Q2 2020 Knoll Inc Earnings Call
Welcome to the no.
Inc. second quarter 2020 question answer session. This call is being recorded.
This call is also being webcast. In addition to call me offers famous airport lucky, including without limitation famous for barring no long term revenue and profitability growth goal future outlook for the industry, an economy ability to integrate acquired businesses and a patients with cute with respect to feature leveraged.
These forward looking statements are based largely on the company's current expectations are subject to a number of risk and uncertainties.
No.
Beyond the copies control.
Actual results may differ materially from forward looking pretty much as a result.
Many factors, including the factors are with agility and its Rabenold annual report on form 10-K, and other filings with the Securities Exchange Commission.
These costs were sitting with a particular.
Fortunately wireless in the current balmy weather Tobin Nike pandemic has created significant uncertainty.
All of our forward looking statements today should be considered within that context that uncertainty.
The call today May also include references to non-GAAP.
The consolidation of these margins to the most comparable GAAP financial measures include in the earnings letter released earlier today.
I'll now turn the call over the air do Kogan, the chairman and CEO of no for opening remarks.
Thank you operator.
Okay and good afternoon everybody.
The second quarter of 2020 wasn't like any quarter. We've got we experienced it went to two trust the bar people culture agility and strategy in that context. We are pleased to report solidly profitable adjusted second quarter results. It's what was the progress we've made responding to the cope with Nike pandemic and its impact on our community.
These are people and all content from the start of pandemic. Our focus was really for full force keep our people around the world. It seems as possible, while maintaining as much of our operational capability as government mandate and safe working practices would allow second protect our financial position maximizing liquid.
Studying scaling the business to ensure we mean remain profitable and cash flow positive third lean into the marketplace challenges in fund about what's the thought leadership and product support to help our workplace clients retrofit reimagine their offices for returned to work and work from home and fourth.
Average our brand reputation broad product offering multichannel platform in 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 in those businesses, but the brand reputation like no founded on the belief that good design transcends grid you'd boundaries of where we live in work backed up by a broadening growing range of products and price points with multiple physical and digital path to market and lean agile cost structures will be the ultimate victory.
This unique Todd.
It's also an interesting moment, where more fluid you didn't affordable contemporary live work, where brands like Muto and fully can thrive.
For the past three years since we borrowed the wave of the resident virtualization of the workplace in North America, we focus with great success driving me go through our contract dealer channel earlier. This month, we expanded who does reach through our own direct to consumer E Commerce channel at all dotcom carrying the brands crossover design.
With an expanded range of no products for the home office as well living and Don you spaces with free shipping in one to three days and we're very pleased with the growth in traffic and sales activity on the site in the first few weeks.
Both fully involved full these position and then the old plus Muto 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 food future plays out we think we are uniquely positioned to <unk>.
See with a range of brands in price point now we'd like to open up the call to your question. Thank you.
Thank you, ladies and gentlemen to ask a question. Please press Star then one when you touched on telephone again, if you like asked the question. Please press Star then one.
Our first question comes from Greg Burns of Sidoti and company. Your line is open.
Yeah.
Correct.
Good start off with.
Andrew on.
The.
Ecommerce opportunity I think you're working on developing like a dedicated.
Ecommerce channel, but now maybe it seems like pivoted and.
No channel, but can you just talked about.
Your your.
Ecommerce strategy in general and specifically.
Your expectations for the.
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Sure absolutely and I think our strategy hasn't change our goal is early in 21 to operate.
And launch a dedicated Muto muto Dot 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. We're pivoting to work from home to bring more to make muto products accessible in the North American market now, particularly those products that were geared towards.
Working from home, but that's exactly what we've done I mean the strategy as it is really is as follows you know we have with fully it's almost like a good better best strategy with fully we had for brand you know it. It's a it's a b core it's got a great vibe an attitude, it's a very young be temporary brand and its really focus on organon make offers.
In the height adjustable and height adjustable ceded tables, and ER and heating and then the accessories you know the computer accessories, the I'm, putting it out at a fully I just want that's now with the outlet according to data and the fully like that's geared towards that kind of organon back home office and the.
Really pros that that the idea now with no plus Muto dotcom was to really include a broader range of our ergonomic seating our own height adjustable tables, and then start layering in the pieces that shipping one to three days in most cases and some in one to two weeks.
That cannot use 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 is both working from home and and spending more time living from home and so it gives us.
You know Foleys got more the entry level price point, our price points are a little bit higher with mood owned out we have a range of price points and kind of you know that the the good range and then with the Knollstudio classic in the better range. So we think there's a tremendous breath now and that the market opportunity are so large.
So we can segmented in service in a different ways in certainly you know since weve since we've launched it and again, albeit the comparisons are are easy, but we're seeing you know 50% increases in traffic from where we were a year ago, we're seeing 500% increases in in orders.
We're seeing our conversion rate.
You know quadruple and we're seeing the volume per day steadily grow over the first two weeks. So I think were onto something you know fully full these ecommerce business was up 130% in the second quarter ours doubled but we're just scratching the surface here Tonight I do think this will be a more permanent part of the workplace.
Mix and I think NOL is incredibly well positioned to I'd be a player here.
Great. Thanks than maybe we could just talk about you gave some color in the.
Press release around order patterns.
Walk us through how orders are particularly around the.
The segment trended throughout the quarter and how they've looked in the early part of July so far.
Yes sure.
I think if you listen if you've seen the BIFMA data I think you know the industry was down about 33% in April and 38% in May I mean, those were the two of the of the bleakest month 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 eight lessening of the a lessening of the rate of decline and then also kind of car lately, we've been very carefully tracking new opportunities that are being entered into our salesforce on all because I think that in some ways right now where we're all trying to get held on what that what the future looks like.
And we look we look like we really troughed in new.
New opportunities be entered in May and they were down pretty much in line with these order numbers and then we saw nice sequential improvement in June. So I think there were some maybe some bottoming and then Oh I'm much more palatable level as we got into because we've gotten into June I think there.
Interesting thing if you look at kind of the first time, you know our orders and sales declined pretty much tracked each other and the first half the year orders were stronger 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 to the quarter and I think that's why.
You know if you look at our if our guidance you know we're talking about a 20% decline the back half that's certainly better than the numbers. We were seeing in April and May on on the workplace side. So I I think the other thing.
To remember.
When you think about Nols, specifically is we're probably one of the most diversified players in our space you know today, 25% of our of our of our activity is residential that includes now over 10% that you know kind of that.
E Commerce, I, driven which is obviously growing very quickly and then if you factor in our strong position in government. She's 15, 17% of our revenue and that sector actually we're forecasting out to grow this year with federal outpacing state and local I think you get to a point, we're over half of our business or approximate.
How far business is not pure play commercial office exposure and again I think right now that diversification and remember that diversification in categories that are higher margin. We think really will serve knoll well to me. This and those are categories, where we're leaning very hard into without abandoning the opportunity in the traditional workflow.
It's market as clients retrofit in reimagine their workplaces.
Okay and then.
Lastly, could you just talked about.
The rationale behind.
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Preferred stock as opposed to maybe.
Just working with your bankers.
Like you were going to push up against the covenants, just because it seems like where EBITDA as.
Shaking out here. If this is the worst of it this quarter.
It doesn't seem like you were going to be.
The 4% threshold is gonna be.
Surely reach but maybe not but maybe just talk about the thought process behind that.
Yes.
Absolutely well I think first thing we entered the back half with with the bulletproof balance sheet, we've got $380 million of liquidity I think on a pro forma basis, our our leverage is half of our 4.0 Covenant I think that thinking behind the capital raise was real was really was really twofold. One I don't think anyone knows what the future hole.
Right now and we were able to attract capital I think at a very favorable rate you know, 4.5% you know one up 45% can conversion price within Investor who has an appreciation for the space and the brand number one number.
Number two we're very focused on the fact that we think they're going to be significant opportunities on a M&A front as we move through and come out of this and we believe we can continue to pick knoll towards a higher margin maybe more digitally native residential mix in our business of high design.
In 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 will be opportunities from others that arent as well positioned national number one and then number two frankly I think it was smart just to have some more breathing room from a leverage and the covenant standpoint.
I can tell you having now having that capital if you look at the operating spikes 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 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 bit less constrains now a lot less constrained 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 that a smart thing for us to do.
Proactively and so we're very comfortable with with why we did it and Anda and I think what the outcome in there that benefit to Knoll and are all are all our stakeholders will be.
Okay, great. Thank you.
Thanks, Greg.
Thank you.
Again, because I guess the question. Please press Star then one when you touched on telephone.
Thank you. Our next question comes from Stephen Ram give Thompson research your line is open.
Hi, Stephen Good evening, Hi, Andrew.
I guess maybe to start with on.
Residential sales.
You know good performance clearly compared to workplace you know maybe can you talk to 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 evolve through the quarter.
Sure.
Well I think this is as we went into this this is these locked down from everything we are we immediately saw you know an explosion demand for foley's work from home furnishings, and I think to be honest fully probably could have shipped quite a bit more into corridor.
We weren't somewhat constrained in terms of just inventory levels. So I think we weren't really taken back by the literally been doubling up demand I'm ecommerce is up 130% in in the quarter. So we had to spend some time really replenishing inventory and you know some are fully is inventory comes from Asia. So there were some lag there was some.
Hi, there, but I think the good news is we've started producing tops were fully they are in a much better inventory place now their lead times are coming back down and and I believe as we get to August that fully really will be able to unleash the full power of that we've held back marketing investment spending because there's no.
Oh point driving the business beyond that which we can pull it but we.
Phil It, but we clearly TV demand there it's enduring we haven't seen it let down since the middle of March and you know, we don't really have our foot on the gas right now and that business because we really work we're doing replenishing the inventory. So I think come August who will be able to step that up and I would be soon.
We're encouraged about the prospects there as we move forward, regardless of whether I mean, we're going to go back to work.
And with a balance you Barton clearly work from home, which has its challenges will be a factor 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 thought myself. You know you start working at your dining table with whatever your you know.
R&D dining cerna initial dining table I started working there, but it's like little uncomfortable spending 10 12 hours a day and then you know that I invested in the adjustable cable enough and a Anna and I know all regeneration Tas chairman I can work much more efficiently and much more comfortably in healthily and I think you're going to see.
That continued investment in that work from home category. The other things happening as everyone. You know in their homes in there they're walking around saying you know this it's rug looks little worn out. This this you know the self funds kind of hot and I think we're starting to see you know that and that's really the idea behind the no work from home no plus Muto work from home is that it's not.
Just about the ergonomic piece of it which which fully does a nice job of and we do a nice job, but it's about all the other runs and things. So I think you're going to see you know the though the home move up in terms of the kind of discretionary ladder of what consumers are spending on peep folks are traveling you know as much and so I think there's more discretionary dollars.
We'll go into the home even in the higher end with with Holly Hunt and stuff like that as we've been able to we opened our showrooms and all that we're seeing activity at the higher end come back and everything and we were really constrained we had oh Holly actually two Holly Hunt manufacturing location shut down the corridor and many of the.
Residential showrooms workloads, so as things start to reopen not closed a little bit.
Back and forth a little bit.
But we are seeing that business you know trend in a positive direction as well. So you know I do think people will invest more in the homes and I think knoll as a brand you know is a brand that fluid lit lives in the workplace. It lives in the home we've got products that crossover.
I think it's a tremendous opportunity funnel, if we can make ourselves accessible and easy to do business with and that was really the philosophy that that the team embraced as we as we launched in an old plus muto a work from home and gone the website. It works Fabulous easy order, we ship in one to three days.
Shipping included a we're in the mid supercell right now.
Which is going great. So I think there's a tremendous amount of upside for an old here.
Great and then thinking about where backlogs are how has backlog picture involved.
On the workplace on the office side of things and you.
You know will that be sales driver in Q3 or backlog that pretty normalized levels and therefore, you know would new orders with dose go out to customers in a timely manner.
Well I think we are now.
Operating pretty much on time things coming in and thing and things going out you know our team did an amazing job frankly in the midst of pandemic closing, our our our facility in Grand Rapids, and moving production there to both Michigan in Pennsylvania and doing it seamlessly as has one could in the midst of a pandemic enough.
Everything and so I'd say, probably backlogs a little bit elevated in terms of of what we have sold to work through again as I as I mentioned, you know Holly Hunt and some of our their businesses weren't really shipping dates wiser wasn't really shipping no Europe wasn't really shipping for for a meaningful chunk of the you know probably half for two thirds of the second key.
Corridor. So so I think they have some backlog to move through but but again as I as I mentioned orders were stronger in Q1, and you know, but shipments weaker than in Q2, we had it slightly better shipment, 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, you know we talked about you know approximately a 20% no blended decline with you know workplace being weaker and I would expect residential growth.
Excellent and last question for me on on sales expectations for the second half that down 20%.
Range is that you know somewhat even in Q3 in Q4 or do you expect Q3 to be greater than Q4's decline much more modest or if you have any trend line. There I mean I you know I think at this point, we're saying that's what we expected to be pretty evenly across the bass.
Yeah, I don't could we can really give you credibly more color than that right now.
Great. Thank you.
Okay. Thank you Stephen.
Thank you I'm showing no further questions over time, I turn the call back over to the cold for any closing remarks.
Great. Thank you all very much for your continued interest in all you know I hope we we've made no clear on this call why we think NOL is different.
And then other players in the space with our with our much greater residential mix with our government mix that we think we're we're well positioned to could do as well as one can in this environment that we've got a bullet proof balance sheet.
Now that gives us.
Flexibly to take advantage of M&A opportunities and breathing room to make that kind of strategic investments that will allow us to to thrive and come out stronger on the other side I would like to close by commenting on our commitment to diversity and inclusion in creating opportunity for associates with color no build.
On our leadership in LGBTQ equality Modernism design was born as a means towards social good and always found in the principle that modern design could make a difference improving the quality of the way we live in work like extension. Good does not do you think gnostic about the color scheme responding to the universal desire futility join.
Beauty with so many suffering we are taking this moment no to re commit ourselves to leveraging the power of designed to build a fairer world and they know that is more reflective of the communities, where we live and work we look forward to work and it's our diversity inclusion council to make meaningful progress here in the months ahead.
Across the constellation no associates are demonstrating their commitment to teamwork and client service. Many in ingenious in new ways and we deeply appreciate and I deeply appreciate how hard everyone. At all is working and want to thank them for all they are doing.
So be safe everyone. Thank you for your continued ownership and interesting no and we'll look forward to talking to you at the end of the third quarter take care everybody.
Good evening.
Ladies and gentlemen, this does conclude today's conference. Thank you participating and have a wonderful day give me on disconnect.
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