Kimball International, Inc.

Good afternoon, ladies and gentlemen. My name is Michelle, and I will be your conference call facilitator today. At this time, I would like to welcome everybody to the Kimball International Second Quarter Fiscal 2022 Earnings Conference Call. As with prior conference calls, today's call, February 3, 2022, will be recorded and may contain forward-looking statements as defined under the Private Security Litigation Reform 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 on 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's international website. On today's call are Christy Jester, Chief Executive Officer 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.

Good afternoon, everyone, and thank you for taking the time to join us on today's call. Our second quarter results were in line with our expectations, reflecting strong demand for our diversified portfolio of Kimball International products. We are pleased with the double-digit revenue growth we achieved in the quarter, and importantly, we have continued to see momentum in orders and pipeline activity throughout the quarter. The evolution of the hybrid workplace is on track, despite some delays in return to offices caused by the Omicron variant. The return to learning is proceeding as expected, and capital projects at major health systems remain on the upswing. These business trends are consistent with our views on how the markets would evolve post-pandemic and support the choices we have made over the last two years to position Kimball International for accelerated growth. Workplace and health orders combined have increased at double-digit rates in each of the past three quarters, indicating the strength and consistency of demand in these two markets, which account for 89 percent of our second quarter net sales. The magnitude and extent of the prevailing commodity inflation and supply chain issues continued to impact our business in a variety of ways, affecting us on the top line as well as margin levels. Despite these pressures, we were able to deliver adjusted gross margin improvement of 40 basis points versus last quarter. Kimball International's year-to-date performance together with the robust growth in orders we experienced in the second quarter, continue to support our expectations for fiscal 2022 to be a year of 15 to 20 percent sales growth, indicating a substantial pickup in the second half of this fiscal year. TJ will provide additional detail on the elements that affected gross margin in the second quarter and the assumptions underlining our expectations for pronounced margin expansion in this year's fourth quarter. Taking a closer look at our key end markets, workplace revenue and orders increased 21 percent and 42 percent, respectively, in the second quarter, led by the commercial and education sectors and supported by growth in the finance sector. These figures include Poppin, where delays in inventory availability presented a challenge to Poppin's in-stock business model. This caused a pause in the positive sequential momentum in Poppin's sales, which we expect to resume in this year's second half, as evidenced by Poppin's bookings up 106 percent versus last year's quarter. As the return to office continues, companies are investing in reimagining their spaces to accommodate three consistent themes. a hybrid workplace that caters to both physically and digitally present workforces, a flexible workspace that allows for configuration based on short-term needs and the evolving long-term trends, and an amenity-rich workspace that attracts and retains the best talent and fosters the culture, safety, productivity, and well-being of its workforce. With ancillary products representing 85 percent of our portfolio, Kimball International is benefiting from these themes, as our products are well-suited to address these demands. Equally, our long-time presence and momentum in secondary metropolitan areas from which we derive approximately 80 percent of our revenues has been a significant advantage. as companies migrate to more affordable geographies or establish satellite offices in these areas. We have also seen a steady increase in demand in the education vertical, driven by the return to in-person learning, and we are very optimistic for the upcoming educational buying season. Institutions are looking to create flexible environments that support the many ways of learning while driving connection and collaboration for students and staff. Research shows that hybrid learning will become the norm. Technology will play a critical role in ensuring equitable learning opportunities, and safety of students and teachers will remain a priority. At Kimbell International, our responsive design and our ancillary products that support adaptive and flexible environments allow students to learn comfortably and safely, and enable staff to gather and collaborate in a variety of ways. As shared, our Poppin business has been more affected by the supply chain disruption due to the in-stock value proposition. In spite of this, we continue to see the proof of how Poppin will support and elevate our go-to-market strategy. Our acquisition was grounded in three assumptions. our ability to ramp the direct digital B2B model, our belief in expansion in secondary markets, and our ability to expand the Poppin brand and portfolio into the Kimball International dealer channel. Our progress has been significant in all three areas. Poppin orders were up 106%. Our showroom expansion into secondary markets is in full execution with Miami fully operational, and both Austin and Atlanta showrooms opening this quarter. And our new Poppin Pro dealer cross-sell opportunity will represent a new channel that is over 10% of our total mix at Poppin in year one. We continue to hold much confidence in our ability to scale and expand this business. Moving to our health market, Second quarter revenue increased 6% and orders were up 13%. Despite a slight slowdown due to the COVID variants and diverted focus from non-critical care, orders have picked up in the second quarter and we expect demand to build further in the coming quarters as focus will return to elective surgeries and preventative care. We are actively addressing the expanding healthcare concentrations in investing in customized products in areas such as behavioral health and outpatient clinics, where we see substantial long-term growth opportunities. Staffing shortages and burnout amongst hospital workers have been well documented, and health systems are looking for innovative ways to attract and retain staff. We continue to leverage our research and product development efforts to focus on these issues. And our designs for this market incorporate features that facilitate and support offer amenities and offering amenities in the workplace, flexible environments, and hybrid approaches to patient care. Our continued focus on innovation with award-winning products such as the Embra and Esri lines is resonating in the market with new product sales representing 23% of our health market sales in the second quarter. and will continue to provide opportunities for us to expand further into the retail health space. While our hospitality market is awaiting the full-scale return of business and international travel, the industry continues to be pressured by the effects of the pandemic. Within this environment, we are proactively shifting our sales mix to higher margin, customized products. In the first half of fiscal 2022, Customized products account for 64% of hospitality market revenues, up from 42% in the first half of fiscal 2021. We will be well positioned to benefit from a recovery in this market, which we expect to materialize during fiscal 2023. In summary, We are pleased with the strength and the consistency of the demand trends we have seen in the first half of this fiscal year, which is a clear indication that Kimball International is well positioned in the end markets that stand to benefit the most from the pandemic recovery. With that, I'd like to turn over the call to our CFO, T.J. Wolf, to provide a financial review that will include our update on operational progress.

Thank you, Christine. Good afternoon, everyone. We are very pleased to report double-digit revenue growth this quarter, especially given the continued economy-wide labor and logistic challenges. Our second quarter net sales were up 11% to $151.4 million compared to the prior year's quarter. If not for the labor and supply chain issues that constrained our production and shipment capabilities in the first half of this year, our revenue for the quarter would have been approximately $18 million higher than reported. Topline growth continues to be led by strength in our workplace and health end markets, offsetting continued expected weakness in the hospitality market, and a slightly lower than anticipated contribution from Poppin of $13.5 million. As Christy already mentioned, despite strong demand trends, the ongoing supply chain issues particularly impacted sales at Poppin, which experienced a challenge to its in-stock business model as a result of inventory availability issues. We expect Poppin revenue growth to resume next quarter, However, because of the impact COVID and related labor and logistic issues have had on Poppin's near-term results, we have recognized a one-time $34.1 million non-cash goodwill impairment charge associated with the Poppin acquisition. This charge is partially offset by a corresponding decrease in our earn-out liability. These actions do not change our view of Poppin's long-term prospects at all and simply reflect the current COVID-related operating environment. We continue to see Poppin as a key driver of our long-term growth model and are excited to underline this commitment through investments such as the three new Poppin showrooms opening this fiscal year. Gross margin adjusted for one-time pandemic-related expense of 1.6 million was 31.8% and increased 40 basis points sequentially despite the widespread inflation and supply chain pressures. While material inflation and higher freight and labor costs continue to pressure our margins, partially offset by price increases that went into effect earlier in 2021 and ongoing cost savings programs. While we expect the pace of inflation to subside over the coming months, we think that prices will maintain their elevated levels, thus creating a new normal in our input cost environment, which we've attempted to offset through our various pricing actions. As we mentioned to you before, we announced a price increase that went into effect on October 1st, and introduced a price surcharge effective as of November 15th that will become a permanent price increase next month. Approximately one-third of our backlog reflects the November surcharge, and the remaining two-thirds includes the previously announced price increases, giving us good visibility to improving gross margins, especially starting in the fiscal fourth quarter. Adjusting selling and administrative expenses amounted to $48.5 million compared to $40.7 million in the year-ago quarter, primarily related to a full quarter of costs associated with the pop-in acquisition compared to just three weeks in the year-ago quarter, and incremental investments such as the Miami pop-in showroom to support our sales growth and new product introductions. Excluding the goodwill impairment, the earn-out adjustment, as well as the acquisition-related non-GAAP charges and restructuring, The second quarter adjusted net loss was $5.7 million or $0.16 per diluted share compared to adjusted net income of $3.3 million or $0.09 per diluted share in the prior year quarter. Adjusted EBITDA was $4 million compared to $9.1 million a year ago. Diving into our end markets, net sales in workplace and health increased 21% and 6% year-over-year respectively. Order activity in the workplace end market was 42% higher compared to the year-ago quarter including the full contribution from Poppin, whose orders were up 106% year-over-year, and double-digit order growth rates in commercial, finance, and education verticals within Workplace. Health orders were up 13% year-over-year. Business activity in the hospitality and market remains at depressed levels, which is reflected in a 23% revenue decline and order activity 12% below the year-ago quarter. Our second quarter end total backlog was a record 196.9 million compared to 170.8 million in the prior quarter and 144.9 million in the second quarter of fiscal 2021. And we expect 134 million of this backlog to ship out in the third quarter. From a balance sheet and cash flow perspective, we ended the quarter with 99.6 million in short-term liquidity, which includes cash and cash equivalents, plus the unused amount of our credit facilities. Our capital expenditures were $8 million, and we returned $4 million of capital to shareholders in the form of dividends and share purchases. Despite the near-term challenges, we are reaffirming our guidance for fiscal year 2022 and still expect year-over-year revenue to increase approximately 15-20%. Gross margins in the third quarter should be comparable to the first half and should see a sequential increase in the fourth quarter. Capital expenditures and other disposals are on track to total approximately $25 million, unchanged from prior guidance with spending primarily allocated to the construction of our new warehouse in Jasper and 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 and showrooms, as Christy mentioned earlier, as well as our marketing and promotional spend and building out of our sales force. As a result, we project higher overall S&A spend in fiscal 2022 compared to the prior year. For our third quarter guidance, we forecast year-over-year revenue growth of 23% to 25%, with gross margins at approximately 31%, and S&A expenses totaling $50 to $52 million. With that, I will turn the call back to Christy for her closing remarks.