Kimball International, Inc.

Good afternoon, ladies and gentlemen. My name is Richard, and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimbell International First Quarter Fiscal 2022 Earnings Conference Call. As with prior conference calls, today's call, November 4th, 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 Juster, Chief Executive Officer of Kimball International, and T.J. Wolfe, Executive Vice President and Chief Financial Officer. I would now like to turn today's call over to Christy Juster. Ms. Chester, you may begin.

Thank you and good afternoon, everyone. We appreciate your interest in Kimball International. I am pleased to report our first quarter business trends were aligned with our expectations and support our guidance for a year of substantial growth for Kimball International in fiscal 2022. There are several key takeaways from this quarter's results that I'd like to highlight. First, as anticipated, we experienced strong customer demand across our workplace and health end markets, with orders up 51%, and together accounting for 86% of our net sales. This performance has more than offset the softness in hospitality, where we have been consistent in our beliefs that the recovery will lag until the end of this year. Second, within the workplace end market, Poppin is ramping very well, with sales up 22% sequentially and orders up 32%. Third, our business differentiators, including our dominance in ancillary products, our positioning in midsize metropolitan markets, and our emphasis on new product development are all contributing to our ability to gain share in our targeted markets. And lastly, We have proven our agility and nimbleness during these difficult business conditions. We are navigating inflationary pressures, supply chain disruptions, and labor availability challenges that are constraining sales and margin in the near term. But we do see light at the end of the tunnel in the second half of this year. Taking a closer look at our business highlights in the first quarter, workplace revenues increased 16% year-on-year led by the commercial and educational verticals. Even more impressive, workplace orders in the first quarter were up 57% compared to last year's level, and this growth was broad-based, representing substantial year-on-year increase across the majority of our verticals. While the spread of the Delta variant has delayed the return to office in some areas, We have not experienced any impact on either order rates or pipeline activity. Clients are actively addressing the changing dynamics of work environments by reconfiguring their spaces to foster collaboration and incorporate flexibility and adaptability. Additionally, our education vertical is benefiting from a boost in federal and state funding through the CARES Act and the America Rescue Plan. which is expected to remain in place until 2024. A key highlight of the first quarter was the recovery of the Poppin business model to near pre-pandemic levels. Based on order trends, Poppin could be back to pre-pandemic annual run rate of approximately 80 million as early as next quarter. Importantly, approximately 60% of Poppin's first quarter revenue was generated through the core B2B channel, which is an indication of its strength in its historical business model and which supports our expectations for the continued robust performance of this business. Our health market was the first to ramp after COVID and continues to be a strong performer for us. Net sales in the first quarter increased 18% year on year and orders were up 30%. reflecting the traction of our interwoven dedicated health brand, our strong positioning in the government health sector where there is substantial federal funding, and our development of relationships with large health systems. We continue to see a shift in the delivery of care due to COVID and further expansion of our growth in specialty centers and outpatient clinics. While there have been construction postponements due to the shortage of labor and materials, All indications are that the important structural trends will continue to accelerate and underscore the long-term growth potential of this market, along with the need for caregivers and patients alike to be surrounded by efficient, comfortable, and adaptable furniture. We are also pleased to share at last week's Healthcare Design Show, Kimball International was selected as Women in Healthcare's recipient of the organization's award. recognized for promoting an environment where each employee is valued, respected, and treated with dignity alongside an intentional focus on increasing diversity of leadership. Just a few words on our hospitality market, which was especially hard hit by the pandemic. While orders received in the first quarter were below last year's first quarter, the dollar amount of orders was the highest it has been in a year. This was a bright spot in a market that we do not expect to recover until the end of this fiscal year. In the meantime, we have taken steps to improve our margin profile in this market by closely managing costs and increasing our mix of customized products, which accounted for 73% of first quarter sales, up from approximately 50% in a similar period last year. Looking ahead, we are confident that Kimball International is very well positioned for accelerated growth and margin expansion as the industry recovers and supply chain headwinds abate. Our strategic choices have been clear and consistent. We are well positioned geographically with strong relationships in secondary, fast-growing metropolitan areas where the post-pandemic return to office has been underway. and are expanding our position in these markets with the opening of three new pop-in showrooms in Miami, Austin, and Atlanta this fiscal year. Kimball International specializes in ancillary products, which are precisely the types of products and solutions that customers are looking for as they reconfigure their workspaces to adapt to a post-pandemic working environment. These products accounted for 85% of our trailing 12-month revenues. To further leverage the strength of our broad portfolio across the dealer network, we introduced Perfect Harmony, an integrated go-to-market strategy for our five workplace and health brands. This is providing our dealers with access to an expanded and complementary array of products that offer our customers a much broader set of design possibilities than in the past. Additionally, in collaboration with a market research firm, Ipsos, we conducted research. We validated our initial market insights, namely that the right spaces create connections. And we have identified six space types that we believe will define the post-pandemic workplace and reinforces the important role of the office in the exciting, changing environment. The hub supports open and collaborative interactions. Work Your Way, unique and personal user space. Room on the Move, flexible activity space. Culture Cafe, brand and customer experience. The Meetup, functional and collaborative space. And Well and Good, designed for employee wellness. These six space types fueled 22 new products at the Neocon Trade Show in October, with the largest being EverySpace. a solution-based system that addresses the constantly changing needs of the workplace, providing solutions that can span from open plan workstations to private offices to collaborative environments. The flexibility and adaptability of every space provides users the ability to feel focused, creative, and connected all at once. To sum up, we were pleased with the demand trends evident from our first quarter performance, and in fact, the year-on-year revenue growth rate would have been twice as high if not for the supply chain issues that reduced our production and shipment capabilities. This demonstrates the relevance of our product portfolio and how well it is aligned with today's market needs. I'll now turn over the call to TJ Wolf, our Chief Financial Officer, to provide a financial review of the first quarter and discuss the current supply chain and labor issues we are navigating and our expectations for fiscal 2022 results.

Thank you, Christy, and good afternoon, everyone. As you can see on slide 7, 2022 first quarter net sales increased 6% year-over-year to $156.6 million, including a $15.2 million contribution from Poppin'. We'll discuss each end market in the next several slides, but as expected, our growth in the first quarter came from workplace and health, as these markets on a combined basis increased by 16% from the year-ago quarter, and together accounted for 86% of net sales. It is important to note that demand for our products remains strong, as reflected in our expanding orders and backlog. However, our top-line growth has been somewhat constrained due to the ongoing disruptions in our supply chain. Specifically, we've experienced challenges related to labor and material availability, along with dislocations across our logistics network. We expect these challenges to persist at relatively the same level in the second quarter before conditions begin to improve in the second half of our fiscal year. Gross margin declined 410 basis points compared to last year's first quarter, but expanded 70 basis points sequentially to 31.3%. The year-over-year decline reflects raw material inflationary pressures, as well as higher freight and labor costs, partially offset by the price increase we implemented in March of 2021, along with improved production efficiencies and benefits from cost savings initiatives. We do anticipate gross margins will improve on a year-over-year basis in the back half of this fiscal year, as our price increases work their way through the order book and offset the inflationary pressures we are currently experiencing. Selling and administrative expenses were $50.2 million compared to $41.7 million in the year-ago quarter. This increase is primarily related to costs associated with the Poppin acquisition and incremental investments to support our sales growth and new product introductions. Excluding amortization from the Poppin acquisition, totaling $1.6 million, as well as our supplemental employee retirement plan, adjusted selling and administrative costs were $48.6 million, or 31.1% of sales, compared to $40.8 million or 27.6% in the prior year. For the current year first quarter, our effective tax rate was 33.2%, which is higher than the statutory rate due to an earn-out adjustment as compared to a 25.7% tax rate in the year-ago quarter. In the first quarter of fiscal 2022, we reported a net loss of $5 million or net loss per share of 14 cents, which includes the after-tax contingent earn-out loss of 3.4 million related to the pop-in acquisition. This compares to net income of 5.4 million, or 14 cents per diluted share, in the first quarter of fiscal 2021. Excluding the earn-out, as well as the acquisition-related non-GAAP charges and restructuring, all totaling 2.4 million, adjusted net income was 0.8 million, or 2 cents per diluted share compared to 8.6 million or 23 cents per diluted share in the year-ago quarter. Adjusted EBITDA was 4.9 million compared to 15.8 million in the fiscal 2021 first quarter. Now let's move to slide nine and discuss in more detail our revenue and order trends by end markets. Net sales in workplace and health grew 16% and 18% year-over-year respectively. Order activity in the workplace end market was strong and increased 57% compared to the year-ago quarter, including the contribution from pop-in, as order trends reached near pre-pandemic levels. Within workplace, order trends were robust in a majority of our verticals, but most notably in education and commercial. Health orders increased 30% compared to the year-ago quarter, aided by robust end market demand and strong customer demand for our new product launches. Regarding price, During Q1, we announced a price increase that went into effect on October 1st, covering the majority of our workplace and health products. This follows the price increase we previously implemented on March 1st of this year. In addition to these two price increases, and in order to offset the continued inflationary pressures we are experiencing related to raw materials and transportation costs, we announced a price surcharge across the same product categories that will go into effect on November 15th. We will continue to monitor the inflationary environment and adjust our pricing as needed. However, we would expect to transition this temporary surcharge into a permanent list price increase sometime during the third quarter. In the hospitality end market, sales declined 32%, reflecting the ongoing depressed level of demand, which we anticipate continuing for the remainder of the fiscal year. However, we have been successful in shifting the mix of our hospitality business from program to custom. with custom projects accounting for approximately 73% of our revenue in Q1. Our total backlog at the end of the first quarter was $170.8 million compared to $141 million in the prior quarter and $139.5 million in the first quarter of fiscal 2021. Now let's review our balance sheet and cash flows on slide 10. We ended the quarter with total available liquidity of $111.2 million representing cash and the unused portion of our credit facility. Operating cash flow was $11.9 million, and capital expenditures were $3.8 million. In fiscal 2022 first quarter, we returned $4.8 million of capital to shareholders in the form of dividends and share purchases. We reaffirm our four-year guidance for fiscal year 2022. As you can see on slide 11, we expect year-over-year revenue to increase approximately 15% to 20%, with significant growth occurring in the back half of the year. As sales growth accelerates in the back half of fiscal 2022 and our pricing actions are realized through sales, we anticipate a corresponding improvement in our gross margins. We expect capital expenditures net of disposals will total approximately $25 million unchanged from prior guidance. CapEx will be primarily directed toward the construction of our new warehouse in Jasper with a portion of this project funded by proceeds we receive from the sale of our existing site as well as an investment in a new automated metal manufacturing capability in our Salem facility. We continue to anticipate operational excellence projects to yield cost savings of approximately $10 million in fiscal 2022. These savings will partially fund our ongoing growth investments, namely the opening of new pop-in showrooms, as Christy mentioned earlier, as well as our marketing and promotional spend and building our sales force. As a result, we project higher overall S&A spend in fiscal 2022 compared to the prior year. We expect our full year effective tax rate to be in the range of 25 to 27%. Now turning to our second quarter guidance. We forecast year over year revenue growth of 10 to 15% with second quarter gross margins ranging from 32 to 33% and S&A expenses totaling 51 to 53 million. Our revenue guidance reflects our current backlog of 170.8 million which includes approximately 120 million scheduled to ship in the second quarter, as well as current order trends and the expected impact from production capacity constraints and the potential for temporary operational challenges related to complying with the vaccine mandate for government suppliers. With that, I will turn the call back to Christy for her closing remarks.