Q4 2019 Earnings Call
Good afternoon, everyone and welcome to the Knoll Inc. fourth quarter question and answer session.
Charles Rayfield no that's cpms.
Joining me on this call it Andrew Cogan, our chairman and CEO.
This call is being recorded.
It's also being webcast.
In addition, this call me offer statements that are forward looking including without limitation statements regarding.
Long term revenue and profitability growth goals future I worked for the industry any color <unk> ability to integrate acquired businesses and expectations with respect to feature leverage.
These forward looking statements are based largely on the company's expectations and are subject to a number of risks and uncertainties certain of which are beyond the company's control.
Actual results may differ materially from forward looking statements as result of many factors, including the factors and risks identified in the tried in old annual report on form 10-K, and its other filings with the Securities and Exchange Commission.
They called it any also include references to non-GAAP financial measures.
Reconciliations of these measures to the most comparable GAAP financial measures are included in the earnings quite a released earlier today.
As noted in today's release, rather than reading scripted comments on the earnings call. We've included expanded commentary on our earnings release to shareholders.
That shareholders, an investment any investment community can better understand the factory shaping our results.
We will now open the call up for questions.
[music].
As a reminder to ask a question you need to press star one on your telephone so withdraw your question the pound Keith Please standby the compiled the Q and a roster.
And our first question comes from Greg Burns from Sidoti and company. Your line is now open.
Yeah.
We talk a little bit about the a slowdown you saw in activity in the second half.
When you started to see that.
Decelerate and maybe was there any particular segment of the market.
Larger orders small and medium.
Any additional color you could give us on the complexion of that.
The second half.
Sure Great Hey, this is this is Andrew.
Good afternoon, I think I I would say we began to see the slowdown I really you know what are you all to that.
The BIFMA data were really starting around the middle of the year around June.
You saw the trailing 12 months order numbers start to roll over from what kinda about peak and in March to May timeframe.
In June you saw this well ordered yeah, we incoming orders declined about 2%.
Little bit of a rebound in July August decline, just under 3% little bit rebound in September that another decline in October and no growth in November so that was where we saw the industry really starts to slow down from the June I'd say November timeframe I think it was led by a couple.
I think one is we definitely saw a decrease in co working activity that had been something that had been driving.
Demand to some extent, but we saw that slowed down we continued to get slow down in some of our international and more middle Eastern business and those are primarily the categories, where we saw declines I'd also point out that decline over that kind of.
Made a November period also correlated with I think that's the first quarter of negative negative year over year absorption in awhile and the slowest quarter leasing activity in about four years. Then you can see this in a kind of market JLL data. So I think clearly you know where there was I cannot.
Certain see you know tariffs.
Downs and you know surface sector employment growth I think all those factors came together and kind of you know depressed overall industry demand in movie, we simply weren't immune to that.
Now the flip side of this I have to say is that as we've moved into December and into the New York, We have seen a nice pick up in orders growth and we've seen since December the last three months the bundle of business, we're tracking which in December was up double digits over prior year.
Oh, it's in dollars and number of opportunity actually has grown each of the next couple of months. So January was up over December and the February for an old was up over January which was up over December so I'm not saying, there's a V recovery here, but I definitely think we seem to have bottomed in the fourth <unk>.
Order in terms of kind of the incoming.
Orders rate and we're seeing a nice pick up here in the last couple of months now that's not going to really ship into first quarter and I think as we talked in our in our earnings release and prepare prepared remarks.
We have the challenge.
Well move in Michigan, which will reduce capacity in the fourth quarter and then I think as you heard from others. Our backlog is a little extended out. So we really don't expect some of that backlog to ship. So more to the second quarter. So we think this is more kind of a timing issue than it is a fundamental degradation in.
Business to our outlook and again to it so I think validated by the strong waters trends, we've seen and the improving final.
Okay, great. Thanks.
Very helpful.
No I'm not sure all the.
Yeah. The color for next year in terms of growth rates in margins and.
You kind of gave some explicit numbers around the the margins. The gross margin expansion you expected, but it seems there seems to be a lot of moving pieces in terms of I'm a lot of investments you're making you have the.
Manufacturing consolidation on the positive side, so and maybe some of these timing issues on the revenue. So how should we think about maybe operating margin or EBITDA margin expansion for next year and the cadence of.
Any kind of.
David you might get throughout the years feels like it's gonna be building throughout the year or more back half loaded, but maybe you could just.
Walk us through that thanks.
Yeah, Yeah, Greg Garland.
Hi, Charles Yes, great. Thanks. So so good question, Greg So I think as we noted in the a in the latter.
The earnings release, there are some factors that would probably drive us to have a little bit more opex earlier in the year, so from a waiting perspective.
I have a little bit more.
Opex spend earlier in the year might even now what are the more as we go through the back part of a year. So I would expect that yeah. The goals that we had around EBITDA expansion would probably be more back half weighted.
So yeah, I think I'd, probably look for that to sort of be the driver and yeah. We do have a lot of costs there'll be restructured out but yeah. Why do you activities around the move with Grand Rapids will happen during more of the first six months the year, but most of the most of the growth and expansion will probably be weighted more towards back off.
Okay. So do you foresee like.
Do you Wanna from number maybe on like would you like it like a range EBITDA margin expansion.
It's.
20 to 50 basis points I don't know like what what do you know Greg.
Greg. This is this is Andrew I'd say couple of things I think first of all I think we're you know we're talking about you know cancer 20 basis points of EBITDA margin improvement. This year over last year, primarily driven by margin expansion and then I think as we look at 21 as we get the full benefit.
Restructuring is probably not very you know.
60 to 80 basis points of margin improvement beyond that so you know our goal remains to get to 15% EBITDA margin I think we get you know shy Oh, Hi, 13, you know a in Twentytwenty and then you know need or better fourteens in Htwo.
2021, and I I would just kind of point out of a couple of things. One is we're still very much in a investment in ramp up mode. Leveraging that's we've made that have proven themselves effective and I'll take muto as an example, so mood always up well grew 35% last year.
Talk with I think 25% throughout the year before so work celebrating that is we're accelerating that initiative. We made a decision to roll that more product into showrooms. We made a decision to happen national sales meeting last week to really really up the intensity around the whole ancillary area.
Eat it often less left Chicago in Fulton market edge charged up as I've ever seen them in my career no feeling that their armed with everything from Rudolph the ancillary to high deductible table to broader price points to really go in and win in the marketplace. You know, what we decided we could.
Listen in any given year, we could fall 50 basis points of operating expenses out, but it's going to hurt somebody's incremental growth initiatives and we just felt that just because the markets slowed down a little bit before we saw good you know we were encouraged about that the data we're seeing for her 20.
And that we should continue to lead into what we're doing and not get distracted by a couple of months of at slower growth. So very much. We're playing this for the for the long game urine and very much you know convinced we can get into the mid you know mid four teams are better you know as we as we move to.
Anyone well get the plant reconfiguration behind us that's a significant initiative, we've got investments in some of the lifestyle businesses like Holly Hunt things like that that we're making because their rights for the long term and then well. He is just beginning to ramp up and we haven't seen any benefit from not yet. So you know we yeah we've had.
Sales people, we've added you know a.
Dealer development, no deal or brand managers people that live in the deal. There's no last year, we gained 400 basis points of share within our dealer about 70 or $80 million. So we almost doubled the number of those people and hope to make further share gains and intertwined. So I think we've got very focus initiatives.
Soon about saying it means operating expenses would be elevated the mid 28% range. This year, probably tick down a little bit next year takes a gross margin improvement 2030 basis point. This year more like 60 80 next year and that's how you get to at least 100 basis points of EBITDA margin prison 21.
On top of 10 to 20 this year.
That's helpful.
Perfect. Thanks.
Color and then in terms of the manufacturing consolidation.
You've always had your continuous improvement initiatives and this is the first since I've been covering the companys more more structural change. So when you look at your manufacturing footprint.
Beyond this initial.
Consolidation.
You see is there room for other is or more opportunity for more structural.
Changes to the cost structure.
Well I think that I think this is one of the biggest opportunity CRM. This takes out you know I think if you're talking about 20% of our manufacturing square footage. So there's some really significant efficiencies, particularly from shipping things from fewer plan I think that the next big move frankly will be some rationalization or for a whole logistics approach.
Where we're mixing product geographically, where we're doing that and we think they're meaningful opportunities. There would always had its own mixing center, we think there's consolidation opportunities and ways of improving both our transportation and logistics costs. So I'd say, that's probably our next big focus.
But we're not backing off that kind of you know continue with lean kaizen work in the plants, which has no generated you know meaningful margin to look at the gross margin improvement. This year no that was a big I was a big chunk of the you know of the of the gross margin improvement, we delivered and in 2019 so.
Those activities continue I'd say logistics, and and transportation, probably isn't that big thing the Taco once we get the footprint we sat.
Great. Thank you all back into queue.
Thank you.
And again, ladies and gentlemen, if you have the question just press star one on your telephone again to ask the question really have to do is press star one on your telephone and our next question comes from Stephen Ramsey from Thompson Research. Your line is now open.
Good afternoon, guys I like the new format or I guess the jump in on.
In Q4, so hills on the co working.
In market if you were.
No working a meaningful percentage of your sales now that that industry has built up or is that just kind of a specific segment to call out for the quarter.
Well I think a seamless Andrew first I'm glad you appreciate the format, we're trying to get more information out there to everybody on on a more expedited basis I hope. This it is helpful.
Working I I would say what was a meaningful you know I tailwind in terms of growth or you know much of the back half of 18 and the front half of 90. So definitely that was you know helping the growth in terms of a percent of our overall business not.
Particularly meaningful let's spend a few percentage point so no I don't expect it big you know enduring headwind from that but certainly it was helpful over that that four or five quarter basis that said you know co working I think it's only like 3% of the total lease activity out there so.
You know it pales compared to where we've seen strong performance in app.
Government business was very strong last year, well, making we feel really good progress and education hospitality and even health care and that all is part of this resident commercialization you know we presented to our sales team pictures.
You know hotel lobby, you know student centered and the opposite it's while these cafes and co working faces and people couldn't identified with way. So that overall blending is really playing to our strength, it's why mood always doing so well and so on trend. So you know I think.
And I I mean, so I think that that is that it has permeated many categories and frankly.
Finally, a co working opportunity for us in though in the years ahead, so but I do think it was a headwind in the fourth quarter and it will be a headwind for the next quarter or so in terms of about a year over year concept is more challenging.
Great and then switching to.
New tool on the resi side.
What did the barriers that really keeps you guys from going after this opportunity now Ah why do you need to wait is it more.
And manufacturing capacity or or sales and marketing on the people side. We're focused on Holly Hunt said I don't know any any color on Paula no. I think it's you know we've been very methodical when we laid out.
Three year plan to double the business that really was 100% based on leveraging muto through our contract channels and our relationships with architects and designers and really on the corporate side and that's really where we focus that's where we reinvested in terms of that the sales resources.
And frankly, that's where we've invested in terms of the product development. There's been a lot of work to make it easier for our dealers to do business with Muto I mean as an example, you know in North America in January our mood orders were up 100%. So we're really focused on leaning into that channel we tied to work on the supply.
Chain, we work on the inventory we've had to make moodle easier do business one of things you'll see now if you are on our on all our.
On an electronic specification tool now and all that you figure rituals Muto now is 100% in those tools. So you now can you know plan muto with the same specification tools that you're planning knoll studio in <unk> and other an old products. We brought the customer service organization together. So if youre you alert the same.
When you're working with the you know manage your Knoll orders now managing your mood orders. So there's been a lot of like blocking and tackling the get that really to war and so we think there's one more year really leaning into that which will effectively have doubled the muto business.
And again I think we're just scratching the surface you know 20% of our dealers are doing 80% of the Muto volume, we have a much bigger opportunity to blow that out more nationally and so then we're now starting to look at the work that has to happen to build out a direct to consumer Muto business, you know well learn somebody.
That's really what we're talking about operating an honest to goodness ecommerce business or Murdo, which is a kind of separating infrastructure separate leadership based here in North America and its yet.
We want to get to that and we will get you. It 21, but it's just he was it would've been a distraction from achieving all the things I just talked about with moved up.
Let me know, 20% plus EBITDA margin.
Right makes sense, Okay, I guess would fully to since we're on it.
You know you're looking to get no Bhutto products in there you know where are you in that story, how much you know how far can it go what are the key metrics, you're looking at and how you make progress with fully asset merging it with your Oh. Your brands you already have yeah, well is you know thanks. Thank you.
Well fully is that you know digitally native be Corp. I mean, it's got you know wonderful values and it's a great you know online spot for to really start to leverage things. We're doing so you know the strategy with fully has been to first help them improve their cost structure, which is what we've done sharing works or.
Vendor isn't up and things like that so we're working on improving their profitability. It's clearly not at no like levels. Today number. One then number two we are trying to take some select Nolan muto products and again very select because fully targets a totally different client base and we reach it no I mean.
Average fully transaction is under $1000. The average fully project when they do a workplace is about $4000. Our dealers don't want to deal with that kind of business that was that a very different segment a market that we think we can move very select mood and very select no office CD products through.
We also see an opportunity to use fully R&D and supply chain to provide us with some lower cost products, particularly in height adjustable tables, and ergonomic accessories and lighting. So there's a nights two way to wait two way street, there, but our goal is to kind of investing for at least front end.
They're just in the process now revamping their website building out a much more mobile friendly offering broadening the product line and our goal with fully is to take up $50 million business and make it 100 million dollar online engine over the next you know read a five year.
And so and then a quite profitable and so that's kind of our our vision for fully and using fully is a way to learn about doing business you know online that kind of.
Learning can be shared with other and all brands and businesses.
That's the theory behind fully.
Underserved segment, a market that we think we can leverage and help gross.
Great and then with online sales as a whole for no. It's a mid single digit percentage of total revenues that the current level or is that where it's going in in this.
I guess two more questions. What that is there are certain customer base, that's driving it and it's the margin structure of this channel can it be better than the traditional dealer channel yeah, Yeah, Oh, well first of all that's the current level is mid single digit and that's primarily fully and then our own knoll dot com.
Shop, where it which is primarily knollstudio classes. So those are the two areas.
You know I can tell you again I just wanted to close a really separate client base. So very different again, you know complex clients that are that our dealers or you know the size and I made it very very distinct in terms of you know terms of profitability I can tell you. The the knoll Dot com business is you know.
Right in line with our lifestyle EBITDA margins. So you know that's what we would expect and I would expect fully you know again as we get it ramped up to scale have margin no worse than our office segment. You can see those are now in the double digit EBITDA range. So that's how I would look at it today.
Excellent and so I guess ultimately.
Online sales don't cannibalize the existing business you have with.
You know because their clients. We just don't get today, we just don't reach them our dealers do not do transactions under $5000. They certainly don't do transaction of $800. I think we we put a lot at front to kind of segmenting. The market you know kind of marketing one on one and a you know looking at Okay. This is an underserved.
Channel, we think it's gonna grow how do we participated in frankly, you know we've looked at a lot of things in this area. You know many online things can grow fast and make no money. You know fully you know grows okay and makes nice money and so we think we can help them make more money and we think we can help them grow faster overtime.
<unk>.
Excellent we did want to not be profitable E Commerce channel.
Right. Okay, and then last question for me on the dealer share gain that you mentioned, a 400 basis points is that mostly because of muto or what are the other.
Contributing breads and then.
That.
Lead to instill read a share gain or is that sort of more traditional office products.
No. Thank you I'm first of all its 100% ancillary I mean, that's really where the gain is it's coming we we believe our office products share. It's held constant that you know we have 90% of their workstation business and and so there's not a lot of share maybe more not a lot of share that'd be gain.
I'd say up the dealer share gain about half of its muto.
And then the other half its been dates wiser, where we've had success getting our our deal to our dealers going it's been more knollstudio sales and those are really been or the areas.
Ended the Knollstudio meeting table line.
Why is there continues to broaden their portfolio and then moved up and that's where we're gaining share and that's no. One of the reasons, we're not seeing no even though they're not as many large projects out there we're not seeing any more degradation in our average order size because what work what we're seeing it we're capturing more of what our clients suspended with all these answers.
Larry products, and it's really great to see got validated in the dealer share gain well next get new dealer shared data mid year 2020.
How we did last year. So it's about a six month lag. So we got that data, but it's very hard.
Great. Thanks for the color.
[music].
Thank you.
And again, ladies and gentlemen, if you have is a question that is star one on your telephone again to ask a question that is star one asked a question and we have a follow up question with Greg Burns from Sidoti <unk> Company.
I know you mentioned that the prepared remarks that you're not seeing any meaningful impact.
Watching and trying to yet but can you just.
Maybe let us know.
What percentage of your Cogs are sourced from China, or maybe what what.
What is potentially.
At risk for disruption.
What's going on in China.
Yeah sure Greg So I'll take this one so we have as you know with the tariffs that were introduced last year, we did quite a bit of working to effort around reducing the impact of those which was pushing things to neighboring Asian countries moving things back to United States. So we've reduced the amount of exposure there signal.
Annually over the course of 29 team at this point, yeah, a lot of the materials, we use in our seating and some of our adjustable tables come from China and the Chinese region.
So at this point, we're still monitoring the impact of what's happening there but.
Relatively minimal in general and we certainly have a limited exposure from a direct sales perspective, that's mostly its supply chain perspective, it's gotten some good news out of the reason in terms of materials moving getting out of countries. So what we've reduced the exposure there is some risk there but at this point, we're still monitoring it doesn't seem to be significant at this point.
Okay. Thank you.
Thank you and I'm showing no further questions I would now like turn the call back over to Charles where you feel no CFO for closing remarks.
Well. Thank you all for joining we're certainly looking forward to a very prosperous and successful 2020. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you participating you may now disconnect.
[music].