Knoll, Inc. Investor Update Fourth Quarter 2007

Transcription

1 Knoll, Inc. Investor Update Fourth Quarter 2007 You can count on one hand the number of American corporations that take design seriously. There is Target and Knoll, and then there is Apple. Michael Specter Men s Vogue, September 2007 Shelton Mindel Side Chair Andrew Cogan, CEO Barry McCabe, SVP, CFO

2 Disclaimer 2 The following information includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding Knoll, Inc. s expected future financial position, results of operations, cash flows, business strategy, budgets, projected costs, capital expenditures, products, competitive positions, growth opportunities, plans, goals and objectives of management for future operations, as well as statements that include words such as "anticipate," "if," "believe," "plan," "estimate," "expect," "intend," "may," "could," "should," "will," and other similar expressions are forward-looking statements. Such forward-looking statements are inherently uncertain, and readers must recognize that actual results may differ materially from the expectations of Knoll management. Knoll does not undertake a duty to update such forward-looking statements. Factors that may cause actual results to differ materially from those in the forward-looking statements include corporate spending and service-sector employment, price competition, acceptance of Knoll s new products, the pricing and availability of raw material and components, foreign exchange pressures, transportation costs, demand for high quality, well designed office furniture solutions, changes in the competitive marketplace, changes in the trends in the market for office furniture and other risks identified in Knoll s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Many of these factors are outside of Knoll s control.

3 Legacy of Design Innovation A product portfolio by prominent, internationally acknowledged architects and designers Recognized as a design leader with a premier brand identity Products noted for their high quality and sophisticated aesthetics Ludwig Mies van der Rohe Frank Gehry Eero Saarinen Formway Design Harry Bertoia Shelton Mindel 3

4 We Were One of the First Furniture Manufacturers to Demonstrate Leadership in Sustainability Environmental commitment that is well over two decades old One of the first furniture companies to achieve GREENGUARD certification across all products First company to LEED train and certify all of our A&D specialists First furniture company to join the Chicago Climate Exchange (CCX) $1 Million Greenhouse Gas Reduction Initiative in conjunction with the Clinton Global Initiative (CGI) Walk the talk Gold LEED for Lubin Facility LEED Certification for San Francisco and Philadelphia Showrooms 4

5 Premier Brand Identity Knoll Targets the Middle to Upper End of the Market Where Image, Performance and Customer Service are Key Differentiating Factors North America Market Share¹ High BPS BPS 8.5% 14.1% 18.8% 18.8% Price Range Mid-High Mid-Low Budget (1) Based on LTM June 30, 2007 North America or U.S. publicly reported segments as a percent of LTM June 30, 2007 BIFMA U.S. industry shipments. 5

6 Industry-leading Margins Throughout Business Cycle 25% Knoll Herman Miller Steelcase 20% 15% 13.3% (1) Operating Margin 10% 5% 10.1% 4.4% 0% (5)% MOS 2007 Source: Knoll financials and public financials (1) Operating margins excludes certain non-recurring costs. See reconciliation of Knoll operating profit to the comparable GAAP measure for the periods 2004 through the 9 months of 2007 on page 25. No adjustments were made to operating margins for the periods prior to

7 Our Growth from our 2004 IPO through 2007 $1.60 $1.40 $ % Adjusted EPS Growth (1) $1.17 $1.41 (2) $180.0 $160.0 $ % LTM EBITDA Growth (3) $142.1 $161.3 $1.00 $120.0 $114.6 $0.80 $0.60 $0.66 $0.80 $100.0 $80.0 $60.0 $87.7 $0.40 $40.0 $0.20 $20.0 $ $- 12/31/ /31/ /31/2006 9/30/2007 (1) Adjusted EPS exclude certain non-recurring costs. For a reconciliation of these non-gaap measures to the comparable GAAP measure, see page 24. (2) Represents $1.02 EPS for the first three quarters of 2007 and assumes $0.37 EPS for the fourth, which is the midpoint of our EPS guidance for the fourth quarter of Included in the $1.41 adjusted EPS is a reconciling item of $0.02 for the write-off of deferred financing fees. See reconciliation on page 24. (3) For details of the LTM EBITDA calculation, see Leverage Ratio on page % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Operating Margins Increased 320 Basis Points 11.5% 10.1% 11.9% 13.3% 0.0% 12/31/ /31/ /31/2006 9/30/2007 7

8 Strong Return Metrics 25.0% 20.0% 15.0% 19.4% Return on Invested Capital (1) 15.7% 12.8% 11.6% 21.1% 23.2% 20.0% 18.0% 16.0% 14.0% After-tax Return on Average Assets (2) (adjusted for one-time expenses and excluding intangibles) 15.8% 15.8% 17.5% 10.0% 5.0% 12.0% 10.0% 8.0% 6.0% 10.7% 8.1% 10.5% 0.0% LTM 9/30/07 4.0% 2.0% 0.0% LTM 9/30/07 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 7.7% After-tax Return on Net Sales (3) (adjusted for one-time expenses) 5.2% 4.5% 5.2% 6.1% 6.6% (1) ROIC is defined as Net Operating Profits after Taxes (net income plus nonrecurring costs, interest expense and taxes paid on investment and interest income less the sum of investment and interest income and the tax shield from interest expense (effective tax rate * interest expense)) divided by the sum of debt plus total equity. See a reconciliation of ROIC on page 26. (2) After tax return on average assets is defined as net income excluding nonrecurring costs divided by average assets, excluding intangibles. For details of the non-recurring costs see the ROIC reconciliation on page % 1.0% 0.0% LTM 9/30/07 (3) After tax return on net sales is defined as net income excluding non-recurring costs divided by net sales. For details of the non-recurring costs see the ROIC reconciliation on page 26. 8

9 Share and Leverage Improvement 90,000 80,000 70,000 Free Cash Flow and Common Stock Repurchased ($ thousands) (1) FREE CASH FLOW $77,551 $69, Leverage Ratio(2) ,000 50,000 40,000 $35,552 $48, , ,000 10,000 # of shares 0 purchased # of shares purchased LTM 9/30/07 13, ,408 6,048,746 1,689,131 (1) Free Cash Flow is defined as Net Income plus depreciation and amortization and non-cash stock compensation less capital expenditures. For details of the free cash flow calculation, see page 26. (2) For details of the leverage ratio calculation, see page Debt Levels $316 $332 $324 $375 $350 $357 $329 Diluted Weighted Average Shares (millions) /05 3/06 6/06 9/06 12/06 Q107 Q207 Q307

10 Blue-chip Customer Base Continues Buying Over $7 Billion of Installed Base Provides Platform for Recurring and Add-on Sales 10

11 The Fundamentals Are in Place for Continued Growth, Although Rapidly Rising Rents and Limited Office Space Supply in Certain Key Markets Appears to be Dampening Demand Thousands of Employees 88,000 86,000 84,000 82,000 Net Absorption (millions sq. ft.) (10) (20) (30) (40) % 17.5% 15.0% 12.5% 10.0% 7.5% % Vacancy 80, Q Q Q Q Q Q Q Q1 Net Absorption Vacancy % Value of Nonresidential Construction % Change from Prior Year 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% Source: U.S. Bureau of Labor Statistics J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J Change In Previous Quarter Commercial Rent Source: Grubb & Ellis Source: U.S. Census Bureau Source: Reis Inc.

12 08(F) While Industry Growth Has Slowed, the Long-term Outlook Remains Positive 14, % 8.5% 17.1% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 7.2% 4.8% 6.3% 13.0% 7.3% 14.2% 10.0% 7.6% 6.8% 5.8% 5.3% 4.6% 12,000 10,000 8,000 6,000 4, % 2.0% 1.6% 2, % 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 0 Source: BIFMA (F) x YOY SHIPMENTS GROWTH $3.33 $3.75 $4.15 $4.56 $5.74 $6.41 $6.68 $7.33 $7.45 $7.83 $7.86 $7.71 $8.16 $8.85 $9.44 $10.04 $11.46 $12.35 $10.98 $8.90 $8.51 $8.94 Shipments - millions of US$ 8.5% 12.6% 10.7% 9.8% 25.9% 5.1% 9.8% 0.4%-8.1% 1.7% 11.8% 4.1% 6.7% 5.8% 6.6% 8.5% 6.4% 14.1% 7.8% -0.9% -17.4% 12.7% 7.4% -19.0% -4.3% 5.1% 5.5% 2.3% $10.1 $10.8 $7.23 $12.24 $13.28 $11.4 $11.7

13 Our Goal: Target Market Share Opportunity in Under-penetrated Categories Seating, storage, tables, and casegoods represent 60% of BIFMA shipments. Those same categories represent only 21% of Knoll North America sales. Category Share (%) % $3,084 18% $552 27% $2,959 Category Share of Total Industry Shipments¹ Knoll Category Share 22% $2,382 11% 5 4% 3% $1,164 0 $114 $81 1% Office Systems Seating Storage Casegoods $135m $125m $100m $75m 1. Percent of LTM 6/30/07 industry shipments of $11.1 billion, as reported by BIFMA 2. As of LTM 6/30/07 13

14 Implementing a Geographic Segmentation of the (1) Business to Raise Visibility and Focus on $15B International Opportunity Today 98% of Our Sales Come from Less Than 50% of the Global Market Knoll International 0.15% $15.0B (1) $10.9B (1) Knoll North America 8.41% $6.4B (1) ¹ Estimate 14 Knoll Europe 1.05% Market Opportunity North America Market Opportunity Knoll Europe Market Opportunity Knoll International

15 We Are Building a Design-driven Portfolio Less Dependent on NA Office Cycles Significantly Decreased Exposure to Office Systems Category % % Sales YTD December 31, 2000 % Sales YTD September 30, 2007 Strengthened and Expanded Complimentary Seating, Storage, and Casegood Offerings Aggressively Increased Specialty Sales, Distribution, and Marketing Efforts Category Share (%) % 19% 18% Acquired Edelman Leather our 5 th Specialty Business 10 12% 13% 7% 9% 0 Office Systems Complimentary Specialty Europe/International 15

16 We Had a Very Strong NeoCon Dividends Horizon The Graham Collection The Lovegrove Collection KnollTextiles 60 th Anniversary 16

17 Financial Performance

18 Contribution Margin Shows Good Progress KNOLL, INC. 3RD QUARTER & YTD 3RD QUARTER SEPTEMBER YEAR TO DATE VARIANCE VARIANCE SALES 253, ,609 10, , ,185 64,813 % YEAR OVER YEAR GROWTH 4.3% 16.4% 9.1% 21.0% COST OF GOODS SOLD 165, ,389 3, , ,227 28,605 GROSS MARGIN 88,249 81,220 7, , ,958 36, % 33.3% 1.4 PTS 34.4% 32.4% 2.0 PTS CONTRIBUTION MARGIN 67.9% 55.9% OPERATING EXPENSES 53,967 51,062 2, , ,627 14, % 21.0% 0.3 PTS 21.1% 21.0% 0.1 PTS ADJ OPERATING PROFIT (1) 34,282 31,041 3, ,697 82,743 19, % 12.7% 0.8PTS 13.3% 11.7% 1.6 PTS CONTRIBUTION MARGIN 31.3% 30.8% ADJ EARNINGS PER SHARE (1) $0.37 $0.33 $0.04 $1.05 $0.81 $0.24 % GROWTH 12.1% 57.1% 29.6% 44.6% (1) Adjusted operating profit and adjusted EPS exclude certain non-recurring costs. For a reconciliation of these non-gaap measures to the comparable GAAP measure, see page

19 We Remain Committed to Our Mid-term Goal of Achieving 35% Gross Margins by the End of 2008 POSITIVES Pricing Realizing price and stabilizing discount NEGATIVES Foreign Exchange Canadian dollar strengthening Global Sourcing Expanding opportunities Factory Initiatives Absorption and efficiencies improving 35.0% 34.5% 34.0% 33.5% 34.1% 33.7% 34.1% 34.3% 34.7% Inflation Moderating 33.0% 32.5% 32.5% 32.0% 31.5% % Q107 Q207 GM as a % of Sales Q307

20 And to Our Goal of Achieving 15% Operating Margins by the End of % 14.0% 12.0% 10.0% 10.7% 11.6% 12.1% 12.4% 13.8% 13.5% Continue Leveraging Our SG&A Selectively invest in our support infrastructure 8.0% Where possible, keep costs variable 6.0% 4.0% Keep SG&A at 20-21% of sales 2.0% 0.0% Q107 Q207 Q307 (1) Adjusted Operating Margins as a % of Sales (1) Adjusted operating margins exclude certain non-recurring costs. For a reconciliation of adjusted operating profit to the comparable GAAP measure, see page

21 Our Margin Performance is Approaching its Historical Average 25% 19% 17% 18% 19% 20% 20% 16% Avg.: 15% 13% 12% 10% 12% 12% 12% 14% 14% 6% 5% 0% Q107 Q207 Q307 Adjusted Operating Margins (1) (1) Adjusted Operating margins exclude certain non-recurring costs. For a reconciliation of adjusted operating profit to the comparable GAAP measure for the periods 2004 through the Q307 see page 25. No adjustments were made to operating margins for the periods prior to

22 Allocation of Free Cash Flow Invest in Focused Initiatives to Drive Top-line Growth and Improve Margins Complementary acquisitions New and enhanced products Look at factory machinery and equipment for efficiencies and cost improvements Pay Dividends to Shareholders Share Repurchase (7.5 million shares since December 2004) Target x Debt / EBITDA 22

23 Goals Continue to grow Knoll, Inc. revenue faster than BIFMA Generate minimum of 35% gross profit and 15% operating margin Continue to diversify Knoll s product and geographic mix Reinforce Knoll s brand promise: industry leadership in providing well designed, high quality, modernist furnishings Out-sized Value Creation Free Cash to Enhance Shareholder Value 23

24 Reconciliation of Adjusted EPS 2004 through Earnings per Share - Diluted $ 0.55 $ 0.68 $ 1.14 $ 1.39 (1) Add back: Write off of deferred financing fees Public offering expense Restructuring charges Taxes related to repatriation of foreign earnings Adjusted Earnings per Share Diluted $ 0.66 $ 0.80 $ 1.17 $ 1.41 (1) (1) Represents $1.02 EPS for the first three quarters of 2007 and assumes $0.37 EPS for the fourth quarter of 2007, which is the midpoint of our EPS guidance for the fourth quarter of

25 Reconciliation of Non-GAAP Results Nine Months Ended 9/30/07 Nine Months Ended 9/30/06 FY 2006 FY 2005 FY 2004 Operating Profit ($mm) $ $ 81.3 $ $ 92.8 $ 71.3 Add back: Restructuring charges Public offering expenses (1) 1.5 (1) Adjusted Operating Profit $ $ 82.8 $ $ 93.6 $ 75.7 Net Sales $ $ $ $ $ Operating Margin 13.3% 11.7% 12.1% 11.6% 10.7% Earnings per Share (Diluted) $ 1.03 $ 0.78 $ 1.14 $ 0.68 $ 0.55 Add back: Restructuring charges Public offering expenses Write-off of deferred financing fees Taxes related to repatriation of foreign earnings Adjusted Earnings per Share $ 1.05 $ 0.81 $ 1.17 $ 0.80 $ 0.66 Three Months Ended 9/30/07 Three Months Ended 9/30/06 Three Months Ended 6/30/07 Three Months Ended 6/30/06 Three Months Ended 3/31/07 Three Months Ended 3/31/06 Operating Profit ($mm) $ 34.3 $ 30.2 $ 37.6 $ 29.2 $ 30.8 $ 21.9 Add back: Public offering expenses (1) (1) (1) Adjusted Operating Profit $ 34.3 $ 31.0 $ 37.6 $ 29.4 $ 30.8 $ 22.3 Earnings per Share (Diluted) $ 0.37 $ 0.31 $ 0.35 $ 0.28 $ 0.30 $ 0.19 Add back: Public offering expenses (1) (1) Write-off of deferred financing fees Adjusted Earnings per Share $ 0.37 $ 0.33 $ 0.37 $ 0.28 $ 0.30 $ 0.20 (1) - Includes costs associated with our two secondary stock offerings, the buyback of 3.9mm shares from Warburg Pincus and fees incurred in connection with the amendment of our credit facility 25

26 Return on Invested Capital LTM 9/30/07 (in thousands) Net Income $ 59,722 $ 36,349 $ 26,744 $ 35,909 $ 58,633 $ 68,744 Add: Non-recurring costs (1) - - 5,312 6,468 1,393 1,195 Interest expense 26,541 20,229 19,452 23,684 23,717 25,522 Taxes paid on investment/interest income Less: Investment/interest income Tax shield from interest expense (10,749) (8,719) (8,267) (10,350) (8,918) (9,596) Net Operating Profits after Tax $ 75,514 $ 47,859 $ 43,241 $ 55,711 $ 74,825 $ 85,865 Debt $ 452,042 $ 380,871 $ 392,858 $ 316,038 $ 350,316 $ 308,533 Equity (63,123) (8,119) (21,345) 37,716 4,384 61,723 Invested Capital $ 388,919 $ 372,752 $ 371,513 $ 353,754 $ 354,700 $ 370,256 ROIC 19.4% 12.8% 11.6% 15.7% 21.1% 23.2% Leverage Ratio 12/31/04 12/31/05 6/30/06 9/30/06 12/31/06 6/30/07 9/30/07 Debt Levels $ $ $ $ $ $ $ LTM Net Income ($mm) $ 26.7 $ 35.9 $ 42.8 $ 50.2 $ 58.7 $ 65.9 $ 68.7 LTM Adjustments Interest Taxes Depreciation and Amortization Non-cash items(2) LTM EBITDA $ 87.7 $ $ $ $ $ $ Leverage Ratio Free Cash Flow LTM 9/30/07 (in thousands) Net Income $ 26,744 $ 35,909 $ 58,633 $ 68,744 Add: Depreciation 20,080 18,721 19,194 19,277 Amortization 1, ,130 Stock compensation expense 167 4,052 4,504 5,247 Less: Capital expenditures (13,131) (10,744) (13,362) (16,847) (1) Non-recurring costs include public offering expenses, write-off of deferred financing fees, restructuring charges and additional taxes from the repatriation of foreign earnings (2) Non cash items include stock compensation expense, unrealized gains/losses on derivatives and the write-off of deferred financing fees Free Cash Flow $ 35,552 $ 48,564 $ 69,632 $ 77,551 26

27 Thank You! 27