Q4 2020 Knoll Inc Earnings Call
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 debt uncertainty.
The call today May 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 released earlier today.
I will now turn the call over to Andrew Cogan, the chairman and CEO of know for opening remarks.
Thank you operator.
And good afternoon everybody.
We hope this finds you and your safe and well 'twenty 'twenty was a year as we all know of unimaginable challenge and we cannot be prouder of the way our team rose to the occasion to support our clients deal or is the architecture and design community and our fellow Knoll associates approach for Knoll constellation our associates successfully kept our pea.
Lance and warehouses operational reopened showrooms, where allowed by government regulation and found 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 the great work.
Our long term strategy of diversifying our sources of revenue both organically and through acquisition.
Way from a sole dependence on commercial workplace sales with fluid brands. They can pivot between sectors has paid off exceptionally well this year.
The 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 of 2020 this helped to offset.
At a 22% decline in our commercial workplace sales in 2020 and resulted in total revenues of one point to $3 6 million down 13, sorry, 1 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, Michigan manufacturing site and the pending consolidation of our North American warehouse locations in mid 'twenty 'twenty, one as well as approximately $25 million of operating expense reduction.
Including head count travel and entertainment variable incentive and other discretionary expenses, while protecting our core digital on product development initiatives. These actions combined with a favorable mix shift between residential and workplace have allowed us to protect our profitability and delivered double digit adjusted EBITDA margin for the full year of <unk>.
<unk> 20 for the quarter adjusted EBITDA margin was nine 8% compared to a full year of 10, 2%.
We're particularly proud of the progress we made on our corporate social responsibility and diversity and inclusion initiatives, including a robust sustainability report prepared in accordance with global reporting standards on new scholarship for Black design students our partnership with habitat for humanity and enforced important diversity hires on both our board of directors.
And senior leadership team.
COVID-19 has had a dramatic short term and likely long term impact on all of them on the way, we all live and work in the short term the disruption to the office market has been profound office demand. According to industry data has plunged from between 22% to 38% monthly since the start of the pandemic. After a brief respite over the summer.
When it looked like more folks might be for trying to the office demand has been hit again, there's a second wave for the pandemic swept across North America, and Europe, we track, but the Google mobility data and the castle back to work barometer in both confirm this setback in this context, it's not surprising to see that our workplace business continuing to decline in the fourth quarter.
Well data today shows 60, 80% of all office work is happening remotely this won't be the case forever well, we believe our office business will continue to decline over the first half of 'twenty 'twenty. One is clients hold off on en masse returned to work well vaccines are being disseminated we are heartened by several factors that so.
Just a return to more normalized levels of demand and a rebound later in 2021, when we survey our clients on their return to work plans, we see most falling in the third and fourth quarter of 2021, our funnel of activity, which has been a good indicator of where demand is heading show signs of stabilization of demand three quarters out and the price.
Back to a double digit growth four quarters out.
We think that once there's more clarity on vaccine distribution companies will start to firm up their return to work plans and activate workplace projects now on hold on.
Isn't that different than the travel industry, where bookings for travel in Q3, and particularly Q for a strong once people start returning to the office the momentum of more people in versus out will also create additional impetus for return to work and the in person interaction. We know most of us missing crave.
With that now we're happy to open up the line to your questions operator.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone.
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Our first question comes from the line of Greg Burns with Sidoti.
Good afternoon.
Let me just start first talk about the.
The order patterns, you're seeing in the office side of the business you know how those trended throughout the quarter. If you saw any sort of improvements or.
Do you expect them to stay at the same levels for the next couple of quarters.
Well I think interestingly 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 if theres a normal seasonality and both the combination of that seasonality and the delayed return to work.
Well, probably incrementally pressure the <unk>.
The top line in the in the office business on the flip side you know.
As we move into 'twenty 'twenty, one we're seeing the residential on ecommerce stay as strong as they were at the end of the year. So you know where we're encouraged by that and frankly, where we're you know we're quite we're quite encouraged by the trends as I mentioned in the pipeline you know when we look at the E B I doubt it.
And we see an uptick in future inquiries that jives with what we're hearing from our team about you know activity within within design firms I was talking to one of our larger regional managers today and she said to me every day, we have more returned to work activity than we had the day before.
So you know as I kind of look at all of those indications you know I see clients starting to take advantage of of lower rent I C. C. O confidence you know at at the highest it's been since before the pandemic all of those things day to me that well and we are starting to see more projects come on hold that as we move through the year, it's going to be very.
Back half loaded probably even more fourth and third but that the momentum will we believe will build but you know 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.
Okay and then.
In terms of the on the residential side of the business, obviously very strong momentum there and it seems like you're.
Sure.
Investing more heavily around around marketing and promoting promoting those brands I know earlier in the year.
Some constraints, maybe around product availability or anything like that.
Or are you do you have any constraints now on that side of the business or is it kind of just as hard as you can price on the gas here to drive growth going forward. Yeah, I know I think clearly the latter Greg I mean, we're well inventory in stock debt at fully and the marketing you're you're referring to I think it was we were super pleased with the we ran we didn't run on.
National Super Bowl AD, but we ran a 32nd spot in in five or six local markets and we are just tremendously impressed with the reaction one it's a I think a great a great fund spot two we thought tremendous ramp up obviously in traffic to the website, which was something we did in the fourth quarter with a brand marketing campaign.
It had a huge positive impact on <unk> fourth quarter performance.
Since that at his run we've already had over 5 million views of that add on full these Youtube page I would urge it's in the the address is and you can do search your find your workflow fully on Youtube and you can see that the video. So we're we're well inventory there you know across the other business Holly's and really good.
Shape from a supply chain and Theyre seeing really strong double digit growth really across the country.
Knoll studio and our own Knoll dotcom efforts are really really hitting hitting stride. So you know we're very encourage Europe.
In Europe residential is is growing and a mood always is doing really well also residential is so it's pretty broad based there no supply chains, and we are leaning into it incrementally.
As hard as we hard as we can.
Okay and then when.
When we think about the cost structure, you've made some structural permanent savings and you also talked about some other things that might maybe may or may not be as permanent may come back in.
The P&L next year. So can you just talk about.
The expense expense structure as we move into next year, maybe relative to where we ended the year on the fourth quarter.
Charles do you want to yeah, I can take that one hey, Greg.
Really quickly why don't we just do a quick recap of some of the actions that we took in 2020. So we.
We had a wage freeze we suspended for when K contributions.
We did two to work force reductions, which eliminated about 600 full time positions, which is about 20% of the work force.
That is expected to yield about $40 million of annualized savings and we had about $10 million of <unk>.
Savings from Furloughs and other discretionary spending reductions in addition to the Grand Rapids closure that we that we did on this in the end of the second quarter.
Just breaking it down by Cogs and Opex.
Some of the savings will have Andrew mentioned earlier in his opening remarks, we expect to get $8 million to $10 million from the Grand Rapids closure.
Nobody was closed in June of 2020, we completed our role for move.
In the fourth quarter.
And we've got warehouse and distribution consolidation plan for them for later in 2021.
Out of some of the.
Work force reduction actions the head count actions that we had there was about $15 million associated with Cogs.
Which we took about 8 million of those savings in 2020 and would expect the residual the hit in 2021.
Some of the 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.
We do do for purchases, which reduced the impact and we expect it to reduce the impact for the first part of the year in 2021, certainly some risk in the back half of the year if market prices continue to stay higher.
Transportation costs are expected to be up a bit metals and transportation are about 3% each other.
Of our total no ink revenue.
And then we also have about $10 million less in government subsidies are government wage subsidies that we were able to realize in 2020 would you have a price increase that will offset some of the.
The commodity increases.
That plan to go into effect on about April.
So maybe for Cogs, it might be sort of a wash.
And then moving down to Opex are similar.
Similarly from the head count actions, we expect about $10 million on carryover savings in 2021, so out of that $40 million would you expect to get $10 million in Opex in 2021 compared to 2020.
And that will likely be offset by about $10 million to $15 million of investments in digital and return of incentive and other volume based compensation certainly will continue to focus on.
Lending discipline.
Actually in the workplace businesses as we go through 2021.
I think that's kind of a breakdown of what we would expect on the cost side.
Okay. Thanks, Thanks, a lot of detail on color. There. So just so just maybe if you could frame at all from where we exited the fourth quarter or is that a good run rate to build off of are assuming.
Yes.
I would take the I would take the full year.
And use that as the basis and then obviously for a wash for Cogs I think he can use Q4 as a run rate and then for Opex.
If you base it on the full year and you take the $10 million of full year.
Benefit for the head count reductions offset by 10 to 15 million I think that's probably a good baseline.
Baseline.
Okay, great. Thanks Charles.
Thank you.
Our next question comes from the line of Steven Ramsey with Thompson Research.
Hey, guys good evening.
Maybe to start with.
Looking at the office pipeline.
Just more detail the projects or they are these projects coming on hold are these customers.
Customers that maybe we're not in the pipeline previously coming in.
Is there a consistent character to the projects do they reflect the resin Marshall steel does it reflect clients expanding space just any detail on the character of what future demand looks like.
Sure I think there is definitely a big chunk, which are things that were put on hold that are starting to get reactivated that 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.
So we need to we need to take some things off hold and get them going so that's kind of the the more immediate lift I'd say, where we're seeing right now those conversations and then the debt.
The work in the further out in the pipeline is companies again that had had plans that they are now reactivating based on the fact that there they are coming back to work. What we're also seeing and we've introduced this notion with our clients and have been training our team on kind of this idea of the thriving workplace, which is what is the workplace, we're going to come back to on what are the things.
That our clients are going to have to adjust to to make a make a safe and healthy and productive workplace and a workplace folks are going to want to be in and that's that those are environments that allow both physical and virtual interaction theres, a heavy mix of of ancillary and that and in that work. So we're we're benefiting we're benefiting from that.
There's I think a focus on on you know less densification, so spacing things out.
Giving people some areas dedicated areas for focus more areas for smaller collaboration as opposed to larger collaboration so you know.
Those are the kind of planning things that people are saying, okay, well, we're gonna be being pulled back what does the workplace, we have to kind of change and reengineer look like so you know change has always been good for for this industry and I would expect that the same thing here on everything.
Great and then I wanted to dig in more on the stable demand do you see coming for kind of the next three or so quarters I guess I'm trying to think of this in relation to the ballpark net 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.
Yeah, No no I appreciate it.
Without getting into kind of all the specifics because I think things moving 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 ended the year at a higher level and that's kind of how we see it right now that aligns with that kind of bottoming out we've seen in our backlog that deals for the fact that the backlog in that sector.
The pipeline sorry, the pipeline in the first half is you know continuing the downtrend that you've been seeing in the Madonna.
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 you know kind of sub par sub run rate in the first half and above run rate in the back half.
Great Great hunting losses, and then residential obviously there is a different story on with very strong levels of margin and profitability, where I would expect those to be generating growth on both the top and bottom line, while we're kind of dealing with the trough quarter of our office business.
Great Yeah, I wanted to do.
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 for second half kind of dynamics in residential even though we know it's going to be definitely a stronger segment.
Yeah, 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 you know in the back half should be the run rate in the front half and 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 in the workplace eco system is going to be different post COVID-19 than it was.
Pre COVID-19 and so you know there is going to be this permanent work from home element that I think we're really well positioned to take care take advantage of I think clearly the digital and E. Commerce has been transformed and accelerated you'd hear that all the time, we're seeing that in our business and in every bits I don't care, whether it's Holly are fully are.
We think theres, great digital opportunity great opportunity to engage our our clients in a more.
Intimate intimate way so really.
Exciting work there so I think the and so I think even when we return to work, we're still not going to be traveling as much for not going on 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 E V P.
Of of digital Commerce, He's got a tremendous background in this area. It comes.
It comes out of Facebook and understand how every all the algorithms and all of that work. We have so much opportunity to mine are our customer data that where we're really excited about 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 returned to work.
I mean, I think the one thing I had regional managers, 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 we're starting to have.
Have have with clients and everything and I think you know 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 are kind of like off to the races in 'twenty two here.
If people are going to have to make the we don't have to make the workplace something so appealing for people to come into you got to change that habit of of working at home and I think that's going to drive more ancillary investment it's going to drive all the things Knoll as is good and we have you know.
So I'm quite encouraged about now you know the latter half of 'twenty, one and really what 22 can look like here because I think we will continue to have good residential momentum.
And we're gonna get back we're going to get a big recovery in the in the office business I would expect sometime in 'twenty two.
Great and then last one for me I'm trying to think about the excess sales capacity.
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, well I would say that so we've made a conscious decision not to cut more if we were just trying to you know.
Maintained historic margins, we've generated and in the office business, we we'd cut.
We cut it we got quite a bit deeper so I don't know, whether it's 20 or 30% deeper than where we're at but its something of that magnitude I think we've just made the call that one you know our balance sheet is in great shape. We're under no pressure to do anything we want to be positioned both in terms of product in terms of manufacturing could.
Passing in terms of sales capacity for the turn our dealers are ready our plants already so so.
So were consciously accepting what's going to be lower margins in the office business than we could generate in the first half of the year. So.
As you look at it over a full year basis, you know the residential stuff going on continuing to deliver mid teens mid teens, you know margins, but and then 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 'twenty one.
And then pretty quickly returning to double digit EBITDA margin in 'twenty, two 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 hundred basis points of short term EBITDA margins in the first half of the year.
When demand is going to be weakest.
Right that makes sense. Thanks, Andrew.
Thank you Steven.
Thank you and I'm showing no further questions. So with that I'll turn the call back over to chairman and CEO, Andrew Cogan for any closing remarks.
Hey.
Thank you and thank you everybody for for joining us on on today's call. If you believe as we do that the future of the workplace ecosystem as I've talked about on this call will all be about flexibility as to where on one one works and those with balance work from home work in office and residential portfolios combined with <unk>.
On the 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 in showrooms will be the winners in the post COVID-19 landscape certainly that is the knoll we have.
Ben and continuing to build on.
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 continued 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 is it.
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 continued 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 and stay safe and well everybody and we'll talk to you again in a couple of months.
Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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