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Edited Transcript of KNL earnings conference call or presentation 27-Apr-20 9:00pm GMT

Q1 2020 Knoll Inc Earnings Call

EAST GREENVILLE Apr 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Knoll Inc earnings conference call or presentation Monday, April 27, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew B. Cogan

Knoll, Inc. - Chairman & CEO

* Charles W. Rayfield

Knoll, Inc. - Senior VP & CFO

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Conference Call Participants

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* Colin Casey

Vulcan Value Partners LLC - Equity Analyst

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Steven Ramsey

Thompson Research Group, LLC - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the Knoll, Inc. First Quarter 2020 Question-and-Answer Session. This call is being recorded. This call is also being webcast.

In addition, this call may offer statements that are forward-looking statements including, without limitations, 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 current expectations that are subject to a number of risks and uncertainties, certain of which are beyond the company's control. Actual results may differ materially from forward-looking statements as a result of many factors, including the factors and risks identified and described in Knoll's annual report on Form 10-K and its other filings with the Securities and Exchange Commission.

These cautionary statements are particularly relevant in the current environment where the COVID-19 pandemic has created significant uncertainty. All of our forward-looking statements today should be considered within the context of that uncertainty.

The call today may also include references to non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP financial measures are included in the earnings letter released earlier today.

I will now turn the call over to Andrew Cogan, the Chairman and CEO of Knoll for opening remarks.

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [2]

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Thank you, and good afternoon, everyone. I hope this finds all of you on this call safe and well. In addition to the enhanced commentary in our earnings release, I thought it would make sense to start off this call with a few brief comments on current business conditions. Understandably, April orders are tracking down approximately 35% compared to prior year. On the residential side, with Europe, including many of our dealers as well as our 2 Italian plants largely shut and most HH showrooms and our own 2 Knoll shops closed, the declines are greater. We would expect, as these businesses are able to start to reopen in May and June, these trends will improve.

On the workplace side, we've continued to see a greater number of orders pushed out, and even in some cases, canceled as clients reassess their needs. But at the same time, new opportunities are emerging as some of our larger clients, in particular, are planning on placing orders for screens, partitions and other safe workplace enhancements as they prepare to bring employees back into their offices in the weeks and months ahead.

A bright spot on the work-from-home front has been our Fully e-commerce business, which is seeing 50% to 100% weekly increases in demand, and as we noted in our release, we are accelerating our other e-commerce initiatives to take advantage of what we believe will be a growing leg of our clients' workplace strategies.

There is as much volatility in overall activity here as I've ever seen. So it's hard to drive too many longer-term conclusions from April. We do know, however, that compared to the dot-com/9/11 period or the financial crisis of '08-'09, where the industry declined approximately 30%, that we did not have the bubble buildup in demand heading into 2020 that contributed to the multiyear overhang in those crashes.

We've clearly spent significant time looking at a variety of scenarios in terms of how this could play out. With the benefit of the actions we've taken, we think depending again on the mix in any given quarter between the Office and Lifestyle segments that we will experience between 40% to 50% negative deleveraging on the gross margin line and approximately 20% to 25% on the adjusted EBITDA line. In these scenarios, we expect to remain cash flow positive.

Obviously, there's a lot of uncertainty with respect to the economy and how all this plays out. But today, we don't see leverage elevating beyond what is allowed under our credit facility. We have enjoyed a 20-plus-year relationship with our lending group and have worked through previous recessions and, in some cases, waivers, without hindering our ability to grow or invest in the business. We wouldn't expect the current environment to create different behavior with our lenders, especially given their ongoing support of our business. So if we did need relief, we don't think that getting some would be a problem, particularly given our ample liquidity and credit facility that runs well into 2024.

Now let us open the line for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

(technical difficulty)

Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

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Can you just maybe give us an update on your operations? What facilities are, I mean, still closed? What are open? Or maybe a better way to look at it might be what percent of your manufacturing capacity is currently online?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [3]

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Sure, Greg. So in general, right now, in -- why don't we start with North America. So our 4 main plants in North America, which include 2 in Michigan, 1 in Toronto and 1 in Pennsylvania are completely open and operational, as are all our warehouses for everything from Fully to Edelman to KnollTextiles, Spinneybeck, all those are operational. In North America, really the only facilities we have closed are DatesWeiser in Buffalo, which is where we produce the DatesWeiser product, and then the HOLLY HUNT workrooms in Chicago and Texas. The good news there is that we've just learned that it looks like the HOLLY HUNT space in Texas will be able to open in the middle of this month as well DatesWeiser in Buffalo. So we're encouraged by that.

In Europe, our 2 plants in Italy are shuttered. However, they both will be opening this week, first in the south and then a little more in the north. So basically, by the end of this -- by the end of the middle of May, everything but HOLLY HUNT in Chicago, where we have another workroom on the upholstery side, everything will be open except that and we hope that opens by the end of May. So we're really fundamentally operational.

And in terms of staffing capacity, I'd say we're running around 75% or 80% of our usual capacity, Greg, which is about in line with demand right now.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [4]

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Okay. And I guess you gave some incremental color about the order patterns in April. I don't know if you could look much beyond that. But just in general, I guess, what are you hearing from your customers because it sounds like there are maybe some positives of them. Looking again at their office spaces, they bring customers back. But are you seeing maybe delays in buying decisions, orders getting pushed out? Just what are you hearing from your customers? Do you feel like you'll get past this and it's more of a V-shaped recovery, we'd get back to normal? Or do you think this kind of has caused maybe a longer-term slowdown that maybe takes a longer time to recover from -- for the industry?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [5]

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Well, I'd say all of the above, Greg. Again, I think 3 weeks of a month are really too hard to make a judgment from. What I will say is this, I think initially, the residential piece has been hit harder. And I think that's understandable when you think about all the HOLLY HUNT showrooms are shut. You've got -- decorators can't go into those buildings. We've got folks working remotely and/or on furlough. Our Knoll shops are shut. Our residential dealers across Europe are pretty much closed. So even if -- and Muuto is, by the way, fully operational. But even there, the dealers aren't necessarily open. And then similarly, the residential dealers for Knoll Europe are shut. So I think the residential thing has really kind of shut the hardest, fastest and declined the most.

I think on that end, as things start to reopen up, we would expect to see that activity gradually pick up. And in fact, many of those businesses have good backlog to ship, but they're struggling with the fact that the clients just can't receive the product. HOLLY went into this with a very solid backlog and they just can't ship a lot of that product to their clients and everything. So I think that's kind of the picture on the residential side.

On the workplace side, I think, again, people are just trying to get their handle on what's going on. I think some clients are using this, frankly, to complete work they had underway. Others where they've made a real estate commitment are moving forward. Now they may be delayed in their ability to accept that. And clearly, as construction is starting to be deemed or allowed in more states, that will allow us to ship some of that product. So we are holding more product than usual and everything.

Clearly, as we look kind of beyond this immediate period and everything, every time there's a change or disruption, it often ends up creating demand for furniture. And we are spending a lot of time with our clients looking -- and ourselves, frankly, at looking at what the future of work is going to be, what the workplace will look like, how do we help our clients come back in a healthy and safe way and what does that mean in terms of partitions and screens and different ways of planning, materials. And those are all things our teams are really aggressively on. We're doing a lot of co-creating with some of our largest clients and that could result in some incremental demand, particularly as clients may spread out over more facilities. So I think there is some opportunity, clearly, that all this disruption will lead to more demand.

Listen, I mean the reality also is that our clients -- a lot of clients are conserving capital, conserving cash and where they have a discretionary investment, they're postponing it. So I would say we've seen a handful of cancellations. We've seen a lot more postponements. And I think depending on how this plays out, that will determine how long those postponements linger.

Looking at the absorption data in the first quarter, I was heartened today to see the positive absorption in the first quarter. That means there's -- people have signed leases and they're going to fill up those space. Now what they fill it up with and how they fill it up may be different. And I think that's causing some of the pause in orders we're seeing right now. But we do believe people will kind of go ahead and, if you've signed a lease, you're going to finish out building up those facilities. Much beyond that, Greg, it's really hard to predict.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [6]

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Okay. Appreciate it. And then I just want to touch on the investments you're making around the e-commerce in Fully and Muuto. Are the investments you're making there inclusive of the $65 million you expect to save? Or is that an incremental investment you need to make, maybe reinvesting some of that $65 million back into the business?

And then what is the time frame on -- now with the Muuto side of the -- rolling out the residential side of that business?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [7]

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Yes. You've been consistent on the Muuto point for a long time, Greg. So I appreciate your question. In terms of the incremental investment, I don't think it's going to be tremendous. What we've decided to do, and again, we've seen the success with Fully, that business is running up 50% to 100% weekly and we're just trying to keep up with all the demand for ergonomic work-from-home products, well-designed work-from-home products, which Fully -- and they ship in 1 to 2 days. I mean, really, really a terrific model on everything.

So we said, well, how can we learn from Fully and implement that for our own businesses? So we do have a small knollshop.com -- knoll.com, we have our own e-commerce shop, but the offering is relatively limited in the work-from-home. And as you know, there are no Muuto products available on an e-commerce basis really anywhere in North America. Certainly not in our site. So we gave the teams a challenge to how do you, in 90 days, leverage the platforms we have, the inventory we already have, so there's really very little incremental investment, and broaden the scope of our own work-from-home office products and stand that up in 90 days. And we gave that challenge a couple of weeks ago and the teams, both in Denmark and in North America, have been going hard at it. We're meeting with them a couple of times a week and I'm super excited with what they've figured out, both from a technology and a service standpoint. And my hope is that we stand it up in that 90-day window, which would be, let's call it, right after the July 4 holiday. And so that's what the teams are doing, and we're super excited about it. And it could be a really nice addition to supplement the way our clients are working from home.

The other thing I would point out with Fully is that we're also able to support some of our corporate clients who said, listen, how do I get these -- get our employees furnishings for their home offices? I mean I had to stand up a home office very quickly that I didn't have and I've put an order in Fully, and 3 days later, I was in business. So we're also working with our clients so they can access Fully as well for their employees at home.

So that's the challenge, Greg, I'd say, early in July, if not sooner.

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Operator [8]

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(Operator Instructions) Our next question is from Steven Ramsey with Thompson Research.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [9]

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I guess to continue on with the Fully thoughts. Can you maybe talk to even just broadly where Fully margins were prior to the acquisition and where you think you can have them this year as you invest for growth and grow on the fixed base and maybe over time, maybe longer term?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [10]

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Yes. I mean off the top of my head, I think they were in the upper single-digit kind of adjusted EBITDA margin basis. And I think we've obviously been able to help them on some of their cost work and everything, leverage some of our sourcing, some kind of the back office stuff that wasn't a lot of kind of value-add. And I would hope, over time, we are consistently running in the double-digit EBITDA margins.

So certainly, Fully shouldn't be any lower than our Office segment adjusted EBITDA margins. That would be kind of our goal, at worst, in line and hopefully, maybe even a little bit better.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [11]

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Great. And maybe more elementary question on Fully, but how much of Fully's product goes through dealers? How much of it goes direct-to-consumer from Fully? And is there an intention over time for that breakout of customers to change?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [12]

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Yes. I mean Fully is really a very independent channel. I mean, listen, our contract furniture dealers don't really want to waste their time selling someone 3 desks for their home. I mean our dealers are phenomenal at larger, more complex projects where there's a lot of value-add both in how they service it and then in the ongoing relationship. And Fully is very much about an individual at home trying to set up an office. That's the bulk of their business. They do some small kind of workplace projects where they'll do 10-, 20-, 30-, 40-person offices. But it's really a different segment of market than our dealers.

What we have done is where we have extended some of these Fully -- extended offers to -- for Fully to support our corporate clients, we are doing that with laying off part of that to our dealers. So they have a participation in it where they have the corporate relationship. But you really should think about these as very distinct channels and solving very different problems.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [13]

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Great color. On the CapEx reduction, to understand this better, the $20 million reduced CapEx, is that geared towards a certain segment, a certain category?

And then I guess, also, could CapEx be reduced further? And what conditions would warrant that?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [14]

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Charles, do you want to go ahead?

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Charles W. Rayfield, Knoll, Inc. - Senior VP & CFO [15]

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Yes. Yes. Yes, Great. Thanks, Steven. So I would say that some of our investment CapEx has been reduced where possible. But our split's still about 30% IT related and probably maybe 45% investment and then 20% or so maintenance. So sort of unilaterally across the board, a little bit more in the investment area.

And yes, we can take CapEx down quite a bit further if needed. I think there's a couple of projects we want to keep moving forward with for appropriate investment purposes, obviously, some of the maintenance activities. But yes, we can reduce it quite a bit more if needed.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [16]

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Excellent. And then last question for me. I guess just pondering, obviously, there's 1,000 scenarios that could happen. But under a scenario where the economy is open again in the second half of the year and then you have the deferred work that you're playing catch up on, so you get the natural lift of the reopened economy, but you've also pulled back on operations. How would you be able to handle that sort of scenario?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [17]

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Well, we're not expecting a snapback here. I mean I think we've got a good backlog that will help some in the second quarter, although, again, it will be limited by our either openness, which is getting better each day and/or by our clients' ability to accept that product. And then I think, right now, everyone is kind of a bit frozen and so you'll need to work through that. But I don't see our capacity being a constraint. It's not on my list of top 10 worries right now.

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Operator [18]

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Our next question comes from Colin Casey with Vulcan Value Partners.

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Colin Casey, Vulcan Value Partners LLC - Equity Analyst [19]

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I appreciate the commentary on margins and cash flow. What level of revenue decline would it take for you to be free cash flow neutral for the year?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [20]

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Charles, do you want to take that?

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Charles W. Rayfield, Knoll, Inc. - Senior VP & CFO [21]

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Well, thank you for the question. I mean it's kind of a theoretical question. I think, as Andrew mentioned earlier on, I think as we look forward to the year, we expect to be cash flow positive. I think that we got to have a pretty significant revenue decline in order to start hitting negative free cash flow, but currently, we still expect to be cash flow positive.

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Colin Casey, Vulcan Value Partners LLC - Equity Analyst [22]

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Okay. And yes, certainly, appreciate it is a theoretical exercise. I mean if I threw out a theoretical number, say, revenue were to decline 50% for the year, would you be free cash flow positive, negative or neutral on that scenario?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [23]

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I think there are a zillion -- as you just said, there are a zillion hypotheticals, and I think we're not going to get into hypothetically this or that. All I can say is we've worked lots of scenarios. We've got -- our models have models.

And we've also got a really good track record of managing Knoll through 2 very significant and sudden declines, 35%, 40% declines and we were cash flow positive in all those scenarios. So I think this is a kind of a seasoned team that knows how to manage Knoll through this, and more importantly, manage Knoll through this to come out stronger on the other side, which we've done every time, and I would imagine we'll do again here.

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Colin Casey, Vulcan Value Partners LLC - Equity Analyst [24]

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Okay. And that cash flow, is that free cash flow, just to be clear?

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Charles W. Rayfield, Knoll, Inc. - Senior VP & CFO [25]

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Yes, free cash flow.

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Colin Casey, Vulcan Value Partners LLC - Equity Analyst [26]

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Okay. And I may -- I think I missed the EBITDA margin flow through. You said 40% to 50% decremental gross margins. What was the EBITDA margin?

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [27]

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We said 20% to 25%. And again, I'm using those ranges because mix has a tremendous impact here.

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Operator [28]

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And sir, I'm not showing any further questions. I'll get the call back to Andrew for his final remarks.

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Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [29]

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Great. Well, thank you, everyone, for joining us on today's call. In closing, while these are challenging and unprecedented times, I want to leave you with reasons for optimism, too. Our sales teams are working with clients to help them implement best practices for safe work in their offices and this is creating demand for new furnishing screens and panels. If CNBC today is right that the office of the future is the office of the past, then that's more good news for our cubicle business. We're seeing continued growth, as I mentioned, in our e-commerce work-from-home channels, and teams across Knoll are working hard to expand our offerings here.

Like our own clients, we too have begun planning to bring many of our people back into our offices and showrooms with the same precautions and preventative measures we've put into our plants and warehouses. And we're encouraged that many countries and states here at home are beginning to ease stay-at-home orders and are allowing construction and manufacturing work to resume. Finally, all this time at home will no doubt lead clients to think about investing in their own homes and home offices.

Across our constellation, Knoll associates are demonstrating their commitment to teamwork and client service. I appreciate, truly appreciate, how hard everyone at Knoll is working around the clock, and I want to thank them for all they're doing.

Stay safe and all our best to you and yours, everybody. Talk to you soon.

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Operator [30]

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And with that, ladies and gentlemen, we thank you for participating in today's program. And you may now disconnect.