Q2 2019 Earnings Call

And the spelling of your company name.

Hi E R. A one word.

Yeah, you're right.

<unk>.

Okay. Thank you and I know again holdings and congrats again.

Good morning, everyone and welcome to the known incorporated second quarter 2019 Conference call. This call is being recorded. This call is also being webcast presentation slides to accompany the webcast. In addition, this call may offer statements that are forward looking including without limitation statements regarding knolls future outlook for the industry and economy and expectations with respect to future leverage. These forward looking statements are based largely on the companys 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 as described in Knolls Annual report 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 Coke, the chairman and CEO of Knoll.

Thank you everybody and good morning, and welcome to our second quarter earnings call I Hope Youre able to review the video release posted concurrently with the earnings release yesterday, frankly, it's a lot more fun to talk about at all when you can see what we're talking about and then just listen to I think your color are reading the numbers.

It featured a tour of our flagship Fulton market space in Chicago and is accessible on our know investors relations website.

Lawrenceville once wisely commented that no became successful because it was unique noxious and other furniture company that could not have been truer than the second quarter of 2019, when we departed the merchandise Mart near Khan for our inaugural design day celebration in our new flagship home in the emerging Fulton market neighborhood of Chicago.

The move to Fulton market.

Millennial friendly neighborhood that Optimizes, the mix of living and working that is driving workplace design today was the perfect environment to exhibit the breadth and depth of our constellation of design driven brands and demonstrate to architects and designers dealers and clients are no can uniquely help them create a modern workplace experience that blends the hospitality resident commercial and high performance individual products. They crave.

And boy come to see us they did as we were overwhelmed by the thousands of visitors that made and continue to make the trip to Fulton market.

The feedback was universally positive from large clients planning major new headquarter projects to architects and designers inspired by the space through our dealer partners, who viscerally experienced our strategies and why we want and deserve a greater share of their business.

Our own people are often our harshest critics and they too were energized by the bugs in spirit in the space was the youngest crowd I've experienced in Chicago, and it's heartening to see both Nolan the industry aspiring the new generation, which bodes well for business as the workplaces. This space right reinvention and re imagination, and we intend to make sure that knoll remains at the heart of that conversation.

Our 30000 square foot Fulton market space flooded with natural light and fresh share represents the culmination of a multi year journey to position knoll to take advantage of the changing workplace and bring together through both organic product development and M&A. The best in hospitality based workplace design and high performance furnishings for everyone from individuals intimate groups to large teams.

We designed Fulton market to be a living laboratory, where clients can experience an active workplace and holistic approach to total workplace design and the tremendous variety of settings, which you know can help clients create it's a space that wouldn't have been possible to envision without the hospitality solutions using reimagine knollstudio residential classic and new solutions like Rockwell unscripted and its architectural lounge setting that include integrated acoustic products.

Any backfill the space also showcases a range of up to date workplace solutions from dates wiser its confidence in meeting solutions, our new island would tables, the high performance height adjustable tables to mobile power beams and benches for teams and individuals.

Move those new perspective on ancillary furnishing allows us to create everything from cafe meeting settings.

The individual high back upholstered pieces, a quick with power to support focused work.

And our expanded line of pixel training tables offers a high performing and cost effective training in application settings.

All these settings were tied together of course by what Florence Knoll described as a total design vision and a fresh and vibrant approach to natural materials, textiles colors, and ubiquitous and subtle technology.

Looking at the second quarter results, it's clear that a lot of what we're doing is resonating with our clients and dealers.

Furthermore, our strategy to diversify our sources of revenue in the higher margin lifestyle categories with both residential and crossover workplace applicability combined with efforts to improve the profitability of our office segment is continuing to deliver strong topline growth margin expansion and EPS growth in the period just completed sales grew over 13% adjusted EBITDA increased 15% and adjusted EPS is up double digits.

In the workplace side, we grew 18% driven by 27% growth in the sale of lifestyle products to workplace clients. This growth was led by a record quarter for Muto in North America with over 75% loan growth plus increase ancillary penetration by Knollstudio, Spinneybeck Filzfelt and Holly Hunt.

Combined with just under.

15% growth in our reported office segment led by continued strength in height adjustable tables storage systems dates wiser and Rockwell unscripted you get the 18% result.

Lifestyle products as a percent of total workplace increased from 24% last year to 26% in Q2 further proof of our share gains and accelerating traction and ancillary spaces.

The durability of this trend was also validated in the most recent dealers shared data. We received for 2018. This showed a meaningful uptick of almost 400 basis points in our share of our top dealers representing over 80% of our total workplace sales were particularly pleased with our progress and remember the 2018 data had minimal benefit from the Muto acquisition. So our belief is that in 2019, our share gains in our dealers have accelerated the ongoing rollout of our new Threed specification tools will also make it easier to simultaneously integrating visualize the full breadth of our workplace and ancillary offerings in real time as they work of a designer and client in should be supportive of further share gains too.

On the lifestyle front sales grew just under 12% to a record Q2 rate of 144 million.

And represented approximately 40% of our total business.

Growth was led by Muto, Knollstudio and Spinneybeck Filzfelt, all three brands strongly benefiting from the resin commercialization of the workplace. When you break break apart the lifestyle growth by Residentially focused channels sales were down 1.8% as we continue to see some of the similar or higher end residential headwinds that others have reported both in Europe and here in North America.

As expected our lifestyle EBITDA margins rebounded back over 21% in the quarter. It's important to note that while others are talking about expanding their lifestyle businesses. We are really the only one for whom this is accretive not dilutive to our overall enterprise margin.

Muto continued to deliver on the promise we found the brand when we acquired it 18 months ago.

Q2 was just another record quarter for mood out its worldwide sales grew over 30%.

About half of this growth was attributable to increased traction in North America, where sales no dealers increased four fold in total shipments grew by over 75%.

We're now tracking well north of $100 million with EBITDA margins accretive to both the lifestyle segment and consolidated knoll with meaningful incremental EBITDA contribution margin from that growth.

In the quarter, we continued to expand our inventory position in North America rolled out a major wave of additional product samples and opened in dedicated Muto flagship space on the fifth floor of our Fulton market space indicative of the forward momentum, particularly in North America orders increased over twofold and were above a record $10 million and remember we have yet to target the consumer opportunity in North America that we see for the brand as we continue to build out the capabilities that will be required for the consumer launch sometime in the back half 2020.

Looking ahead to the balance of the year in the workplace side, we remain encouraged by the double digit growth in both the number and dollar value is of opportunities. We are tracking as well as those that have been awarded is not yet booked. Additionally in June the BDI commercial and industrial index posted its third consecutive month of improvement and at 52.3 is in solidly positive territory.

This we believe speaks to both the solid demand environment is demonstrated by the positive industry growth being reported coupled with a particular relevance of our solutions and the fact that with our expanded ancillary offerings coordinated sales efforts and increased dealer share we're expanding the amount of white space, we can serve increasing our share of our client furnishing budget and improving our win rates too.

Residentially, we continue expect so much flatter result, but have you seen year to date, we can leverage our workplace position to drive continued lifestyle growth. We feel inflation has peaked and while we will continue to invest in the select expansion of our sales force expanded visualization capabilities infrastructure and showrooms, we feel good about our ability to continue to deliver improved profits in the back half of the year now let me turn the call over to Charles to walk you through our results in more detail Charles.

Thank you Andrew.

As Andrew discussed we have continued to expand our sales growth through our constellation strategy I'll walk through some additional details relating to margins operating expenditures and key financial metrics.

Adjusted gross margin expanded during the quarter by 110 basis points due primarily to fixed cost leverage in our manufacturing facilities from higher volume absorption continuous improvement activities and favorable product mix.

These positive drivers were offset partially by inflation and transportation in commodities.

The impact from tariffs in the quarter with minimal due to the strategic planning and sourcing of the products impacted by Terrace currently in effect.

Sequentially second quarter inflation decelerated moderately compared to peak inflation in the first quarter of this year.

Total adjusted operating expenses increased 15.1 million driven primarily by incremental volume related expenditures increased information technology spending and selling and showroom initiatives.

Early in the second quarter, we successfully deployed the second phase of our ERP implementation going live with the order management functions that support the front end of the business, including order entry and customer service.

We did not experience any significant disruptions to our business and have received positive feedback from our dealers. In addition, we made several showroom related investments in various areas of the business most notably in our new Chicago flagship showroom as Andrew previously outlined as well as Muto related expansion.

We also increased our sales headcount and while not nearly at the level. We expanded the sales force in 2017, it's a worthwhile investment to help fuel our ancillary growth in key markets across North America.

Adjusted operating expense adjusted operating expenses excluded $2.1 million of amortization of intangible assets related to our acquisitions of the muto.

Holly Hunt and Edelman businesses and move related integration expenses, a point $1 million.

Adjusted EBITDA margins increased to 13.2% in the second quarter of 2019 from 13% in 2018 the increase in adjusted EBITDA margin was due primarily to gross margin improvements were offset by increased incremental volume related expenses and strategic investments for future growth.

From a segment perspective, adjusted EBITDA for the office segment increased 50 basis points from 9.3% in Q2 of 2018% to 9.8% in Q2 of 2019.

The increase was primarily driven by sales volume growth and continuous improvement initiatives, partially offset by increased investment spending and volume related selling expenses.

Adjusted EBITDA for the lifestyle segment increased sequentially by 220 basis points and decreased 10 basis points from 21.6% in Q2 of 2018% to 21.5% in Q2 of 2019.

The decrease in adjusted EBITDA margin was mainly due to mix shift amongst our various lifestyle businesses additional investment spending and new product initiatives and our infrastructure footprint.

Interest expense was up point 2 million from a year ago, due primarily to higher interest rates, partially offset by decreased outstanding debt levels.

The effective tax rate for the quarter was 25.1% down from 26% in Q2 of 2018.

The mix of pre tax income in the varying effective tax rates in the countries and states in which we operate directly affects our consolidated effective tax rate.

Adjusted net earnings for the second quarter of 2019 with $23.6 million up from $20.8 million for the same period in 2018.

Adjusted net earnings is exclusive of the $1.9 million of tax affected net earnings adjustments that were previously discussed.

The related to the amortization from acquisitions acquisition related expenses and a pension settlement charge.

Adjusted diluted earnings per share was 48 cents and 42 cents for the second quarter of 2019 and 2018, respectively.

Regarding our balance sheet and cash flow cash and cash equivalents were approximately 2.9 million at the end of the quarter and our outstanding debt balance was approximately $450 million.

Consistent with our focus on reducing leverage significantly within 18 months of strategic acquisitions, we further reduced our leverage during Q2, ending the quarter just over 2.4 times.

Leverage reduction during the quarter was primarily driven by use of free cash to reduce outstanding debt as well as strong adjusted EBITDA growth.

Cash provided by operating activities was $36.8 million in the quarter, largely offset by investments from capital expenditures of $12.7 million in cash used in financing activities of $23.6 million.

Capital expenditures during Q2 related primarily to our showroom and information technology infrastructure and cash used in financing activities in the quarter was primarily related to payments on our outstanding debt and the payment of dividends of $8.3 million.

In the second quarter of 2019, we announced a 13% increase to our Q2 quarterly dividend based on our confidence and the effectiveness of our strategy and financial position to continue to invest in our business and reduce our debt.

As we enter the back half of the year, we expect to continue to grow our top and bottom lines and improve our leverage ratio as we grow adjusted EBITDA in Q3 cash flow to pay down debt.

We continue to focus on lean initiatives to drive our continuous improvement activities as well as actions to offset increased tariffs.

As a new initiative. This year, we partnered with say dotcom to provide no shareholders. The platform to directly engage in the quarterly earnings call. We'll begin our Q and a portion of the call by answering the questions. We received on state Dot com.

Well answer three questions and the first question is as follows.

Great to see the dividend increase in May how do you think about managing an increased dividend and continuing to invest in our capital into growing the business.

First we're glad to see that you notice the increased dividend our priority has been and remains to continue to invest organically in the business to drive growth and improve our profitability.

This includes investments in new products showroom, selling tools and feet on the street as well as investments in our infrastructure to make no easier to do business with as well as investments to lean out our supply chain.

Today, we spent about 30 million of cash on dividend payments, which leaves ample free cash flow to invest in the business and simultaneously paydowns that.

Given our free cash generation, we feel it's appropriate to return the excess cash to our shareholders in the form of a dividend payment and as a reminder, we still have access to 200 plus million dollars of available capital under our revolving credit facility for strategic opportunities and continued M&A such as the successful acquisition of Muto in 2018.

The next question.

Is how does no plan to attract more millennial customers in the face of competition with direct to consumer furniture companies like feather pushing alternative furniture and purchasing rental models Andrew Thanks, Charles Thanks for the question.

It's interesting to talk about other channels, but we find today that with our core corporate clients employee the greatest number of millennials and exactly these clients who are driving demand by competing to create more residential and hospitality based workplace is that helping attract and retain and retain millennial employees. It's one of the reasons, we acquired Muto and increased our focus on ancillary spaces with new designs like Rockwell unscripted and are just opened flagship Fulton market space in Chicago. We also believe it is one of the reasons, we've been gaining market share as our offerings appeal to clients trying to attract millennials.

Specifically to the question around alternative.

Go to market models, we're in the process of commencing actually a test with fed there to support their business and it will be interesting to see how that goes. We're also devoting time and effort and 29 2019 early 2020 to the development of more BDC capabilities, most notably with Muto, but also with Holly Hunt. These capabilities will serve both the individual consumer designer and small business market with the latter being an area. We have not historically played much in so considerable opportunity there as well.

Great. The last question from say Dotcom is how has the rise of augmented reality for showcasing interior design effected knolls future plans very much so with regard to augmented reality, we're excited by the potential of HR functionality in our direct to consumer home design shop, and Knoll Dot Com, where we're testing you can go on and see that as a selection of our most popular classic designs in a are for those using I phones, who want to see these products in their space.

On the workplace side of our business, we see huge potential for just in time visualization through Configures C.T. designer software the ongoing rollout of this threed specification tool makes it easier for our dealers. This time, most simultaneously integrating visualize the full breadth of our workplace and ancillary offerings in real time as they work with a designer in client as we built out this capability, we have the potential to continue to leverage Jr, and virtual reality functioning as well.

Now I will turn the call over to the operator for some live question.

Thank you ladies and gentlemen at this time if you have a question. Please press Star then one on your Touchtone phone. If your question has been answered or you would like to remove yourself from the queue. You press the pound key prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated our first question comes from Greg Burns of Sidoti and company. Your line is open.

Good morning.

So.

The margin leverage was a little bit less than I would have expected given that given the strong sales growth and it does sound like your.

You're making some growth investments in the business, but historically you've talked about looking to expand.

The EBITDA margin about 50 to 100 basis points a year is that still a good way to think about the business for 2019 and 2020. Thanks.

Thanks, Craig.

So.

Looking forward.

As we discussed we had a pretty strong first half 2019.

We do think that we had.

Shifting the activity pull into the first half of the year ahead of our ERP go live.

As we look at the remaining pipeline our statements are probably more heavily weighted to Q4.

Nonetheless, we are seeing positive indicators of pipeline pipeline opportunities overall.

And on a full year basis, we expect that the topline is going to grow faster than the industry average you asked.

Specifically about margins.

We're also expecting expansion in adjusted EBITDA margins on a full year basis for 2019 compared to the prior year.

The adjusted EBIT improvements dependent upon.

Continued top line strength and growth margin improvements offset our strategic investments in the back half of 19.

We anticipate gross margin improvement from continuous improvement activities.

As well as the dissipation of commodity transportation inflation and volume sources. These factors.

Will be offset by tariffs and we'll see what price realization is.

So we still expect EBITDA EBITDA growth and Greg. This is Andrew I would just add a couple of things you know actually in the first half on a operating profit basis. We got about we got over 50 basis points of operating margin improvement. So it was a little bit.

More diminished at the at the EBITDA level, but we're getting in that 50 to 60 basis point range on the operating profit side I would expect to see.

Continued.

Operating profit improvement and maybe a little bit more muted at the.

At the at the EBITDA level number one number two we are very much in this phase of investing to drive growth and when you look at what we what we've done now with mood, where we've got something working we've made decisions to lean into heavier and are putting additional.

Investments in place to drive that harder to get it more broadly exposed the in the second quarter, we had a significant cost as you can imagine from the launch of the Fulton market space, which was also a significant investment and we've also decided to do some additional investment in ramping up.

Our sales coverage, particularly in our high opportunity dealers, we did some cats last year.

And we saw a real.

[noise] differentiated performance and we put an old person in a high opportunity knoll dealer in moving share our way when you look at the total share number we reported and you saw the 400 basis point improvement in dealer share I think thats evidenced that that's working but we're leaning into more of those people. So I think right now we're in a time, where it's a healthy market our products and designs are resonating. This is exactly what I think we should have our kind of put on the pedal a little bit in terms of trying to even accelerate.

Investments that we think over the next two or three years will will drive will drive better than than industry growth.

In terms of what this means for 2020 again, we're going to target.

At least 50 basis points of margin in both operating and EBITDA margin improvement and I. Just think it's too early to see exactly how that will play out as we won't really start our planning tilda till the end of the summer.

Okay, great. Thanks, and then in terms of meal.

Really nice growth on that front.

Are you seeing.

Having mutoh in your portfolio are you seeing that.

Paul.

Pulled the rest.

He'll pull sales for the rest of your business are you can you are you seeing more opportunities.

No because you now have neutral or maybe.

Are you.

Able to get.

A larger.

A larger percentage of of of a project now that you have can you just talk about that dynamic having that broader portfolio of products. Thank you.

Firstly I think everyone thought we were crazy when we acquired mood and obviously with the price we paid and we said to everybody. We thought we could double the business and double the earnings in three or four years, we are very much on that path today. So we feel confident that no.

One to two years little will be in excess of $150 million with well north of 20% EBITDA margin. So the whole theory is playing out very much as we expected and it really was based primarily on leveraging our our dealers in our corporate relationships here in North America, and capturing more of what our clients are spending so that when we win.

Workstation or kind of a core office products, we can layer in these ancillary piece as well as the ancillary is becoming a bigger part of that story and that theory is actually even more impactful. So we're very much seeing mood.

Being captured by our clients that we have relationship with and our dealers as they are looking to do more of their complete space and I've got a bunch of examples I've been involved in here in New York and elsewhere, where we win the system, but we're really focused now on on driving that clients are saying, yes, let's just drop.

We did let's just drop your stuff in.

I think thats working really well the other thing thats really happening within our clients is that theres. So many areas that ludo plays in that we didn't even touch before so cafe.

No not not our four day.

Meeting areas. They are putting I mean, we just came from a a wonderful.

Hotel project Thats filled with Muto Muto stacking chairs again, a client of ours, but we never could have played in those parts of the parts of the opportunity we're doing a lot more restaurants and hospitality. So clients, where we may have some corporate work for them. We didn't do their their restaurants, we didn't do their cafeterias. So its really broadening out the playing field. We have and then again as Weve noted and now you've noted.

We're not even touching the consumer opportunity in North America right now we've got a lot of infrastructure work to do we've really focused on the on the on the corporate side, but.

The Muto team, it's an extraordinary team great leadership, the partnership between US and Ludo has been phenomenal. They are great people to work with their high quality contract product.

It's great and it's going to be greater.

Great. Thanks.

Thank you.

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

Okay.

Budd you there.

Your line is open Sir.

Hello can you hear me hi, good morning, Andrew Good morning can you hear me.

Yes.

If I could.

The operating expenses in the second quarter increased $15 million I think on the adjusted operating expense line and maybe we get a little bit more flavor in some detail as to what would.

Made into those operating expense increases.

Yes, sure, but so you're right. It was up 15 million this quarter over last year as we talked about.

It's primarily primarily related to volume related increases for incentives.

And commissions dealer compensation et cetera, as well as increase investments in some of the showrooms that we discussed the most notably Chicago.

And some north American sales head count.

And then some additional spending on strategic investments Andrew outlined earlier.

Sort of our mentality.

We had our ERP go live.

In early part of Q2 and you know once you go live you've got that.

Hyper care, where you stop capitalizing those costs and they burned straight through to the piano that.

Completed in early July so we're now out of hyper care.

But I think.

The fact that we have and will continue to invest and while this is a little bit of an elevated level we think.

For the quarter in terms of percentage of revenue.

Probably come down maybe 28 percentage level.

For for the full year.

So is that so you are telling me about 50 basis points of.

25.

What what what was non nonrecurring or kind of.

Yes, I would say, we're going to be somewhere between 20 and 28.5 for the full year I'd say in this particular quarter. It was probably 20 to 30 basis points of things that we think were more one time ish.

Charles mentioned the ERP, we had the showroom launched and things like that but I think where it may not I think we're going to being.

And in that 20 828 half range for that thank me for the balance of the year as we.

For the third and fourth quarters. So you know the first quarter was a little lower but I still think you'll see it in a bit of an elevated level and I can just tell you. That's a very conscious strategy. When we have things that are working well.

I think we want to lean into that and so could we knock that down 50 to 100 basis point, absolutely, but I think this is not a moment to do that.

I think we've shown the ability through.

To adjust and scale, our our SDMA as appropriate I think right now this is a time.

To keep investing and we see great opportunities and we want to take advantage of them and frankly, I think thats what are our shareholders want to see us do as well. This is a good time for us now.

I have no disagreement with that I'm, just trying to understand how much your dog.

Increase might might be stuff that was non investing and nonrecurring. So maybe good morning, Sir.

Okay and in Muto.

Your initial strategy and your current strategy as I know it is more what I would call an inventory solution you bring in products from offshore that is the product. It's available domestically is that strategy still there or are you considering now some additional production strategy or some.

Mike made the strategy and domestically, yes, no. Thank you Thats a great question, but so yes. The initial strategy has been kind of inventory Im now what we're doing is we're taking the highest volume ludo products and we're starting to make those in in North America.

And our goal would be that you mean, what that does is it allows clients to do CLM. It opens a lot more of our textiles, and leathers application on ludo product and it reduces the lead time when you want to do something non standard. So that pipeline is now getting put into place and is starting to be operational was operational in the second quarter, we will expand it and the balance of the year and add more products, but definitely we think broadening out the finish and material capabilities with Muto also broadens out the market potential pretty significantly.

So its a dual and so to come.

Answer to complete the solar on that those are capabilities that I'm not sure. No has internally are you are you outsourcing those capabilities or are you building in in insourcing for that outsourcing outsourcing and that goes with the whole asset light approach to muto.

Very consistent with the brand and doing it at a very high quality way and I think thats. The other thing about Muto is that it's not just ancillary its high quality ancillary and its contract quality ancillary and thats not true of what everyone else is doing in those in those areas.

Okay and lastly from me can you kind of give us a feel where your share of wallet is that your.

Your dealer base, so what's the share of wallet for no no problem.

Yeah, I think we're now pushing up up to 55% and that's up from the low fiftys to the mid Fiftys and I think our we certainly see you know another five to 10 points of share gain within our dealers remember each point of share gain roughly $15 million. So it's not an insignificant opportunity within our within our dealers.

And it will be driven by.

All this kind of ancillary stuff because our share of the core workplace products is.

I'd say, probably 85 or 90%.

So it's got to have is there much juice.

Is there much variance among your dealer base and that is that you got a wide standard deviation or is it kind of is that a pretty tight.

Well I think when you look at the top 40 or 50 dealers.

We probably have slightly more share and then as you broaden out below the top 40 or 50 dealers.

Our share is probably less.

So its a strategy that works in in.

Across the dealer network.

But what I would say is we're taking those top 50, 40 or 50 dealers and even though we may have slightly higher than average there that share there that's where the dollars are and so when we think about deploying what we're calling our dealer brand managers into those markets, we're deploying them into those highest opportunity dealership.

Really sit there and make sure no products are specified and so and again, we did that test last year worked well that's one of the incremental investments that we decide to go ahead with this year that wasn't in our initial thinking but the data says it works and.

Are going to keep doing it.

Okay. Thank you very much good luck on the next quarter and for the full year.

Thanks Bye.

Thank you again, ladies and gentlemen, as a reminder to ask question that star one.

Our next question comes from Matt Mccall of Seaport Global Securities. Your line is open.

Thanks, Good morning, guys.

Good morning so.

So.

The.

So 20, 820, and a half gets you to I think that'd be about 70 to 140 basis points of EPS. You date deleveraging. This year can you can you talk about the outlook for gross margin for a pretty good job in the first half it looks like.

Comps get a little tougher to gross contribution margin cost definitely get tougher in the back half, but what's the what's the outlook for gross margin I never did hear a net outlook for EBIT and EBITDA margin.

Expansion or traction this year.

While it's Andrew Matt I'll go a little bit and then I'll, let Charles dive in a little more more deeply and stuff like that.

I think for the full year, given the incremental investments and the things we're doing we're probably going to be in that.

No 20.

30, 40 basis point improvement in terms of of EBITDA margin I think at the operating yes, I meant the operating level, probably pretty similar so and I think you can directly attribute that to some of the incremental investments that we've decided to make so.

I think probably 20 to 30 is a more realistic realistic number it's been a little bit muted by the additional carats.

The carrots are you know for us in the back half for three or $4 million sale not a huge number but you know that's probably the difference between getting to that 50 basis points and you know maybe the 30.

2030, where I think we'll be.

So thats kind of that outlook, there and I think again as we said that we see we see.

You know inflation decelerating.

You know steel now again, we had some collars. So we weren't just hitting as badly as others last year in steel, but the third quarter were kind of neutral the fourth quarter I think we'll get some more margin pop from from steel. So I think you'll see the biggest gross margin improvement in the fourth quarter also our attack mitigation efforts, we kind of put on hold because of the 10% level. They didnt make sense, but the 25% level. They do make sense. So we're about a quarter behind on reacting to that so that will help the fourth quarter. So I would I would expect that sequentially from the second to the third you'll see some gross margin improvement.

And I think from the third to the fourth you will see some more gross margin improvement, but the fourth is where I think you will see kind of the greatest year over year gross margin improvement.

From where we've been.

Okay. That's helpful. Thank you. The so I guess the next question is really kind of putting together all the topline commentary I think you said you're going to outperform the industry.

And you've got the dealer share of wallet opportunity you've got Muto continue to grow a lot I guess put it all together to start with the industry growth and then then talk about.

You know the expectations beyond that what's your interest growth expectation just your expectations for growth beyond that because while the the margin costs appear to get tougher your topline comps actually get easier in the back half. So so what does that mean from an overall growth rate perspective.

I actually think that topline comps get a little bit tougher in the back half Stan.

And then in the front half, Matt, but but any anyway I listen I as I look at for the break in a couple of years. The macros are pretty good and I know you you publish some commentary on that on the macros and stuff like that.

I have to say you know absorption remains strong 19 of the top 20 markets are showing positive absorption over the last four quarters and in fact year to date absorption has been equivalent to what happened to the full year in 16, 17, and 18 leasing activity.

Looks solid.

Hi Tech and co working probably the biggest drivers, but government has been very strong as well and rents continue to increase which I think is kind of indicative of of demand for space.

You can look at the headline a DIY, which is skewed lower by residential but the commercial they'd be eyes is really solid and everything and so we feel good about that and you have the secular trends like that resin resin virtualization of the workplace that the nice same question about millennials you know you got competition for our for attracting and retaining so I think thats all a pretty good background for us.

And then I look at our pipeline and our funnel of opportunities and they are both up double digits. So.

I think it's a good a good background I don't think we're going to keep growing at kind of a torrid.

10.

15% I think you settle down into like a mid.

So kind of mid to upper single digit kind of growth rate quarter over quarter for the balance of the year and then I think as we head into 2020 I think what you'll see is you know if we continue with that.

Mid mid to upper mid single digit rate.

I do think the ash DNA spend is going to moderate as we get into 2020, and I think we will get back in 2020 and beyond to more like 50 to a 100 basis points of contribution margin because the other thing going on is the way our mix is evolving. It's also supportive of higher margin. So that's kind of how I would see it playing out over the next couple of quarters and into 2020, if thats helpful. No. It's very helpful. So that the cop I guess confusion if I look at total sales growth you're right the comp well actually still see the comp getting getting easier that there would be organic growth.

Looks like around 10% in the first half of last year fall into four or 5% in the back half maybe I need to if it does that not match your numbers from an organic growth perspective, I don't have it I don't have last year broken out like that.

I can't I can't give you a top my head I guess, because I I think we're going to settle into like a mid to upper mid.

Single digit growth in the back half of the year.

And to give us.

Upper single low double for the full year.

As we think about planning for next year, we will be thinking mid.

Upper single digit growth and you know we were not turning down business and we got it Okay. And then last question Im sorry go ahead.

No go ahead.

Last question I had was really around some of the.

The facility conversation that we had at facilities conversations that we've had in recent quarters and some of the analysis you've been doing there is there any update.

Any update there.

No I mean, we continue to.

Kind of lean out our operations were very much much in the midst of taking a big picture look at what we're making where were making and what we should be doing down the road I would imagine you know as we get into 2020 that will that will crystallize, even further but I think I have to say I think our sites are doing a nice job of leaning out their operations. We're doing some things like you know, we announced the discontinuation of our markets and system last quarter that frees up space. So there are a lot of the things we're doing to leverage and create space to continue to become more efficient in our manufacturing operations.

Okay got it thank you guys.

Thank you and at this time I have no other questions in the queue I'd like to turn the call back over to Mr., Andrew Cogan for closing remarks.

Great well. Thank you everybody for the for the Super questions on todays call and we appreciate the say shareholders participating.

On behalf of the 3800 associates no I want to thank all of you for your continued interest in and really really if you find yourself in Chicago, Please stop by Fulton market.

And experienced the space in person so have a great.

Summer and we'll talk to you on the fall. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference you may disconnect everyone have a wonderful day.