Kimball International, Inc.

Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to Kimball International Third Quarter Fiscal Year 2021 Conference Call. As with prior conference calls, today's call, May 4th, 2021, will be recorded and may contain forward-looking statements as defined under the Private Security Litigation Act of 1995. Actual results could differ materially from forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen and the Kimball International Forum 10-K. During today's call, the presenters will be making references to an earnings slide deck presentation that is available on the investor relations section of Kimball International's website. On today's call are Christy Jester, CEO of Kimball International, and T.J. Wolfe, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Christy Jester. Ms. Jester, you may begin.

Thank you everyone for joining us to review our third quarter results and discuss our business outlook. The third quarter was our most challenging period since the pandemic began due to several key factors that I will review and are outlined on slide three. First, this is our seasonally lowest quarter. The contract furniture industry normally experiences a drop off in orders and revenue in our fiscal third quarter. Second, revenues came in below our forecast due to slower than anticipated order rates early in the quarter. And third, as expected, inflationary pressures on our raw materials and continued high logistics costs were most pronounced in the third quarter ahead of our price increases. That said, there were several data points in third quarter supporting our view that the industry is showing signs of recovery. and that Kimball International is well-positioned to capture market share gains as business conditions progress. Most significantly is the cadence of order rates in our workplace and health business units, which account for close to 80 percent of Kimball International's year-to-date revenues. Although order rates in these two end markets declined in the third quarter, they improved progressively throughout the period and into April. indicating a pickup in the conversion of bidding activity into hard orders. At the same time, bidding activity in both workplace and health increased at a strong double-digit rate compared to Q2 levels, another indication of better market conditions ahead. We also expect a considerable sequential recovery in our gross margin in the fourth quarter. as our March price increases begin to take hold and will contribute to a substantial rebound in gross margin compared to the third quarter. Importantly, we continue to execute well on our Connect 2.0 strategy in terms of gaining traction in our targeted end markets, achieving our cost-saving targets, and making meaningful progress on the Stage 1 priorities that that we have identified to drive revenue growth and synergies within our Poppin acquisition. Now let's review Kimball International's end markets and their relative positioning with respect to a business recovery. Beginning with health on slide four, we continue to see this market ramping out of the pandemic more quickly than our other end markets, reflecting a faster return of the health administrative workers increased public funding, and expansion of areas such as behavioral health, academic medical centers, and specialty hospitals. The previously announced official launch of our new health brand, Interwoven, has brought together a dedicated team of professionals with extensive industry knowledge and experience, which is enabling us to engage in key strategies within targeted health organizations, including the expansion of projects services, and geographies. Order rates and health increased progressively throughout the third quarter, and we saw a meaningful pickup in the number of orders and of bidding opportunities compared to Q2. Also in the third quarter, we had significant sales to the Veterans Administration, where the government has announced an $18 billion program to modernize VA hospitals across the country. We have over 600 products qualified for purchase by the VA and consider public health to be an important growth driver for the business. The recently passed stimulus bill allocates substantial funding to support mental health services, behavioral education and training, as well as telehealth and improved veterans care. New product introductions accounted for approximately 21% of our total health sales in the third quarter. The interwoven health specialty products provide solutions for caregiver stations, exam rooms, treatment areas, and patient rooms, all designed around the improvement of the delivery of care. We recently launched EMBRA, a thoughtfully designed family of lounge seating that make people feel more at home and at ease in healthcare spaces. The modular design allows for flexibility and space, all customized with elements of storage, lighting, and power, and provides the warmth of a residential aesthetic. Our progress in health is driven by both an expansion of new product solutions and targeting of the new markets, such as the Veterans Administration. Slide five provides an update on the hospitality market. Third quarter sales in this end market were up sequentially as we worked off our backlog. But orders were down considerably, reflecting the continued impact of the pandemic on travel and leisure activities. Custom products, which carry higher margins, accounted for 50% of our year-to-date hospitality sales, up from 30% one year ago. We expect to build on this trend as we navigate what is likely to be an uneven recovery in hospitality with leisure, business, and international travel each ramping at a different pace. We are closely managing our costs in the business where our fixed costs tend to be much lower, given that we source approximately 75% of our hospitality products. Higher ocean freight costs, however, had a significant impact on Q2 and Q3 results. We expect the margin in Q4 to show improvement from Q3 as we are able to partially offset higher costs with pricing. As we had stated previously, we continue to see increased activity in leisure travel, but anticipate a later ramp for the broader business in international travel. Now let's move to slide six, where we begin our discussion of the workplace market, which represents the largest portion of our business. Although the pandemic impact on workplace furniture spending continues to be felt across the industry, we see early indications that a market recovery is in sight. Our order rates progressively increased through the third quarter, and that trend continued into April. Additionally, the number of new opportunities that we are bidding on increased at a double-digit rate from Q2 levels, as did the dollar value per opportunity. These data points signal that employers are engaged in the development of a new forming work environment, which our research indicates will be comprised of a combination of the office, satellite locations, and work from home. Kimbell International's new omnichannel capabilities put us in a strong position to gain share of the new hybrid workplace. On slide seven, we share our outlook on the future of work, which is the product of our proprietary research. At the center of the new forming hybrid model is the concept that by providing flexibility in where you work, employers will be able to attract, retain, and develop the most qualified and diverse workforce. It is clear the office plays a crucial role as a centralized hub for collaboration, learning, and teamwork, complemented by both work from home and in some areas, satellite locations. The pandemic has taught us that while work can happen anywhere, offices play an important role in corporate culture, creating community, and driving innovation. Moving to slide eight, you can see how well Kimball International is positioned to take advantage of the transitioning workplace market. Approximately 85% of our workplace products are in the ancillary category, which in contrast to systems are ideally suited for the collaborative atmosphere of the new office environment. And approximately 80% of our workplace business is derived from secondary markets, where office reentry is taking place at a faster rate than in larger metropolitan areas. Additionally, these secondary markets like Austin, Nashville, and Miami are gaining an appeal due to their favorable business climate and the attractiveness of a less dense, more comfortable living situation. The Poppin Acquisition. which we completed in mid-December of 2020, is a key driver of our ability to accelerate future market share gains. On slide nine is a summary of the stage one priorities we outlined when we announced the acquisition and have been focused on over the last several months. First, we have identified 10 markets for pop and showroom expansion and plan to open five in fiscal 2022. These locations will be in secondary markets where Kimball International has long-standing relationships. Second, we are expanding our work-from-home portfolio with new product introductions scheduled for late summer and alongside scaling our corporate sponsorship program. Third, the Prop and Pro dealer program will officially launch later this month to over 1,000 existing Kimball International dealers. providing them full access to Poppin's suite of products, new categories, and services. Slide 10 provides a closer look at Poppin Pro, which will provide our Kimbell International Network with an assortment of innovative products that are tailored to meet the needs of the post-pandemic workplace. This program includes two new categories of Poppin Pods and Poppin Spaces. Each provides flexibility and adaptability in an open space environment for individual, private, and group use, all enabling productive teleconferencing, pop-up offices, and meeting spaces. The just-launched pop-in spaces is a simple, flexible system of freestanding rooms that gives our customers the ability to add collaboration, meetings, and private workspaces for their employees without the cost of construction. Dealers in the A&B community are excited about the launch of Poppin Pro because they will gain access to the new product categories, benefit from the simplicity and speed in the transaction, and gain quality products at an affordable price. And all with the unique design, colors, and fun offered by the Poppin brand. To sum up on slide 11, Kimball International supports work and life wherever it happens, with a portfolio of high-quality products and solutions that are well-suited to today's dynamic marketplace. Now I'll turn the call over to T.J. Wolfe, our Chief Financial Officer, for financial review of the third quarter and our guidance for the June quarter. T.J.?

Thanks, Christy, and good afternoon, everyone. I'll provide more details about Kimball International's financial performance in the third quarter of fiscal 2021 and our guidance for the fourth quarter, which includes a significant rebound in gross margin. Let's start on slide 12 with key financial highlights. Net sales increased 2 percent sequentially to 138.7 million, including an 8.9 million contribution from Poppin, but declined 22 percent year on year. I'll discuss sequential revenue order dynamics by end market in a moment. Our gross margin was 28.7%, 530 basis points below last year's third quarter levels, mainly due to logistics and raw material inflation, higher healthcare costs, and the loss of leverage on a lower revenue base. Of the total $6 million of transformation plan savings in the third quarter, $4 million are related to our operational excellence program, helping to mitigate part of these margin pressures. As a reminder, we announced selective price increases in our workplace and health product line that went into effect March 1st to help offset some of these industry-wide inflationary cost pressures. Given the timing of the price increase, we did not see a material benefit in the third quarter, but expect to see a more meaningful contribution during the fourth quarter, which will benefit gross margin with the full realization of pricing in the first quarter of fiscal 2022. Selling and administrative expense declined by $0.7 million to $44.9 million, benefiting from cost management and savings from our transformation program of $2 million. Excluding SERP adjustments, acquisition-related charges, and $1.7 million of amortization from the Poppin acquisition, adjusted selling and administrative costs were $42.6 million, or 30.8% of sales, compared to $47.2 million, or 26.5% in the prior year. Our total transformation savings in the third quarter were $6 million, bringing our year-to-date cost savings to $16.8 million, which puts us firmly on track to achieve $20 million in transformational program savings by fiscal year-end. We plan to reinvest a portion of these savings in the fourth quarter as we increase our SG&A spend in anticipation of a business recovery in fiscal 2022 and the continued expansion of Poppin. Our GAAP net loss was $4.5 million or negative $0.12 per diluted share, including $3.5 million or $0.09 in after-tax special restructuring charges, as well as amortization related to the Poplin acquisition. This compares to net income of $9.5 million and earnings of $0.25 per diluted share in the third quarter of fiscal 2020. Adjusted diluted EPS was negative $0.03 compared to earnings per share of $0.27 in the year-ago quarter. Adjusted EBITDA was $1.9 million. Now let's take a closer look at our sequential revenue performance by end market on slide 13, keeping in mind that the third quarter is our seasonally lowest quarter. Hospitality sales increased 61% sequentially as we worked through our backlog and accounted for 25% of total revenue this quarter. Health sales decreased 9% sequentially and accounted for just under 18% of our total revenue this quarter. Workplace revenues, which represented 57% of our total sales, declined 10% sequentially, and new product introductions for workplace accounted for approximately 27% of total workplace sales in the third quarter. As Christy mentioned earlier, the contract furniture industry normally experiences a seasonal decline in revenue during this reporting quarter. Historically for us, that has been around a 10% decline in revenue from Q2 to Q3 for workplace and health. which is the rate of decline we saw this year. Slide 14 shows positive sequential momentum in new orders in workplace, which increased by 2%, including a sequential improvement in pop-in orders, as pop-in was part of our results for a full quarter in Q3 versus only a few weeks in Q2. Within workplace, we see a particular ramp of order rates in the education vertical. Orders in health declined 4%, and hospitality orders decreased 40% sequentially. It is worth noting that order rates in both the health and workplace end markets improved progressively throughout the quarter, and this positive trend continued into April as well. We saw a 6% increase in total orders for health and workplace in April compared to March. Thus, while order trends in the third quarter were quite soft, there were definite signs of improvement throughout the period and into the first month of the fourth quarter. While it is too early to call this a trend, we are cautiously optimistic that it signals the beginning of an industry recovery. Now let me switch to the balance sheet and cash flows on slide 15. We ended the quarter with $34 million in cash and cash equivalents. In the third quarter, we generated $2.8 million of operating cash flow compared to $4 million in the comparable period of fiscal 2020. Capital expenditures were $5 million compared to $5.6 million in the year-ago third quarter. The majority of our CapEx was in machinery and equipment at our manufacturing facilities and investments in technology. Year-to-date capital expenditures were $13.9 million, and we expect full-year CapEx to be approximately $20 million. This quarter, we returned $4.8 million of capital to shareholders in the form of dividends and share purchases, bringing the year-to-date figure to $12 million. Based on our backlog of $129.6 million at the end of the third quarter and the tenor of our order rates, we expect a sequential increase in workplace and health revenue to be offset by a decline in hospitality revenue due to the lower hospitality backlog entering the quarter, resulting in a fourth quarter revenue to be in line with third quarter levels. We are projecting gross margin to rebound significantly, expanding by approximately 300 basis points from Q3 levels as the March price increase takes hold, offsetting a portion of the continued commodity and freight pressures in Q4. We are planning to selectively increase selling and administrative investments in the fourth quarter around our growth initiatives, including pop-in, return to work, and incremental health resources. We will continue to monitor incoming orders throughout the quarter and adjust planned investments if needed. I will now turn the call back to Christy for her closing remarks. Christy?