Kimball International, Inc.

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to the Kimball International Fourth Quarter and Full Fiscal 2021 Earnings Conference Call. As with prior conference calls, today's call, August 4, 2021, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the forward-looking statements, risk factors, that may influence the outcome of forward-looking statements can be seen in the Kimball International Form 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 Justice, CEO of Kimball International, and T.J. Wolf, Executive Vice President and Chief Financial Officer. I would now like to turn today's call over to Christy Jester. Ms. Jester, you may begin.

Thank you, everyone, for joining us to review our fourth quarter and full year 2021 results and discuss our business outlook. I am pleased to report that we ended a challenging year on a high note. Robust growth and fourth quarter orders from our workplace and health and markets indicate that these markets are in recovery. and that Kimball International is positioned well to benefit from the industry upturn. Let me begin by covering the key takeaways from our fourth quarter performance on slide three. First, this was the first quarter since the onset of the pandemic that revenues from our workplace and health markets increased year on year. Workplace and health accounted for 80% of our fourth quarter revenues, and their expected double-digit growth in fiscal 2022 will boost these two end markets to at least 85% of our total revenues next year. Second, order rates in our workplace and health markets improved progressively throughout the quarter, and this momentum continued into July. indicating a pickup in the conversion of bidding activity into orders. Our strong year-over-year orders were led by workplace and health day-to-day bookings, as we anticipated. Our leading indicator metrics quoting activity in mock-ups in both workplace and health increased at strong double-digit rates compared to Q3 levels, another indication of better market conditions ahead. We are pleased with the consistent and continued development of orders in both workplace and health. Third, we reported a considerable sequential increase in our gross margin in the fourth quarter. Although not as high as we had initially expected due to continued inflation, TJ will discuss this in more detail later in the call. Fourth, We continue to gain traction in the choices we have made in our Connect 2.0 strategy, both in driving share in our targeted end markets and exceeding our full year cost savings targets by over 10%. And lastly, we are very pleased with our progress on the stage one growth priorities for the Poppin acquisition. In summary, the fourth quarter represented what we believe is an inflection point in our business and confirmed our clear path forward to future growth. Now let's review Kimbell International's end markets and their relative positioning with respect to business recovery. Beginning with health on slide four. As we have shared, this market continues to ramp well post-COVID, reflecting the faster return of health administrative workers, increased public funding, and expansion of areas such as behavioral health, academic medical centers, and specialty hospitals. Fourth quarter sales to the health market increased 16% year-on-year, and orders were up over 60%, all driven by a 53% increase in the number of orders and a 13% increase in order size compared to Q4 last year. Our key differentiators in this market are our dedicated health brand Interwoven, our team of experts with extensive industry knowledge and experience, our focus on connecting with selected 32 health systems, our partnership with the Fed government health sector, such as Veterans Affairs, and our full access to the Kimbell International multi-branded portfolio. We have just concluded a proprietary research project that has given us tremendous insight to the future of healthcare delivery from industry leadership in design, health systems, and doctors and nurses. The results confirm the importance of the physical environment in health. Over 72% said a hospital environment plays a key role in determining patients' health outcomes. 90% said they need a more flexible environment, and 90% also said they were planning construction in the next three years. The trends changing the interior environments range from blending in the benefits of telehealth, the importance of non-clinical areas in behavioral health, the need for our caregivers to work in an efficient and comfortable environment, and of course, the required flexibility of space and adaptability of furniture. The results in Q4 and the future indicators continue to give us confidence in our investment and focus in health. Now let's move to slide five, where we begin our discussion of the workplace market, which represents the largest portion of our business and where we also see firm indications that a market recovery is underway. In the fourth quarter, we experienced a 27% year-over-year increase in workplace orders, led by education and commercial. And we're pleased to report that the 26% sequential increase in workplace orders featured a considerable increase in demand for pop-in products. Our fourth quarter day-to-day business was significantly ahead of last year's fourth quarter. And while large project sales are still lagging to last year, Our return to learning and educational buying season orders ramped up 30% year over year and reached pre-pandemic levels for K through 12 for fiscal year 2021. On slide six, we share our outlook on the future of work, which is very consistent with our beliefs entering last quarter. The new forming hybrid model will be the center of the workplace strategy. And although unique to each company, the principles of attracting and retaining talent through flexibility in a highly collaborative space that is a centralized hub for teamwork, community, and culture are highly consistent. For future success, employers will need to entice staff back to work with wellness in mind. create comfortable human-centric spaces, focus on elements of connectivity and socialization, and offer continued freedom and flexibility for focused work. As return to work continues, employees expect a more hybrid level of furnishings, merging the comfort of home with the durability of the office. Kimball International's portfolio, together with our recently released new product introductions, and our best-in-class lead times support our confidence in our ability to gain share as the industry moves to furnish the blended office with comfort. We believe the office will become more important than ever in attracting, developing, connecting, and motivating talent. Our multi-branded selling approach, our expertise in the ancillary open space product portfolio, and commitment to winning in secondary markets is proving to be an exciting path as the industry ramps. Our broad portfolio of brands provides options for our dealers to provide tailored solutions for their customer, depending on their specific needs and budget requirements. Today, over 85% of our workplace products are in the ancillary category, which are ideally suited for the collaborative atmosphere of the new office environment. And approximately 80 percent of our workplace business is derived from secondary markets, where office reentry is taking place at a faster rate than in larger metropolitan areas. Now to slide eight for an update on Poppin, which we see as a transformational transaction for Kimball International, bringing proven digital and direct expertise into our portfolio. Revenue increased sequentially by 42%, and bookings have increased sequentially by 16%, and that should be recognized in the next two quarters. We are seeing the return of projects with a higher average order value closer to Poppin's pre-pandemic metrics. The Poppin digitally-driven B2B commercial furnishings direct business model is leading out of COVID at a faster rate than our traditional channel. This significant growth has come from core pop and showroom markets in major metro areas, reigniting the model that we recognized at acquisition. As well as our stage one priorities are well underway. We have identified three of the 10 markets for pop and showroom expansion in scope for fiscal 2022. These locations will be in secondary markets leveraging our talent and long-standing relationships. Poppin Pro, reflected on slide 9, is the dealer program we officially launched in late May, providing full access to Poppin's suite of products, new categories, and services to over 1,000 existing Kimball International dealers. Our team has spent the past two months educating the dealer network, and early indicators show strong traction to our internal plan. We are also excited about the two new categories of poppin' pods and poppin' spaces, each providing flexibility and adaptability in an open space environment for individual, private, and group use, all in line with the strategy of where Kimbell International excels in the market is forming. Now moving to the hospitality market's Q4 performance and how we are thinking about for 2022. As we have shared, we expect hospitality will be the last to ramp with no significant sequential sales improvement until end of fiscal 2022. Fourth quarter sales decreased 35% year on year, and we are managing the business very carefully as margins remain constrained due to high freight costs. With longer lead times and a need for large group business travel to return, we will take a similar approach into fiscal 2022, managing our cost, increasing our mix of more profitable custom products, partnering with our customers, and preparing for growth as the market returns. To wrap up, the timing, composition, and speed of the market recovery in workplace and health is tracking broadly in line with our expectations, and we continue to gain confidence Our strategy is setting us up for growth in fiscal 2022 and beyond. Now I will turn the call over to T.J. Wolf, our Chief Financial Officer, to provide a financial review of the fourth quarter, talk about inflationary dynamics we are experiencing, and share our guidance for our fiscal 2022. Thanks, Christy.

Good afternoon, everyone. I'll spend the next few minutes providing more details on our financial performance during the fourth quarter of fiscal 2021 and our expectations for the upcoming quarter and fiscal year 2022. As Kristi noted, we are confident that the recovery is now underway, and while we expect some short-term supply chain and inflation challenges, we are confident that the strategies we have put in place over the past year have set us up for a year of growth in fiscal 2022. Let's start on slide 10 with the key financial highlights. Net sales were $146.2 million in the quarter, including a $12.5 million contribution from Poppin, compared to $156.1 million in the prior year and $138.7 million in the prior quarter, making this the first quarter of sequential organic revenue growth since the onset of the pandemic. I'll talk in more detail about each end market in a moment, but as expected, our growth in the quarter came from workplace and health, which account for approximately 80% of total sales, with hospitality remaining at depressed levels. Gross margin was 30.6%, a 190 basis point sequential improvement from the third quarter. These results were below our expectations, mainly due to an inflation-related increase in our LIFO reserve that reduced our reported gross margin by 150 basis points year over year. This quarter's gross margin was also impacted by higher domestic and ocean freight costs and raw material inflation. The price increase we implemented in March partially offset these negative pressures, and we recently announced a price increase effective in October that should further mitigate the impacts from inflation. I should note that we've begun to experience some modest production constraints driven by supply chain disruptions related to the availability of certain raw materials and shipping containers, which have extended product lead times. We expect these issues to normalize over the next two quarters, having no impact on full-year sales resulting in a revenue shift from first quarter to second quarter. I'll provide more detail on Q1 and full year guidance in a moment. Selling and administrative expenses were up $7.6 million to $49.2 million, reflecting the inclusion of expenses related to Poppin. Excluding amortization from the Poppin acquisition, totaling $1.7 million, as well as SERP adjustments, acquisition-related charges, and CEO transition costs, adjusted selling and administrative costs were $46.5 million, or 31.8% of sales compared to 39.9 million or 25.5% in the prior year. Our total transformation savings in the fourth quarter amounted to 5.5 million, bringing our full year cost savings to 22.3 million ahead of our 20 million projection. A portion of these transformation savings have been reinvested to support our growth strategy as we exit the downturn. We recorded a tax benefit during the quarter compared to a 27.6% tax rate in the year-ago quarter benefiting EPS by approximately $0.09 per share. This was driven by certain permanent book-to-tax differences, including the POPIN earn-out adjustment of $11.6 million, or $8.6 million net of statutory tax, which we recorded during the quarter. The earn-out adjustment represents a change in the fair value estimate of the contingent liability we recorded in conjunction with our acquisition of POPIN, and reflects the impact of a longer-than-anticipated decline in demand due to the pandemic. This liability will continue to be revalued in subsequent quarters based upon financial projections. As we previously stated, we expect Poppin to be EBITDA positive by the end of fiscal year 2022. Fourth quarter 2021 gap net income was $7.4 million, or $0.20 per diluted share, including the after-tax contingent earn-out gain of $8.6 million. This compares to $9.2 million, or $0.25 per diluted share, in the year-ago quarter. Excluding this one-time item, as well as after-tax and tangible amortization expense and restructuring charges totaling $2.9 million, along with acquisition-related costs, among others, adjusted net income was $2.1 million, or $0.06 per diluted share, compared to $10.7 million, or $0.29 per diluted share, in the year-ago quarter. Adjusted EBITDA was $2.9 million, compared to $19.1 million in the fiscal 2020 fourth quarter. Revenue and order trends by end market are provided on slide 12. Net sales in workplace and health, which accounted for approximately 80% of total sales, increased 2% and 16% respectively. Workplace orders increased by 27%, reflecting the pop-in acquisition as well as overall improving business trends. Within workplace, we saw particular strength in the education vertical as well as commercial being driven by a return to the office in many markets. Orders in the government vertical also increased over the same period. Health orders were up 64%, validating our belief that this end market would show the earliest recovery. Hospitality net sales and orders remain at depressed levels, and while we see long-term value in this market, we do not expect significant activity to return until the end of the fiscal year. Our total backlog at the end of the quarter was 141 million, compared to 130 million in the prior quarter, and 151 million at the end of the prior year. Although our total backlog remains below pre-pandemic levels, It is important to note that the combined workplace and health backlog was $99 million at the end of the quarter versus $92 million at the end of Q2 fiscal year 2020, the most recent pre-pandemic quarter. Switching to the balance sheet and cash flows on slide 13, we ended the 2021 fiscal year with total available liquidity of $107.6 million, representing cash and the unused portion of our credit facility. Full-year operating cash flow was $27.3 million compared to $29.8 million a year ago. Full-year capital expenditures were $19.5 million, just slightly below our expectations of $20 million. The majority of our CapEx was invested in manufacturing equipment to drive our operational excellence programs and investments in new technology. In fiscal 2021, we returned $16.8 million of capital to shareholders in the form of dividends and share purchases. We are also taking this opportunity to initiate full-year guidance for fiscal year 2022, reflecting our expectation for a significant business recovery. As you can see on slide 14, we expect year-over-year revenue growth of approximately 15% to 20%, increasing progressively throughout fiscal 2022, with the highest year-on-year comparisons taking place in the second half. Similarly, we believe gross margins will increase sequentially throughout the year with more pronounced gains in the second half. Capital expenditures, net of disposals, will total approximately $25 million, with the increase driven primarily by the construction of our new warehouse in Jasper, offset by the sale of our existing site. Operational excellence projects are expected to result in cost savings of approximately $10 million in fiscal 2022, and we expect our full-year effective tax rate to be in a range of 25% to 27%. We will continue to invest savings back into the business to support accelerating future growth. These investments include the opening of three new pop-in showrooms in fiscal 2022, as Christy mentioned earlier, increasing our marketing and promotional spend, and building our sales force, which will result in higher S&A spend than in fiscal 2021. Based on our backlog of 141 million at the end of the fourth quarter, with approximately 75 million scheduled to ship in the first quarter of fiscal 2022, current order trends, as well as taking into account the production capacity constraints I noted earlier, we expect first quarter fiscal 2022 revenue to grow mid-single digits year over year. Sales in workplace and health end markets are projected to increase high single digits, offset by continued softness and hospitality. First quarter gross margins should be in a range of 31% to 33%, and S&A expenses will increase slightly from the Q4 2021 level. With that, I will turn the call back to Christy for her closing remarks.