Knoll (KNL) Q1 2019 Earnings Call Transcript

Knoll (KNL)
Q1 2019 Earnings Call
April 26, 2019 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Knoll Incorporated first-quarter 2019 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 and expectations with respect to future leverage. 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, described in the 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 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, chairman and chief executive officer of Knoll. Please begin.

Andrew Cogan -- Chairman and Chief Executive Officer

Thank you. Good morning, everybody, and welcome to our first-quarter 2019 earnings call. We began 2019 with a bang, as we delivered 12% top-line growth, driven by just over 9% growth in office and 17% growth in our lifestyle segment. Gross margins improved by 90 basis points, adjusted operating margins by 80 basis points and adjusted EBITDA increased by just under $5 million to 12.5% of sales.

Adjusted EPS grew from $0.38 to $0.41. Our strategy to diversify our sources of revenue into 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 top-line growth, margin expansion and EPS growth. Furthermore, it has positioned us to meaningfully benefit from the trends toward more social and hospitality-based workplaces, as evidenced by the accelerating penetration of ancillary spaces we saw this quarter. With last year's acquisition of Muuto, we believe, we now have a well-balanced portfolio that will continue to offer superior returns compared to pure-play residential and our office competitors for a few reasons.

First and foremost, as the workplace continues to become more residential, those with expertise in living spaces bring a broader portfolio of choices to workplace clients. This is something our more workplace-focused competitors can't do. Second, those more residentially oriented competitors don't have the workplace clients installed base, contract dealer and our commercial architect and designer relationships to leverage to drive resimmercial and ancillary penetration. And third with our DNA and portfolio, rooted in both stand-alone residential and workplace categories, we can benefit from whichever market segment may be growing faster versus being solely dependent on how any single category is performing.

This diversification is meaningful, and I believe significantly underappreciated asset of our business. And it makes it all the more the befuddling to see our share price often react more extremely to other's less diversified results than our own. Let's look exactly at what this meant in Q2. On the workplace side, we experienced 14% growth, driven by over 30% growth in the sales of lifestyle products to workplace clients.

This growth was led by over 100% increase in Muuto's North America sales plus increased ancillary penetration by KnollStudio, Spinneybeck Filzfelt and even Holly Hunt. Combined with 9% growth in our reported office segment, led by continued strength in height adjustable tables, DatesWeiser and Rockwell Unscripted, you get the 14% workplace result. Lifestyle products, as a percent of total workplace sales, increased from 22% last year to 25% in Q1, further proof of our share gains and accelerating traction in ancillary spaces. And we believe that increasing ancillary capture rates are helping to contribute to improving trends in average order size.

14% workplace growth was well above reported industry data. Put in another way, without the benefit of our growing lifestyle portfolio, our workplace business would have grown 500 basis points slower than it did. Inversely, looking at our lifestyle segment, we reported a strong 17% year-over-year top-line improvement. Within lifestyle, growth was led by very strong year-over-year growth in total Muuto sales and double-digit growth in KnollStudio and Spinneybeck Filzfelt.

When you break apart the lifestyle performance by pure-play residential sales growth versus workplace residential sales growth, you see the benefits of a diversified market versus pure-play residential players. In Q1, our residential sales grew approximately 5% as we saw some of the similar high-end residential headwinds that others have reported. However, with over 30% growth, we're experiencing workplace applications of our lifestyle brands. We delivered 1,200 basis point of better growth than we would have delivered as a pure-player residential supplier.

Today, our lifestyle products are split roughly 50-50 between residential and workplace applications. Further proof of the competitive advantages of our portfolio includes both robust residential and office products and the blurring of the boundaries between the different spheres was clear when I attended Salone del Mobile in Milan earlier this month. Traditionally, a residential show this year, we had more meaningful workplace client engagements and dealer visitors than ever before, seeking out new erstwhile residential designs for workplace setting. This was true both at the fair grounds where KnollStudio and Muuto separately participated, and in the city, where Knoll celebrated the 100th anniversary of the founding of the Bauhaus, and Muuto collaborated in a Google design studio exhibition exploring neuroaesthetics, which studies how a person reacts to a physical environment, be it a home or a workplace.

We had lines over two hours long, as word of mouth spread about the impactful experience of this Muuto and Google collaboration. The opening of our new light-filled 30,000 square-foot flagship space this coming June in Chicago, during what we are calling Knoll Design Day and what others refer to as NeoCon, will allow us to visually demonstrate the strength of our constellation of design-driven brands, the clients, dealers and architects and designers looking for inspiration and direction as to where the resimmercial workplace of the future is headed, and we hope all of you will join us there, too. Looking ahead to the balance of the year. On the workplace side, we're encouraged by the accelerating growth in both the total funnel of awarded projects and pipeline activity, as well as the double-digit increase in the total number of projects we are tracking.

Year-to-date growth has been relatively broad-based, both geographically and across key verticals, and we would expect that to continue. Residentially, we expect more muted growth, but as you saw in Q1, we can more than leverage our workplace position to drive continued lifestyle growth. Muuto is just, just scratching the surface of its North America potential. And we have an exciting pipeline of new products in the office and ancillary spaces launching later this year to continue to excite our clients.

We feel installation has peaked and while we will continue investing in the select expansion of our sales force, new visualization capabilities, IT infrastructure and showrooms, we feel good about our ability to continue to deliver improved profits. Now let me turn the call over to Charles to walk you through our results in more details. Charles?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Thank you, Andrew. As Andrew discussed, we've had great success with our strategic initiatives evident by strong top-line performance year over year for the first quarter. I'd like to walk through some additional details relating the margins, operating expenditures and key financial metrics. Gross margin expanded during the first quarter by 90 basis points, due primarily to the fixed cost leverage in our manufacturing facilities from higher volume, accelerating continuous improvement activities and positive impact from price realization in foreign currency.

These positive drivers were offset partially by inflation and transportation and commodity input costs. We believe that Q1 represents peak inflation, which we expect to ease over the balance of the year. We continue to focus on lean initiatives to drive our continuous improvement activities. Total adjusted operating expenses increased $10 million in Q1 2019 compared to the prior year, driven primarily by increased information technology spending, showroom investments and incremental volumes and incentive-related expenditures.

Earlier this month, we deployed the second phase of our ERP implementation, successfully going live with the order management functions that control the front end of our business, including order entry and customer service. I'm very pleased to report we experienced minimal disruption, and it will make us meaningfully easier to do business with our dealers. Adjusted operating expenses exclude $2.1 million of amortization of intangible assets related to our acquisitions of the Muuto, Holly Hunt and Edelman businesses. Acquisition-related expenses of $0.3 million and $0.1 million of restructuring charges.

Acquisition-related expenses include retention agreements for key Muuto employees and integration-related costs. The restructuring charges were related to our supply chain optimization initiatives. Adjusted EBITDA margins increased to 12.5% in the first quarter of 2019 and 12.4% in 2018. The increase in adjusted EBITDA margin was due primarily to gross margin improvements offset by an increase in operating expenses and a decrease in other income.

From a segment perspective, adjusted EBITDA for the office segment increased 110 basis points from 9% in Q1 2018 to 10.1% in Q1 2019. The increase is primarily driven by sales volume growth and continuous improvement initiatives. As a result of an organizational realignment during Q1 2019, DatesWeiser has been repositioned as part of the office segment. We believe that this move affords greater synergies in both our selling and manufacturing capabilities.

Adjusted EBITDA for the lifestyle segment decreased 190 basis points from 21.2% in Q1 2018 to 19.3% in Q1 2019. The decrease in adjusted EBITDA margin was mainly due to mix shifts among our various lifestyle businesses, additional investment spending in product launches and showrooms. However, we expect that the full-year lifestyle margins will be in the low 20s moving forward, as we benefit from Q1 price increases. Interest expense was down $0.3 million from a year ago, due primarily to debt extinguishment cost in the prior year of $1.4 million that were partially offset by increased debt levels and higher interest rates.

The effective tax rate for the quarter was 26.6%, down from 27.1% in Q1 2018. The mix of pre-tax income and 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 quarter of 2019 was $19.9 million, up from $18.7 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, related to amortization from acquisitions, restructuring charges, acquisition-related expenses and a pension settlement charge.

Adjusted diluted earnings per share was $0.41 and $0.38 for the first quarter of 2019 and 2018, respectively. Regarding our balance sheet and cash flow, cash and cash equivalents were approximately $2.4 million at the end of the quarter and our outstanding debt balance is approximately $465 million. Consistent with our track record of levering up for strategic acquisitions and then quickly delivering, as we realize the benefit of those acquisitions with increased cash flow, we have decreased our leverage from 3.12 times at the time of the Muuto acquisition in the first quarter of 2018 to 2.58 times at the end of the quarter of 2019. Cash provided by operating activities was $19.1 million in the quarter, largely offset by investments from capital expenditures of $9.2 million and cash used in financing activities of $9.1 million.

Capital expenditures related primarily to our information technology infrastructure and showroom investments and cash used in financing activities in the quarter was primarily related to the payment of dividends of $7.8 million. As we entered the second quarter, backlog is up sequentially, and we expect our leverage ratio to continue to improve throughout the remainder of 2019, as we grow adjusted EBITDA and use free cash flow to pay down debt. Thank you. We'll now take any questions. 

Questions and Answers:

Operator 

[Operator instructions] Our first question comes from Greg Burns with Sidoti.

Greg Burns -- Sidoti and Company -- Analyst

Just wanted to maybe dig into the momentum you're seeing in Muuto a little bit. Could you just talk about maybe the absolute growth you saw in the Muuto business, I know you mentioned doubling in North America. But just as a whole, what kind of growth they did this quarter? And last quarter you gave some data points around order growth and backlog growth in Muuto. Is there anything maybe you can share with us on that front to give us confidence in the outlook for growth this year for Muuto?

Andrew Cogan -- Chairman and Chief Executive Officer

Sure, Greg. Thank you. Yes, we are exceptionally pleased with how Muuto is playing out. It's playing out exactly as we anticipated.

We saw a tremendous opportunity, and we're really able to pounce on the acquisition because we thought it would be so transformational, not just for Muuto but also for Knoll and our clients. And that thesis is 100% playing out. In the first quarter, Muuto organically, so Muuto compared to Muuto a year ago, was up about 40% in shipments and even more in orders. When we kind of peel that onion a little bit and look at the North American performance, what's really exciting, and as I mentioned, Muuto in North America more than doubled from what they did a year ago, the primary growth driver has really been our Knoll distribution channel that has really embraced this product.

So not only our dealer is starting to sell it day to day but we're now just beginning to start to see the benefit of some of the larger projects that Muuto is now participating in. And these are projects where we have to use our several hundred thousand dollars, not $5,000 or $10,000. So those are accelerating. We're winning more of those.

And I think this coming June at Knoll Design Day, you will have a store really primarily dedicated to Muuto and how it plays with Knoll. And I think you'll see some very significant new products that make Muuto even more relevant in the workplace settings where we're getting that growth. All of this is without really yet any work on the entire Muuto consumer opportunity, which I think we believe could be as large as the workplace opportunity. But we've prioritized that secondary to what we're doing to continue to leverage in the short term our contract relationship.

So you know, we said when we acquired Muuto, we're going to take that $75 million business and double it to a $150 million in three or four years, and we are absolutely on track to do that with very strong margin, lots of cash generation and really great, great design work.

Greg Burns -- Sidoti and Company -- Analyst

OK. Great. Thanks. And then in terms of the DatesWeiser, just looking at the reconstituted financials, it looks like that's operating at a breakeven to a small loss.

Can you maybe just talk about your outlook for that business, maybe getting it back to profitability?

Andrew Cogan -- Chairman and Chief Executive Officer

No, no, no. DatesWeiser had a very strong first quarter. The business is up significantly. The growth margins tend to be in line with our office business, but we're well into the double-digit levels of profitability now, whereas in 2018, it was pretty neutral from an EBITDA standpoint.

It generated north of mid-teens EBITDA margins in the first quarter. The business was up over 50% year over year. And again, it's very similar to Muuto. When we acquired the business, we get -- exceeded in our distribution network.

We bring our sales force onboard where they may become enthusiastic and trained on the products. We can then drive it through our existing client relationships. So again, we're seeing increasing geographic participation in DatesWeiser activity. So prior was a good business in a pocket of market.

I think we more than doubled the number of markets they're participating in, and now that they've gotten above a certain level, they are really leveraging their fixed costs very effectively to generate the mid-teens EBITDA margin. So they were really pleased, and I think the outlook continues to be really solid, and it's enhanced our entire wood story. So when I look at our growth across Knoll, we made a big investment a couple of years ago in wood finishing in our plant in Toronto, which is now really rising the growth of those wood products and then you add DatesWeiser at the higher end, it's very exciting what were the capability we're evolving in wood. And then this coming June at Design Day, you'll see a whole incremental addition to our wood capability that we're identically doing.

So we're building a real -- we had a powerhouse there, but now with DatesWeiser and our new finishing in Toronto and the work on new products we're doing, we are building a powerhouse capability there. And what I love about it is that you got Muuto at the affordable luxury end of the market and the workplace then. Then you've got DatesWeiser on the upper end and these conference and meeting areas, so we're really broadening the playing fields that we can go after, and I think that's why we're doing better than the market, one of the reason.

Operator

Our next question comes from Budd Bugatch of Raymond James.

Budd Bugatch -- Raymond James -- Analyst

Talk a little bit more about Muuto in North America, if you would? Can we get a feel for maybe the percentage now of Muuto that is North America? I know you've talked about doubling, but can you maybe put some numbers on that?

Andrew Cogan -- Chairman and Chief Executive Officer

I think North America represents now about a third of Muuto's business, a quarter to a third of Muuto's business. And so it is the fastest-growing, I mean, geography. And you've got a business growing about 40%. The North American piece grew over 100%.

I think what's exciting -- but I don't mean we're done, but seeing it grow within our dealers and within our corporate relationships. And what's happening with Muuto is, there are parts of an office or their hospitality settings that our clients are doing, that in the past, we have a great lineup with KnollStudio, but we could never kind of get to the price points or even some of the functional categories that Muuto is now able to fill. So we can take these great relationships we've had, and again, cover more where our client spend is. So I mean, I can give you one example.

We have one of our large entertainment clients. We've been doing -- we've done millions of dollars with a year, but we never did anything in some of the cafeterias, as an example. We'll do a couple of million dollars over the next two or three years in their cafeterias. There are a variety of hospitality settings where we have clients that we've done corporate work for, but we haven't been able to move over into some of their hospitality applications.

Now with Muuto products, we're able to do that. And so what's exciting is when you look at the pipeline of what Muuto is developing, and again, Budd, you'll see this at Knoll Design Day, it's expanding both in terms of the workplace. So we're able to bring our workplace insights to Muuto. They have an exceptional design effort and team there, and they are able to then take those insights, turn them into products very quickly.

And again, we -- you'll see amazing amount of new product work with Muuto. And we've only been together for about 15 months now, and that product now is coming to market. In addition to broadening out Muuto's capability and hospitality, other lifestyle, and ultimately even more residential categories. So it's working very much as we had hoped.

Budd Bugatch -- Raymond James -- Analyst

OK. Just probably not appropriate for an earnings call, but I mean, there is a philosophical change here because Knoll has always been the high-priced spread. And we recognized that when you moved into Muuto, and they were, as you said, as you quote affordable luxury. I worry a little bit about the standards and maybe confusing your ultimate customer, but I want to talk about that.

Andrew Cogan -- Chairman and Chief Executive Officer

No, I think that's actually very appropriate for an earnings call. And I can tell you I don't see any evidence of that happening for a couple reasons. One, Muuto is completely consistent from an integrity of design and a quality standpoint with what we do as a brand. And when I compare to some of the other ancillary brands out there -- and actually, we had one interesting story where, someone we know, they were doing an assessment of ancillary product for a pretty visible project.

And they had all the products lined up in the room and there was Muuto and Knoll, and I won't mention some of the other brands. And after like a couple of hours, someone leaned back in one of the other chairs, and it completely shattered. And thankfully, no one was hurt, and it wasn't our product, but that's an exact example of the BIFMA level of quality of Muuto's design. It's totally consistent with what we're doing and not with a lot of the other ancillary players you see there, No.

1. So I think the quality is consistent. The other thing, Budd, is that while we are marketing Muuto with Knoll and our sales teams, particularly in North America. In Europe and Asia, Muuto is really continuing to do very well on their own.

But North America, we're marketing it together, but we're keeping very distinct brand identity. And I think this will be helpful, Budd, when you come visit Knoll Design Day because what you'll see is we really have a separate floor for Muuto that has a somewhat different identity. So we're not creating this like mush of products. Muuto has a specific identity.

Knoll and KnollStudio, there's great new Knoll studio things. We talked about going higher end with DatesWeiser with our wood enhancement. So I think there is absolutely nothing inconsistent Florence Knoll talked about this between great design and affordability. And as long as you're consistent in that way, I think our brand is becoming -- the Knoll brand in our constellation is becoming more relevant and perceived as relevant by a whole other generation.

Now with Muuto that we on our own wouldn't be, and that Muuto on their own never would have been. So I think it's completely consistent, Budd. And I think you'll really see that in Chicago this time around.

Budd Bugatch -- Raymond James -- Analyst

OK. One more thing for me. You had still an inventory investment strategy for the U.S. is over the North America market, is that right? So when you look at the balance sheet last year between the end of the year and first quarter, it looked like $18 million delta in finished goods.

Is that about the inventory investments that we're looking at for Muuto?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Yes. So some of it was related to Holly Hunt and some other expansion in outdoor furniture, etc., but largely it was for Muuto. We'll still have a little bit more growth as we continue to expand Muuto, but largely Muuto.

Andrew Cogan -- Chairman and Chief Executive Officer

Budd, we're doing two things there. One is given the ramp up in volume, we've had to take more warehouse space, and we put more product in the warehouse because it's -- the demand is just there. I think when we win these large projects, we need that. The second thing we're doing is we are building a domestic or North American supply chain for Muuto.

So we'll be able to do COMs and more kind of customization, and that's coming online very effectively in the back half of the year. And that will relieve some of the need to inventory as much as we do because we will be able to do more in shorter lead times here in North America.

Budd Bugatch -- Raymond James -- Analyst

OK. And just last for me, just quantification. Maybe you can quantify the percentage of the backlog? Give us some feel as to how that's going to flow into revenues for the rest of the year? What kind of revenue growth we should see balance of the year?

Andrew Cogan -- Chairman and Chief Executive Officer

Well, listen, I mean, I think in terms of the balance of the year, we feel confident, we should continue to outperform the industry, not only is our core workplace business, core office business doing -- growing -- last I thought two times BIFMA, but we have then that 30% growth in the Lifestyle piece in the workplace portion of our lifestyle business. So I would expect us to continue to outperform the industry in terms of backlog and all that. I don't want to get too specific, but I can tell you that orders growth exceeded shipment growth in the first quarter. And we sequentially built backlog, which is unusual because normally we kind of bleed off backlog in the first quarter.

So this year, we built backlog. So I think it's encouraging.

Operator

Your next question comes from Steven Ramsey of Thompson Research.

Steven Ramsey -- Thompson Research -- Analyst

Can you maybe discuss on the robust project pipeline? How much of that is attributable to Muuto? How much of that is Rockwell? Any other standouts by brand in the project pipeline? And also, if the pipeline gives you optimism on margin expansion in the next few quarters on a year-over-year basis?

Andrew Cogan -- Chairman and Chief Executive Officer

Well, I mean, the pipeline, it's our entire workplace portfolio. Again, Muuto is still a pretty small piece of our workplace portfolio. So I would not attribute a ton of it to Muuto, that certainly helps in everything. And again, as we get it, as we brought in the acceptance of Muuto, we'll become a bigger part of the pipeline, but right now, it's a pretty small part of the pipeline.

I mean, really frankly, the core workplace business is doing well. So we've seen this year, strong orders growth with Rockwell Unscripted. We've see strong performance with our wood products. Height adjustable tables have been very strong.

And we're particularly excited by some of the acceleration we are now seeing in our seating products, where new introductions, like Ollo that now we're just now hitting our dealers this quarter, are also starting to resonate. So I'd say it's pretty broad based. Even legacy products were up nicely mid-single digits. Our newer platforms, which now are well over half of our revenue are up double digits.

So I'd say it's pretty broad -- pretty broad based. So that would be how I would characterize it. And in terms of the margin impact, again, the mix is -- the greater the mix is of newer platforms, those tend to have higher gross margins. And so as we see more of that in the backlog that should be supportive of gross margin improvement as we move through the year.

And I think we mentioned on our last call a February price increase, and that should start to flow through in the second and third quarter. So we think margins should continue to improve as we move through the year.

Steven Ramsey -- Thompson Research -- Analyst

Excellent. And what was that on Rockwell Unscripted margins, we're a few years into that launch. Are they where you thought they would be? And is Rockwell leading to additional sales of products outside of this line whenever that goes into a customer workplace?

Andrew Cogan -- Chairman and Chief Executive Officer

Absolutely. I mean, Rockwell is -- again, we had very strong orders growth in Rockwell in the first quarter, which we're very pleased with. It's six different categories of products. It creates an architectural setting that we can drop other products into.

And I think one of the things you'll see, Steven, if you're at Knoll Design Day, is that the way we use Rockwell's architecture to integrate other products from KnollStudio, from office, and frankly, from Muuto and everything. So it does become that architectural kind of spine that the other products can drop into. And -- so yes, very, very effective.

Steven Ramsey -- Thompson Research -- Analyst

Excellent. And the last question again on Muuto. You guys have sort of discussed doubling this business and it being, I think, you said around $150 million of North America sales sort of is at that level or at the doubling stage. I mean, is that sort of a place you get to and it stops growing at 40%, 60% or 100%? Or is there a range of sales where you sort of consider the maturity stage and growth still at solid levels? Can you maybe discuss the ceiling on the business?

Andrew Cogan -- Chairman and Chief Executive Officer

Sure. First of all, growing to the $150 million is a global Muuto number, not a North America number. So the business was about $75 million when we acquired it, and we talked about $150 million total goal over the next three or four years. In terms of your question and everything, I would say this, the plan to get Muuto up to the $150 million is primarily predicated on this workplace expansion that we're doing as well as Muuto leveraging its presence in Europe and growing in Asia.

What really we haven't factored in yet is what the consumer impact of Muuto can be. So we're spending this year doing a lot of the IT infrastructure and backbone, but Muuto is not -- the Muuto brand is not well known in America. It's just -- we're just scratching the surface of it. And we think there's a significant consumer opportunity both on the B2C side, as well as through a handful of stand-alone Muuto flagship opportunities.

Plus Muuto's product portfolio is also just scratching the surface of what it can be. We have a major push into -- you saw at Salone, a beginning of a push into outdoor. There is a tremendous outdoor push with Muuto. There's a tremendous residential push with Muuto.

You'll see some of the new Muuto workplace products at Knoll Design Days, and there's a tremendous workplace push with Muuto. We have a huge opportunity in accessories. So I wouldn't view $150 million as a ceiling at all. It's just where we'd like to get to.

And then beyond that, I frankly think this is just one of those things that can be even bigger than that. And so in terms of the growth rates, yes, I don't expect them to keep growing at 100% North America and 40% around the world. But they should certainly be multiples of our overall growth rate, particularly as we get those products to better penetrate the market. But again, just scratching the surface here.

Operator

[Operator instructions] Our next question comes from Matt McCall of Seaport Global.

Matt McCall -- Seaport Global Securities -- Analyst

So maybe, Charles, to start with, I think, you said that you expect the inflation to have peaked in Q1. Can you just talk about inflationary pressures you saw? Was it a price cost drag that you experienced in Q1? And how should we think about price relative to cost in Q2 versus -- through Q4 of this year?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Yes, sure, Matt. So we do think that commodity price and transportation price probably slightly peaked in the first quarter. We expect it to dissipate as we go through the year. So there still will be some year-over-year cost increases from that in the second quarter.

It should become less and less as we go throughout the year. So far, in the first quarter, our continuous improvement and price realization largely offset those commodity costs and input cost increases. And we had a little bit of additional impact on a net income basis from FX. But we do largely expect this to be sort of a peak of it, and it will continue to go down as we go through the year.

Matt McCall -- Seaport Global Securities -- Analyst

So you largely offset it in Q1. Does it flip to neutral? Does it flip to a benefit in the remaining quarters? Or should we just assume neutral?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

I don't think -- certainly, in Q2, I think, you still have some year-over-year impact. May go to neutral as we hit the back half of the year or potentially a bit of a benefit.

Matt McCall -- Seaport Global Securities -- Analyst

OK. And then maybe talk about the segment gross margin opportunities. You talked about ERP in Office, and there was a little bit of fluctuation out. I think you said that you expect EBITDA margin to be back in the low 20s.

But I guess, two-part question: what impacted lifestyle margins in the quarter? And then, when you talk about office margins, do you have any visible milestones that you see as providing a gross margin boost as you move forward and kind of hit some of these thresholds and maybe that turns into a bit of a step function for all those gross margins?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Sure. So starting with your first question on lifestyle, it was largely affected by mostly mix shift. We had more furniture sales and covering sales in the quarter year over year. Also some incremental investments around PD marketing, etc.

And we do expect the margins to be back up in the 20s, as we go throughout the year on more of a full-year basis. Looking forward to office, I would say, on a total companywide basis, our next milestone is getting our consolidated EBITDA margins up to 15%. We've talked a lot about some of the cost-reduction initiatives that we've had. Obviously, we had a price increase that came into effect in March.

We'll start to see some benefits of that as we go throughout the year. But when you look at some of the longer-term initiatives that we have in place, we've talked a lot about some of our continuous improvement initiatives. We expect to get maybe $10 million to $12 million a year out of that. We've also talked about some longer multiyear schools there, where we might expect to get another $10 million to $15 million, maybe in the 2020, 2021 time frame.

So maybe in that year, maybe double the impact. So we'll continue to focus on that as we go throughout the year. And actually, really great news in the first quarter, we had our largest net savings realization in the first quarter from continuous improvement activities. So continue to do a lot on that front.

Andrew, do you have anything to add?

Matt McCall -- Seaport Global Securities -- Analyst

OK. Then that is very helpful. I may have kind of already asked this, but SG&A was -- we had modeled something quite a bit lower in dollar terms. Is it just bad modeling? Or did you spend a little bit more than you planned? Same kind of question, I mean was it -- if you did, what did you spend it on? And if not, what's the outlook as we move through the year?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Sure. Let's take a step back. So year over year, we were up about $10 million in opex. Part of that was from additional three weeks of Muuto that we didn't have in the prior year.

And the other components were really around volume-based expenses, volume-based costs for incentives and commissions, etc., and some additional spending around strategic investments. We might expect throughout the year that our opex, as a percentage of revenue, will be around 28% on a full-year basis. So I think there probably is some additional spending there but not out of the norm.

Matt McCall -- Seaport Global Securities -- Analyst

OK. Maybe expanding on that a little bit, that will be about 90 basis points year over year, how much of that is -- is there any -- what's that tied to?

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Yes, so obviously, probably a third to half that's really volume related. So as we continue to expand sales in some of our structures and programs, you're going to have some additional expenses related to that. And then around strategic investments, some of that is the ERP go-live, which we mentioned. So there's going to be some additional costs related to that and consolidation of IT infrastructure, also some additional product development initiatives and some additional marketing activities.

For example, we attended the Salone fair in Germany this year. We have not been there in the prior year. That also contributed to some additional marketing expenses.

Andrew Cogan -- Chairman and Chief Executive Officer

Matt, yes, I think just to follow up on what Charles said. I think 28% in the year on an average is not a bad number. We really are going to continue to invest in growing the business. One of the incremental investments on the SG&A side is, about two years ago, we made a step-level change in our sales force coverage.

Now that we have a broader range of ancillary and lifestyle products that cross over into the workplace and we're increasingly focused on penetration of our dealers and capturing share within our dealers, we are going to be deploying more dedicated sales resources into our highest potential dealers. So whereas we kind of paused last year on head count. We'll be layering in some additional head count. And then we basically told our team, "Let's flood the market with Muuto products." So we've given them almost a carte blanche, in terms of incremental sampling to get the product out there and to maximize the exposure.

And so we're really leaning heavily into the investments we made. And then the opening of our new Fulton market, Knoll Design Day flagship showroom is also an incremental investment, particularly in Q2. So layer that altogether, I think they're smart growth-oriented investments. And I think right now when you look on our top line, you can see -- we're getting a fair New England return on those investments.

Matt McCall -- Seaport Global Securities -- Analyst

OK. Yes, I agree. So I guess, the follow up would be EBITDA margin, EBIT margin. I think you talked more about EBITDA.

You still expect EBITDA margin expansion this year, given the elevated spend on some of those new growth initiatives?

Andrew Cogan -- Chairman and Chief Executive Officer

We do. And again, I think, as Charles said, because the inflation headwinds will still be with us in the second quarter, but then they will start -- we had some very smart colors and other hedges in place that mitigated inflation last year. So we got the carryover effect in the first half. We won't have our price increase really kicking in until the back half.

So I would expect you won't see as much margin improvement in the first half, but then we would expect to see accelerating EBITDA margin improvement in the back half. We target 50 to 100 basis points annually. I think last year, we were about 70 basis points. I don't know that will be that high this year, but our goal is to continue to improve margins as much as we can and have a balanced approach to growth investments on the opex side and then increasing margins on the bottom line and a nice mixture of both.

Operator

And at this time, I have no other questions in the queue. I would like to turn the call back to Mr. Andrew Cogan for closing remarks.

Andrew Cogan -- Chairman and Chief Executive Officer

Great. I want to thank everyone for their participation and the good discussion this morning. And in closing, I want to personally extend an invitation to all of you on this call to come visit us in Chicago for our inaugural Knoll Design Day celebration, June 10th to 12th at our brand-new flagship Fulton Market showroom. We'll be open daily from 8:00 a.m.

to 5:00 p.m. and I look forward to welcoming each and every one of you at 811 West Fulton Market. Thank you for joining us this call, and enjoy the rest of your day.

Operator

[Operator signoff]

Duration: 46 minutes

Call Participants:

Andrew Cogan -- Chairman and Chief Executive Officer

Charles Rayfield -- Chief Accounting Officer and Acting Principal Financial Officer

Greg Burns -- Sidoti and Company -- Analyst

Budd Bugatch -- Raymond James -- Analyst

Steven Ramsey -- Thompson Research -- Analyst

Matt McCall -- Seaport Global Securities -- Analyst

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