Kimball International, Inc.

Good afternoon, ladies and gentlemen. My name is DeeDee, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Third Quarter Fiscal 2022 Earnings Conference Call. As with prior conference calls, today's call, May 3, 2022, 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 Kimbell 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 Jester, 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 Jester. Ms. Jester, you may begin.

Good afternoon, everyone, and thank you for joining today's call. I am pleased to report that Kimball International's fiscal third quarter results marked a significant positive step change in our financial performance, and we see this momentum carrying into the fourth quarter, supporting our outlook for accelerated growth in fiscal 2023. This quarter's 30% sales increase demonstrated the relevance of our product portfolio in the actively forming commercial spaces that support both physically and digitally present workforces and allow for the needed flexibility for today and the ever-evolving trends of tomorrow. It particularly underlines the strength of our positioning in the workplace and health end markets, where we believe our 41 percent sales increase indicates that Kimball International continues to gain share. Demand in these markets was strong across each vertical, led by commercial, education, and e-business, and aligned with our expectations for returning to learning and return to hybrid workplaces. Sales in our hospitality market were similar to prior year levels, including shipments, which were delayed from the second quarter. While this is our fourth consecutive quarter of double-digit growth in order rates, it is the first quarter we've been able to fully convert the strong demand into significant revenue growth and meaningful profitability. Price increases we implemented in October of last year and March of this year mitigated part of the supply chain, labor, and inflationary pressures, and we will see increased benefits in the fourth quarter and into fiscal 2023. Additionally, we succeeded in managing through supply chain disruptions and labor issues, allowing us to reduce lead times that constrain shipments in prior quarters. These actions have resulted in Kimball International reporting industry-leading gross margins and underpin our confidence in the company's future performance. Taking a closer look at our key end markets, workplace revenue increased 52 percent in the third quarter, representing growth across all verticals, and orders were up 36 percent. These strong results reflect important strategic differences. namely the alignment of our product portfolio with today's new forming workplace and our geographic footprint, which is geared towards smaller metropolitan areas that have experienced significant population and employment growth in recent years. We have also realized a broad-based recovery of our day-to-day business as a proof point of our continued consistency with workplace orders of 29%. led by corporate and education and markets, up 38% and 47% respectively. Ancillary products accounted for 86% of our trailing 12-month sales and provide the collaboration, flexibility, and residential design that employers are looking for as they return to hybrid or fully in-person settings. and evaluate the most effective ways to manage their workplace footprints. Kimbell International's vast collection of products offer designs that create an amenity-rich workplace that help engage, recruit, and retain the best talent. Innovative and award-winning products such as Eklund and EverySpace continue to resonate with our customers due to their custom configuration and flexibility. At Poppin, with increased inventory levels on hand, sales bounced back significantly in the third quarter, up 94% year-on-year, and order rates climbed 64%, positioning us to end the year with an $80 million run rate. The improved inventory position and our effective lead generation model have increased our new customer acquisition to 28% of total Poppin sales. Poppin's in-stock, ready-to-ship business model is particularly appealing to companies looking to efficiently expand their current workplace footprints or quickly furnish a new satellite office in another market. This design is fresh and clever and their simplified ordering process supports speed and reliability. Poppin's pod business continues to grow, representing over 20% of the overall B2B mix, and it is now Poppin's second largest product category. Our showroom expansion strategy is well underway as we open additional showrooms in Austin and Atlanta for a total of eight, and are planning to open three more in fiscal 2023. Additionally, Poppin Pro, which leverages the expertise of both Poppin and KII, continues to exceed our expectations at over 15% of total sales. Moving to our health market, third quarter revenues increased 8% and orders were up 2% ahead of fiscal 2021 levels. As we shared last quarter, we detected a slight pause in this market due to the recent COVID However, we continue to be very confident that these issues are short-term in nature. In fact, sales volumes in many of our territories are up significantly in the quarter and year to date, led by the Midwest, Pacific Northwest, and Southwest markets. We are addressing emerging trends in healthcare through community, spaces, patient rooms, exam areas, and treatment areas. that are designed to create better, more tranquil experiences for patients and families while maintaining an efficient workplace for caregivers. We are achieving this by leveraging the power of our combined brand portfolio, with our fastest-growing territories fully adopting our multi-branded go-to-market strategy. As we have previously stated, the hospitality market remains soft. with business and international travel remaining well below pre-pandemic levels. We are managing this part of our business very closely, continuing to prioritize higher-margin customized products. We just returned from the hospitality design show in Las Vegas, where the energy, activity, and focus point toward an industry recovery that is slated to begin in 2023. And we are well-positioned to benefit in its upswing. We are also pleased with our strides on the ESG front. You may have read our announcement that most of our showrooms have earned the Well Health Safety Rating through the International Well Building Institute. We have also launched our Sustainability Data Portal and Green Standards Program, a platform for sustainable redistribution of furniture, fixtures, and equipment during times of workplace change. Kimball International has also been named one of America's most trustworthy companies in 2022 by Newsweek. We are very pleased with these accomplishments and continue to be dedicated to building a more sustainable future in making a difference in our communities. In summary, the third quarter represented a period of very strong performance for Kimball International. which clearly puts us on track to achieve our fiscal 2022 guidance. Now I'd like to turn the call over to our CFO, TJ Wolfe, for a financial review, a discussion of our operating progress, and fourth quarter guidance. TJ?

Thank you, Christine. Good afternoon, everyone. I'm pleased to share more details on our strong financial performance in the third quarter of fiscal 2022 and our forward growth expectations as we believe our business has reached a financial inflection point. Net sales in the third quarter of fiscal 2022 were up 30% to $180.9 million compared to the prior year's quarter, reflecting strong demand in our workplace and health end markets that accounted for approximately 81% of total revenue. In addition, Poppin contributed $17.3 million to sales. This sales growth across our portfolio was driven by both volume increases and the pricing actions we've implemented over the past 12 months. Taking a deeper look into our end markets, sales and workplace increased 52%, with our commercial, education, and government verticals achieving double-digit year-over-year sales increases. It also benefited from pop-in generating 94% revenue growth year-over-year. Health experienced an 8% growth in net sales, and due to lack of business travel, activity in the hospitality end market remains relatively soft, leading to a 2% revenue decline in the third quarter. We were very pleased with our 180 basis point expansion in gross margin to 30.5% year-over-year, despite ongoing industry-wide supply chain inflation and labor challenges. Although we have seen some improvement in supply chain and material availability, inflationary pressures persist in materials pricing, labor availability, and the logistics network. To mitigate these cost increases, we have implemented timely pricing and cost saving measures that will enable us to offset the inflationary pressures across the supply chain that I just mentioned. Our disciplined cost controls and operational efficiency helped improve adjusted selling and administrative expenses as a percentage of revenue, with adjusted S&A declining to 26.6% of revenue compared to 30.8% in the year-ago quarter. At the same time, we continue to make strategic investments to further expand sales growth. such as the opening of the new pop-in showrooms that Christy mentioned earlier, and in new product development and introductions. Strong sales growth and expanding margins drove substantial earnings growth in the third quarter. Net income was $6.3 million or $0.17 per diluted share, compared to a net loss of $4.5 million or $0.12 loss per diluted share in the prior year quarter. Adjusted net income was $7.6 million or $0.21 per diluted share, up from a net loss of $1.0 million or $0.03 loss per diluted share in the third quarter of fiscal 2021. Adjusted EBITDA grew to $11.5 million versus $1.9 million in the year-ago quarter. We experienced another quarter of robust order activity, supporting our strong conviction in Kimball International's future sales growth. Workplace orders were 36% higher compared to the year-ago quarter, driven by double-digit growth commercial and education verticals, and the contribution from Poppin, where orders increased 64% year-over-year. Health orders improved 2% year-over-year, and orders in the hospitality and market represented a 43% increase over a significantly depressed market last year, and one that will continue to underperform pre-pandemic levels until the full-scale return of business and international travel, which, as Christy mentioned, we expect to begin in 2023. Our total backlog at quarter end was $178.5 million compared to $129.6 million in the third quarter of fiscal 2021. Approximately two-thirds of our backlog reflects the November surcharge, which turned into a permanent price increase in March, with the remainder including the previously announced price increases. Our backlog declined sequentially, which underlines our ability to ship orders faster, improving revenue and price realization, as well as gross margins. Now moving to the balance sheet and cash flow. We ended the quarter with $78 million in short-term liquidity, which includes cash and cash equivalents, plus the unused amount of our credit facility. Our capital expenditures were $4 million, and we returned $3 million of capital to shareholders in the form of dividends. We also realized a $4.5 million gain from the sale of one of our warehouses. Capital expenditures net of disposals are on track to total approximately $22 million, which is a slight decrease from our prior guidance. Year-to-date, we achieved cost savings of $8.1 million, putting us firmly on track to achieve our $10 million guidance. We continue to reinvest these savings into high-growth initiatives, such as marketing and promotion, and in further building out our sales force. Having opened additional pop-in showrooms in Atlanta, Austin, and Miami this fiscal year, and given the demand trends for the pop-in brand, we are planning on opening a similar number of additional pop-in showrooms in fiscal 2023. Looking now at the fourth quarter, we forecast revenue of $180 million to $185 million, representing a year-over-year increase of 25% at the midpoint, with sequential gross margin improvement of 100 to 200 basis points at approximately 31.5% to 32.5%. We expect fourth quarter S&A expenses will range from $52 million to $54 million, reflecting investments in people and marketing, as well as promotional spend as we strive to match S&A investments with realized revenues. With that, I will turn the call back to Christy for closing remarks.