Kimball International, Inc.

Good morning, ladies and gentlemen. My name is Valerie, and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Second Quarter Fiscal Year 2021 Honors Conference Call. As a prior conference call, today's call, February 4th, 2021, will be recorded and made between forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results can differ maturely from the forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball International Forum campaign. During today's call, the presenters will be making references to an earnings-wise deck presentation that is available on the Investor Relations section of Kimball International's website. On today's call are Christy Juster, CEO of Kimball International, and T.J. Wolfe, Executive Vice President and Chief Financial Officer. I will now turn the call over to Christy Juster. Ms. Juster, you may begin.

Thank you, Valerie, and welcome to today's conference call to discuss our second quarter results and business outlook. In reviewing our results for the quarter, there are four key takeaways on slide three that I'd like to share. First, the Kimbell International Organization continues to demonstrate resilience within a difficult operating environment. The combination of our focus and expertise in health and secondary markets for workplace is proving our ability to gain share and operate in end markets that are emerging faster than the overall industry. Second, we closed on the Poppin acquisition on December 9th and are moving quickly on our stage one priorities to capture revenue synergies. Third, we made meaningful progress on our Connect 2.0 strategy in the quarter. investing in areas such as health and work from home, meeting our facility optimization plan targets, and setting up a step change in our e-business capability and strategy with the closing of Poppin. Fourth, based on backlog and current order rates, we expect third quarter revenues to be similar to second quarter levels. But we are seeing increased bidding activity around the new forming workplace. It is too early to know when this activity will translate into firm orders, but we are encouraged by the possibilities we see on the horizon. There were some headwinds that impacted us in the second quarter, namely the $6 million in hospitality shipments that were delayed due to port congestion, margin pressure we experienced due to spiking freight costs, and the inflation impact on raw materials. On balance, however, second quarter business trends unfolded in line with our expectations. Now, let's talk about Kimball International's target end markets and their different stages on the path to recovery, beginning with the health end market on slide four. As we expected, this market is ramping out of COVID more quickly than our other end markets, reflecting a more rapid return of health administrative workers expansion in areas such as academic medical centers, behavior wellness, specialty hospitals, and increased public health funding. We are pleased to announce the official launch of our new health brand, Interwoven. This is a dedicated team with extensive expertise and understanding of the health industry and the home for our specialized clinical products. This team will have access to the full Kimball and National portfolios allowing us to offer unparalleled full facility of solutions. The initial results have been encouraging. In the second quarter, health sales were up 31% sequentially and accounted for just under 20% of total company-wide sales. The double-digit sequential growth in order rates of 23% is a strong sign of momentum in the business, and we have just gotten started. Six new clinical product platforms will be launching in the coming months. Our focus on the top 28 health systems and federal health environments, such as the Veterans Administration, has resulted in both large project awards and sustaining program expansion. And we are developing significant partnerships with the design community through research and innovative solutions. Health represents an increasingly important growth market for Kimball International, and we look forward to sharing more details of our long-term growth potential as we see the market forming post-COVID. Slide five provides an update on our hospitality end market, which we expect will be the last of our markets to recover from the COVID impact. In the second quarter, hospitality accounted for 16% of the total sales. down from 22% in the first quarter of this year, reflecting a significant sequential revenue decline. Our team has been highly focused on partnering with our customers to both navigate their fluid timelines on projects and the disruption of ocean freight. We expect to see much of the same challenging dynamics in Q3. At the same time, we are starting to see the opportunity funnel develop for leisure travel and custom product design as lower occupancy periods provide a productive time to renovate. As we look longer term, we are making progress on the development of our new Kimbell Hospitality living sub-brand and product portfolio for senior living and luxury student housing. We believe our unique custom product development and program management capabilities and direct selling expertise can be expanded to reach a broader market. Now let's move to a review of workplace, which you can find on slide six. The resurgence of the virus has extended its impact on workplace furniture spend. But we believe we are making the right choices to emerge as a stronger competitor in the post-COVID environment, and we are seeing some positive signs. While second quarter sales to the workplace and market were down sequentially, order rates were up from Q1 levels, showing an uptick in the commercial, finance, and government subsectors. Also, it is important to note that Kimball International has a strong presence and name recognition in secondary markets. Our own data indicates that these geographies are rebounding more quickly than the larger metropolitan areas. Sequential order rates of combined workplace and health reflect a 20% improvement in secondary markets compared to a 3% recovery rate in larger markets. This is consistent with many bodies of research highlighting the growing appeal of secondary markets due to both the business climate and people's desire for more space, comfort, and less density. As we're speaking with our clients, the majority are engaged in long-term planning, critically analyzing their businesses and contemplating new guidelines, structures, and real estate strategies. The workplace model is clearly changing to a hybrid model comprised of office, work from home, and satellite office environments. Employers will be looking to provide a seamless work experience for every location. Headquarters, satellite, co-working, health facilities, and work from home. Our deep knowledge in residential design, our multi-brand portfolio, and new omni-channel capabilities will enable us to provide solutions for the broader new workplace. The workplace team continues to focus and deliver on both new products for the changing office environment and a new expanded assortment of the Etcetera brand to address work from home. In the second quarter, 27% of our sales were delivered through new products, even under the current market conditions. This work and our continued investment in research and design will be critical to setting us up for success as the market returns. Meeting the employee where they want to work is exciting new thinking for Kimball International. Please move to slide seven. The acquisition of Poppin is an important move to set up Kimball International to address the broad new forming work from home and work from office environments. Our accelerated growth plan is designed to support both the opportunities for growth within the Poppin brand and work on the opportunities to drive synergies and opportunities across Kimball International. You may recall we identified several stage one priorities when we announced the Poppin acquisition. The first is to scale Poppin's marketing playbook into secondary markets, and these activities are fully underway. In addition to Kimball International's long-standing presence and relationships in these markets, We believe that these are the geographies where the Poppin' brand is the perfect solution for our simplified customer experience, in-stock assortment, and all at approachable price points. The site selection process is underway for showrooms and our lead generation plans are being built for each specific market. We look forward to announcing our first set of new secondary locations as we confirm the details. The second priority is to accelerate our work-from-home business and corporate partnerships for Poppin and our Etc. brand. While our priority is to reach the growing work-from-home demand by expanding relationships with corporate clients, long-term we plan to build a meaningful direct-to-consumer work-from-home business as well as to utilize a limited number of resellers where we see good traction. Our third priority is to offer Poppin products through Kimball International's existing distribution network. We already have put in place an interim program that gives our dealer network access to Poppin to facilitate immediate sales. The distribution plan for Poppin Pro and Poppin Pods will be completed this quarter with full scale market launches in the first quarter of our fiscal 2022. I'm pleased to report that we've already seen substantial interest in Poppin products from our dealers in the A&D community. We continue to validate the interest in the unique application of the privacy pod category in the new workplace. Slide 8 provides a look at what we see on the horizon with respect to additional revenue and expense synergies related to Poppins. Toppen comes to us with expertise in digital marketing, dropship capabilities, and industrial design. Over time, we believe these capabilities and experiences can be leveraged across the broader Kimbell International and markets. We also have begun connecting our experts in sourcing, manufacturing, and logistics, and are very motivated to share best practices and synergy projects. I am very pleased to formally welcome the Poppin team to Kimball International. We are confident that the Poppin business, the Poppin leadership team, and Kimball International make a great combination that will accelerate growth and result in significant market share gain over time. Now I'll turn the call over to our CFOs, T.J. Wolf, for a financial review of our second quarter results. T.J.?

Thanks, Christy, and good afternoon, everyone. I'll discuss Kimball International's financial performance during the second quarter of fiscal 2021 and our forward expectations. Let's turn to slide nine, which shows the key financial highlights that were also noted in the release. Net sales decreased 29% year over year to $136.2 million, primarily reflecting the ongoing impact of the COVID-19 health crisis. Sales during the quarter were also reduced by approximately 6 million due to poor congestion delays that impacted shipments in our hospitality end market, as Christy mentioned earlier. Sequentially, our net sales declined 8%. I'll discuss sequential revenue and order dynamics by end market in a moment. As Christy mentioned, sales of new products in the second quarter for workplace and health were both 27% of the total sales of each respective end market, compared to our internal target of 25%. This reflects the success we are having developing innovative products that fit the needs of the new forming workplace and health environments. New products are defined as those that were introduced in the last three years. After eight successive quarters of year-over-year gross margin improvement, our gross margin declined slightly to 33.4% from 34% in the year-ago quarter, mainly due to the negative margin impact of a lower revenue base along with higher domestic and ocean freight costs that reduced our gross margin by 190 basis points. Transformation plan savings related to our operational excellence program were 4.1 million and helped to mitigate the margin pressure. As many of you are aware, freight volumes are at unprecedented levels outpacing industry capacity. We believe the market will remain tight for the remainder of the fiscal year and have taken selective price increases in our workplace and health product lines effective March 1st, 2021, to help offset this impact. Our freight costs in the second quarter were approximately 10% of net sales. Sequentially, our gross margin declined 200 basis points for the same reasons. Our transformation program yielded an additional $2 million in selling and administrative savings and helped to reduce our selling and administrative expense by $3.8 million to $46 million. However, as a percentage of revenue, selling and administrative expense amounted to 33.7%, compared to 25.9% in the prior year. Excluding non-GAAP items, primarily acquisition-related charges, adjusted selling and administrative costs amounted to $40.7 million, or 29.9% of sales, compared to $48.8 million, or 25.4% in the prior year. For reference, included in those non-GAAP items is $3.4 million of pre-tax costs in the second quarter related to completing the acquisition that will not repeat in the third quarter. Our total transformation savings in the second quarter were 6.1 million. We remain on track to achieve 20 million in transformational program savings by year end. Our net loss was 0.8 million or negative two cents per diluted share, including 4.1 million or 11 cents in after tax special charges, which are primarily acquisition and restructuring related. This compared to net income of 11 million and earnings of 30 cents per diluted share in the second quarter of fiscal 2020. Excluding acquisition and restructuring-related charges, EPS was 9 cents compared to 33 cents in the year-ago quarter. Adjusted EBITDA decreased 56% to 9.1 million in the second quarter of fiscal 2021. Adjusted EBITDA margin declined 420 basis points year-over-year to 6.7% due to negative operating leverage given lower volumes. Our effective tax rate for the second quarter was a negative tax rate of 34.1%, as non-deductible costs related to the pop-in acquisition and non-deductible compensation more than offset the tax benefit from the small pre-tax loss during the quarter. We expect our effective tax rate for the full year fiscal 2021 will be approximately 30% to 32%. Although we reported a year-over-year revenue decline, we had sequential improvement in one of our key end markets as shown on slide 10. Health sales increased 31% sequentially and accounted for just under 20% of our total revenue this quarter. While workplace revenues, which represented 64% of our total sales, declined 8% sequentially, within workplace, we're pleased with sequential improvement in our commercial vertical revenue from Q1 2021. Hospitality saw a 32% sequential revenue decline and represented 16% of sales as we see a continued impact from COVID. Slide 11 shows positive sequential momentum in new orders in our two largest end markets. Orders in health grew 23%, while workplace orders increased 10% sequentially. Hospitality orders declined 46% from the first quarter of 2021, partially due to the large order we received in the first quarter. Moving to slide 12, on the last earnings call, we announced our acquisition of Poppin, and we closed on December 9th. For the period that we have owned Poppin, the company contributed $2.7 million to net sales. Similar to other fast-growing industry disruptors, Poppin has made aggressive investments in channel development, resulting in negative EBITDA. However, we still expect Poppin to be EBITDA positive by the second half of fiscal 2022. As a result of this acquisition, Kimball will amortize $3.4 million of intangibles over the remainder of fiscal year 2021. There will be additional pop in historical and pro forma financials in the 8K, which we will file later this month. Now let me switch to the balance sheet and cash flows on slide 13. During the second quarter, we consumed 2.4 million of cash from operations compared to 2.3 million generated in operating cash flow in the comparable period of fiscal 2020. Capital expenditures were 5 million compared to 6.2 million in the year-ago second quarter. The majority of our capital spend was directed toward technology investments and product specification tools to simplify the ordering process and manufacturing upgrades to increase automation. We expect our full-year CapEx to be approximately $25 million. This quarter, we returned $3.3 million of capital to shareholders in the form of dividends. Additionally, we reinstated our share buyback program and repurchased 62,000 shares for $750,000 in the second quarter. In January, we repurchased an additional $750,000 for a total of 1.5 million since we reinstated our share repurchase program in November. We will continue to repurchase shares opportunistically for the remainder of fiscal year 21. We ended the quarter with 41.2 million in cash and cash equivalents. Following the acquisition closing, our net debt to EBITDA ratio was 0.7 times, including the liability for the earn-out payments to Poppin'. Our backlog at the end of December was 144.9 million, up 3.9% sequentially. We expect 80 million of this backlog will be shifted in the third quarter of fiscal 2021. Based on this, we expect third quarter organic revenue to be at similar to second quarter levels. We also expect freight costs will continue to negatively impact gross margins in the short term, resulting in a temporary sequential decline in the third quarter. As we start to see the benefit of our price increases in the fourth quarter, along with more clarity on the new forming workplace, we expect a sequential increase in gross margin in the fourth quarter. I will now turn the call back to Christy for her closing remarks. Christy?