Knoll, Inc.
Q2 2020 Earnings Call Transcript

Published: 24 Jul 2020

[Operator:]

Good afternoon, and welcome to the Knoll Inc Second 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 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 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 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 uncertainties. 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.

[Andrew Cogan:]

Thank you, operator, and good afternoon everybody. The second quarter of 2020 was unlike any quarter we've ever experienced. It was a true test of our people, culture, agility and strategy. In that context, we are pleased to report solidly possible adjusted second quarter results, as well as the progress we've made, responding to the COVID-19 pandemic and its impact on our communities, our people and our clients. From the start of pandemic, our focus was really thoughtful. First, keep our people around the world as safe as possible, while maintaining as much of our operational capabilities as government mandate and safe working practices would allow. Second protect our financial position, maximize liquidity in scaling the business to ensure we remain profitable and cash flow positive. Third, lean into the marketplace challenges in front of us with the thought leadership and product support to help our workplace clients retrofit and re-imagine their offices for return to work and work-from-home. And fourth, leverage our brand reputation, broad product offering, multichannel platform and marketing capabilities in the residential space, in short, taking advantage of the pivot to work-from-home and the increased focus on residential life resulting from our working, schooling and exercising where we live. We believe that those businesses, with a brand reputation like Knoll founded on the belief that good design transcends rigid boundaries of where we live and work backed up by a broadening growing range of products and price points with multiple physical and digital paths to market and lean agile cost structures will be the ultimate victors during this unique time. It's also an interesting moment, where more fluid and affordable contemporary live work brands like Muuto and Holly can thrive. For the past three years, as we've rode the wave of the resimmercialization of the workplace in North America, we focus with great success on driving Muuto through our contract dealer channel. Earlier this month, we splendid Muuto's reach through our own direct-to-consumer e-commerce channel at knoll.com, carrying the brands crossover design within the extended range of no products for the home office as well living and dining spaces, it's free shipping in one to three days. And we are very pleased with the growth in traffic and sales activity on the site in the first two weeks. Both Fully and Knoll's -- Fully's position and the Knoll Plus Muuto initiative also enable us to take these brands direct-to-consumer ergonomic offerings to our corporate clients, providing their employees with online access to the right furniture for working from home. However the future plays out, we think we are uniquely positioned to succeed with our range of brands and price points. Now, we'd like to open up the call to your questions. Thank you.

[Operator:]

[Operator instructions] Our first question comes from Gregory Burns with Sidoti and Company. Your line is open.

[Gregory Burns:]

So, maybe we could start off with where you ended up, Andrew on the Muuto and your e-commerce opportunity. I think you were working on developing like a dedicated Muuto e-commerce channel, but now maybe it seems like you might have pivoted and now you're using your Knoll channel. But can you just talk about, your e-commerce strategy in general and specifically, your expectations for the Muuto brand?

[Andrew Cogan:]

Sure, absolutely. And I think our strategy hasn't changed, our goal is early 21 to operate and launch a dedicated Muuto.com channel for North America with a vastly expanded range of offer, but we really felt there was a tremendous opportunity now, particularly, as people were pivoting to work-from-home to bring -- to make Muuto products accessible in the North American market now, particularly those products that were geared towards working from home. So, that's exactly what we've done. I mean, the strategy is really as follows. We have this Fully, it's almost like a good better strategy. With Fully, we have a brand, it's a it's a B corp. It's got a great vibe and attitude. It's a very young, temporary brand, and it's really focused on ergonomic offerings in the height- adjustable tables and seating. And then the accessories, the computer accessories, I'm sitting at a Fully high-adjustable desk now with the outlet cord on the desk and the Fully light, that's geared towards that kind of ergonomic home office, and they're really pros at that. The idea of now with Knoll Plus Muuto.com was to really include a broader range of our ergonomic seating, our own height adjustable tables, and then start layering in the pieces that ship in one to three days in most cases and some in one to two weeks that cannot just furnish your home office workplace, but the living spaces that are contiguous with that and where you can mix in the kind of iconic living dining and outdoor pieces to create a holistic environment for someone who's, both working from home and spending more time living from home. And so it gives us, Fully's got more the entry level price points, our price points are a little bit higher with Muuto now we have a range of price points and kind of the good range and then within those to your classic in the better range. So, we think there's a tremendous breadth now and the market opportunity is so large, that we can segment it and serve it in, in different ways. And certainly, since we've launched this, and again, albeit, the comparisons are easy, but we're seeing, 50% increases in traffic and where we were a year ago. We're seeing 500% increases in order, we're seeing our conversion rate, quadruple, and we're seeing the volume per day steadily grow over the first few weeks. So, I think we're onto something. Fully's e-commerce business was up 130% in the second quarter are doubled, but we're just scratching the surface here. And I do think this will be a more permanent part of the workplace mix, and I think Knoll is incredibly well-positioned to be a player here.

[Gregory Burns:]

Then maybe we could just talk about, you gave some color in the press release around order patterns. But could you just walk us through how orders, particularly around the office segment trended throughout the quarter and how they've looked in the early part of July so far?

[Andrew Cogan:]

Yes, sure. I think as you -- listen, if you've seen the BIFMA data. I think the industry was down about 33% in April and 38% in May. I mean, those were the two of the bleakest months for us. But I think what was encouraging was, in June, we saw a nice sequential improvement in order patterns from the levels we saw in April and May, a lessening of the lessening of the rate of decline. And then also kind of correlated, we've been very carefully tracking new opportunities that are being entered into our sales force funnel, because I think that in some ways, right now, we're all trying to get handle what the future looks like. And we looked like, we really troughed in new opportunities to be entered in May. And they were down pretty much in line with these order numbers. And then we saw a nice sequential improvement in June. So, I think there were maybe some bottoming and then, a much more palatable level as we got into June. I think the other interesting thing is, if you look at kind of the first half, our orders and sales declined pretty much tracked each other in the first half of the year. Orders were strong in Q1, shipments were a little weaker. In Q2, orders were weaker, shipments were a little stronger. But I think they kind of leveled out as you got through the quarter. And I think that's why, if you look at our guidance, we're talking about a 20% decline in the back half, that's certainly better than the numbers we were seeing in April and May on the workplace side. So, I think the other thing to remember, when you think about Knoll is specifically, we're probably one of the most-diversified players in our space. Today 25% of our activity is residential. That includes now over 10%. That's kind of -commerce driven, which is obviously growing very quickly. And then, if you factor in our strong position in government, which is 15%, 17% of our revenue and that sector actually, we're forecasting out to grow this year, with federal outpace in state and local. I think you get to a point where over half of our business or approximately half our business is not pure play commercial office exposure. And again, I think right now that diversification. And remember those diversification in categories that are higher margin, we think really will serve no wealthy this and those are categories leading very hard into without abandoning the opportunity in the traditional workplace market as clients retrofit and reimagine their workplaces.

[Gregory Burns:]

Okay. And then, lastly, could you just talk about the rationale behind, assuring the preferred stock as opposed to maybe just working with your bankers, if you felt like you were going to push up against the COVID? Just because it seems like where EBITDA shaking out here, this is the worst of it this quarter, it doesn't seem like you were going to be at 4% threshold was going to be surely breached or maybe not. But maybe if you can just talk about the thought process behind that the capital raise?

[Andrew Cogan:]

Absolutely, well, I think firstly, we enter the back half with bulletproof balance sheet. We've got $380 million of liquidity. I think on a pro forma basis our leverage is half of our 4.0 covenant. I think the thinking behind the capital raise was really was really twofold. One, I don't think anyone knows what the future holds right now, and we were able to attract capital, I think at a very favorable rate, 4.5%, an up 45% conversion price with an investor who has an appreciation for the space and the brand, number one. Number two, we're very focused on the fact that we think they're going to be significant opportunities on the M&A front as we move through and come out of this. And we believe we can continue to pivot Knoll, towards higher margin, maybe more digitally native residential, mix in our business of high design, high margin businesses. And we really felt we could use some capital to do that. So, I feel like we're in a phenomenal place now to take advantage of what we are sure we're being opportunities from others that aren't as well, position as well, number one. And then number two, frankly, I think it was smart just to have some more breathing room from a leverage in the company standpoint, I can tell you having now having that capital, if you look at the operating spot expense guidance we gave. We were, I think last quarter talking about $60 million of operating expense reductions, and now we're talking about $50 million. Well, in this period, we've released about 10 million of investments that we think will drive better performance, both on the residential side and on the workplace side of the business. So, I feel like we're a little less constrained now or a lot less constraints. In terms of investments, we think that will allow us to continue to outperform both on the top and bottom line. And I think that freedom was a smart thing for us to do proactively. And so we're very comfortable with why we did it and, and I think what's the outcome and the benefit to know and are all our all our stuff folders will be.

[Operator:]

Thank you. [Operator instructions] Our next question comes from Steven Ramsey of Thompson Research. Your line is open.

[Steven Ramsey:]

I guess maybe start with on residential sales, good performance clearly compared to workplace. Maybe can you talk to you, is that due to the broader shelter-in-place driving more spending on homes or is it maybe talk to what is unique to your trends and how they evolved through the quarter?

[Andrew Cogan:]

Sure. I think this news as we went into this, these lockdowns and everything. We immediately saw an explosion in demand for Fully work-from-home furnishings. And I think to be honest, Fully, probably could have shipped, quite a bit more in the quarter, if we weren't somewhat constrained in terms of just inventory levels. So I think we were really taken aback by the, literally the doubling of demand in the e-commerce is up 130% in the quarter. So, we had to spend some time really replenishing inventory and Fully's inventory comes from Asia. So, there was some lag, there was some lag there. But I think the good news is, we started producing tops for Fully. They are in a much better inventory place now. Their lead times are coming back down. And I believe as we get to August, that Fully really will be able to unleash the full power of that we held back marketing investments and spending because there's no point driving the business beyond that which we can pull it will be facility, but we clearly see the demand there. It's enduring. We haven't seen it let down since the middle of March. And, we don't really have our foot on the gas right now in that business because we really work doing replenishing the inventory. So, I think from August, we'll be all to step that up, and I would be super encouraged about the prospects there as we move forward, regardless of whether, I mean, we're going to go back to work and ran with a balanced environment. But clearly, work-from-home, which has its challenges, will be a factor of going forward to kind of one of the strategies I think companies will employ. And I think frankly, the more time people are spending working from home and I saw it myself, you start working at your dining table with whatever your bearing and dining chair and shelf's dining table. I started working there, but it's a little uncomfortable spending, 10, 12 hours a day. And then, I invested in high-adjustable table and a Knoll regeneration task chair, and I can work much more efficiently and much more comfortably and healthily. And I think you're going to see that continued investment in that work-from-home category. The other thing that's happening is everyone's in their homes and they're walking around saying, this rug looks a little worn out, this sofas kind of hide it, and I think we're starting to see that, and that's really the idea behind the Knoll work-from-home is that, it's not just about the ergonomic piece of it, which Fully does a nice job of redoing a nice job, but it's about all the other rooms and things. So, I think you're going to see, the home move up in terms of the kind of discretionary ladder of what consumers are spending on people, folks aren't traveling as much. And so, I think there is more discretionary dollars that will go into the home. Even the higher end with HOLLY HUNT and stuff like that, as we've been able to reopen our showrooms and all that. We're seeing activity at the higher end to come back and everything. And we were really constrained, we had actually two HOLLY HUNT manufacturing locations shut down in the quarter and many of the residential showrooms were closed. So, as things have started to reopen and close a little bit, back and forth a little bit. But we are seeing that business trend in a positive direction as well. So, I do think people won't invest more in the homes, and Knoll is a brand, is a brand that's fluid. It lives in the workplace. It lives in the home. We've got products that crossover. I think it's a tremendous opportunity for Knoll, if we can make ourselves accessible and easy to do business with. And that was really the philosophy that the team embraced as we launched in Knoll Plus Muuto, work-from-home. And go on the website, it works fabulous, easy order. We shipped in one to three days, shipping included. We're in the midst of the sale right now, which is going great. So, I think there's a tremendous amount of upside for Knoll here.

[Steven Ramsey:]

Great. And then, thinking about where backlogs are, how has backlog picture evolved on the workplace, on the office side of things? And will that be a sales driver in Q3 or backlogs at pretty normalized levels in therefore new orders would those go out to customers in a timely manner?

[Andrew Cogan:]

Well, I think we are now operating pretty much on time, things coming in and things and things going out. Our did an amazing job frankly in the midst of the pandemic, closing our facility in Grand Rapids and moving production there to both Michigan and Pennsylvania, and doing it as seamlessly as his one quit in the midst of a pandemic and everything. And so, I'd say probably backlog's a little bit elevated in terms of what we have still to work through. Again, as I mentioned HOLLY HUNT and some of our other businesses weren't really shipping DatesWeiser wasn't really shipping. Knoll Europe wasn't really shipping for a meaningful chunk of the probably half or two thirds of the second quarter. So, I think they have some backlog to move through. But again, as I mentioned, orders were stronger in Q1, but shipments weaker than an in Q2 we had to think about our shipments even though we had those headwinds, but orders were weaker. I think it starts to normalize in the back half now. And we would expect orders and shipments to track in line. And again, we talked about, approximately a 20% no blended decline with, workplace being weaker and I would expect residential growth.

[Steven Ramsey:]

And last question for me on sales expectations for the second half, that down 20% range. Is that, somewhat even in Q3 and Q4? Or do you expect Q3 to be greater and then Q4 has declined, much more modest, if you have any trend line there?

[Andrew Cogan:]

I mean, I think at this point, we're saying that's what we expect it to be pretty evenly across the back. I don't think we can really give you credibly more color than that right now.

[Operator:]

Thank you. I am showing no further questions at this time. I would turn the call back over to Mr. Cogan for any closing remarks.

[Andrew Cogan:]

Great. Thank you all very much for your continued interest in Knoll. I hope we've made clear in this call why we think Knoll is different than other players in the space with our much later residential mix, with our government mix that we think we're, we're well positioned to do as well as one can in this environment that we've got a bulletproof balance sheet now, that gives us the flexibility to take advantage of M&A opportunities and breathing room to make the kind of strategic investments that will allow us to thrive and come out stronger on the other side. I would like to close by commenting on our commitment to diversity and inclusion, and creating opportunity for associates of color at Knoll, building on our leadership and LGBTQ equality. Modernism design was born as a means towards social good, and Knoll was founded on the principle that modern design could make a difference, improving the quality of the way we live in work. By extension, good design is agnostic about the color of one's skin, responding to the universal desires utility, join beauty. With so many suffering, we are taking this moment at Knoll to recommit ourselves to leveraging the power of design to build a fairer world and then Knoll that is more reflective of the communities where we live in work. We look forward to working with our diversity inclusion council to make meaningful progress here in the months ahead. Across the constellation, Knoll associates are demonstrating their commitment to teamwork and client service, many in genius in new ways. And we deeply appreciate and I deeply appreciate how hard everyone adores working and want to thank them for all they're doing. So be safe everyone. Thank you for your continued ownership and interested in Knoll, and we'll look forward to talking to you at the end of the third quarter. Take care, everybody. Have a good evening.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for participating and have a wonderful day. You may all disconnect.