Knoll's (KNL) CEO Andrew Cogan on Q4 2017 Results - Earnings Call Transcript

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About: Knoll, Inc. (KNL)
by: SA Transcripts

Knoll, Inc. (NYSE:KNL) Q4 2017 Results Earnings Conference Call February 9, 2018 10:00 AM ET

Executives

Andrew Cogan - President and CEO

Charles Rayfield - Senior Vice President and Chief Financial Office

Analysts

Greg Burns - Sidoti and Company

Matt McCall - Seaport Global

Budd Bugatch - Raymond James

Operator

Good morning everyone, and welcome to the Knoll Incorporated Fourth Quarter 2017 Conference Call. This call is being recorded. This call is also being webcast. Presentation slides accompany the webcast. In addition, this call may offer statements that are forward-looking, including without limitation statements regarding Knoll's future outlook for the industry and economy. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control.

Actual results may differ materially from the forward-looking statements as a result of many factors including the factors and risk identified and described in Knoll’s annual report on Form 10-K and its other filings with the Securities and Exchange Commission. This 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 are accompanying the webcast.

Now, let me turn the call over to Andrew Cogan, the President and CEO of Knoll. Thank you.

Andrew Cogan

Good morning and thank you for joining us on today's call. As we celebrate the founding of Knoll 80 years ago, the vision of our founders Hans and Florence Knoll to bring the beauty benefits of modern design to the way we live and work is as inspiring and vital mission to our people and clients as ever.

Our growing consolation of high defined global brands from more residentially focused brands like HOLLY HUNT and Edelman to cross over brands like KnollStudio and Muuto and KnollTextiles to work place focused brands like KnollOffice Spinneybeck FilzFelt, KnollExtra and DatesWeiser gives us a singular ability to solve our clients commercial and residential requirements like no one else.

And the fastest growing opportunity set is at the residential intersection of living and working we couldn’t be better positioned with the debts of offering and range of price points and lifestyles starting with Muuto’s new perspective and millennial appeal at the affordable luxury entry point all the way upto HOLLY HUNT’S timeless appeal at the premium luxury level.

This broad capability is core to the strategic initiatives that drive us forward. These include targeting underpenetrated and emerging ancillary categories and markets for growth, expanding our reach into residential and decorator channels around the world, improving the profitability of our office segments and leveraging technology to expand our market visibility and improve our efficiency.

For our shareholders, a growing and increasingly global business with our unique constellation of high design brands and the expanding double digit EBITDA margins that will spring from that as our mix evolves and as we get more sales and higher margin categories combined with an improving office segment should result in an entity valued like the quality of our people, products and brands.

Let me touch on how these initiatives are shaping our results and expectations. As you’ve heard, we’ve been talking about changing work styles and residential merchant design trends that have been profoundly impacting the office landscape and the way clients use and fit out their workplaces. This trend has accelerated in recent years as the newest generation of millennial coming into the workplace have a different set of practical and cultural expectations and the competition to create environment that attract and retain talents become more intense.

And as the options for where and how to work from company owned to co-working and seated the standing height have blossomed. Together with technology they can untether a worker from a dedicated space. Businesses have used this disruption to fashion a workplace which shifts the balance of space allocation away from the individual even if that individual space is upgraded with more ergonomic performance in the group while simultaneously reducing the use of total real estate and looking for ways to reduce the cost of their fit outs and furnishings.

Our topline turn around in the fourth quarter was driven in part by our active response to these trends with new hospitality based products like Rockwell Unscripted accelerating their ramp up with the strongest quarter to date and our expanded range of adjustable tables and benches continuing to decline.

The success of our newer immersive experiential workplace model is one of the reasons we have returned to growth as these combined platforms on an incoming orders basis exceeded those of our legacy workstation and storage products in the fourth quarter.

For the full year, high teen’s growth in new platforms more than offset low teens legacy declines. The shift in the balance of new versus legacy removes the headwind we’ve been fighting.

DatesWeiser has the strongest quarter to date since we acquired them last December, and we are seeing synergies and opportunities to blend their custom capabilities with our existing wood offer as well as leveraging their strong contents from line with our corporate accounts.

While DatesWeiser was an OP detractor in 2017, we expect to start making a return here in 2018 and they are an important part of our holistic workplace capability.

Based on research, we believe that approximately half of the $18 billion mark, workplace market in North America exists outside of the core individual workplace market; we and the other majors predominantly plan today. This portion is growing faster in the market as a whole and the Muuto acquisition gives us what we believe is one of the deepest and consistently branded ancillary offerings on the market today, from lighting to furnishings and accessories.

And it does sell at price points 20% to 40% below most of all Knoll's Studio offerings, so we see it’s completely additive in terms of capturing important pieces of the workplace that here before [ph] we have been locked out of competing for.

Rather than having our sales team or dealers manages a rag tag and hazard collection of different brands, we can now provide a complete ancillary package within our tight 100% Knoll-owned constellation.

And the way our sales team deal with partners and clients are already embracing Muuto, boards well for great success. We have a detailing stage roll out plan for Muuto that will culminate in a national introduction this June at NeoCon in Chicago.

These shifting mixed trends have also directly impacted the size of the opportunity that we are pursuing. While in the fourth quarter we experienced a welcome rebound in larger projects the opportunities in our growing funnel continue to be increasingly weighted towards projects under a $1 million.

As such we are encouraged that the investment in market coverage and headcount we made in our office business this past year will continue to pay off in terms of share gain and growth and expect the incremental cost of these hires to anniversary themselves by mid-year.

We also made another very significant change that into 2018 that we believe will accelerate our penetration of these ancillary opportunities and increase our share of wallet with both our dealers and clients.

In the past our Studio and DatesWeiser sales team were managed nationally. While this brought focus to their efforts, it didn’t always result in the best local coordination. Effective in January, we’ve now moved the reporting responsibility for these ancillary focused sellers to our local office regional managers.

With Muuto included here as well, we now have locally empowered, aligned and incented leaders and sellers working synergistically to maximize growth. Directionally, we believe industry forecast from mid single digit growth are supported by increasing business confidence growing of course possibility and expanded deductibility for capital investments like furniture and internally by a higher yearend backlog and double digit increase in both the number and pool of opportunities in our funnel.

With the absorption of office space as the best levels since late 2015, and more positive projections for growth and business CapEx , we find more tailwinds than we did entering 2017. And with these estimates, we’ve outlined above I like our competitive position better as well.

On the margin side, we’ve realized there remains much work to do particularly in our office segment. This past year we’ve had a slight lower absorption start of the year and then accelerating inflation and foreign exchange headwinds at the end of the year.

While discounting deteriorated over the course of the year and impacted Q4 office margins most acutely, we have seen discounts on incoming orders stabilize and we’ve implemented 2% to 3% price increase this past January which had helped later in the year.

With record shipments in Q4, we are also not as efficient and experienced an increase in both overtime and expedite freight cost. While some of these trends have continued into 2018, we believe margins – we believe as margins on our newer products improve and our lead initiatives gain traction we should do better.

Additionally beyond the dozens of lean events in 2017, and those scheduled for 2018 we are taking a fresh look at our manufacturing footprint and overheads for further rationalization. We will provide more color on these efforts as they get solidified.

We continue to believe upper single to low double digit in our office OP margins should be achievable in the future, but we are not there yet that we did make some sequential improvement here in Q4.

In our lifestyle businesses those with a greatest residential exposure delivered the strongest results. Prior to the addition of Muuto, just under 20% of our sales went into residential end markets. With Muuto, we expect residential and consumer sales to approach 25% of our revenue as favorable margins and with Muuto our sales outside of North America should increase from 15% to 20% of our total revenue.

In Europe, we had another record year of sales and profits. The team there has done an outstanding job of elevating our Knoll Studio brand in Europe with deeper presences in key dealers, new products and revitalized Knoll classics. While our residential dealers in Europe carrying [ph] many lines they were surprisingly a little overlap with Muuto.

As these dealers particularly in markets where we are strongest look to expand the range of lifestyles and consumers they can appeal to, Muuto will be a great addition to the lines they carry.

HOLLY HUNT delivered record results and expanded margins too this year. The investments in new product categories like Outdoor and the acquisition of Vladimir Kagan drove growth in both the top and bottom line.

Additionally, we continue to expand our showroom footprint as we began to test some smaller category focus showroom and an outlet to profitably move out older showroom for models to make room for newer designs.

HOLLY continues to be extremely active in the business and we brought in a full time President to work with her to enable David Schutte to oversee our entire lifestyle portfolio. For the year, Studio segment margins were impacted primarily by the losses at DatesWeiser which we expect to turn to profits as we move through 2018.

Additionally, we incurred start-up expenses for our first retail shop outside of New York. This street corner shop in the residential furniture district of West Hollywood, Los Angeles, echoes the elevated consumer and decorative presentation of the brand that has been so successful for us in Europe. The LA shop opened to rave reviews by Architectural Digest in mid January and we expect it to break even in 2018.

Without these two head margin headwinds margins would have been inline with prior year levels and we are still 15 % for the year. Coverings remained strongly profitable for the year on flat sales. Although on the fourth quarter volume was pressured by some strong project comparison at Spinneybeck, FilzFelt and weakness in KnollTextiles.

Heading into 2018 we are encouraged by the orders momentum we signed KnollTextiles fourth quarter results.

In closing, 2017 was an important rebuilding year for Knoll, as we made fundamental investments across our residential and commercial businesses. In particular, adjustments upto our go-to-market strategy and product portfolio in our office segment responded to rapidly changing market conditions.

The return to growth that we delivered in Q4 demonstrates the traction we are gaining in our core market and bodes well for the year ahead. With the Muuto acquisition now closed, an integration with our North America sales team well underway, our momentum in the market should build.

While on the short term these investments dampen their profitability, we believe over the course of the year ahead the combination of continued growth, of plateauing in the ramp-up investment spending; our lean initiatives and a significantly lower tax rate should lead to EBITDA margin expansion and meaningful EPS growth.

Before I turn over the call over to Charles to walk you through our results and the benefits we expect from the new corporate tax rate, I wanted to acknowledge the tragic passing late December of our Chief Operating Officer Joe Coppola. Joe was an extraordinary leader who was loved by all of those who had the honor of working with him at Knoll.

Joe kicked off our lean journey and we'll be forever grateful to the foundation he put in place in his nearly three or two short years with us. Joe knew his time with us would be limited, and he acted with urgency and commitment to make sure this good work will endure.

Joe selected Scott Cameron, our Senior VP of operations to carry on our lean journey and Scott had picked up Joe’s baton. We have passed our condolences on to Joe's wife, Tammy, and his daughters, Bell and Mia. Charles?

Charles Rayfield

Thank you, Andrew.

Knoll Inc., fourth quarter net sales increased $23.3 million or 7.9% from a year ago. Our Office segment was up $18 million or 9.9%. The increase in Office sales compared to prior year was due primarily to a strong growth in new work place platforms and complementary products in the commercial space.

Our Studio segment sales increased $7.3 million or 8.7%. The increase in Studio was driven primarily by growth in both the contract and residential markets at Knoll Europe, and from increased sales at HOLLY HUNT.

Coverings segment sales were down $2 million or 6.9% driven primarily by fewer large project opportunities. Gross margin decreased 250 basis points from 38% a year ago to 35.5%. This decrease was primarily due to unfavorable net price realization, accelerated commodity inflation and any efficiency from higher volume sales of our newer product lines in the office segment. The decrease is partially offset by higher sales volume and net cost absorption.

Total adjusted operating expenses in the fourth quarter were $80.7 million compared to $75.6 million in 2016. The increase was due primarily to incremental cost associated with headcount investments in our salesforce, and increase incentive compensation compared to the fourth quarter of 2016.

Adjusted operating expenses excluded a $16.3 million asset impairment charge, a $2.2 million pension settlement and $0.5 million of transaction related expenses. The asset impairment charge related to a write-off of capitalized software cost that were previously included in construction and progress.

The write-off was a result of a global design review of the next phases of our enterprise resource planning system implementation that was conducted to ensure that the proposed design for the remaining phases of the project is aligned with our operational requirements.

As a result of the review, the company’s technical needs and project scope were revised and it was determined that certain expenditures that were previously incurred and capitalized would no longer provide a future benefit.

These expenditures pertain largely to consultant cost, internal labor and expenses and software license purchases for modules and functions that we determine would no longer be a part of the scope of the project.

We believe the revised project scope would result in a greatest likelihood of project success, an achievement of our strategic, technological infrastructure goals. The next phase of the implementation for order management is scheduled to go live in 2019 and the final phase related to our manufacturing processes will go live two to three years after the order management phase.

The pension settlement was related to cash payments in the fourth quarter resulting from lump sum elections by employees that were affected by the restructuring activities in the second quarter of 2017.Transaction expenses relate to our acquisition of Muuto which closed late last month in the first quarter of 2018. Interest expense was up $0.7 million from a year ago due primarily to increase interest rates.

The fourth quarter tax provision was adjusted for the effects of the $26.6 million benefit received from the one-time remeasurement of the company’s deferred tax liabilities at the new corporate income tax rate.

This remeasurement was in response to the passage of the U.S. Tax Cuts and Job Act of 2017 or tax reform, which was signed in about the end of 2017. Excluding the benefit from tax reform, the tax rate for the quarter would have been 39.2% up from 38.1% in Q4, 2016.

The increase in the tax rate was related primarily to book-to-tax adjustment following the filing of the prior year’s tax returns. The tax rate was also affected by the mix of pre tax income and the varying effective rate in the countries and states in which we operate.

Adjusted net income for the fourth quarter of 2017 was $17.6 million, down from $21.4 million for the same period in 2016. Adjusted net income is exclusive of the $11.5 million of tax effective operating expense adjustments related to the asset impairment charge, pension settlement charge and transaction related expenses that were previously described.

Adjusted net income also excludes the tax benefit of $26.6 million resulting from the impact of tax reform. Adjusted diluted earnings per share was $0.36 and $0.44 for the fourth quarter of 2017 and 2016 respectively. In regards to our balance sheet and cash flow, the cash and cash equivalents decreased from $9.9 million at year end 2016 to $2.2 million at year end 2017.

Operating activities provided $44.3 million of cash in the quarter compared to $8.6 million in the prior year. We use the excess cash generated from operating activities to invest in the business, pay dividends and reduce our outstanding debt.

Investing activities included capital expenditures for the quarter of $11.1 million compared to $14.7 million in Q4 of 2016. Capital expenditures related primarily to manufacturing equipment, information technology infrastructure and showroom investments.

Total cash used by financing activities was $35.6 million. The primary uses of cash in financing activities during the fourth quarter of 2017 were the repayments of our revolving credit facility and the payment of dividends of $7.3 million.

We concluded 2017 with $191 million of debt outstanding, our leverage ratio of 1.37 and remaining compliance of all that covenants.

During the first quarter of 2018 we completed an amendment and extension of our existing credit facility. Under the new facility we have a total capacity of 750 million that is comprised of a $400 million revolving credit line, a $250 million U.S. based term loan and $80 million euro based term loan.

The facility matures in five years. The refinancing was completed in connection with our acquisition of Muuto which closed on January 25 of 2018. At the close of the facility refinancing our outstanding debt was approximately $530 million and debt leverage ratio is just under 3 times.

The proceeds of the credit facility we used to fund the Muuto acquisition, refinance outstanding debt and to fund ongoing operations. In conjunction with the credit refinancing we entered into an interest rate swap contract that ships approximately half of our outstanding debt from a variable rate to a fixed rate from 2019 through maturity in 2023.

As we look forward to 2018, we want to provide some high level guidance in a few areas and also highlight some reporting presentation changes that will occur beginning in the first quarter of 2018

Looking ahead, and exclusive of Muuto given solid backlog growth albeit a bit more skewed to Q2 and Q1 and positive field summit, we are expecting just north of mid-single digit topline organic growth.

Gross margin percentages will likely be flat to slightly up from 2017 levels as positive absorption, continued efficiency initiatives and with price increases are offset by continued inflation and FX headwinds.

With a ramp-up and operating expenses largely built into our Q4 run rate, including sales headcount and investment spending, we think that annualizing operating expenses gives a fair approximation of our expectations for 2018.

We expect Muuto will conservatively match our organic sales growth in absolute dollars with it being loaded to the back half of the year as we get our sales effort in North America up to speed.

Muuto's EBITDA margins are approximately 25% and we expect an additional $8 million of amortization from Muuto. We believe Muuto should contribute a few cents of EPS in 2018 and then accelerate from there.

Overall our interest rate should be just under 4% on an average debt balance of 500 million for 2018. In regards to tax reform, we expect that our normalized effective tax rate will be between 24% and 26% for the full year 2018.

Capital expenditures are expected to be between 35 million and 40 million for 2018. As we start 2018 ASU 2017 – 07 became effective on January 1 and will result in the reclassification of certain pension-related income and expenses from operating expense to other income and expense.

We expect this reclassification to reduced operating income by approximately 7 million in 2018. This change will have no effect on net income EBITDA or EPS. As it pertains to segment reporting beginning in the first quarter 2018 we will combine our Studio and Covering segments into one segment called lifestyle.

In addition, our European contract business that was previously reported in the Studio segment will be reported as part of the office segment. Muuto will be included in the newly formed lifestyle segment, so in summary who will have the office segment, lifestyle segment incorporate.

Prior-year comparative financials we recast to conform in this new presentation. We believe this presentation better align our segment reporting with how we view and manage the business.

Thank you. We’ll now take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Greg Burns with Sidoti and Company. Your line is now open.

Greg Burns

Good morning. Could you just talk about -- you mentioned booking strength in the quarter for the office segment, but can you just give us a sense of the kind of booking growth you saw this year that gives you confidence in that kind of mid-single digit revenue growth in 2018?

Andrew Cogan

Sure, Greg. This is Andrew. I think it was very consistent with the kind of sales growth we reported. So I think that gives a good indication. I think as we said in our prepared comments there were – there was a rebound of some larger project. So that was certainly encouraging to see and we’ve see a rebound at some of our international activity, but it does look like some of those projects are more scheduled to ship a bit into Q2 and a little bit less in Q1.

But I think again, we’re optimistic -- when I look at the –in January we do our reviews of each of our regions and divisions and we go through it pretty thoroughly. And I think we were encouraged that both the pipeline. the number of opportunities in the pipeline and the total dollar value of the pipeline were both up double digit which again is I -- we believe supportive of kind of our expectation of mid single-digit growth for the office business this year.

Greg Burns

Okay. And then, can you just talk about some of the levers that you see driving the margin leverage next year maybe in particular some of the lean initiatives that you have in place or plan on instituting next year. How do you foresee those layering in or maybe like the timing of kind of realization on some of those lean initiatives in 2018? Thank you.

Charles Rayfield

Sure, Greg, this is Charles. So, we would expect the price increase that we put into effect in January to play in a little bit more towards the back half of the year. We’ve also layered in about 150 to 200 basis points of continuous improvement that probably will also kick in more towards the back half of the year. To the extent that those continuous improvement initiatives fall through is largely dependent upon how much impact we see from commodity inflation and FX headwinds.

As we looked at Q4 the majority of our continuous improvement activities were consumed by commodity’s inflation and FX. So to the extent that commodity inflation remains increasing, you might see a bit of an offset there with slight improvement in margin more towards the back half.

Greg Burns

Okay. Thank you.

Operator

And our next question comes from the line of Matt McCall from Seaport Global. Your line is now open.

Matt McCall

Thanks. Good morning, guys.

Charles Rayfield

Good morning.

Matt McCall

Charles thanks for the outlook and the guidance that was helpful. Just want to clarify, you talked about annualizing the Q4 OpEx, so I think it’s about 80 million, 81 million, somewhere around 320 plus. Just making sure, does that inclusive of Muuto, the additional Muuto?

Charles Rayfield

No, that’s not inclusive of Muuto.

Matt McCall

Okay. It might be helpful, Andrew to talk about the segment outlook from a profitable perspective especially given that you now got to. How should we – first of all, what’s the margin profile going to look like for 2017 for the two segments? And then how would you expect that to progress in 2018? I’m just trying to layering in some of things you talk about for instance, the Studio pressure from DatesWeiser and start-up of the Hollywood store. Just how we think about segment progression?

Andrew Cogan

Well, we don’t have the reconstituted segments on an apples-to-apples basis yet, but in general I think I can comment on this. In terms of the office segment and the margins that we see there for the full year, now we definitely lost 200, 300 basis points this year from prior year in office margins. The bulk of that decline was in the first half of the year and again that’s where we saw probably some of the absorption pressures there and everything. And I was please that sequentially we saw some stabilization from Q3 into Q4 in the office segment.

So I think our goal remains in office to pick up a 100 to 200 basis points of operating margin as we move forward. Moving forward I think Charles nicely walked through, that’s really going to come on the lean continuous improvement side and we’ve got close to 150, 200 basis points of initiative. The real question is going to be how that gets eroded by what it continues to be accelerating inflation and some more foreign exchange headwind.

Price seems like it is stabilizing a little bit. So if our office operating margins would just below 7% this past year when they were 10% a year ago, we’d hope to start to move away back for those double digit level, but it’s going to depend on how some of other factors play out and certainly absorption should be helpful as well.

I think on the – specially on the lifestyle side of things, if you look at the old studio segments, most of the margin degradation there was really due to the addition of DatesWeiser, which was lost a couple of million dollars last year and the startup expenses for the new store. I don’t think those immediately turnaround in the first quarter, but again we move to the back half of the year those business should stabilize around the 15% operating margins that we average for last year.

And then as you know as we layered in Muuto, we may start to pickup a little bit from there, and Muuto in general will be accretive to our overall margin. And then Coverings, I would expect to be pretty stable. I think we’re through kind of the worst of the challenges in that business and we would expect those margins to stabilize on the 22%, 23% range.

Matt McCall

Okay.

Andrew Cogan

So we’re going to get mix help from Muuto and we think the office margins really troughed and should build as we move through 2018.

Matt McCall

Okay, okay. That’s helpful. So you talked about the investments this year and just want to make sure I got the full list and a good handle, everything that you did. Maybe just go through some of those, you talked about studio, the dives I just mentioned, the DatesWeiser losses and the startup of Hollywood, but how do we – I’m trying to get a visibility and level of visibility that you have for 2018 versus 2017 just given investments that occur that won’t recur. How much of the margin outlook that you have is because of growth. How much of it because of these investments that won’t recur?

Andrew Cogan

Well, I think you know, again, I think Charles took you nicely through the gross margin dynamic, so we got a couple of hundred basis points of improvement initiative, but we have couple of hundred basis points headwind. So I think conservatively gross margins and you know when they don’t get better, I think that’s the conservative point of view, and if some of the headwind start to mitigate we get a little bit more price. We could see gross margins improve. Now adding Muuto in should be worth on a blended basis, 50 to 100 basis points of incremental gross margin at the Knoll Inc. level.

So that’s kind of the margin piece and I think – in answering Greg’s question we talked about the top line piece. So then it’s really, Matt, the SG&A piece, and I think the investments we’ve talked about, we increased our headcount in our office, salesforce by 15% to 20%, that’s probably the single biggest increase in operating expense probably half of the increase in operating expenses. So I’d say that that’s number one and we’re seeing great traction from that.

Again, one of the thing that was so important to, I think our turnaround on the top line was that we have more feet on street, they’re seeing more market and we’ve changed how they organize, so we’re going to market with all our brands in a much more compelling and synergistic way. So that with a big chunk of the incremental investment. And then on the product side, we had a Rockwell launch cost and getting that rolled out across our showrooms and network. And so, that was a big chunk.

On the specialty side we have the DatesWeiser’s losses which were couple of million dollars. We have the opening of a couple of additional HOLLY HUNT location and that we had the shop in L.A [ph]. So a lot of that is behind us, so some of them will continue into the first quarter, but much of this is built into the run rate where we ended the fourth quarter, so you know that you annualizing that 82. And then I think on top of that, Matt, you got to add – you got to add couple of things. You’ve got to add the Muuto operating expenses and I think we’ve given enough guidance to help you approximate that. And you have to add a return of some of the incentive and compensation stuff which was about 50% of the prior year.

So you have some of those costs coming back. So I think again you take the annualization of the fourth quarter, you add Muuto and some of the incremental compensation cost and I think you can get to a good approximation of what operating expenses will be.

Matt McCall

Okay. That’s very helpful. In policies can you remind us of the components of Muuto that you’ve given us, so make sure we’ve got it, reflected correctly both gross margin and operating expenses? I think you did gross margin but what about the OpEx?

Andrew Cogan

Yes, I mean, I think in general we expect Muuto to have about 25% EBITDA margin and I think we’ve talked about approximately 50% gross margins.

Matt McCall

Got it. Okay. And last one from me, the D&A outlook for 2018? What should we expect inclusive of Muuto?

Charles Rayfield

Yes. Sure, Matt. So inclusive of Muuto, I think you should expect about 38 million of D&A. And then in addition for an EBITDA we probably look at stock compensation of about 9 million. So all in for add back to probably looking at about 48 million.

Matt McCall

All right. Thank you, guys.

Operator

And our next question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is now open.

Unidentified Analyst

This is Steven on for Kathryn. Just to start with -- can you talk about just maybe over the past couple of years the pace of decline in legacy office systems and growth in new office systems for you and if that has changed meaningfully in the past couple of quarters?

Andrew Cogan

Yes. Thank you. And yes it has. What we’re really excited about is that we ended 2017 with our new platforms in absolute dollars greater than our legacy platform. So if you look over the past couple of years, the newer platforms have been growing high-teens, low 20s and legacy platforms have been declining mid to low teens. So you kind of have this headwind while we beginning great growth from adjustable products and new ancillary platforms and rock on all that, we’ve had there kind of erosion of the more legacy system.

So now we’re at a point where new products, greater portion of our sales and the legacy products and they are growing at a much faster rate than the almost twice the rate the legacy products are declining and that really takes the headwind away.

Unidentified Analyst

Right. And then I guess just looking forward I mean does Muuto have any mix of how you would define legacy systems and how does Muuto contribute to that trend going forward even just speaking broadly if not quantifying?

Andrew Cogan

Muuto has no legacy systems or no legacy, Muuto is a company that was founded about in 2007, I mean it is very much resimmercial, ancillary, evenly split between residential and office application, it is a fresh young vibrant portfolio with a very exciting pipeline of new products. I think the Muuto play is very simply they haven’t really been in North America. And they’ve been selectively in one or two markets and as we roll it out nationally we believe we can double the size of the Muuto business and we talked it was about $70 million globally, a very small portion in North America.

And if the initial feedback and training which we’ve already started rolling out is any indication we’re quite optimistic that our goal of doubling that business over three years is very doable at 25% like EBITDA margins.

Unidentified Analyst

Excellent. And then, last question which is on Muuto, North America. Can you discuss the geographies they're in and just any helpful information regarding where they are already at?

Andrew Cogan

Well, they’re not in many geographies today, so its all – I view it is all upside. And I think what’s exciting about the Muuto portfolio and again we’ve trained about half our sales force so far it we’ll do the other half next week. Is the reaction from our team is this is fantastic. These products are 100% incremental. They allow us to respond to areas of bids that our clients are asking us to respond to where we have nothing we can put in today. So it’s truly incremental and very, very exciting.

Unidentified Analyst

Excellent. Thank you.

Andrew Cogan

Thank you.

Operator

[Operator Instructions] And our next question comes from the line of Alex [Indiscernible]. Your line is now open.

Unidentified Analyst

Good morning. Thanks for taking my call. First of all, I appreciate the sales growth, that’s very impressive in what’s been a tough market for a while. I wanted to follow-up, you talked a lot about the margins today. And I think the question I have is just trying to understand internally do you have enough control? Because maybe that's the wrong word, but you have talked about lean initiatives for some time and I think we’ve been expecting some kind of margin improvement yet I think we’re now looking at four quarters of margin degradation on the gross line.

And I recognize sensitivity around your COO's passing which is very unfortunate. But, internally when you present these results to the Board, are they pleased with the way the results are going on the margin side or is there some concern, because from this outsiders perspective and I don’t have all the detail you do, it seems like there should be better flow through if you are beating your expectations and putting up good revenue growth, and there's something to me that just doesn’t seem quite right.

So I’d like to understand a little bit better, are there initiatives that maybe you're going slower than anticipated or the lean initiatives just not big enough to offset that, because realistically what you have just said it sounds like gross margin could be just flat again because of inflation and because of pricing pressure which we’d like to see better. So could you maybe give a little color on that?

Andrew Cogan

Sure Alex, well, I think we all like to see better gross margins but I think the reality is when you look across the industry right now and you look at our results competitively and you see the margin degradation in general, I’ve seen every single person in this space report somewhere between 100 and 300 basis points of gross margin erosion. So I just think the fact is that when you're in an industry uses a lot of steel, and you’ve got some of those kind of aluminium and -- some of the inflation challenges, those are significant and those are outside. Similarly there’s not a lot on FX and some of the other things we can do. We certainly can control pricing and all that, but I don’t look at our margin degradation quite frankly as outside the balance of what I’m seeing across the industry.

Now, that's just I think putting in perspective. That said and where [ph] it is our number one topic of our team internally we’re very focused on it. I don’t think much of this had anything to do with Joe or his passing quite honestly, and I think it just – some of these headwinds have accelerated and what we’re trying to do internally is accelerate the offset. So taking aggressive look at our plan footprint. Looking at accelerating our lean initiatives and events. Looking at other things we can do to reduce product cost to shift the mix of what we’re selling, I think all those initiatives increase our prices sooner than we normally would have done.

Those are all initiatives that we’re taking and I would expect we’ll have traction. I also think is our mix of alls and we get more higher margin products in our portfolio and use our position with clients to capture more of their furniture spending in higher margin areas more studio and more lifestyle products, more Muuto, all that should overall be accretive to our margin. So yes, I think we’ve realized the frustration around margin that’s something we’re -- all over, but I don’t think our performance out of the balance again of unfortunately what you’re seeing across the industry at the moment.

Unidentified Analyst

Okay. And just to help understand the newer products don’t have the same margin profile but is there a point at scale or time? What have you where you start to see accelerating margins from the newer products?

Andrew Cogan

Yes. Absolutely. And I think at some point later this year you’ll start to see that.

Unidentified Analyst

Okay. Thank you.

Operator

And our next question comes from the line of Budd Bugatch from Raymond James. Your line is now open.

Katherine West

This is Katherine, on the line for Budd. I have two questions. Since U.S. tax reform incentivises capital expenditure specifically office furniture, how do you think about demand going into next year just from the general industry environment.

And also on that same point you’ve mentioned in the past that pricing has been extremely competitive on the contract bid side of things. Do you -- just volatile demand. Have you seen that trend lighten up every time as demand starts to improve?

Andrew Cogan

Sure. Thank you, Katherine. Well, firstly on the tax front, I don’t think anyone is going run out and buy office furniture just because its expanded deductibility, but on the other hand where they’ve decided to buy office furniture it certainly supportive of that decision, so I don’t know that that’s going to have a huge impact.

In terms of pricing and everything, we did see stabilization of pricing on an incoming orders basis and so as we kind of ended the year and entered this year, so I think there's some reason to believe that that should stabilize. I also believe the inflation is real and significant and I think you’ll see more broader industry based price points because and again my response to Alex’s question the margin – the gross margin degradation has been pretty consistent across everybody in the industry and we’d be hopeful that would lead to more rational price action. And then of course overall demand improving should also help the general discounting situation.

Unidentified Analyst

Okay. Thank you.

Operator

And at this time, I’m showing no further questions.

Andrew Cogan

Great. Well, thank you everyone for joining us on today’s call. And we’ll look forward to talking to you at the end of the first quarter. Take care everybody.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.