive Officer

Craig Spray - SVP and Chief Financial Officer

Analysts

Matthew McCall - BB&T Capital Markets

Kathryn Thompson - Thompson Research Group

Budd Bugatch - Raymond James & Associates

Operator

Good morning everyone and welcome to the Knoll, Inc. Fourth Quarter 2015 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 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 CEO of Knoll. Thank you.

Andrew Cogan

Thank you. Good morning, everyone. I hope you had a chance to access our video presentation last night, which we think helps better give you a sense of the richness of our brand and the drivers of our financial performance. For those of you that did not view this presentation it is available on the Investor Relations page at knoll.com. If you’re on a mobile device you need to select the desktop site at the bottom of the page to view the video.

We are so pleased to be reporting strong Q4 and 2015 results today. Before we get into those in detail, I thought some broader context of our strategy would be helpful. Our pursuit of building a constellation of high design, high-margin businesses that leverage our historic relationships with architects, designers and decorators has resulted in the creation of a singular and distinct entity.

Clients around the world use our designs to create inspired workplaces, education, hospitality and residential settings versus those to whom someone will lump us, North America office furniture represents a smaller part of our total sales, our European business is highly profitable and split evenly between office and residential customers and distributors, our residential strategy does not involve building out a separate direct-to-consumer retail business and we don't have any exposure to mass supply driven channels.

Simply put, we are playing a different game than others and executing that game plan well. The differences are truly that stark. We believe over the long run, our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. And importantly, our brand of DNA and ownership of the authentic design position in the markets we compete gives us an emotional resonance with buyers and specifiers, which few others in any industry enjoy and helps to attract a higher quality of salesperson and dealer partner.

Furthermore, as the workplace evolves whereas the traditional boundaries between residential and contract blur, companies compete to attract and retain talent and the importance of a total environment trumps any one particular element, we have the singular constellation of businesses to meet these requirements.

Our recently renovated showrooms from New York to San Francisco to Houston demonstrate viscerally for our clients and designers the power of bringing together our innovative mix of office furnishings, KnollStudio design classics and lounge designs, Spinneybeck and FilzFelt architectural material and our broad range of KnollTextiles coverings.

This package helps us to capture both more of our client's total spend and elevates the profitability of that engagement in a way it doesn't for others. Two other trends merit mentioning and create opportunity for Knoll. The changing balance between the allocation of office space between the individual and the group creates opportunities outside the traditional workstation market. At the same time we are also seeing clients incrementally investing in giving the individual more adjustable and high-performance options. This can increase the average selling price of an individual space.

Coupled with an increased focus on wellness, this also creates opportunities to innovate with new types of products, which we look forward to bringing to market this year that gives our clients compelling reasons to incrementally invest in the individual workspace. We committed three years ago to put in place a strategy to improve our profitability and diversify our business. Since then sales have grown by 28% or $242 million split between organic growth and the HOLLY HUNT acquisition.

Adjusted operating profits have more than doubled from $55 million to $113.5 million and we have delivered two years of consecutive 180 plus basis point improvement in our adjusted operating margins from 6.4% to 10.3% driven by significant gross margin expansion. Adjusted EPS has increased by 124% from $0.68 to $1.52 and our leverage has been reduced from a peak of 3.2 to 1 to 1.67 to 1.

Today, over 38% of our sales and 61% of our adjusted profits come from outside our North America Office segment. No contract furniture company could make that statement. We at Knoll take our commitments to our shareholders seriously. These increases have been the result of a combination of efforts including the transformation of our manufacturing operation. The evolution of the mix of products we sell with a highly successful acquisition of HOLLY HUNT and tailwinds from a strengthening dollar, which uniquely help reduce our product costs given our manufacturing operations in Canada and Europe.

Since we began these efforts, our office adjusted margins have gone from 2.7% to 6.5%. Our studio adjusted margins from 11.7% to 14.4% and coverings from 19.3% to 22.3%. Yet even after this progress, we still believe we can continue to generate at least another 100 basis points of adjusted operating margin improvement annually as we drive better profitably in our Office segment from more efficiency and continued work in our plants to more profitable mix of product revenue. And we prove that in Q4, where we delivered adjusted office margins of 8.7% and Inc. adjusted margin of 11.1%, increases of 140 basis points respectively.

Well, no doubt we are in cyclical businesses, we as the smallest of the majors are the most nimble with the greatest opportunity for shared gains across the broad spectrum of our product categories. In fact, that’s what we've done in the past two years as our North America commercial business has grown meaningfully faster than the reported BIFMA market data.

I [would] [ph] expect us to do that again in 2016 as we innovate and leverage significant new-product momentum in areas of adjustability, ergonomics, architectural materials, and collaborative furnishings combined with sales and marketing investments and increased feet on the street to cover our more dispersed market and a new marketing campaign that serves to further differentiate our brand and unique constellation of capabilities.

This coming June at NeoCon, we will launch what we believe is the most compelling and broad-based new-product platforms since the introduction of Antenna Workspaces, which extends our reach into growing markets contiguous to those where we have a core strength today. Our track record organically innovating, creating new revenue streams is strong and we expect no less this time around.

On the residential side, HOLLY HUNT continues to exceed our expectations as our strategy of expanding her showroom footprint and using this foundation as a platform for both organic growth and existing categories and future acquisitions plays out. The quality of the HOLLY HUNT showroom experience stands out in a fragmented to the trade marketplace.

And together with residential opportunities in our KnollStudio business here and in Europe gives us exposure to a sophisticated and educated clientele that is willing to invest in the finest and modern design. We think this is a time of great opportunity across all of our design driven businesses and we look forward to taking profitable advantage of this environment to continue to build one of the greatest all-time brands, all-time design brands ever created, Knoll.

Now, let me turn the call over to Craig to walk you through our results in more detail. Craig?

Craig Spray

Thank you, Andrew. We are pleased with our 2015 results. We finished the year with net sales up $54.1 million or 5.2%. On a constant currency basis net sales were up 6.9%. Adjusted operating profit improved $27.5 million from $86 million in 2014 to a $113.5 million in 2015.

Our growth and strong operating performance allowed us to increase our dividend by 25% during the fourth quarter and paid down $36 million of debt, reducing our leverage ratio from 2.41 to 1.67 times EBITDA. Knoll fourth quarter net sales increased 6.7%, or 8.4% on a constant currency basis from a year ago.

Office was up 7.2%, or 8.4% on constant currency basis driven by growth in all product categories and customer sectors. Much of the growth in the quarter was due to recent introductions in complementary products like adjustable tables, seating and ergonomic accessories. For the full-year sales grew across all of our product categories, but again, complementary product categories were we have been aggressively investing grew the most.

Studio segment sales were up 8.5% or 11.7% on a constant currency basis as all of our Studio segment businesses, including HOLLY HUNT, KnollEurope and KnollStudio, continued to grow. Growth in these businesses spanned both commercial and residential clients. For the full-year each of these Studio businesses grew their topline on a constant currency basis and expand their bottom lines.

The Covering segment was down 1.3% for the quarter or 0.7% on a constant currency basis as continued year-over-year growth in Spinneybeck and FilzFelt offset weakness in KnollTextiles as well as softness in the private aviation market impacting our Edelman Leather business.

For the full-year Spinneybeck, FilzFelt and KnollTextiles all grew, while Edelman was impacted by the aforementioned aviation weakness. With the better than industry sales growth across Knoll, we are particularly pleased to grow our backlog heading into 2016 as we saw an increase in both day-to-day and $1 million plus orders in the fourth quarter.

For the full-year 15 out of our 18 office sales regions grew versus prior year. In addition, our overall pipeline is up versus prior year including $1 million plus opportunities. Gross margin increased 37.4% in the fourth quarter compared to 35.9% in the prior year. This is inclusive of a $0.9 million one-time charge related to the discontinuation of one of our seating products.

Exclusive of this one-time charge adjusted gross margins improved 180 basis points from 35.9% a year ago to 37.7%. Gross margin improvement was driven mainly by the Office segment as business mix, foreign exchange rates, net price realization, operating efficiencies, and improved fixed cost absorption from higher volume all contributed positively.

Excluding $11.2 million of one-time items, fourth quarter adjusted operating expenses were $81.5 million in 2015, compared to $75.2 million in the same quarter of 2014. The increase in operating expenses in the quarter is related to higher commissions from increased sales volume as well as higher incentive compensation and profit-sharing resulting from increased profitability.

The one-time items included a non-cash Edelman tradename impairment and slower than projected growth at Edelman Leather primarily due to continued weakness in sales to private aviations have resulted in the Edelman tradename being considered impaired and a write-down of $10.7 million was recorded. There are no cash implications and Edelman Leather remains solidly profitable and accretive to our earnings.

Additionally, we incurred restructuring charges of $0.5 million necessary to streamline our corporate structure to improve future profitability. Adjusted operating profit in the fourth quarter improved across all three of our operating segments to $33.9 million, compared to $27.7 million in the prior year. Adjusted operating margin improved to 140 basis points from 9.7% to 11.1%.

Interest expense was down $0.4 million in the fourth quarter from a year ago this is primarily due to a reduced balance on our term loan and revolving credit facilities. For the fourth quarter other income was $0.5 million compared to $3.2 million a year ago. In Q4 2014, other income was related to foreign exchange gains due to the devaluation of the Canadian dollar as well as the gain on the sale of our equity product lines.

Our effective tax rate for the quarter was 35.5% down from 42.3% at Q4 of 2014. Our tax rate in the fourth quarter was lower due to legislative action related to the allowance of certain research and development tax credits that could not be recognized in prior quarters during the year, as well as the mix of sales the varying rates in the countries and states in which we operate.

Net earnings for the fourth quarter of 2015 were $13.4 million up from $12.3 million for the same period of 2014. Diluted earnings per share was $0.28 for the quarter up from $0.26 a year ago. Adjusted diluted earnings per share was $0.43 for the quarter compared to $0.35 per share in the fourth quarter of 2014.

Our balance sheet and cash flow remains strong. Cash provided by operations was $50.7 million in the quarter, compared to $23.5 million in the prior year. We use the excess cash generated from our operating activities to reduce our outstanding debt, invest in the business and pay dividends.

Capital expenditures for the quarter increased to $9.8 million compared to $9.6 million in the prior year. These expenditures are reflective of our continued commitment to invest in our manufacturing and information technology infrastructure. Total cash used by financing activities in the quarter was $43.5 million, the primary use of cash and financing activities with the repayment of debt. Other financing outflows during the fourth quarter of 2015 include the payment of dividends of $7.2 million.

We will now take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt McCall of BB&T. Please proceed.

Matthew McCall

Thanks. Good morning guys. So you referenced backlog growth a little bit and I know that it’s kind of a reasonably near-term indicator, but can you give any more color on kind of the way the quarter ended from a backlog perspective and then any comment on the trends that you’ve seen thus far in Q1?

Andrew Cogan

Sure Matt. It’s Andrew. Good morning. I may say a couple of things. We had a very strong orders into the year and we continue to January with further growth. As we look at the timing of the backlog, it looks like it’s a little more second quarter weighted than first quarter weighted and if you recall last year our greatest growth was in the first and fourth quarter.

So I think as you kind of play that all out our sense is that we should continue to grow greater than BIFMA, BIFMA may be at 4.2% a bit optimistic particularly given the kind of Q4 trajectory and some of the macro uncertainty, but nonetheless with the backlog we have we feel we continue to grow as we move through 2016.

Matthew McCall

Okay. You mentioned a few times complementary and I think you’ve talked about adjustable height desks things like that. When we talk about the mix opportunities and I think the phrase you use is profitable mix of, I can’t read the rest of my writing something revenue, but when we think about the mix opportunity and you’ve introduced a bunch of products, how much do you think beyond what BIFMA is going to do, how much can you benefit from those mix shift and thus share gains within some of these product categories?

Andrew Cogan

I think very much so. When you look at the BIFMA data for 2015, it’s interesting to see kind of the companies in the $25 million to $150 million range grow faster than the companies in 150 plus range.

Now we outperformed those smaller companies particularly from an order standpoint, but I think that's indicative of more of the action or the growth is in these complementary areas outside of the core office workstation market and we've been very active in that area when I referred to some of our major plans for NeoCon, we have incredibly robust effort targeting that area where we have low share and think there is significant opportunity to gain share.

And these aren’t plans that we’re just doing. These have been in development obviously for 18 to 24 months and are now starting to come to fruition. So we’re really excited about our opportunities in those ancillary areas.

Matthew McCall

If you had to pick one complementary product that a year or two, three years from now makes up a much bigger percent of your total revenue what would it be?

Andrew Cogan

I'm not smart enough to give you that guess, but what I can tell you is we are shooting pretty broadly in terms of a whole range of products in that area and I think it's actually less about any one particular thing, but more about a whole range of offerings and entire as we say constellation of capabilities and that’s really what we’re developing.

If I had to be specific, if you viewed the video and you saw a new product called [Hi-Lo] [ph], which we previewed, we think it's one of the most innovative products this generation and it’s something literally every office worker should have in addition to the chair they're working with, particularly if they're working in an adjustable environment.

Matthew McCall

Okay. Yes, I did see. That was the one you were sitting on?

Andrew Cogan

Perching on, yes.

Matthew McCall

Perching, I’m sorry I wanted to say perching so badly, but. Yes, you mentioned the video and you’ve also referenced M&A I think you did it in the video and you referenced on the call. Can you talk about the M&A opportunity, the pipeline, the capacity you have now that your leverage is down less than 1.7 times and has this stock market dislocation potentially helped at all?

Andrew Cogan

I think we have a robust pipeline of activities both adding to our existing businesses and then further penetrating some other categories that we’re interested in. I think obviously from a balance sheet standpoint, we have hundreds of millions of dollars of balance sheet availability. We have never been in this strong shape that I can recall from a leverage and balance sheet standpoint.

In fact, one could argue we are maybe under levered, but part of our theory is to kind of keep our powder dry, so we can do continue to do acquisitions and I think we’ve got a very, very strong record. HOLLY has been a home run as an example. So we’re excited about those opportunities and what's out there.

Matthew McCall

Okay. Final one for me. You mentioned some sales and marketing investments in furniture, sounds like adding some feet on the street there, and then obviously the new marketing campaign and all the new products you have out, so is this an indication that your SG&A is going to tick higher as a percent of sales, how should we think about SG&A overall?

Andrew Cogan

In general I think we’re managing SG&A around 27% of sales on average. So I think that's probably a good way to think about it. As we look at incremental growth, we’re getting really good leverage on the gross margin line. Our plants are doing an outstanding job, but we are reinvesting in some of the contribution margin from that incremental sales in terms of more SG&A spending and investment.

We’re doing it selectively, we’re doing it very smartly, it's highly analytically driven, it’s market-by-market, it’s not scattershot, but I think it’s prudent to be doing that. And we still think we can generate 100 basis points of operating margin improvement annually, which remains our commitment with that incremental level of SG&A spending as long as we continue to get the gross margin improvement, which I think we continue to show even in the fourth quarter we were capable of delivering.

Matthew McCall

Is that 100 basis points dependent on a certain level of growth?

Andrew Cogan

Again, our theory is that BIFMA is going to be lower than they're expecting right now. But we still think we can grow low-to-mid single-digits in that range, barring some dramatic development. Yes, I would think we can generate another 100 basis points of operating margin improvement in 2016. That’s certainly what we’re shooting for. We obviously can’t promise it, it’s a particularly dynamic environment right now, but that's our goal.

Matthew McCall

Okay. Thank you, Andrew.

Operator

Your next question comes from the line of Kathryn Thompson of Thompson Research Group. Please proceed.

Kathryn Thompson

Hi, thanks for taking my questions today. First of all, I’d like to focus on margins. You as a firm have been placing a heightened focus on margin expansion through overall process improvement particularly in the Office segment. When you look at the margin expansion in Q4, how much of this reflects these specific process improvement efforts versus a combination of just better volumes, pricing et cetera?

Craig Spray

So I would say the better volumes are probably the least of the drivers. We've been making this journey now for few years and I think we’re starting now to really see some traction on the operating improvements and I think that's really one of the biggest drives along with some net price realization.

Andrew Cogan

Kathryn, its Andrew. I’d also add in our plants, the focus on efficiency, productivity, better leveraging some of the major capital investments we’ve made has been significant contributor. As well as listen, we’ve got a nice tailwind from a strengthening U.S. dollar given our manufacturing in Canada and Europe. So that also is helpful.

Kathryn Thompson

Perfect. In terms of where you are from an inning standpoint, are we towards the middle innings, latter innings, early innings of these operation I mean I know it’s a constant process, but in terms of specific initiative focusing and how products are manufactured and the flow through the entire process of the Company where we…

Andrew Cogan

Kathryn yes, that’s a great question. I’d say we are in the early to middle innings. I was with our operations team yesterday going through their initiatives in detail and they’re thinking and it's at a level I haven't seen before. And obviously with that strength and team we’ve got Joe Coppola, our Chief Operating Officer who has elevated the game. Craig has got great operational experience. So we are really – the quality of the discussions, the leadership and the work is at a much higher level and I think we are just starting to scratch the surface and our potential.

There is no reason our office operating margin should be below the industry average. So that gives us 300 to 300 basis points of improvement over the next couple of years and if you look at the fourth quarter, we are really expecting office to drive the operating margin improvement. Studio Coverings they are generating really strong margins and I don't – I wouldn’t count on them to deliver even better operating margins. We want to leverage those margins into further growth.

So it's really going to be driven by improvements on the office side and I am pleased that we are frankly off the industry pace with a clear path to get at least two if not better than the industry pace. On the office side and that gets us and already we have industry-leading margins that will only make our margins further ahead of where the industry is.

Kathryn Thompson

Perfect. Thank you. And final question really has to do with the cycle, everyone’s favorite question to ask these days, based on your prior experience in managing through prior cycles what were the earliest signs that we were at the peak or things are about to turn over and how does that compare to what you're seeing today? Thank you.

Andrew Cogan

I would approach it maybe a little bit differently. There's no doubt that the industry had decelerated over the course of 2015 and as we know it’s kind of turned down towards the end of the year. We actually accelerated towards the end of the year and maybe those are somewhat Knoll specific indications, but I also would remind everyone. We’ve got a lot of businesses that aren’t correlated to the BIFMA data. We've increased our residential exposure.

Our European business is chugging along a double-digit going very strong, we had a practically poor year in 2015 internationally outside of Europe, but we’ve really already been awarded as much business as we did all last year in some of those international markets.

So I think we are chugging along right now. I think the question and I don't have any particularly great insight into it is this slowdown in BIFMA, the beginning of something greater or is it just kind of a slowdown that reflects the challenges and confidence in some of the other macroeconomic things that people are talking about.

I’d say right now it’s probably more slowdown than the beginning of a step level down, but we’re watching it and we’ll react appropriately I mean we’ve managed through the cycles before, but we've never been this diverse in our revenue mix and sources of profitability. So whatever the environment brings I think we’ll weather it better than we have in the past and we’ve got a good track record of weathering those kind of environment.

Kathryn Thompson

Great. Thank you so much.

Operator

[Operator Instructions] Your next question comes from the line of Budd Bugatch of Raymond James. Please proceed.

Budd Bugatch

Good morning Andrew, good morning Craig. I am looking forward in my advanced age for you teaching me how to perch when we get to NeoCon so?

Andrew Cogan

We can’t wait Budd.

Budd Bugatch

Okay. I guess picking up a little bit on what Kathryn was saying you were particularly anxious I think a year or so ago to start improving the operating performance inside of office and I know your new Chief Operating Officer is doing that. Can you describe a little bit what you are doing and how much you have to go on that or try to get to Kathryn’s question a little differently?

Craig Spray

Yes. So Budd, as you make improvements in factories a lot of times you bring in new equipment, you’re changing flow, you’re moving up learning curves and while we have made a lot of those improvements, a lot of the goodness that comes out of those is yet to come. And as I mentioned to Kathryn really Q4 was we start seeing some of those fall through.

Now, we’ve experienced those positives for a while, but we’ve been offsetting them with disruptions and outsourcing to third parties that maybe a premium things of that nature. So as we are able to bring these things back in house, our expectation is that with Joe and his team we can ramp up and do these things more efficiently. So we do think there's a nice runway in front of us and I won’t say we just scratched the surface, but we’re not - certainly not much below the surface?

Budd Bugatch

Okay. And so when you look at office I think the margins were up year-over-year or something like a 139 basis points, 140 basis points. How much of that was due to the Canadian dollar just looking at how much of was due to the operating improvements?

Craig Spray

So the lion share was between FX and price realization. I'd say 40/40/20 kind of split and that's really the good news for us because that 20% was really heavily weighted towards the back half of the year as we started to really layer in the savings. So we have some momentum coming into 2016 and our expectation is that that will continue.

Budd Bugatch

Okay. And Andrew do you still think office margins can get to the 10% range I think that was something you’ve told us before?

Andrew Cogan

Absolutely.

Budd Bugatch

And you want to put a timeframe on that?

Andrew Cogan

Listen, I think right now we are saying about a 100 basis points a year and that’s basically going to be driven by a 100 basis points a year of office operating margins. I think you saw that in the fourth quarter, we were up 140 basis points in our office operating margins in the fourth quarter and then that’s at the office level and that really flowed through to the Inc. level.

So I would say the focus is on continuing to drive the office operating margins and I would build on Craig’s comments, which were last year we really focused on the reliability of our supply chain and we achieved a very high level of reliability. I think this year we’re really focusing on the efficiency and productivity of it there is still an enormous amount of waste in our manufacturing process.

Our cycle times are still longer than they need to be internally. And so there's just so much improvement and I will say operationally we have the strongest team we've ever had at Knoll and each one of those people is very focused and what they need to be doing in their particular area to drive improvement in there and they’re delivering on that.

So I think 100 basis points is a reasonable expectation and then it’s a two or three-year journey to get to double-digit operating margins in office. Now, there will be a lot of other pieces that move around over the macros in the pricing environment and there is a lot of other things the commodity environment FX, but again apples-to-apples I think you'll see our operational efficiency and improvement only accelerate.

And one more build on Craig’s point. In the back half of the year we had significant more continuous improvement projects realize themselves than in the front half. So we probably have some more carryover opportunity of things, we just started ramping up in the back half of the year, in the front half of 2016.

Budd Bugatch

Okay. Thank you for that. When you look at office and you look at the growth year-over-year which was quite impressive compared to the industry type metrics that we see. How much of that – can you parse out office growth year-over-year domestically maybe Europe and you’ve always had some strong business coming out of I think Middle East. So can you give us a feel for how the domestic side or the North American side did in the other areas of the geographies?

Andrew Cogan

Sure. Europe is not reported as part of our Office segment so I would take that out. Any Europe office work is in really in the Studio segment of Europe. So on the international piece, again the Middle East international markets were very weak last year. I think we were down well over 50% in those markets, but as I think as I said earlier the good news is we’ve already won as much business going into this year as we did all of last year. So I'm optimistic that will be better this year.

On the core U.S. Office business, we grew over twice as fast as the market and it was driven by couple of things. One, our government business is stabilized and actually is growing again and so that's not insignificant thing for us. We have good exposure there.

Our day-to-day dealer business was up strongly. So we are doing the better job there. And as our reliability has improved our dealers are coming to us for more things. So that's really good to see. And then as Craig said from a product standpoint a lot of the investments we are making in seating, in tables, and accessories, all that stuff has really gelled and resonated with clients.

And the good news is we have a lot more of that coming and including the most robust platforms we've ever launched certainly since Antenna this coming NeoCon. So I think we've got good momentum and again the only caution is really where the market is going to go and it is – it has decelerated and we'll see whether it’s a lull, whether or how long the lull lasts or whether it’s something more. But regardless of what it is, we have the products to continue to gain share and that I feel very good about and the feet on the street to do so in a more dispersed market.

Budd Bugatch

Okay. I don’t think I’ve ever seen your leverage as low as it is now. What is the target leverage ratio that you want to reach and do you want to take leverage ratio back up a bit by…

Andrew Cogan

I think it's great that our leverage ratio is where it is. Now our interest costs are less than 2%. We have strong – our free cash flow is really rebounded, we’ve tried to return that to shareholders in terms of increased dividends and some very modest share buybacks. But I think our focus is we have a vision of trying to build as diverse an entity as possible focused on high margin, high design businesses. And we want to use that balance sheet to do that.

Now we’re prudent about how we do that. HOLLY was an exceptional opportunity and we brought some additional people on to our team to help focus on those opportunities. In response to one of the questions earlier, what we haven't seen is while the public markets have adjusted, many of the private sellers still have what we consider to be inflated senses of value and that’s made getting some deals done very difficult. But nonetheless, we've got couple of things we’re working on which would use some of that, not obviously all of that.

And I think as with HOLLY, we are willing to lever up to about 3.2 times to 1. And then as you have seen over two years, we got that right back down under 2 to 1. So I think that kind of willingness to lever up for an acquisition that we think can be accretive, that we feel confident, we can add value to that we bring synergies to. We’ll lever up for that, use the free cash flow, delever and then do it again.

So I think we’re in a good position and if the private markets adjust in line with the public markets that would be great for us. And we have a couple of things very much in line that we would like to do if the values are there.

Budd Bugatch

Got you. This is on the acquisition front. I think this is the second impairment we’ve seen in a couple of years and Edelman Leather for the tradename, what’s left to impair there and what's left on that is there still more that…

Craig Spray

There is not much left on the tradename and so my expectation is we won’t see that again. And again that's strictly a topline driven impairment doesn't impact our profitability still remains high and in fact that particular business is accretive to our overall result.

So it's a solid business and that's just a number driven primarily by the softness in the aviation area, private aviation. We’ve forecasted that that kind of come back, a couple of years ago and we impaired it, its continued to kind of move along sideways and so we decided to go and take the second impairment, which is the lion share of the tradename value.

Andrew Cogan

And I’d just point out, but we’ve done four acquisitions since Edelman. Edelman was the first, we obviously learned a lot from that experience since then we've acquired Richard Schultz into KnollStudio that’s been fantastic. FilzFelt again up multiples of size from when we bought it and that continues to grow at very strong rates and then HOLLY HUNT has been not only wonderful from financial standpoint, but opened up a whole other channel and platform, which we continue to believe we can scale and grow.

Budd Bugatch

And is HOLLY HUNT were the most of the other intangible sits now on the balance sheet Craig?

Craig Spray

Yes. The majority of it would be sitting there, yes. Maybe large chunk.

Budd Bugatch

Okay. All right, well thank you very much. Congratulations and good luck going forward I look forward to seeing what you’ve got at the NeoCon. You want to give us any other peak is to what’s other than the - what you saw, what we saw in the video?

Andrew Cogan

It’s exciting stuff.

Budd Bugatch

All right. Thank you, Andrew.

Andrew Cogan

I'll help you perch, Budd.

Budd Bugatch

I am looking forward to it. I am not sure I’m teachable on that, but I’ll certainly give it a try. Thank you.

End of Q&A

Operator

At this time, there are no additional questions in the queue. And I would like to turn the call back over to Mr. Andrew Cogan for closing remarks. Please proceed.

Andrew Cogan

Thank you. First I want to thank everyone for joining the call and again I urge you to go visit the video online because I think it gives you a full sense of what we’re doing in a little sneak peek of the new Hi-Lo. I want to extend my thanks to all of the dedicating Knoll Associates at Knoll around the world who work so hard every day to deliver the benefits of our brand promise and make it a reality for our clients around the world.

And to our dealers here in North America and overseas I want to thank you too for your commitment to Knoll. You have built wonderful businesses around our great designs and without all you do, with the Knoll success story wouldn't be possible. As we say these days [Mac Knoll] is modern always because modern always works. We look forward to seeing all of you at NeoCon and talking to you again in April. Take care everybody.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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