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Knoll's (KNL) CEO Andrew Cogan on Q1 2016 Results - Earnings Call Transcript

Knoll, Inc. (NYSE:KNL)

Q1 2016 Earnings Conference Call

April 22, 2016 10:00 am ET

Executives

Andrew B. Cogan - CEO

Craig B. Spray - SVP and CFO

Analysts

Matthew S. McCall - BB&T Capital Markets

Budd Bugatch - Raymond James

Kathryn Thompson - Thompson Research Group

Operator

Good morning everyone and welcome to the Knoll, Inc. First Quarter 2016 Conference Call. This call is being recorded. This call is also being Webcast. Presentation slides accompany the Webcast.

In addition, this call may offer statements that are forward-looking. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control.

Actual results may differ materially from the 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.

The call today will also include references to non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP financial measures are included in the presentation slides that will accompany the Webcast.

Now let me turn the call over to Andrew Cogan, the CEO of Knoll. Thank you.

Andrew B. Cogan

Good morning, everyone. We are pleased to be reporting a strong start to 2016 today. Before we get into the results in detail, I thought reiterating the broader context of our strategy would be helpful. Our pursuit of building a constellation of high-design high-margin businesses that leverage our historic relationships with architects, designers and decorators has resulted in the creation of a singular and distinct entity.

Clients around the world use our designs to create inspired workplaces, education, hospitality and residential settings versus those to whom someone will lump us, North America Office furniture represents a smaller part of our total sales, our European business is highly profitable and split evenly between office and residential customers and distributors, our residential strategy doesn't involve building out a separate direct-to-consumer retail business and we don't have any exposure to mass supply driven channels.

Simply put, we are playing a different game than others and are executing that game plan well. We believe over the long run, our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. And importantly, our brand DNA and ownership of the authentic design position in the markets we compete gives us an emotional resonance with buyers and specifiers, which few others in any industry enjoy.

We committed three years ago to put in place a strategy to improve our profitability and diversify our business. Our first quarter 2016 results continue to demonstrate the benefits of this strategy. In the context of a slowing market, we delivered 6.8% top line growth, well in excess of the 1% growth reported by BIFMA.

Gross margins expanded by over 200 basis points from 35.8% to 37.9%. Operating profits increased from $22.3 million to $31.8 million and operating margins expanded by 280 basis points from 8.4% to a best-in-class 11.2%, the strongest first quarter operating margin we've reported in more than seven years.

The bulk of our first quarter improvement this year came from our North America Office business. In our Office segment, growth of just over 10% combined with significant productivity performance in our plants plus the leverage of greater volume and favorable commodity costs resulted in an incremental contribution margin north of 50%. This helped push operating margins up over 100% from 4.3% to 9%, close to our goal of double-digit margins for this key segment.