Knoll (KNL) Q3 2019 Earnings Call Transcript

Knoll (KNL)
Q3 2019 Earnings Call
Oct 24, 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 Inc. third-quarter 2019 conference. 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 long-term revenue and profitability growth goals. Future outlook for the industry and economy, ability to integrate acquired businesses 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 and 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 the non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP financial measures are included in the presentation slides that will accompany the webcast.

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

Andrew Cogan -- Chairman and Chief Executive Officer

Thank you, and good morning everyone and welcome to our third-quarter earnings call. It was a very balanced quarter performance between our office and lifestyle statements as we continue to deliver strong growth and margin expansion. With overall top-line growth just under 9%, led by further share gains in the workplace from both organic investments and past acquisitions like Muuto coupled with progress on our lean initiatives and continuous improvement work in our office segment. We delivered 190 basis points of gross margin improvement, 30 basis points of adjusted EBITDA margin expansion, to 14.7% of sales and 15% growth in adjusted earnings per share.

These were the strongest gross margin in over five years. And the best adjusted EBITDA margins since the fourth quarter of 2016. On the workplace front, we grew 11% driven by 16% growth in the sales of lifestyle products to both commercial and government workplace clients, as we continue to ride the trend toward more residential and hospitality based workplaces. This growth was led by Muuto, KnollStudio and Spinneybeck FilzFelt, combined with 9% growth in our office segment, led by continued strength in height adjustable tables, DatesWeiser conference and meeting tables and Rockwell Unscripted, you get the 11% workplace result.

Lifestyle products as a percent of total workplace increased over 25% and 24% a year ago. If we continue to rollout our new visualization tools and increase the breadth of our offer included here, it will become increasingly easy for our dealers to present all no solution to prospective clients. Prior to the Muuto acquisition in 2018, we spent a fair amount of time looking at where we believe the greatest opportunity was for Knoll to increase our participation, and the resimmercialization of the workplace and the growth of ancillary and hospitality based products is a share of the total workplace footprint. We enhanced our KnollStudio offering and initiated organic product development initiatives like Rockwell Unscripted to target this emerging area of the workplace.

We're seeing great traction here as Rockwell continues to deliver strong year-over-year growth. Additionally, we look outside Knoll for a high impact contract quality acquisition that we could move through our existing channels and client relationships to amplify and exponentially accelerate our growth. Muuto has done that, and frankly, even more for us, as you can see in the results we've reported this year, and particularly this quarter, as Muuto delivered yet another record quarter of sales and EBITDA performance. In the third quarter, Muuto continued its toward growth as North America sales increased 100% driven by even greater growth and acceptance by our dealer partners and clients.

Today North America represents approximately 35% of Muuto's total volume, up from 25% at the time of the acquisition. And we still believe we're just scratching the surface of both the workplace and consumer potential of this millennial affordable luxury brand. As we've invested in further training, sampling inventory, new products, the results of our investment has been heartening to see. The thinking regarding Fully with similar.

Looking broadly at the $18 billion market, we continue to believe that the contract dealer channel that targets mid to large-sized businesses and architects and designers represents the largest and deepest market opportunity for further growth and share gain, as we have successfully achieved the past couple of years. However, looking out we do see an opportunity within the home office and small business channel to target an underserved segment of the market that values design, but wants to transact online and directly without an intermediary. Today, we don't serve what we estimate to be a $2 billion market segment. With digitally native Fully, we can now reach an audience outside of our current distribution and by enhancing their offer with a limited selection of Knoll products while simultaneously leveraging Fully's portfolio of ergonomic and height adjustable table solutions across our existing channels, we believe we can achieve meaningful synergies.

This scalable, profitable and socially conscious B Corp opportunity will be nicely accretive and another level of profitable growth in the years ahead. And as we prepare for our direct-to-consumer push from Muuto and think about scaling our own e-commerce efforts, there are meaningful learnings from Fully that we can share across the Knoll constellation. On the lifestyle front, sales grew just over 8% and continued to represent approximately 40% of our revenue. Within lifestyle, those businesses with the greatest exposure to the resimercialization of the workplace perform best that we did see stabilization of residential demand in the quarter, as HOLLY HUNT returned to growth.

Lifestyle margins were flat year over year at just under a strong 22%. We were pleased to participate in one of this year's highest-profile project with the completion of the TWA Hotel at JFK Airport and ARO iconic TWA Flight Centre. This multi-million dollar Knoll project was recently featured on the September cover of interior design magazine, and is full of KnollStudio, Muuto, KnollTextiles and Spinneybeck FilzFelt products in the public areas, restaurants, hotel room and even the outdoor pool area. These kind of projects are emblematic of Knoll's unique cultural position, which is enhances our entire brand proposition and commitment to the best and enduring modern design and quality.

We hosted our biannual leadership team meeting there in July, and I encourage each of you to visit if you find yourself out at JFK. Looking toward 2020, mark-ups in our funnel activity continues to grow in both dollars and absolute number of projects, as we target a broader set of opportunities within the workplace. Furthermore, while the positive secular trends driving demand, including the award-for-talent and focus on employee wellness remain intact. We'll continue to monitor the macro conditions and if necessary, adjust the pace of our activities accordingly, without sacrificing the midterm to long-term opportunity in front of us.

Additionally, our work to rationalize our broader industrial footprint, building on our lean initiatives continues to progress, and we'll look forward to updating you in the new year as our plans here at coalesce. Now let me turn the call over to Charles to walk you through our results in more details. Charles?

Charles Rayfield -- Senior Vice President and Chief Financial Officer

Thank you, Andrew. In addition to the sales growth that Andrew discussed, gross margin expanded during the third quarter by 190 basis points due primarily to fixed cost leverage in our manufacturing facilities from higher volume absorption, as well as continuous improvement activities, price realization in favorable product mix. These positive drivers were partially offset by year-over-year inflation in commodity costs and tariffs. While commodity costs had a negative impact in the third quarter, sequentially, these costs have continued to dissipate as expected.

This is the lowest level of inflation that we've seen in two years for both commodities and transportation. The impact of tariffs was minimal due to ongoing mitigation activities around sourcing of the products impacted by tariffs currently in effect. Total adjusted operating expenses increased $14.8 million driven primarily by incremental volume related expenditures, increased information technology spending, showroom investments and product development initiatives. We'll continue to invest in strategic initiatives to drive future growth, but expect to be able to leverage our SG&A infrastructure in the future, as we realize the return on these investments.

Adjusted operating expenses exclude $2.1 million of amortization of intangible assets related to our acquisitions of the Muuto, HOLLY HUNT and Edelman businesses, $0.5 million of debt refinancing fees, $0.3 million of transaction related expenses in connection with the Fully acquisition and restructuring expenses of $0.1 million. Adjusted EBITDA margin increased to 14.7% in the third quarter of 2019 from 14.4% in 2018. The increase in adjusted EBITDA margin was due primarily to gross margin improvements, offset by increased strategic operating expense investments that we believe will strengthen our position for future growth. From a segment perspective, adjusted EBITDA for the office segment increased 40 basis points from 11.6% in Q3 of 2018 to 12% in Q3 of 2019.

The increase was primarily driven by sales volume growth and continuous improvement initiatives that were partially offset by increased operating expenses. Adjusted EBITDA for the lifestyle segment decreased 10 basis points from 21.9% in Q3 of 2018 to 21.8% in Q3 of 2019. The decrease in adjusted EBITDA margin was mainly due to increased operating expenses related to investment spending and sales force, marketing and new product initiatives, partially offset by favorable mix within the lifestyle segment. Interest expense in the quarter was up $0.5 million compared to Q3 of 2018, due primarily to higher average outstanding debt levels from the Fully acquisition, partially offset by lower interest rates.

In the third quarter, the company completed an amendment and extension of its credit facility. The maturity date was extended to August, 2024 and reduced the pricing of borrowings under its term loan and revolving credit facility. At current leverage the amended facility reduces our interest rate by 25 basis points. All other terms remain consistent.

In connection with the amendment and extension of the credit facility, the company recognized $20 million loss on extinguishment of debt from the writedown or the write-off of deferred financing fees. Adjusted net earnings for the third quarter of 2019 was $27.4 million, up from $23.7 million for the same period in 2018. Adjusted net earnings is exclusive of the $8.9 million of tax effected net earnings adjustments that were previously discussed. Adjusted diluted earnings per share was $0.55 and $0.48 for the third quarter of 2019 and 2018, respectively.

Cash and cash equivalents were approximately $8.3 million at the end of the quarter and our outstanding debt balance is approximately $460 million. Cash provided by operating activities was $42.2 million in the quarter, largely offset by investments from capital expenditures at $10.5 million. Capital expenditures during Q3 related primarily to our showroom and information technology infrastructure. In addition to capital expenditures, we used $35 million for the acquisition of Fully.

Cash provided by financing activities was $4.7 million and was primarily related to proceeds received from our revolving credit facility, offset by debt payments and the payment of dividends of $8.4 million. In spite of the additional cash expenditures related to the business acquisition this quarter, leverage was reduced to 2.33 times at the end of Q3 2019 from 2.42 times in Q2 of 2019. Reducing our leverage will remain a primary use of available free cash to the remainder of the year and into 2020. As we've outlined in prior communications and as Andrew has touched on in his remarks, one of our primary strategies are centered around sales penetration into underserved ancillary markets.

In addition to growth in our core system seating and storage business in the office segment, we continue to benefit from strong growth in workplace ancillary sales. Our track record of successful acquisitions continues to be favorable from Filzfelt to HOLLY HUNT to Muuto, and while a different strategic focus, we expect Fully to continue this trend and deliver value to our shareholders. As a final note, we began partnering with say.com in Q2, and then again partner with Say to provide Knoll shareholders the platform to directly engage in the quarterly earnings call. We'll begin our Q&A portion of this call by answering a question we received on say.com, and the question is as follows.

What do you see as the biggest trends in office furniture over the next five years and how is Knoll positioned today to capitalize on these trends. Andrew?

Andrew Cogan -- Chairman and Chief Executive Officer

Thank you, Charles, and thank you Say. Looking out, I think there are few trends we're focused on taking advantage of. First and foremost, we expect the office to maintain its privacy as a place for business is to bring employees together to collaborate innovating gather. We'll be doing so in an environment that appeal to a multi-generational and increasingly diverse workforce, that will demand a greater variety in the settings in which they work moving from individual to group to virtual many times within the same day.

They all want settings that promote wellness or produce an environmentally responsible manner and adjusted their varying levels of need for focus in privacy. Importantly, they'll seek out more experiential settings. They bring together the best of residential, hospitality and traditional workplace design. Our newly opened flagship space in Fulton market which was just named one of the 12 coolest offices in Chicago by Crain's Chicago, embodies all these trends.

Our product development pipeline is full of enhancements and new platforms that will keep us in a leading edge of this change and leverages the breadth of the capabilities are constellation of design-driven brands from Knoll to Muuto to Spinneybeck FilzFelt, bring to the challenge of creating inspired workplaces that help our clients to attract and retain great talent. Second, we see our more complex clients looking to work with a partner, who can help them create a total workplace that's rapidly and specifically tailored to their individual needs and culture. Knoll has always prided ourselves on our extensive custom product development capability that allows us to modify our standard solutions to meet specific client requirement, as well as develop non-standard solution that responds to very specific conditions or requirements. This is a real competitive advantage for us.

When coupled with our investments in new visualization capabilities, we and our dealer partners can work with clients and architects to co-create in real-time holistic workplaces and turn those rapidly into renderings and then orders. Third, at the other end of the spectrum, we believe that increasingly more and more businesses, particularly smaller ones would want to procure their office furniture directly online. Well, this is a small segment of the market today. It's one of the reasons we were excited to add the digitally native Fully business to our constellation of design-driven brands this past quarter.

It does not disrupt our current dealer relationships and allows us to capitalize on the growing B2B and B2C digital commerce trends, while simultaneously leveraging Fully's product portfolio across channels, increasing the breadth of ergonomic designs available to our existing clients and dealers, and we can offer some of our simplest products to Fully's online clients too. Operator, I think we'll open up the lines to questions now.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Greg Burns with Sidoti & Company.

Greg Burns -- Sidoti and Company -- Analyst

Good morning. Can you just let us know how much Fully contributed to revenue this quarter? And what the outlook for the fourth quarter is? Thanks.

Andrew Cogan -- Chairman and Chief Executive Officer

Thanks, Greg. Fully will be worth -- as we said in the release when we announced that Fully right now is running at a $50 million, $55 million pace, so call it $12 million to $15 million of revenue in the quarter, and we basically had one month of Fully activity in the third quarter.

Greg Burns -- Sidoti and Company -- Analyst

OK, thanks. And then, in terms of the gross margin, it sounds like some of the inflationary headwinds, steel and transportation are now turning in your favor, very strong gross margin performance this quarter. Do you see room for further expansion from here? Thanks.

Charles Rayfield -- Senior Vice President and Chief Financial Officer

Yes. Thanks, Greg. So to your point, transportation was relatively flat this quarter year over year. We still saw some commodity year-over-year inflation.

But certainly think that and as we noted on previous communications. We've seen that dissipate. Q1 was peak inflation that's continued to come down from Q1, sequentially. It's where we're at now, still a bit of a headwind for this quarter, but expect that to turn as we finish out the year and go into 2020.

I think as well, the two biggest drivers for margin this quarter were volume and continuous improvement initiatives. And to that end, we'll continue with our continuous improvement in lean initiatives as we go through the remainder of the year and into next year. So I think we're probably maybe about at the midway point with those activities. And as we've talked about previously, we think there is a greater opportunity over the next couple of years for additional fixed-cost reductions.

But certainly, as we close out the year, we expect to get a little bit more of a benefit in the gross margin line from the settling of commodities and transportation costs that we didn't necessarily see earlier in the year and last year.

Greg Burns -- Sidoti and Company -- Analyst

OK.

Andrew Cogan -- Chairman and Chief Executive Officer

Greg, I would just add to Charles's response that I think we're really pleased with the margin trajectory, particularly in our office business. If you go back to early 2017, we've improved gross margins in the office segment by 400 basis points. EBITDA by 300 basis points. And as Charles said, I think we're just at the midpoint of that kind of margin improvement.

And then when you couple all the initiatives in terms of lean that we've been working on and continuous improvement and bundle that with what we now see as we start looking to next year should be meaningful deflation particularly in commodities like steel. That gives us I think good confidence that we'll continue to see 100, 200 basis point improvement in our office margins on a constant volume basis as we move forward.

Greg Burns -- Sidoti and Company -- Analyst

Great. And then in terms of Muuto, are you still on track? What's the time frame in terms of launching the consumer part of that business in North America? Thanks.

Charles Rayfield -- Senior Vice President and Chief Financial Officer

Yes, I know that's been kind of a bit of a moving target. I think right now, our best guess would be sometime in the first half of 2021 and the reason we've kind of moved it out from -- say the back half of '20 into the front half of '21 is, we're just, I wouldn't say overwhelmed, but we're incredibly busy with the success of what we've had ramping into the contract market and we see opportunity to continue to accelerate that. So we've been investing a lot more time in IT resources on making Muuto easier to do business with and enhancing our in-stock capability, starting now to grade in more of our own textile, localizing our manufacturing and again, our dealer business, Knoll dealers generally grew over 100% this past quarter with another record quarter. And the business is continuing to perform well as we start the fourth.

So we've just put all our focus and attention on that and so it means we've had to kind of deprioritize the direct-to-consumer launch. But I feel good that it'll happen in '21. And I also feel that we're going to get a lot of learning and actually how to operate a real B2C business from a -- from the Fully acquisition. So that's the timing today.

Operator

Thank you. Your next question comes from Matt McCall with Seaport Global Securities.

Matt McCall -- Seaport Global Securities LLC -- Analyst

Thank you. Good morning, everybody.

Andrew Cogan -- Chairman and Chief Executive Officer

Good morning.

Matt McCall -- Seaport Global Securities LLC -- Analyst

So maybe -- I want to follow up on the gross margin -- the gross margin questions. I just want to make sure I heard you right, Andrew. When you're talking about the -- maybe the margin improvement thus far as at the midpoint, were you trying to say that you've seen 300 basis points of gross margin expansion last few years and you've got another 300, you think, in office overall. Is the point you're trying to make?

Andrew Cogan -- Chairman and Chief Executive Officer

I think that's entirely possible that you're going to need to have the deflation that we're expecting to layer into that, we're going to need to continue our tariff mitigation efforts, which have been successful in offsetting about 50% of the tariff headwinds. But I think our -- I think there is a path to that kind of improvement over the next two, three years. Yes.

Matt McCall -- Seaport Global Securities LLC -- Analyst

And just to make sure we're talking about the right starting point from here. We've seen some nice -- I guess seasonal build this year. It sounds like commodities possibly help, but we've seen that nice seasonal build, we're now over 39% almost 39.5% of the quarter. Are we talking about kind of -- from that 39.5, 300 basis points, will that get us to the right --

Andrew Cogan -- Chairman and Chief Executive Officer

No, Matt, I was specifically talking about the office segment.

Matt McCall -- Seaport Global Securities LLC -- Analyst

Oh, I'm sorry, yes. All right. So, well, to the next question, what's the starting point?

Andrew Cogan -- Chairman and Chief Executive Officer

Well, OK. Well, the starting point in the office business and I can grab that today is that, let's see. The office segment, gross margins are somewhere around, well we report the EBITDA there about 12% in the most recent quarter. I think we can get them up to 13%, 14% in the office segment and basically office is 60% of our revenue, 60%, 65% of our revenues.

So take two-thirds of that, I think we can move Knoll over 40% gross margin with the mix and the initiatives we're taking over the next couple of years. But again, I think we can get office from 12% to 13%-plus EBITDA margins and that would move us up solidly into double-digit operating margin, which is what we've always talked about consistently delivering and which is where we see others. So there's no reason we shouldn't be able to get there. I think there's a lot of margin upside remaining in our office business.

Matt McCall -- Seaport Global Securities LLC -- Analyst

And then when you think about after Charles referenced a couple of things, but we think about the main drivers of that. I mean, you talk about deflation. But when you think outside of just commodities, can you talk a little bit about mix, can you talk about fixed cost, can you talk about some of these other drivers that you may be able to use to get there?

Andrew Cogan -- Chairman and Chief Executive Officer

Well, listen, I mean, Nick. Go ahead, Charles.

Charles Rayfield -- Senior Vice President and Chief Financial Officer

I was just going to say, I mean, I think we had several things going for us this quarter. I mentioned volume and continuous improvement activities. We also had positive benefits from price realization until a lesser degree, product mix, but still was positive. And that was offset to a lesser degree by inflation and some other miscellaneous items that came through.

In terms of what we can control, obviously, we can control continuous improvement which we noted that we'll continue to focus on. In terms of tariffs, we'll continue with our mitigation activities. As Andrew mentioned, we've had great success reducing the impact to our business. We did have some tariff impacts this particular quarter.

We'll continue to try to mitigate those as we go forward through the end of the year and into next year, but continue to expect to have that -- have an impact in the fourth quarter. But then from a price realization perspective, that's something that's been positive, but we'll have to see how it goes into the 2020.

Matt McCall -- Seaport Global Securities LLC -- Analyst

OK. And then -- and you talked about residential stabilization. I think specifically you brought up Holly Hunt, but when you think about the addition of Fully maybe some stabilization and some benefit from the residential business. If I think about just no specific opportunities outside of just any cyclical drivers.

How do you look at kind of offsetting growth, should we see any typical solves from some of the micro indicators. How can you offset that with some of these Knoll-specific drivers?

Andrew Cogan -- Chairman and Chief Executive Officer

Well, listen, I think we have a lot of drivers that are leading to significantly better than industry performance. And I mean I, you take Muuto as an example. I mean that, again, we still think we're in the early innings of where Muuto can be. Muuto is generating 200 basis points to 300 basis points of incremental growth at the Knoll Inc.

level. So I think, that's significant. I look in the office business. Our adjustable table, Rockwell Unscripted, those businesses are growing super strong.

So I mean, I look at those drivers. Then we're gaining share within our dealers. So in the past, we've kind of, in the last year to we really accelerate it -- we're capturing. I mean, we're broadening our playing field.

So I know people are thinking about what the macro picture is that regardless of the macro picture, I expect to see continued gain share over the next few years and there is significant opportunity within our dealer channel to gain market share, each point of dealer share -- each point of share gain, our dealer is worth $15 million, $20 million and we've gained three or four points in the last year, and I think we can continue to gain in share at that kind of pace. So we're not counting on a macro thing to get us there, although I think the macro background remain supportive, but I think we have some very Knoll specific initiatives that will allow us to continue to perform as we have this year, meaningfully better than the industry.

Matt McCall -- Seaport Global Securities LLC -- Analyst

And then the only thing you did mention there was the resi side of the business, maybe --

Andrew Cogan -- Chairman and Chief Executive Officer

Yes. And the resi side has been -- yes, and the resi side been a little slower this year. And that will be a little bit on kind of how that -- where that resi business kind of plays out. I do think, as we build more of a direct-to-consumer offers and that's where some of the Fully initiatives expanding our own e-commerce efforts getting Muuto into B2C, there is a tremendous opportunity there and you know that will come in '21 and beyond.

So I think, we've got a really robust platform, and I really like that constellation of brands we've assembled. And frankly, the team we have leading those is the strongest leadership team, I've had the privilege of working with here at Knoll.

Matt McCall -- Seaport Global Securities LLC -- Analyst

Thank you, Andrew.

Andrew Cogan -- Chairman and Chief Executive Officer

Thanks, Matt.

Operator

[Operator instructions] Your next question comes from Bobby Griffin with Raymond James.

Bobby Griffin -- Raymond James -- Analyst

Good morning, Andrew and Charles. Thanks for taking my questions, and congrats on a good quarter.

Andrew Cogan -- Chairman and Chief Executive Officer

Thanks, Bobby.

Bobby Griffin -- Raymond James -- Analyst

So I guess first, Andrew, I just want to maybe see if you could expand a little bit on what you're seeing today in the office environment from an industry perspective. There's been a lot of commentary about some of the weakening data points that we on the sell-side have published or we've seen in the news. Are you seeing anything different from larger customers to smaller customers or project size that would give you any type of worry about the overall environment?

Andrew Cogan -- Chairman and Chief Executive Officer

Well, first, let me say this, we're continuing to see order growth and I'll comment a little bit on more on the funnel, but quite constructive. Listen, I think it's clearly demand that has probably down shifted during the first half of the year. You see it in the different numbers into kind of mid to low single-digit kind of growth environment. But in spite of that and you've got this 2%, 2.2% forecast for next year.

I think the overall drivers remain fundamentally solid. Pricing is supportive, which is, again I think reinforces the point of view this is a growth environment. Inflation is receding and so you're seeing actually our bottom-line margins now are expanding at a faster clip than they were in the first half of this year. And then as I mentioned in one of my earlier answers, we have growth drivers that are still very much in their infancy.

So if I take a look at BIFMA as a starting point, now 2.2% is down from this year's 6%, and that probably corresponds to some weakness in recent data like the August ABI, and corporate capex and some of that data. But the September released ABI yesterday. Well, it was slightly negative, did improve versus prior year, and actually the project inquiries and the design contracts rebounded very strongly, which we think is more indicative of where things are going. So listen, I think on a secular level, the thesis for growth, the competition for talent, the resimercialization of the workplace, the increased focus of wellness and that impact on ergonomic seating and tables is going to continue to drive workplace growth.

Office space absorption, while it's down from the Q1, Q2 rates remains very strong. I think 19 out of the top 20 markets were in positive territory, and absorption was up something like 30% over the third quarter. Leasing activity continues to grow, and corporate profits and cash flow are strong. So I think on the macro picture, overall we'll be happy with that kind of growth environment and that we can translate it at a faster rate to the bottom line.

Then, Bobby, when I look at our data, our pipeline looking to 2020 is up low double-digits, we're seeing an increase in both the number of opportunities, as well as the total dollar value and the total number of opportunities. The awarded pipeline for us, for both the balance of this year and next year, is meaningfully greater and we're seeing -- and that kind of this correlating with we're seeing more client visits and better win rates with those clients. We continue to track better than BIFMA. Year to date, 13 out of our 16 regions are up versus prior year.

And for us, the only real pockets of weakness has been in the Middle East where we're kind of comping against a couple of large projects that didn't recur this year. But looking to 2020 actually, the Middle East pipeline is better. The project sizes have been relatively consistent. So we're not seeing and fighting that headwind.

Our share gains are holding, and frankly I think accelerating and you can see that with the Muuto data and then Muuto continues to knock it out of the park and we're just scratching the surface. So I think it's -- I don't think it's about environment. And as we've begun our internal planning for 2020, I think we're quite positive. If we take this month's 2.2% as a baseline, we'd expect to outperform.

Muuto should be worth another again 200 basis points as we go -- you get into 4% to 5% organic growth, and then you layer in some of the Fully benefit and there may be some choppiness here or there, but I think you get to a nice mid single-digit growth outlook for 2020. And then you factor that in with what Charles talked about, which is maybe another 30 basis points, 40 basis points, maybe 50 basis points depending on where some of these headwinds end up in gross margin. That's a terrific place it gets us. We set a midterm goal of 15% EBITDA margins and I think frankly we could make more progress on the margin journey in 2020 than we were able to in 2019, even if we do so on a more mid-single growth rate.

So to me, that's a good environment.

Bobby Griffin -- Raymond James -- Analyst

OK. Yes, that's -- I appreciate all the detail. It sounds very good and I agree. And it actually leads into my second question around the SG&A side of things.

Is there -- would the -- did investments time up this quarter where this could almost be the highest type of growth investments hit this quarter, and then it should kind of maybe wane off a little bit into 2020 to help with that margin expansion story?

Andrew Cogan -- Chairman and Chief Executive Officer

I think the way I would -- maybe the way I might think about it is I think the low 28s is kind of where we're going to run operating expenses going forward. Certainly we can toggle it up and toggle it down depending on what the environment is, but I think we're focused really on the gross margin improvements where I think we can make more progress going forward. And I would assume opex stays in the low 28s for now.

Bobby Griffin -- Raymond James -- Analyst

OK.

Andrew Cogan -- Chairman and Chief Executive Officer

Charles, to you.

Charles Rayfield -- Senior Vice President and Chief Financial Officer

Yes, I would agree. I think as we continue to go forward into 2020, we might get a little bit of benefit from the fact that we'll have expected continued sales growth, but we continue to expect to make these strategic investments due to the opportunities that are ahead of us. So I agree with everything you had said.

Bobby Griffin -- Raymond James -- Analyst

OK, that's helpful. And then I guess lastly for me, Andrew, you talked a lot about Muuto and it's very exciting what's going on there. When you look at the opportunity for 2020, does that growth that we were just talking about, does that include the rollout of the direct-to-consumer channels and getting that more into kind of the consumer environment or would that just -- would those be on top of it? And I guess secondly, how big do you kind of think Muuto could be from a consumer perspective in the U.S.?

Andrew Cogan -- Chairman and Chief Executive Officer

OK. Well, first of all, nothing in 2020 that I talked about assumes any Muuto direct-to-consumer in our part. Muuto does sell through other e-tailers and retailers, some Muuto does get some -- we do some wholesale business in the U.S. So that's certainly -- and that's been growing nicely.

Really what I'm talking about 100% with Muuto is just further contract penetration. Again we are -- when we acquired Muuto we said, we thought we could double the business in three or four years. We are right on a path to doubling the business in three or four years with margins north of 22%, 23% EBITDA margin. So I think what we're talking about in our assumptions for 2020 is just further workplace penetration of Muuto sales.

And one of the things that's happening now with Muuto -- one is kind of success to get success. So as our dealers start to see they can do well with it, they dedicate more resources and they lean harder into it. The other thing that started to happen with Muuto in the back half of this year is a lot of the project work, it's longer cycle work, but we're now starting to get six-digit Muuto projects. And when we started, we were getting $5,000 Muuto projects, so -- or smaller.

So it's really exciting to see the penetration within the A&D community, within our larger corporate clients, within standards programs, and hospitality and corporate settings. So I think we can get the 200 basis points to 300 basis points of total growth for -- as a percent of Knoll Inc. for Muuto, purely in the workplace contrast hospitality market next year. And then in '21, we'll start to attack the consumer market.

What's that worth? It's probably worth another -- I don't know, if I had to swag it right now, I'd say that's worth another 100 basis points to 200 basis points of incremental Muuto growth. But we'll have a better estimate on that when we get there.

Bobby Griffin -- Raymond James -- Analyst

OK, that's very helpful. Well, congrats on the quarter. And thanks again for taking my questions. Best of luck going into 4Q.

Charles Rayfield -- Senior Vice President and Chief Financial Officer

OK. Thanks, Bobby.

Andrew Cogan -- Chairman and Chief Executive Officer

Thanks, Bobby.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Mr.Cogan.

Andrew Cogan -- Chairman and Chief Executive Officer

Great. Well, thank you everybody for joining us on today's call, and we'll look forward to catching up with you in the new year, everybody. Cheers.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Andrew Cogan -- Chairman and Chief Executive Officer

Charles Rayfield -- Senior Vice President and Chief Financial Officer

Greg Burns -- Sidoti and Company -- Analyst

Matt McCall -- Seaport Global Securities LLC -- Analyst

Bobby Griffin -- Raymond James -- Analyst

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