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Edited Transcript of KNL.N earnings conference call or presentation 26-Oct-20 9:30pm GMT

·21 min read

Q3 2020 Knoll Inc Earnings Call EAST GREENVILLE Dec 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Knoll Inc earnings conference call or presentation Monday, October 26, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew B. Cogan Knoll, Inc. - Chairman & CEO * Charles W. Rayfield Knoll, Inc. - Senior VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Gregory John Burns Sidoti & Company, LLC - Senior Equity Research Analyst * Steven Ramsey Thompson Research Group, LLC - Senior Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to the Knoll, Inc. Third 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, 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 current expectations but 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 in 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. Reconciliation 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 Mr. Andrew Cogan, the Chairman and CEO of Knoll, for the opening remarks. -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, everyone. We hope this finds you, and you're safe and well. Today, we announced solid financial results for the third quarter as our e-commerce business grew 434% compared to the prior year and higher-margin residential sales, comprising approximately 1/3 of our business, up dramatically from 1/5 a year ago, grew a total of 39%. Knoll, Inc. sales of $309 million declined 13% in the third quarter, driven primarily by decline in office sales of approximately 25%. Total shipments during the quarter benefited from elevated backlog levels heading into the period, and we are pleased that we saw a sequential improvement in incoming order activity from the very depressed levels we experienced in the second quarter. Nonetheless, orders are still tracking below current shipment levels. With the fall starts and delayed return to the workplace for most of our corporate clients, we continue to see a significant number of new office projects being delayed, even in cases where buildings have been completed and we've been awarded the furnishings. Over long term, no doubt, the office will remain an indispensable part of the workplace ecosystem, and we should see a nice bump when businesses do return to the office. But that landscape will be a synthesis that includes a more permanent work-from-home component in an overall environment that continues to elevate the importance of a well-designed home. The workplace itself will more likely be a we space than a me space as at the crux it becomes a space for collaboration, both in person and with colleagues working remotely. The pressure to create workplaces that draw workers in will only increase as the options of where people can work also grows. All this bodes well for a design-different brand like Knoll with a robust collaborative and ancillary product capabilities. Let me add that we are particularly proud of the results we have reported and the strategies that will guide us forward. There may be those who are daunted by the challenges posed by the pandemic, particularly in the office space. But we believe, if anything, the pandemic has helped to accelerate the long-term trends that we are already building at Knoll to take head on. Now we just have to keep pivoting harder and faster, but the opportunity is there, the pieces are in place, and we can see the excitement in our teams. We're happy now to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Greg Burns from Sidoti & Company. -------------------------------------------------------------------------------- Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [2] -------------------------------------------------------------------------------- I just wanted to first get into the order patterns in terms of workplace. Could you just maybe give us some more quantitative numbers around how much orders were down in the third quarter, maybe relative to the second quarter? And how they've trended in the first part of the fourth quarter? -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Well, Greg, good to hear from you. Listen, we saw a really nice sequential improvement from Q2 into Q3 in our overall order patterns. When we look at the BIFMA data, I think over the last 3, 4, 5 months, the industry is down around 32%, 33% on the workplace side, and we've done nicely better than that. I think for us, the crux is a little bit less what's happening in the workplace part, but what's happening in all the other channels and all the other ways people are working. And there, as you can see from our -- what we talked about today, we saw really solid growth in our work-from-home business, in our e-commerce business and in our residential businesses. And now today, that's 30% and growing of our mix, while we expect the workplace to continue to be challenged. As we talked about in the commentary we shared with our earnings release, we think you're probably looking at 30% to 40% decline in BIFMA demand over the 2021 period, bottoming somewhere in '22 and then starting to turn up. But again, we're pleased to see our orders declining less than the industry at this point. -------------------------------------------------------------------------------- Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [4] -------------------------------------------------------------------------------- Okay. And I guess that view around the -- in the press release around the BIFMA market shrinking 20% and kind of this view for the 30% to 40% decline over the next few quarters at least, is that shaped by any change in kind of conversations you're having with your customers, what you're seeing? Or is it just recovery taking longer or maybe have things gotten any incrementally worse over the last few months or quarters? -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- No. Actually, I think things have gotten incrementally better, particularly in terms of our mix of business. Again, I think we -- when we were talking in the last call, we were talking about maybe 20% shipment declines in the back half. And you can see we did better in the third quarter. So I think our view actually has improved. But I think, in part, it's improved because, again, the mix of our business is substantively different at this point than someone who would be 100% workplace-oriented. And we think it's important that as people start looking at the space, they start to differentiate where everyone is kind of positioned. I think as we look at the industry, to me, this feels a lot like the 2001 to 2004 decline. I mean you look at sublease levels right now, they're above the dot-com levels. You look at the kind of absorption, it reminds me of those periods. You look at the kind of leasing activity, which is much more renewal than new space-oriented. So I could easily see a market that's down. Again, the BIFMA stuff is tracking down 30% this year, maybe another 10% next year. Then you start to get some stabilization and improvement. So no, I don't think our view has changed at all. I mean, our pipeline is not down as badly as the BIFMA data, number one. But what we are seeing is the incoming opportunities are -- the number of incoming opportunities are kind of consistent with that decline in BIFMA. So I just think that's the reality. And the key for us is that the more people and the longer people are staying at home that bodes really well for the pivot to work from home that we are really well positioned to take advantage of and to benefit not only from the e-commerce piece of it on the work-from-home piece, but on the living-at-home piece. So again, I think that's going to be what differentiates us through this cycle. But pure-play BIFMA, we think, is down 30% to 40% over the next 2 years. -------------------------------------------------------------------------------- Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [6] -------------------------------------------------------------------------------- Okay. Great. Let's talk about, I guess, that e-commerce in a little bit. The -- very strong growth in this quarter. I know last quarter, you talked about maybe some supply or inventory constraints. Did that affect you at all this quarter? Has that been all cleaned up? And I know it was restricting some of your investment around marketing dollars there because you didn't have the inventory to support the demand. So are we all caught up there? And are you ready to really step on the gas a little bit on that side of the business? -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [7] -------------------------------------------------------------------------------- Yes. We're all caught up there, which is great. We'll be stepping up on the marketing side, particularly as you head into like Cyber Monday and Black Friday and all the holidays in November and December. So we're looking forward to that. We've expanded the offering both on the fully side of things, and they're really well positioned, but we're also expanding it in 2 other ways. One, globally, we actually have a really nice and fast-growing work-from-home position in Europe. So it's not just a North America phenomenon. And then on the second side, the whole Knoll plus Muuto work from home, which we really launched in the middle of July, that's really gaining momentum, and we're pleased with how that's going. So it's not a -- it's not just on a fully front, it's more multifaceted and increasingly global effort that we're really pleased with. And I would just point out that, that channel, in general, is about twice as profitable as the kind of traditional office channel. So you don't need a dollar-for-dollar transition to capture some good margin stuff. So again, there'll still be headwinds going through this year into next. But I think we're encouraged that from a profitability and mix standpoint, ultimately, that will be more helpful. -------------------------------------------------------------------------------- Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [8] -------------------------------------------------------------------------------- Okay. And then obviously, 400-plus percent growth this quarter. Can you give us maybe a sense of your -- maybe that was a little bit of a catch-up from last quarter, some of the supply constraints. But could you give us a sense of maybe the order patterns there? Or what kind of growth maybe you're still expecting from that channel over the next quarter or 2? -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [9] -------------------------------------------------------------------------------- Yes. Well, I mean, again, I think the interesting is today, residential, which includes work from home and living at home is about 30% of our sales. It was 20% a year ago. So I think you'll continue to see our mix move maybe more 2/3, 1/3. I think you'll see 60-40, you'll see more evolution of that, number one. And in terms of the growth rate, I would continue to expect to see that business double over the next couple of quarters, they will grow 400%, but I'd be happy with 100%, 150% growth, as we continue to move forward there. We're certainly seeing it in the traffic and the conversion rates and all that kind of data, we're seeing encouraging trends. And we have a lot more products and again, marketing effort coming into that space in the fourth quarter, and I imagine will carry over into next year. -------------------------------------------------------------------------------- Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [10] -------------------------------------------------------------------------------- Okay. And maybe we can get Charles in here. I just had a question about the restructuring you announced, the $23 million of savings. How should we expect that to be kind of realized over the next couple of quarters? And is that a net number? Or do you plan on reinvesting some of that back into the business? -------------------------------------------------------------------------------- Charles W. Rayfield, Knoll, Inc. - Senior VP & CFO [11] -------------------------------------------------------------------------------- Yes. Greg, thanks so as we announced, we've got about $23 million of annualized savings. So we would expect it to be generally spread over the course of the year fairly evenly. We have some actions ranging from head count reduction to some future actions with a few facility closures, et cetera. But that's generally a net number. There might be some additional spend around marketing dollars and things like that. But generally speaking, that's a net number. And then against that, you've got a couple of things coming back next year in terms of incentives, a couple of things. In addition to that, we've got some onetime benefits this year from some of the government programs that were going on. So those will return next year. But generally speaking, we've taken out about $60 million out of the business going into -- going into 2021. And so there's a little bit coming back next year, as I mentioned. From the restructuring actions, it's about $50 million of total savings coming from that split about 50-50 between COGS and OpEx. But basically, it's setting us up nicely going into next year to achieve bottom line results of higher single-level margins and EBITDA, adjusted EBITDA, maybe lower double digits. -------------------------------------------------------------------------------- Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [12] -------------------------------------------------------------------------------- Okay. So with the restructuring that still keeps you, I guess, in line with that 20% to 25% to 30% range, incremental margin kind of model. It's how we should think about it still. -------------------------------------------------------------------------------- Charles W. Rayfield, Knoll, Inc. - Senior VP & CFO [13] -------------------------------------------------------------------------------- Yes, I think that's right. So as we finish this year, we're expecting still 25% to 30% deleveraging of EBITDA. But I think you're right. We're hoping to get some expansion next year, but still as we go into next year, expecting to get upper single digits of EBITDA, lower double digits. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from the line of Steven Ramsey from Thompson Research Group. -------------------------------------------------------------------------------- Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [15] -------------------------------------------------------------------------------- I guess to start on the more digging on e-commerce. Can you maybe share -- to make sure I understand for this quarter, the resi versus workplace sales from e-commerce in Q3? And then thinking longer term, as you move towards that $200 million of e-commerce sales, I guess, is there a time frame on hitting the $200 million mark? And as you get to that number, do you envision that having more resi content than workplace? And with that, maybe you can dig in on the driver for better margins in that segment being residential versus workplace or any other factors that drive that. -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [16] -------------------------------------------------------------------------------- Sure. Let me try and start at that. So of the residential business, which again, I said, was about 1/3 of our 30% of our sales in the quarter, about 1/3 of that 1/3 was e-commerce-related. So that's kind of -- so 2/3 kind of bricks-and-mortar are KnollStudio, are HOLLY HUNT. And KnollStudio had a strong quarter. Muuto had a quarter of growth. So I'm pleased to see that Muuto's back to growth, Studio is back to growth. And that goes through multiple channels. It goes through dealers, residential dealers. It goes through e-tailers and retailers in North America and in Europe. And then you have kind of HOLLY HUNT business, which we also saw, as you move through the quarter, nice growth. I mean people clearly are spending more money on their homes. Everyone's kind of cooped up a little bit more. So you see things you need to improve. We believe residential furnishings have really moved up the discretionary ladder in terms of people maybe aren't traveling as much, aren't going out as much, aren't spending as much on entertainment. And so they're spending more in their homes. So we're really a beneficiary of that, whether it's Muuto, whether it's KnollStudio or whether it's HOLLY HUNT. And it was encouraging to see even the trends at HOLLY HUNT as we move through the quarter, that business now, as we enter the fourth, get back on a path to growth again. So I think that's encouraging. So that's 2/3 of the business. The other 1/3 is really more of the e-commerce work-from-home business. So again, if you take those ratios, you're thinking something in the $300 million, $400 million of our revenue is annually on a residential basis. And then you can say 1/3 of that is e-commerce. And I do believe we can take that 1/3 and grow at 50% next year and 100% over the next 2 years. I think we're benefiting both from -- when we look at our market projections, we believe the work-from-home market will double in size. And we believe it's going to be a -- it's not just a trend, but it's a more permanent feature of, as we're talking about kind of the ecosystem of how people will be working. And you read all the stuff. I'm sure you're reading all the stuff we're reading, it looks like 15%, 20%, 25% of folks are going to spend some time working at home, and I think people have enjoyed, to some extent, the flexibility that it offers them. And so we think that's -- whether it's learning from home, working from home, that will drive a sustainable growth in that part of the market. And we have both the digitally native and then a business where kind of from the ground up building. So I think we're particularly well positioned with multiple channels and a broad range of products that we can really omnichannel market and move through multiple channels, work in the office, then we can repurpose those to work from home. And I'll give you 1 example. One of our best-selling shares is our regeneration share. And it's a well-priced share. It does great in work in office, but it does great and work from home, and now we'll be introducing some more residential-oriented colors of those products. We've got a broad range of tops and things that we do on the workplace side, we can now offer those on the residential side. So I think we're really nicely positioned to benefit kind of however this ultimately plays out. Did I give you enough on this, Steven? -------------------------------------------------------------------------------- Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [17] -------------------------------------------------------------------------------- Well, yes, that is helpful, certainly. And I guess to get more color there on the margin improvement being -- or the margins being better through e-comm than traditional workplace, is that because of more resi content in that? Or are there other drivers that caused that margin improvement. -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [18] -------------------------------------------------------------------------------- Well, I think the crux of it is you're selling one of this or one of that. And you're not discounting it like you're selling a $5 million project. So I think it's primarily in the pricing where you get the advantage. I mean there's some disadvantages because the transportation is a little more expensive and things like that. But overall, it's just higher-margin business. And on the adjusted EBITDA line, as Charles was talking about, it's well above our targeted upper-single, low double-digit EBITDA margins in that piece of the business. -------------------------------------------------------------------------------- Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [19] -------------------------------------------------------------------------------- Great. Okay. That makes sense. On your discussions with customers on delays for spending for offices, can you maybe share more on the tone of those conversations? Are they getting better or worse? And is there any meaningful change from the second quarter in these conversations? -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [20] -------------------------------------------------------------------------------- Yes. I mean, I think it's pretty obvious, but I mean with the pandemic raging, people are delaying their return to work. And I think, ultimately, it's going to take a vaccine, easier access to testing. And then you'll see more people return to work. There's some good data that we look at in terms of various return-to-work parameters and things like that where people track. And I think if you look at the top 10 cities right now, at most 25%, 26% of folks have returned to work. And when you look at it by geography, the Chicago -- I mean, the kind of the areas, the Chicago, San Francisco, D.C., those are some of the worst areas, New York is below the 27% average. You got a few areas maybe in Texas that are above it. But in general, I think until people start returning to work in mass, we won't see meaningful improvement in the kind of industry run rate. And I think that's what we're hearing. I mean, we've got, I don't know, $70 million, $80 million of awarded business right now that's kind of on hold, pending people return to work. And so our best guess now is that sometime in the back half of next year, you'll start to see an acceleration of folks returning to work, and we should see a nice bump from that. But I think until then, it's going to be leaning into work from home. It's going to be driving the residential businesses because we're all going to be at home, and we're going to be spending more money on our homes. And that's where I think the action is going to be for the next 12 months. -------------------------------------------------------------------------------- Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [21] -------------------------------------------------------------------------------- Great. And then last one for me, focusing more on specifically the government vertical since that's a stronger vertical for you guys. Can you talk about the performance in this market is diverging from general commercial office space? -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [22] -------------------------------------------------------------------------------- Yes. I mean I think the federal government has been stronger, but the state and local has been weaker. So I think they've kind of washed each other out, in general. But clearly, the combined government, I think, has been stronger than the corporate piece. I also think we were maybe expecting a little more quickly on the corporate side, a focus on return-to-work enhancements. So we've done a lot of work on screens and space division and new ways of laying things out, but even in that area where we've got all those products and we're really having active conversation with clients, even in that area, I think their attitude is, well, we're not going to race to do that until we get some more confidence about when we can bring people back to work. And so again, I think that's probably a few quarters out. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) We don't have any more questions on queue. I will turn the call back to Mr. Andrew Cogan for the closing remarks. -------------------------------------------------------------------------------- Andrew B. Cogan, Knoll, Inc. - Chairman & CEO [24] -------------------------------------------------------------------------------- Well, thank you all again for your continued interest in Knoll. Stay safe and go vote. Take care, everybody. Goodbye. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.