Good Market Insight From Knoll

Good Market Insight From Knoll

(FEBRUARY 19, 2020)  Contract office furniture maker Knoll has changed how it reports its quarterly results and provided some interesting details about current market trends.

Because of a fewer number of securities analysts covering the company, Knoll has decided to provide expanded commentary in its earnings press releases. At the same time, it has ditched the prepared remarks part of its quarterly conference calls and is now diving straight into the Q&A session. The upshot is a more meaningful and transparent set of results, and it is a model that many other listed companies would do well to follow.

The manufacturer confirmed that order growth decelerated in the second half of 2019 due to a number of factors.

“This downshift correlated with increased economic uncertainty around tariffs, declining corporate fixed investment, weaker confidence indices and slower service sector employment growth. Corporate profits also started to stagnate,” it wrote.

“On a more sector level, co-working demand slackened off and was reflected in declining year-over-year absorption rates in the fourth quarter. Geographically, while US growth remained buoyed by solid government demand, we saw weakness in export markets like the Middle East. In large measure, this explains the slower growth we saw in our own results in the fourth quarter and the trends we expect to play out in early 2020. While we believe some of this may be transitory, we do acknowledge additional uncertainty around business and consumer spending plans in an election year.”

Having said that, on the earnings call, CEO Andrew Cogan noted that there had been a “nice pick-up” in orders growth in December of last year and into the start of 2020. He didn’t go so far as to say it was a case of a V-shaped recovery, but believed that the slowdown may have bottomed out.

Despite these order growth challenges, Knoll said that secular drivers of demand, if anything, continued to strengthen in 2019 and at the beginning of this year.

“The primacy of the workplace in attracting and retaining talent is a theme playing out across almost all of our major client engagements,” it stated. “Similarly, the ‘resimercialisation’ of the workplace and the continued shifting allocation of space away from the individual and toward the group continues unabated. This drives demand for more residential-feeling products with contract-level quality.

“The focus on wellness and well-being also continues to drive demand for our fastest-growing product categories, including height-adjustable tables. We see these trends as part of an effort to give users and teams more direct control in shaping their environments.”

Knoll said the “tug-of-war” between slower macro and stronger secular trends was likely to play out for the rest of 2020. Trade association BIFMA has forecast 2% growth this year and the manufacturer called this figure “a reasonable starting point for core growth”. However, that is quite a bit lower than the double-digit increases in both the number and dollar value of the projects it is currently tracking.

Last year, Knoll acquired e-commerce furniture reseller Fully. Online sales – which also include the Knoll Shop website – are still only expected to represent a mid-single-digit percentage of the company’s total sales this year, but this is seen as “an area of much opportunity and focus”.

There is already evidence of the cross-selling synergies between Fully and Knoll’s existing businesses. Later this year, Knoll Office will be launching a lower price height-adjustable desk – driven from a research and development standpoint by Fully – as well as some of Fully’s ergonomic accessories. Going the other way, Fully will start to distribute a handful of Knoll seating and Muuto side chair products through its website.

During the earnings call, Cogan stressed that the Knoll and Muuto products being offered through Fully would not be competition for the manufacturer’s dealer partners.

“Fully targets a totally different client base than we reach at Knoll,” he said. “The average Fully transaction is under $1,000, and the average project when they do a workplace is about $4,000. Our dealers don’t want to deal with that kind of business, so it’s a very different segment of the market that we think we can move very select Muuto and very select Knoll office seating products through.”

Another e-commerce project in the works is a direct-to-consumer site in North America for the Muuto design-led brand acquired at the end of 2017.

Knoll also provided an update on its plans to consolidate some of its production facilities in the US. The closure of its site in Grand Rapids (MI) will result in a reduction of its current square footage of about 20% while 75 full-time equivalent posts will be eliminated. The plant reconfiguration is a major initiative for 2020, with much of it taking place in the first half of the year.

Looking at Knoll’s 2019 financial performance, company sales were $1.43 billion, a net increase of 9.7%, adjusted to 8.2% excluding Fully. Both the Office and Lifestyle divisions achieved above-market growth – interestingly, the higher sales in Lifestyle came predominantly from commercial workplace clients, where a 19% uptick significantly outpaced the increase in the residential segment. That underscores Knoll’s above comments about the ‘resimercialisation’ trend.

Adjusted EBITDA for the year was $194 million, up about 10% year on year. Adjusted EBITDA margin remained flat at 13.6% as an improvement in the Office unit was offset by a decline in the Residential reporting segment. - (OPI)