Q1 2020 Earnings Call

Good afternoon, everyone and welcome to the no incorporated first quarter Twentytwenty question answer session. This call is being recorded. This call is also being webcast. In addition, this cold mail her statements are forward looking statements, including without limitation.

Regarding all day long term revenue and profitability growth goals.

Sure I'll walk for the industry and the economy ability to integrate acquired businesses and expectations with respect to future leverage. These forward looking statements are based largely on the companys current expectations, where I stopped it to a number of risk and uncertainties.

Okay, Okay, which are beyond the company's control actual results may differ materially from <unk> forward looking statements I felt we sold off many factors, including the factors and risks identified and describe involve an old reports on form 10-K.

And it's all their filings with the Securities and Exchange Commission.

These cautionary statements I, particularly relevant in the current environment weren't that cobbett, 19th and then Nick has created significant uncertainty.

All of our forward looking statements do they should be considered within that caused.

Oh that uncertainty.

The call today and that 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 we need earlier today.

I'll now turn to color to Andrew Cold in the chairman and CEO Oh, no for opening remarks.

Thank you.

Good afternoon, everyone I hope this finds all of you on this call safe and well in addition to the enhanced commentary in our earnings release I thought it would make sense to start this call with a few brief comments on current business condition.

Understandably April orders are tracking down approximately 35% compared to prior year on the residential side.

If youre, including many of our dealers Isabella Tortue Italian can't largely shot and most h. show religion around to know shops close.

A decline for greater.

We would expect as these businesses are able to start to reopen in May and June these trends will improve.

Workplace side, we've continued to see a greater number of orders pushed out and even in some cases canceled its clients reassess their needs, but the same time you opportunities emerging it's some of our larger clients in particular are planning on placing orders for screens partition in other safe work place enhancement as they prepare to bring employee.

Back into their offices in the weeks and months ahead.

Bright spot on the work from home front has been are fully ecommerce business, which is seeing 50% to 100% weekly increases in demand and as we noted in our release, we're accelerating or other E commerce initiatives to take advantage of what we believe will be a growing leg of our clients for plate strategies.

There is much volatility in overall activity years I've ever seen so it's hard to dry too many longer term conclusions from April we do know how I bring that compared to the dot com Slash 911 period, where the financial crises, though we don't guide where the industry declined approximately 30% that we did not have the bubble build up in demand heading into.

2020 that contributed to the multiyear multi year overhang in those crashes. We've clearly spent significant time lucky to a variety of scenarios in terms of how this could play out.

With that benefited the actions we've taken we think depending again on the mix in any given quarter between office in lifestyle segment that we will experience between 40% to 50% negative de leveraging on the gross margin line and approximately 20 or 25% on the adjusted EBITDA line in these scenarios, we expect to remain cash flow.

Positive obviously, there's a lot of uncertainty with respect to the economy and how all this plays out but today, we don't see leverage elevating beyond what is allowed under our credit facility.

We have enjoyed a 20 plus year relationship with our lending and I've worked through previous recession and in some cases waivers without hindering our ability to grow or invested the business.

Wouldn't expect a current environment to create different behavior with our lenders, especially given their ongoing support of our business. So if we didn't need relief. We don't think the getting some would be a problem, particularly given our ample liquidity and credit facility that runs well into 2024.

Now, let us open the line for your questions.

Thank you, ladies and gentlemen, easy I've a question just press Star then one to withdraw your question first the town or Ashton.

Again, you have a question just start.

Okay and company.

Yeah.

Maybe give us an update on.

Operations.

<unk>.

Maybe a better when looking at it might be what percent of your manufacturing capacities.

Is currently online.

Sure Hey, Greg I hope, you're doing hope you're doing well so.

Selling general and right now you know when we start with North America. So a four main plants in North America, which include document, Michigan, one in Toronto and one in Pennsylvania.

Absolutely and open up an operational as our all our warehouses for everything from fully to or Edelman to Ah you know to Knolltextiles Spinneybeck. All those are operational in North America really the only facilities, we have closed her gates wiser and Buffalo, which.

Where we produce the dates flies from product and then the Holly Hunt work runs in Chicago in Texas. The good news there is that we just learned that it looks like a Holly hunt space in Texas will be able to open the middle of this month as bill dates wise or in Buffalo. So we're encouraged by that.

In Europe are two plants in Italy are shuttered. However, they both will be opening this week first in itself and then a little more in the north so basically by the end of this by the end of the middle make everything, but Holly Hunt Chicago, where we have another work where I'm on a poll the upholstery side.

Everything will be opened except that and we hope that opens by the end.

So we're really fundamentally on operational and in terms of staffing can topped the I'd say, we're running around 75 or 80% of our of our usual capacity Greg.

Okay, which is about you know in line with demand right now.

Okay, and I guess.

Incremental color about the new order patterns.

April.

I don't know if you could look much much beyond that but just in general I guess, what do you here for your customers because it sounds like there are maybe some positives them looking again at their their office spaces. They bring customers back but are you seeing.

Maybe.

Ladies and buying decisions.

Waters getting.

Pushed out.

What do you hear from your customers do you feel like you.

Get past isn't it.

Shape recovery will get back to normal or do you think it's just kind of.

Hello.

That's caused to maybe a longer term slow down that's maybe takes a longer time to recover from the industry.

Well I'd say all of the above Greg I'm you know, it's again I think you know three weeks of a month or really too hard to to make adjustments I'm wondering what I will say this I think initially the residential team has been hit harder and I think that's understandable and you think about you know all the Holly Hunt showrooms are shot you know you've got decorators can't go into.

Those buildings, we got folks working remotely and door on furlough, our Nols shops are shot our residential dealix across Europe are pretty much close. So you know I'm, even if you know and Muto is by the way fully operational but even there the dealers aren't necessarily open and then can lead to residential dealers for.

For Knoll, Europe or shots. So I think the residential thing has really kind of shot the hardest fastest and declined the most I think on that and it's things start to reopen up we would expect to see that activity gradually gradually pick up and in fact, many of those businesses have good backlog to ship, but.

They're they're struggling at the fact that the clients you just can't received the Prada Callie went into this with a very solid back backlog and they just can't ship a lot of that product to to there to their clients and everything. So I think that's kind of that picture on the residential side on although on the workplace side, you know I think.

Again people are just trying to get their handle on what's going on I think some clients are using this frankly to complete work they had underway.

Others, where they've made a real estate commitment our are moving forward now they may be delayed in their ability to accept that and you know clearly it as construction starting to be deemed or a loud anymore state that will allow that will allow us to ship some of that product. So we are holding more product than that.

Unusual on everything clearly as we look you know kind of beyond this immediate period and everything.

You know that every time, there's a change or disruption often ends up creating demand for furniture, and we're spending a lot of time with our clients looking and ourselves frankly at looking at what the future of works gonna be what the workplace what the workplace will look like how do we help our clients come back.

And that in a healthy in safe way and what does that mean in terms of partitions in screens in different ways of planning materials and you know those are all things are our teams are really aggressively on we're doing a lot of co creating what some of our largest client and that could result in.

Some incremental demand, particularly as client you know base spread out over more facilities. So I think there you know there's some opportunity clearly that all this disruption will lead to more demand listen I mean, the reality also as other clients a lot of clients are you know conserving capital conserving cash and were.

They have you know a discretionary investment there are postponing it so I I would say we've seen a handful of cancellations, we've seen a lot more postponements and I keep depending on how this plays out that will determine how long those postponements linger no looking at the absorption data.

The first quarter I was part and today to see you know the positive absorption in the first quarter that means.

No. There is people have signed leases and they're going to fill up those rates now what they fill it up with and how they filled up may be different and I think that's causing some of that the pause in orders were seeing right now, but we do believe people will kind of go ahead, Jim and if you're signed a lease you're going to finish up building up those facilities much beyond that you know Greg.

It's really hard to predict.

Okay. Thanks for that color.

And then I just wanted to touch on the investments you're making.

On the E commerce fully hutto, <unk> or the investments you're making their inclusive of the 65 million you expect to save.

That.

Incremental investment needed to make maybe reinvesting some of that 65 back into the business and then what what does the timeframe on.

No.

Outside of <unk>.

Yep.

No.

Yep, you've been continuing on the Muto pulling for a long time, Greg. So I. Appreciate your your question in terms of the incremental investment I don't think it's gonna be gonna be tremendous what we've decided to do and again, we've seen that the success with fully you know that business is running up 60% to 100% weekly on and we're just trying to keep up with all the demand.

For for you know you know ergonomic work from home products won't design work from home products, which fully you know they ship in one to two days I mean, really really a terrific model and everything so.

So we said well how can we learn from employee and implement that for our own business. So we do have a small you know on no no shop dotcom Knoll dot com, we have our own our own ecommerce shop, but the offering as well to be limiting work from home and as you know there no muto products available you know on a E com.

For space, it's really anywhere in North America, I'm certainly not in our site. So we gave the teams a challenge to how do you in 90 days leverage the platforms. We have the inventory we already have so there's really very little incremental investment and broaden the scope of our own work from home office products and stand that up.

90 day.

And we gave that challenge a couple of weeks ago, and the teams, both and Denmark and in North America have been going harder there were meeting with that a couple of times, a week and I'm Super excited with what they figured out both from a technology into service standpoint, and my hope is that we stand it up in that 90 day window, which would be.

Let's call. It you know right after the July 4th holiday and so that's what the teams are doing and we're super excited about it and it could be a really nice addition to supplement the way our clients you're working from home. The other thing I would point out with fully.

There were also able to support some of our corporate clients, who said listen how do I you know get these get our employees furnishings for their home offices, I mean, I had to stand up Oh home office, a very quickly that I didn't happen I put it in order and from fully in three days later I wasn't business. So.

We're also working with our clients. So they can access fully at wells for their employees at home.

So that's the challenge Greg I'd say early in July.

It's not Phoenix.

Thank you.

Thank you enter firing line there ladies and gentlemen to ask the question just press Star then one our next question is friends <unk> family Thompson Research.

Good evening, guys I guess to continue on with filled with the fully or thought can you maybe talk to even just broadly we're fully margins were prior to the acquisition and where you think you can have them this year in humans.

Best for growth and grow on the fixed base and maybe over time maybe longer term.

Yeah, I mean I'm also compromised had I think they were in the upper single digit you know kind of adjusted EBITDA margin basis, and I think you know we've we've obviously been able to help them on some of their cost work and everything leverage some of our our sourcing some.

For the back off the stuff that wasn't a lot of kind of value add and I would hope overtime, we're consistently running into double digit EBITDA margins. So certainly fully shouldn't be any lower than our office segment adjusted EBITDA margin.

That would be kind of our our goal you know at worst in line and hopefully maybe even a little bit better.

Great and and maybe more elementary question I'm fully but how much of fully product goes through dealers how much that goes direct.

So consumer.

From Foley and in is there anything tension overtime for that breakout of customers to change.

Yeah, I mean fully is really a very independent channel I'm English our contract furniture dealers don't really want a waste their time selling someone three gas for their home you know I mean are our dealers are phenomenal at larger more complex projects, where there's a lot of value add both in how they service it and then and the.

Ongoing relationship and fully is very much about you know individual at home trying to set up an office. That's the bulk of their business. They do some small small kind of ER workplace projects, where they'll do 10, 2030, 40 person offices, but it's really a different segment of market than our dealers but.

We have done is where we have extended somebody's or you know fully extended offers default for fully to support our corporate clients. We are doing that with laying off part of that to our dealers. So they have a participation in that where they have to corporate relationship, but you really should think about.

These it is very distinct channels and solving very different problem.

Great color on the Capex reduction to understand this better the 20 million reduce capex does that geared towards a certain segments certain category. It and then I guess.

Also could or could capex be reduce further and what conditions would warrant that.

Charles you when Oh, yeah, Yeah, yeah, great. Thanks, Steven So I would say that some of our some of our investment Capex has been reduced for possible, but are split still you know about 30%, yeah, 30% I T related and probably.

Maybe 45% investment and then you know, 20% or so maintenance, so sort of unilaterally cost aboard a little bit more in the investment area and yes, we can take capex down quite a bit further if needed I think there's a couple of projects you want to keep moving forward with for appropriate investment purposes, obviously some.

The maintenance activities, but yeah, we can reduce it we can reduce it quite a bit more if needed.

Excellent and then last question for me I guess, just pondering, obviously, there's a thousand scenarios that could happen, but under a scenario where the economy is open again in the second half the year and then you have deferred work that you're playing catch up.

On you know you get the natural lift to the reopened economy, but.

But you've also pulled back on operation.

You know how would you be handled that sort of scenario.

Well I, we're not expecting a a snapback here I mean, I think we've got a good backlog that will help that will help something in the second quarter. Although again it will be limited by our either openness, which is getting better each day and door by our clients ability to accept that product and then I think right now.

Everyone's kind of a bit frozen and she'll need to work through that but you know I don't see our capacity being a constraint.

Not on my list of top 10 worries right now.

Great. Thank you.

Thank you. Our next question comes from calling case, he went Vulcan valued partners.

[noise] folks.

All right.

Yeah, I appreciate the commentary on margins and cash flow.

Or what level of revenue decline would it take for you to be free cash flow neutral for the year.

Charles do you want to <unk>.

Well I'm not.

Thank you for the question then it's kind of a theoretical question.

You know I I think as Andrew mentioned earlier on I think is what for it to the year, Yeah, we expect to be cash flow positive.

Yeah, I think that's and we've got a pretty significant revenue decline in order to start hitting negative or negative free cash flow, but currently we still expect to be cash flow positive.

Okay. Yeah. So I appreciate it isn't theoretical exercise I mean, if I, if I threw out a theoretical numbers say revenue would have declined 50% for the year would you be free cash flow positive negative or neutral on that scenario.

No I think there are a billion as you just said you're right. There is brilliant hypothetical I think where we're not gonna get into you know hypothetically. They sit at all I can say is we've we've worked lots of scenarios. We've got our models have models and you know we've also got a really good track record of managing no through too.

Very significant incident declined 35, 40% decline and we were cash flow positive and all those and all those scenarios. So I think this is that kind of a seasoned team that knows how to do a man he's no through this and more importantly managers know through this to come out stronger on the other side.

I'd, which weve, which we've done every time and I would.

I would imagine will do again here.

Okay that cash flows that free cash flow just to be clear.

Yeah, great free cash flow.

Okay, and I mean, I think I missed the EBITDA margin flow through you said, 40% to 50% decremental gross margins what was the EBITDA margin.

We said 20 or 25%.

Okay.

And again I'm using those ranges because mix has a a tremendous impact here.

Force.

Okay I appreciate that folks they say.

Thank you.

Oh I'm.

Third I'm not showing any further questions I'll get that called back 200, Jorge I realize.

Right.

Great. Thank you everyone for joining us on today's call in closing well. These are challenging an unprecedented times I want to leave you with reasons for optimism to.

Our sales teams are working with clients to help them Internet implement best practices for safe work in their offices and this is creating demand for new furnishing screens and panels.

If CNBC today is right that the opposite the futures the opposite of the path then that's more good news for our cubicle business.

We're seeing continued growth as I mentioned in our ecommerce work from home channels and teams across no they're working hard to expand our offerings year like our own clients, we too have begun planning to bring many of our people back into our offices and show them.

The same precautions and preventative measures, we put into our plants in warehouses and we're encouraged that many countries in states you're at home are beginning to he stayed home orders and are allowing construction and manufacturing work to resume finally, all this time at home will no doubt lead claims to think about investing in their own homes and home off.

This or cross your constellation no associates are demonstrating their commitment to teamwork and client service I. Appreciate truly appreciate how hard every one at all is working around the clock and I want to thank them for all they're doing stay safe and all our best to you and your as everybody talk to you soon.

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

[music].