Knoll, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Good afternoon everyone and welcome to the Knoll Inc Fourth 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 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.

[Andrew Cogan:]

Thank you, operator, and good afternoon everybody. We hope this finds you and yours safe and well. 2020 was a year as we all know of unimaginable challenge and we could not be prouder of the way our team rose to the occasion to support our clients, dealers, the architecture and design community and our fellow Knoll associates. Across the Knoll constellation our associates successfully kept our plants and warehouses operational, reopen showrooms were allowed by government regulation and find new and innovative ways to connect digitally and in person with the design community, commercial clients and residential consumers. I want to thank them all for this great work. Our long term strategy of diversifying our sources of revenue, both organically and through acquisition, away from a sole dependence on commercial workplace sales, with fluid brands that can pivot between sectors, has paid off exceedingly well this year. Sales to residential end users represented over a third of our total revenue, up from a fifth just a year ago. These sales increased 34% from prior year levels to a record $107 million in the fourth quarter, and increased over 20%, to $335 million, for the full year 2020. This helped to offset a 22% decline in our commercial workplace sales in 2020 and resulted in total revenues of $1.236.4 billion, down 13.4% versus prior year. For the quarter, sales of $312.9 million declined 15.8% versus prior year driven by a 30% decline in workplace sales. We took important steps to reset our cost structure in terms of both manufacturing costs, which were reduced by approximately $10 million annually with the closing of our Grand Rapids manufacturing site and the pending consolidation of our North American warehouse locations in mid-2021, as well as approximately $25 million of operating expense reductions, including headcount, travel and entertainment, variable incentive and other discretionary expenses while protecting our core digital and product development initiatives. These actions, combined with the favorable mix shift between residential and workplace, have allowed us to protect our profitability and deliver double digit adjusted EBITDA margins for the full year 2020. For the quarter, Adjusted EBITDA margin was 9.8% compared to a full year 10.2%.

[Operator:]

Our first question comes from the line of Greg Burns with Sidoti.

[Greg Burns:]

We just start first talk about the, the order patterns, you're seeing in the your office side of the business, how those trended throughout the quarter, if you saw any sort of improvement or do you expect them to stay at the same levels for the next couple of quarters?

[Andrew Cogan:]

Well, I think initially enough orders over like the second, third and fourth quarter were relatively flat on a sequential on a sequential basis, but I think you know as we head into Q1. I think we're going to have the additional challenge as this is a normal seasonality and both the combination of that seasonality and the delayed return to work, we think we'll probably incrementally pressure, via the top line in the office business. On the flip side, you know, as we move into 2021, we're seeing the residential and e-commerce stay as strong as they were at the end of the year. So you know we're encouraged by that. And frankly work, we're quite encouraged by the trends as I mentioned in the pipeline. You know, when we look at the ABI data and we see high of an uptick in future inquiries that jives with what we're hearing from our team about activity within design firms. I was talking to one of our larger regional managers today and she said to me every day we have more return to work activity than we had the day before. So, you know as I kind of look at all those indications. You know I see clients starting to take advantage of lower rent, I see CEO confidence you know at the highest it's been since before the pandemic, all those things say to me that worst and we are starting to see more projects come up all that as we move through the year, it's going to be very back half loaded, probably even more fourth and third, but that’s the momentum we believe we’ll build, but the next quarter or two will probably be the worst of it on the office side. Again with us nicely, offset in part by really strong residential and consumer trends.

[Greg Burns:]

And then in terms of the residential side of the business, obviously very strong momentum there and it seems like you're investing more heavily around marketing and promoting those brands. I know, earlier in the year, there were some constraints maybe around product availability or anything like that. Do you have any constraints now on that side of the business or is it kind of just as hard as you can press on the gas here to drive growth going forward?

[Andrew Cogan:]

Yes, I know, I think clearly the latter Greg, I mean we're well inventory in stock at fully and the marketing, you're referring to. I think it was we were super pleased with the - we ran a - we didn't run a national Super Bowl ad, but we ran a 30 second spot in five or six local market and we're just tremendously impressed with the reaction. One, it's a, I think a great, a great fun spot. Two, we saw a tremendous ramp up obviously in traffic to the website, which was something we did in the fourth quarter with the brand marketing campaign that had a huge positive impact on fully fourth quarter performance.

[Greg Burns:]

And then when we think about the cost structure you've made some structural permanent savings and you also talked about some other things that may or may not be as permanent may come back in to the P&L next year. So you just talk about the expense structure as we move into next year maybe relative to where we ended the year in the fourth quarter?

[Andrew Cogan:]

Absolutely, Charles, do you want to?

[Charles Rayfield:]

Yes, I can take that one. Hi, Greg. So it's really quickly, why don't we just do a quick recap of some of the actions that we took in 2020. So, we had a wage freeze, we suspended 401k contributions, we did two workforce reductions which eliminated about 600 full-time positions, which is about 20% of the workforce that is expected to yield about $40 million of annualized savings and we had about $10 million of savings from furloughs, and other discretionary spending reductions in addition to the Grand Rapids closure that we did in the -- end of the second quarter. Just breaking it down by COGS and OpEx, some of the savings we have Andrew mentioned earlier in his opening remarks. We expect to get $8 to $10 million from the Grand Rapids closure, that facility was closed in June of 2020. We completed our role forward move in the fourth quarter and we've got warehouse and distribution consolidation plan for later in 2021. Out of some of the workforce reduction actions the head count actions that we have there is up $15 million associated with COGS of which we took about $8 million of those savings in 2020 and would expect the residual to hit in 2021. Some of the headwinds that we would expect to see in 2021 are related to commodities mainly. So steel obviously has increased quite a bit since the late summer to the end of the year. We do forward purchases, which reduced the impacts and we expect it to reduce the first -- the impact of the first part of the year-end 2021.

[Greg Burns:]

Okay, thanks. Thanks, Charles a lot of detail and color there. So just maybe you could frame it off of where we exited the fourth quarter, is that a -- like a good run rate to build off of assuming?

[Charles Rayfield:]

Yes, I would take the full year and use that as the basis and then obviously, if we're a wash for COGS, I think you can give this Q4 as a run rate. And then for OpEx if you, based on the full year and you take the $10 million of full year benefit for the headcount reductions offset by $10 to $15 million, I think that's probably a good baseline.

[Operator:]

And our next question comes from the line of Steven Ramsey with Thompson Research.

[Steven Ramsey:]

Maybe to start with looking at the office pipeline, just more detail on the projects, –are these projects coming on hold, are these customers that maybe we're not in the pipeline previously coming in and is there a consistent character to the projects do they reflect the resi commercial feel, does it reflect clients expanding space, just any detail on the character of what future demand looks like?

[Andrew Cogan:]

Sure. I think there is definitely a big chunk which are things that were put on hold that are starting to get reactivated, that's kind of the, most of the activity we're seeing right now is that people are saying, well, you know what our folks are getting vaccinated. We're starting to put our workplace plans into return this summer or fall.

[Steven Ramsey:]

And then wanted to dig in more on the stable demand, do you see coming for kind of the next three years so quarters, I guess trying to think of this in relation to the ballpark that workplace sales in the low 200 million range in Q2 through Q4 is this stable demand in that similar range before kind of the expected uptick or do you think it stabilizes a little better a little worse well.

[Andrew Cogan:]

Yes, I know I appreciate you, without getting into kind of all the specifics. So as I think things move around a lot these days. In general, we had a very strong backlog going into the pandemic, so that backlog basically carried us through 2020. And so I would imagine that you start the year at a lower level and you end the year at a higher level. And that's kind of how we see it right now that aligns with the kind of bottoming out, we've seen a backlog that deals with the fact that the backlog - that's the pipeline. Sorry, the pipeline in the first half is continuing the down trend that you've been seeing in the BIFMA data and the pipeline in the back half is the inverse of that. So I think it's going to really be a tale of two halves with kind of subpar, sub run rate in the first half and above-run rate in the back half.

[Charles Rayfield:]

Great. And then...

[Andrew Cogan:]

Residential obviously, that is a different story and with very strong levels of margin and profitability where I would expect those to be generating growth on both the top and bottom line. Well, we're kind of dealing with the trough quarter just of our office business.

[Steven Ramsey:]

Great. And yes, I wanted to dig in more on that, Andrew on the residential growth that double-digit expectation, if there is any kind of bracketing and is there any first half or second half kind of dynamics in residential, even though, we know it's going to be is definitely a stronger segment?

[Andrew Cogan:]

Yes, well. I think in the first half, the comps are going to be the easiest. So I think the run rate we've been seeing in the back half, should be the run rate in the front half. And then, you'll get into slightly probably more challenging comps in the back half. But I think our belief is, this is that people are going to be working, the workplace ecosystem is going to be different post-COVID than it was pre-COVID. And so there is going to be this permanent work-from-home element that I think we're really well positioned to take advantage of. I think clearly the digital and e-commerce has been transformed and accelerated, you hear that all the time, we're seeing that in our business and in every business whether it's wholly or fully or, you know, we think there's great digital opportunity, great opportunity to engage our clients in a more intimate way. So really exciting work there. So I think and so I think even when we return to work, we're still not going to be traveling as much. And so I think the home is going to be a really important place that people will keep investing in and we're just scratching the surface of our digital potential on the residential side and we just brought in a new EVP of digital commerce. This got a tremendous background. This area, it comes out of Facebook and understand, however, all the algorithms and all of that work. We have so much opportunity to mine, our customer data that work, we're really excited by what that's going to be. So I think that has easy comps in the first half, we continue to drive. I would hope double-digit growth there in the back half. And then, we're going to benefit from return to work, I mean I think the one thing, I mean I had regional manager saying to me that you know, get ready for the floodgates to open in Q3. Clients are just jumping at the bit to trigger their plan, so again I think successful vaccine rollout will embolden companies to start accelerating their planning for return to work. Those are the conversations were starting to have with clients and everything. And I think will benefit. Now, whether it's a third or the fourth, it's not going to be the first. Probably, not the second. And then I think you're kind of like off to the races in '22 here. You know people are going to have to make that we've been asked to make the workplace something so appealing for people to come into, you got to change the habit of working at home, and I think that's going to drive more ancillary investment, it's going to drive all the things Knoll is good and we have. So I'm quite encouraged about now. You know the latter half of '21 and really what '22 can look like here because I think we'll continue to have good residential momentum and we're going to get back, we're going to get a big recovery in the office business I would expect sometime in '22.

[Steven Ramsey:]

And then last one for me trying to think about the excess sales capacity that you guys will have in the interim period of slower demand ramping up and how to I guess think about incremental decremental margins for the full year of '21.

[Andrew Cogan:]

Well, I would say that we've made a conscious decision not to cut more. If we were just trying to, you know you maintain the historic margins we've generated in the office business, we've cut, we cut quite a bit deeper. So I don't know whether it's 20% or 30% deeper than where we're at. But it's something of that magnitude. I think we've just made the call that one. Our balance sheet is in great shape, we're under no pressure to do anything. We want to be position both in terms of product in terms of manufacturing capacity in terms of sales capacity for the turn. Our dealers are ready, our plants are ready. So we're consciously accepting what's going to be lower margins in the office business, then we could generate in the first half of the year. So I think as you look at it over a full year basis. You know the residential stuff going to continue to deliver mid-teens, mid-teens margins, but and our goal remains on the enterprise basis double-digit EBITDA margins, but I think we could drop. You know, into the upper single-digit EBITDA margin range and in over the course of '21 then pretty quickly returning to double-digit EBITDA margin in '22 and that is a conscious decision. And I think it's the right decision and you know I hope our shareholders see that we're really continuing to build a diverse enterprise for the long term. And you know that it's not worth sacrificing that potential for another couple of 100 basis points of short-term EBITDA margins in the first half of the year, when demand is going to be weakest.

[Operator:]

Thank you. And I'm showing no further questions. So with that, I'll turn the call back over to the Chairman and CEO, Andrew Cogan for any closing remarks.

[Andrew Cogan:]

Great, thank you and thank you everybody for joining us on today's call. If you believe is we do it that the future of the workplace ecosystem as I've talked about on this call will all be about flexibility as to where and when one works, and those with balance work-from-home work in office and residential portfolios combined with omni-channel distribution capabilities, including dealers for complex enterprise clients, direct to consumer and small to mid size business e-commerce channels. Digital to the trade capabilities and traditional bricks-and-mortar residential shops and showrooms will be the winners in the post-COVID landscape. Certainly, that is the Knoll we have been and continue to build. Our 2020 results demonstrated the value of this diversification as we meaningfully outperformed our office benchmarks on the strength of our work-from-home and residential businesses and continue to generate double-digit levels of adjusted EBITDA profitability. Now with the reality of a vaccine on the horizon enabling more robust return to work as a pendulum swings back from all work-from-home to a more balance work of work in office and work-from-home. We will see the office side of our business recover. While we continue to benefit from a more permanent balance of where and how we work and elevated levels of investments that consumers globally put into their homes. So with that, we wish you all the best stay safe and well, everybody, and we'll talk to you again in a couple of months. Good bye

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.