Q3 2020 Knoll Inc Earnings Call
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The call. Today also include references to non-GAAP financial measures. The consummation of these measures to the most comparable GAAP financial measures are included in the earnings banners released earlier today I will now turn the call over to Mr., Andrew Cogan, the chairman and CEO of now for the opening remarks.
Thank you good afternoon, everyone. We hope this find you and yours safe and well.
Today, we announced solid financial results for the third quarter is our ecommerce business grew 434% compared to the prior year and higher margin residential sales comprising approximately a third of our business up dramatically from a fifth a year ago grew a total of 39%.
Knowing sales of $309 million declined 13% in the third quarter, driven primarily by a decline in office sales of approximately 25% total shipments during the quarter benefited from elevated backlog levels heading into the period and we're pleased that we saw sequential improvement in incoming order activity from the very dips.
Yes levels, we experienced in the second quarter. Nonetheless waters are still tracking below current shipment levels with the false starts and delayed return to the workplace for most of our corporate clients. We continue to see a significant number of new office projects being delayed even in cases, where the buildings have been completed and we've been awarded the furnishing.
Over the long term no doubt the office will remain an indispensable part of the workplace Echo system, and we should see a nice bump when businesses do return to the office, but that landscape will be a synthesis that includes a more permanent work from home component in an overall environment that continues to elevate the importance of a well designed all the work place.
Its itself will more likely be Ah, we spaced enemies space is at the crux it becomes a space for collaboration both in person and with colleagues working remotely the pressure to create workplaces. They draw workers and will only increase as the options of where people can work also grows all this bodes well for a design gift.
Brand like no with a robust collaborative and ancillary product capability. Let me add that we are particularly proud of the results. We have reported and the strategies that will guide US Ford there, maybe those who were daunted by the challenges posed by the pandemic, particularly in the office space, but we believe if anything the pandemic has helped to accelerate the long term.
Trends that we are already already building a no to take head on now we just have to keep pivoting harder and faster, but the opportunities. There. The pieces are in place and we can see the excitement in our teams are happy now to take your questions.
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Our first question comes from the line of Brad Burns from Sidoti and company. Your line is now open.
That's true.
To.
First get into the order patterns and in terms of workplace could you just maybe.
Give us more quantitative numbers around how much order orders were down in the third quarter, maybe relative to the second quarter and.
How they've trended in the first part of the the fourth quarter.
Well, Hey, Greg good to hear from you I'm listen we saw really nice sequential improvement from Q2 into Q3 in our overall order patterns. You know we look at the the BIFMA data I think over the last three four or five months the industry is down around 30% to 33% on the workplace side and we've done.
You know nicely better than that I think for us the cross is a little bit less what's happening in the workplace part, but what's happening and all the other channels and the all the other ways people are working in there as you can see from our you know what we talked about today, we saw a really solid growth in our work from home business in our ecommerce business.
And in our residential businesses and now today that you know, 30% and growing up our mix.
Well, we expect the workplace that continued to be challenge now is we talked about in the in the commentary we shared with our earnings release, We think you know you're probably looking at 30% to 40% decline in BIFMA demand over the you know 2021 period.
Bottoming somewhere in 22, and then starting to turn up but again you know we're pleased to see our orders declining less than than the industry at this point.
Okay, and I guess that that view around the <unk> and the <unk> and the the press release around the the BIFMA market shrinking, 20% and kinda. This view for the 30% to 40% decline over the next I.
Yes.
A few quarters at least.
That shaped by any change in kind of conversations you're having with your customers what you're seeing or is it just you know recovery taking longer or maybe have things gotten any incrementally worse. Nevertheless, no actually I think quarter to have gotten incrementally better, particularly in terms of our mix of business again, I I think we.
When we were talking in the last call we were talking about maybe 20% shipment declines in the back half and you can see you know we did better in a in the third quarter. So I think our view actually has improved but I think you know in part its improved because again the mix of our business is substantively different at this point than someone who would be 100%.
Workplace oriented and we think it's important that you know.
As people start looking at the space they start to differentiate where everyone is trying to position I you know I think as we look at the at the industry to me. This feels a lot like the 2001 to 2004 decline I mean, you look at you know the sub lease levels right now they are above the dot com.
Well as you look at the kind of absorption.
It reminds me of of of of those periods you look at the kind of leasing activity, which is much more renewals and new space oriented so I I could easily see a market. That's down you know again the dismissed us tracking down 30. This year, maybe another 10 next year and then you start to get some stabilization and improvement.
No I don't think our view has changed at all I mean, you know our pipeline is not down as badly as you know the BIFMA data number one but what we are seeing is the incoming opportunities. Our track the number of incoming opportunities are kind of consistent with that that decline in this month. So you know I just think that's the.
Reality and the key for US is that the more people in the longer people are staying at home that bodes really well for the pivot to work from home that we are really well you know a position to take advantage of and to benefit not only from the ecommerce piece of it on the work from home piece, but on the on the living at home piece. So.
Again, I think that's going to be what differentiates us through this cycle, but pure play BIFMA, we think is down 30 or 40% over the next two years.
Okay, Great, let's talk about I guess I E. Commerce, then a little bit the.
Yeah first of all go through this quarter I know last quarter, you talked about maybe.
Maybe some some supplier inventory constraints that affect you at all this quarter as I've said, all cleaned up and you know I know it was restricting some of your investment around marketing dollars. There because you didn't have the the inventory to support the demand. So are we all caught up there until you're ready to really step on the gas a little bit on that side of the business.
We're all caught up there, which is great we'll be stepping up on the marketing side, particularly as you head into like you know cyber Monday on Black Friday, and all the holidays and in November and December. So we're looking forward to that Weve expanded the offering.
Both on a fully side of things in there and they are really well positioned but we're also expanding into other ways. One globally I'm, we actually have a really nice and fast growing work from home position in Europe. So it's not just a north America phenomenon and then and then on the second side the whole Knoll, plus muto work from home.
Which we really launched you know in the middle of July on that's really gaining momentum and we're pleased with how that's going so it's not a it's not just a you know on a fully front, it's a more multifaceted and an increasingly global effort that we're really pleased with it and I would just point out that.
That channel in general is about twice as profitable as the kind of traditional office channel. So you don't need a dollar for dollar transition to capture some some good margin stuff. So again, you know there's still be headwinds going through this year into next but I think we're encouraged that from a profitability mix.
Endpoint ultimately that will be more helpful.
Okay, and then you have obviously, a 400 plus percent growth. This quarter can you give us maybe a sense here you're.
Yeah, maybe maybe that was a little bit of a catch up from last quarter. Some of the supply constraints, but could you give a sense of maybe the order patterns, there or what kind of growth, maybe or you're still expecting for that channel over the next quarter.
Quarter two.
Yeah, well I mean, you know again I think the important thing is today residential which includes work from home and you know living at home is about 30% of our sales. It was 20% a year ago. So I think you'll continue to see our mix.
Ooh, maybe more two thirds one third you know I think you'll see 60 40, you'll see more evolution of that number one and then in terms of the the growth rates I continue to expect to see that business doubled over the next couple of quarter minimum golf, 400%, but I'd be happy with 100, 150% growth as we continue to move forward there.
We're certainly seeing it in a in the traffic and conversion rates and all that kind of data, we're seeing encouraging trends and we have a lot more product and again marketing effort, you know coming into that space.
In the fourth quarter and I imagine will carry over into next year.
Okay, well, maybe we'll get it Charles and here I just had a question about the.
The.
The restructuring.
You announced the 23 million of savings.
How should we expect that to be kind of realized over the next couple of quarters and is that a net number or do you plan on reinvesting some of that back into the business.
Yeah, Hey, Greg Thanks So.
We announce yeah, we've got about 23 million of annualized savings. So we would expect to be generally spread over the course of the year fairly evenly.
Yeah, we have some actions ranging from a head count reduction to some future actions with a few facility closures et cetera.
But that said, it's generally in that number.
There might be some additional spend around marketing dollars and things like that but generally.
Generally speaking that's a.
That number and then against that you've got a couple of things coming back next year in terms of incentives you know a couple of a couple of things. In addition to that we got some onetime benefits. This year from some of the government programs that were going on.
So those will return next year, but generally speaking yeah. We've we've taken out about $60 million out of the business going into you know going into 2021.
And so there's a little bit coming back next year as I mentioned.
The restructuring the restructuring actions you know, it's about 50 million of total savings coming from that split about 50 50 between Cogs and Opex basically its setting us up nicely going into next year I'm too to achieve Bottomline results of you know higher single level margins and EBITDA adjusted.
EBITDA, maybe maybe low double digits.
Okay. So so with with the the restructuring that's still keeps you I guess in line with that 20 to 25% to 30% range.
Decremental margin kind of model.
So I would say that it's still yeah, I think that's right. So as we finish this year, we're expecting still 25, 30% de leveraging of EBITDA, but I think you're right. We're hoping to get some expansion next year, but but still you know still as we go into next year, you know expecting to get upper single digits EBITDA low double digits.
Okay, Great all right. Thank you.
You bet.
Your next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is now open.
Hey, good evening, I guess to start on the more dig in on E. Commerce can you maybe share maybe to make sure I understand for this quarter the resins burst workplace.
Sales from E Commerce in Q3.
And then thinking longer term as you move towards that 200 million of E Commerce sales.
I guess is there a time frame on hitting the 200 million Mark.
And as you get to that number do you envision that having more resi content then workplace.
And with that maybe you can can dig in on the driver for better margins in that segment being residential worse workplace or any other factors that drive.
Sure. Let me, let me try and started that so of the of the residential business, which again I said it was about you know a third of our 30% of our sales in the corridor about a third of that third was our E. Commerce related so that's kind of how it so to start kind of bricks and mortar.
Our our Knoll studio, our Holly Hunt and Knollstudio had had a strong quarter Muto had you know had a quarter of growth I'm. So pleased to see that mood I was back to growth studio is back to growth I mean that goes through multiple channels. It goes through you know deal. There is you know.
Residential dealers it goes through E tailers and retailers in North America and in Europe, and then you have the kind of Holly Hunt business.
We also saw as you moved through the quarter and nice growth I mean people clearly are spending more money on their homes.
You know everyone's kind of cooped up a little bit more so you see things, yes, you need to improve.
We believe residential furnishings have really moved up the discretionary ladder in terms of people maybe aren't traveling as much aren't going out as much on track as much an entertainment and so they're spending more in their homes. So we're really a beneficiary of that whether its mood, though whether its knollstudio and whether its Holly hunt and it was encouraging to see.
See even the trends at Holly Hunt as we moved through the quarter that business now as we enter the fourth get back on a path to growth again, so I think that's encouraging so that's two thirds of the business. The other one third is really more the ecommerce work from home business.
So you know again, if you take those ratios you're thinking you know you know something in the three $400 million of our revenue is annually on a residential basis and then you can say a third of that is E commerce and and I do believe we can take that third and grow. It 50, 50% you know next year and you know 100 per.
Then over the next two years I think we're benefiting both from when we look at our market projections. We believe the work from home market will will double in size and we believe it's going to be a it's not just a trend, but it's a more permanent feature of you know as we were talking about kind of the echo system of how people will be working and you know you read all.
All this stuff I'm sure you're reading all the stuff, where we didn't you know it looks like you.
You know 15 20, 25% of folks are going to spend some time working at home and I think people have enjoyed to some extent the flexibility that it offers them and so we think that's a you know whether it's learning from home working from home that will drive sustainable growth in that part of the market and you know we have both the.
Digitally native and then a business where kind of from the ground up building. So I think we're particularly well positioned with multiple channels in a in a broad range of products that we can really omni channel market and moved through multiple channels. You know work in the office and we can re purpose those stuff to work from home.
And I'll give you one example.
One of our best selling shares is our regeneration share and it's a you know it's a it's a well priced chair it it does great in in in work in office, but it does great work from home and now we'll be introducing some more residential oriented colors of those products. We've got a broad range of tops and things that.
We do in the workplace side, we can now offer those on the residential side. So I think where you know really nicely positioned to benefit kind of however that this ultimately plays out.
That does that give you right there.
No that yeah that is helpful certainly.
And I guess to get more color there on on the margin improvement being or the margins to be better to E. Com than traditional workplace is is that because of more ready content in that or are there. Other drivers that caused the margin improvement well I think so I think that.
The crux of it is you're selling you know one of their start one of that and you are not discounting it like you're selling you know a 5 million dollar projects. So I think you know, it's primarily in the pricing where you get the advantage I mean, there's some disadvantages because of transportation is a little more expensive and things like that but but overall it just hire me.
Arjun business and you know on the adjusted EBITDA line as Charles was talking about you know, it's it's it's well above our targeted you know upper single low double digit EBITDA margins in that piece of the business.
Right, Okay that makes sense on your discussions with customers on delays for spending for offices can you maybe share more on on the tone of those conversations are they are they getting better or worse and is there any meaningful change from.
The second quarter in these conversations.
Yeah, I mean, I I, you know I think it's pretty obvious, but I mean with a pandemic raging people are delaying their return to work and I think ultimately it's going to take a a vaccine you know easier access to testing.
And then you'll see more people return to work there is there's some good data that we look at in terms of you know various returned to work parameters and things like that where people track and I think if you look at the top 10 cities right now at most 25, 26% of folks have returned to work and when you.
Look at it by geography, you know that you know the Chicago you know.
I mean, the kind of the areas, we know that Chicago San Francisco DC. Those are some of the worst areas. New York is below the 27% average you got a few areas maybe in Texas that are above that but but in general I think until people start returning to work in mass.
We won't see meaningful improvement in the kind of industry run rate.
And I think that's the more hearing I mean, we've got you know I don't know 70 $80 million of awarded business right. Now that's kind of on hold pending people return to work and so you know our best guess now is that sometime in the back half of next year.
You'll start to see an acceleration of folks returning to work and we should see a nice bump from that but I think until then it's going to be leaning into work from home, it's going to be driving the residential business just because we're all going to be at home and we're going to be spending more money on our homes and that's where I think the action is going to be for the next.
12 months.
Great and then last one for me focusing more on specifically the government vertical since that's a stronger vertical for you guys can you talk about the performance in this market is burgeoning from general commercial office office space.
Yeah, I mean, I think that the federal government has been stronger, but the state and local has been weaker so I think that kind of wash each other out.
In general, but clearly the combined government things then been stronger than than the corporate piece. You know I also think we were maybe expecting a little more quickly on the corporate side a focus on return to work enhancement. So you know we've done a lot of work on screens and and space Division and new ways of laying things.
[noise] out, but even in that area, where weve got all those products and we are really having active conversations with clients even in that area I think their attitude as well, we're not going to race to do that until we get some more confidence about when we can bring people back to work and so again I think thats, probably a few quarters out.
Got you. Thank you.
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We don't have any more questions on queue I will turn the call back to Mr., Andrew Cogan for closing remarks.
Well. Thank you all again for your continued interest in Knoll stay safe and go vote take care everybody Goodbye.
Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.
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