Kimball International, Inc.

Good afternoon, ladies and gentlemen. My name is Abby, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International fourth quarter and full year fiscal 2022 earnings conference call. As with prior conference calls, today's call, August 4, 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 Kimball International Forum 10-K. During today's call, the presenters will be making references to an earning 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. 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.

Christy Jester Good afternoon, everyone, and thank you for joining today's call. We are pleased to report Kimball International's strong finish to fiscal year 2022, our accomplishments in Q4, and our outlook for continued growth in fiscal year 2023. Our fourth quarter results reflected both strong revenue growth and a substantial improvement in profitability. Over the last several quarters, we've continued to exhibit that our set of focused strategic choices provides accelerated market growth for Kimball International. The combination of our expertise and ancillary products and secondary markets clearly align with the evolving business trends and workplace priorities. Sales of ancillary products represented 87% of our full-year sales and demonstrate the demand for products that fit perfectly in today's open, accommodating, and flexible work environment. In addition, over 75% of our shipments in fiscal 2022 were to secondary markets, like Nashville, Atlanta, Austin, and Miami, which are experiencing substantial population growth and a more rapid pace of return to office. Kimball International's product portfolio is incredibly well aligned with our customer needs, whether attracting workers back to offices, providing a residential feel in a healthcare environment, or offering a beautiful custom design for high-end hotel properties. We have the right products targeting the fastest-growing end markets and geographies. Our results demonstrate the strength of this focused approach. Sales to our workplace and health end markets increased 33 percent year-on-year in the fourth quarter, accounting for 88 percent of our total sales for the period and a strong indication of our company's share gain in today's dynamic marketplace. Pop-in sales were a key contributor to our fourth quarter performance, increasing 68% year-over-year and up 23% sequentially. We achieved this strong growth market-wide with the exception of hospitality, which we expect to recover in 2023. This was also our second consecutive quarter of substantial year-over-year profitability gains. pricing initiatives which partially mitigated inflationary pressures, effective navigation of supply chain disruptions, and ongoing cost savings all translated into a significant increase in adjusted EBITDA. Taking a closer look at our key end markets, workplace sales increased to 38% in the fourth quarter. with double-digit growth achieved across all verticals led by commercial and education. At the same time, workplace orders were up 18% year-over-year, reflecting the positive business momentum that has continued into fiscal 2023. The pace of return to office continues to build with leading indicators reflecting higher growth and adoption in secondary markets. with a more moderated adoption in larger metropolitan markets, especially during the summer months. We see this trend consistently across our network of new and existing showrooms for both Kimball International and Poppin, with Austin, Miami, Dallas, and Atlanta all leading the way. Additionally, the implementation of our harmonized selling model into a multi-branded selling organization is proving to be a highly productive move. In Q4, dealers that adopted this new multi-branded approach increased new brand volume by more than 50% since last quarter and were a key driver in our market share gain. Neocon in June was a welcome industry gathering with attendance back to 70% of pre-pandemic levels. and was energizing for our dealers, our designers, and our teams. Open and flexible flow plans that accommodate the need for both individual privacy and group productivity were an overarching trend at Neocon and certainly resonated in all of our conversations. The Kimball International Showroom exhibited nine new product introductions and enhancements for all five of our workplace and health brands. including our new Jovali Lounge, Carid executive seating, and Pareidolia privacy and collaboration screens, as well as enhancements through Poppin' Pods. Overall, innovative new products such as these accounted for 23% of workplace sales in fiscal 2022. As shared, Poppin' was a strong contributor to the fourth quarter. Poppin's sales growth reflected the important value-added role this brand in business plays at Kimball International. Alongside the ramp of Poppin's core digital direct business model, we have made significant progress in our new business drivers. Secondary markets with newly opened showrooms in Atlanta, Austin, and Miami quickly gain traction and are fully activated. In all three markets, commercial real estate firms are supplementing Poppin's digital business development model by connecting us with actionable leads early in the process. Our new pod category tripled in revenue year over year, and our Poppin Pro dealer channel accounted for 15% of Poppin sales in the second half of fiscal 2022. Poppin is addressing the demand for quick turnaround office furnishings and refreshing existing offices to accommodate the new hybrid work environment. From a turnkey 60-seat satellite office in 30 days to 1,200 workstations delivered directly to employees' homes, Poppin's in-stock, ready-to-ship business model and its affordable, flexible product portfolio allows us to respond quickly, to the ever-evolving workspace needs of our customers. We will continue to invest in Poppin's growth and are excited to further unleash its full contribution as it provides an important long-term growth engine in our overall company. Moving to our health market, sales were up 14% year-over-year in the fourth quarter, despite industry challenges caused by the prevalence of COVID variants. We continue to believe in the significant potential in health and remain clearly focused on areas of growth, such as outpatient facilities, telehealth, behavior health, and caregiver well-being. The healthcare market is emerging to pre-pandemic levels and growing faster in secondary markets, but it is experiencing short-term lag due to the direct impact of COVID spikes and labor shortages especially in larger metropolitan markets. One of our key areas of focus is leveraging our expertise to service the Veterans Administration. And we have grown the federal government health and market almost 10% of sales in fiscal year 2022. Additionally, our Interwoven Quick Ship for Care product line is available to ship in five to 10 days and enables clients to scale swiftly and efficiently and times of transition and expansion. The interwoven product offering allows us to become a trusted partner in the healthcare industry, and we anticipate it will translate into meaningful contributions to our health sales over the long term. In the hospitality market, leisure and day-to-day business travel have shown steady progress, but international large group business and convention travel are still well below pre-pandemic level. while our large hospitality clients continue to navigate headwinds caused by labor shortages, wage pressures, and supply chain issues. As one of the largest providers of case goods, lounge seating, and ancillary products to the hospitality industry, we will clearly benefit from a turnaround in the business, which we expect to begin in the second half of fiscal 2023. In the meantime, Our focus is supporting and engaging with our key partners, growing our custom product mix and driving for efficiency and exceptional service. To sum up, we were very pleased with our fourth quarter performance, which demonstrated the continued strength of our product portfolio and its relevance to emerging market trends in today's marketplaces. While there are still challenges ahead, we are optimistic that our focused set of strategic choices will lead to significant revenue and profitability gains as we progress through fiscal 2023. Now I'll turn the call over to our CFO, T.J. Wolf, for a review of our fourth quarter, full-year financials, and a discussion of our outlook for fiscal 2023. T.J.?

Thanks, Christine. Good afternoon, everyone. I'm excited to share more details about our strong financial performance and our guidance for fiscal 2023. During the quarter, net sales increased 21% to $176.9 million, led by strong demand in the workplace and health end markets, which was driven by both our pricing actions over the past 12 months, as well as higher unit volumes. Sales and workplace increased 38%, with all verticals achieving double-digit year-over-year sales growth. Leading the growth within workplace, pop-in sales increased 68%, contributing $21.2 million to the top line. Health revenue increased 14% as customers continued to work through the pandemic challenges across the healthcare system. As expected, demand in the hospitality end market remained soft, with revenue decreasing 27% compared to the year-ago quarter. Gross margin rebounded to 34.3%, representing a 370 basis point year-over-year improvement. Gross profit benefited from our pricing actions to offset inflationary costs and supply chain pressures, as well as higher utilization from improved sales volume. This quarter's gross profit also benefited from a favorable mix due to lower volumes in hospitality and a lower than anticipated LIFO expense. Going forward, we expect the LIFO expense to return to a more normalized level as observed in previous quarters this fiscal year. Selling and administrative expenses were 51.4 million, or 29% of net sales, down 470 basis points year over year. Excluding amortization from the pop-in acquisition, totaling 1.6 million, as well as SERP adjustments, adjusted S&A was 51.4 million, or 29.1% of net sales, compared to 46.5 million, or 31.8% a year ago. Our transformational savings in the fourth quarter amounted to 2.5 million, bringing our full-year cost savings to $13.6 million ahead of our projections. Throughout the year, we reinvested these funds to support our future growth. For example, we opened three new pop-in showrooms in Atlanta, Austin, and Miami, as well as a regional collaboration hub in Atlanta. We substantially completed construction of our new warehouse in Jasper and invested in new product development, such as the nine introductions we showcased at Neocon. We also further built out our customer service capabilities, increased our marketing and promotional spend, and expanded our sales force. Fourth quarter 2022 GAAP net income was $4.4 million or $0.12 per diluted share, inclusive of $4.7 million or $0.12 per share in restructuring charges. This compares to GAAP net income of $7.4 million or $0.20 per diluted share in the year-ago quarter. Excluding the restructuring charges, adjusted net income was $9 million or $0.24 per diluted share, up from an adjusted net loss of $0.9 million, or $0.02 per diluted share, in the fourth quarter of fiscal 2021. Adjusted EBITDA was $13.6 million compared to $2.9 million in the fiscal 2021 fourth quarter. Adjusted EBITDA margin was 7.7%, a significant improvement from 2% in the year-ago quarter. Adjusted EBITDA and margin continued to benefit from improved operating leverage on higher sales volume, even as we invest in strategic initiatives to bolster long-term growth. Moving to our order trends, we experienced another quarter of double-digit growth in order activity, led by an 18% improvement in workplace, with particular strength in the commercial, finance, and education verticals. But as Christy already alluded to, our order rates do reflect the delayed return to office in large metropolitan markets. Health orders declined 5% year-over-year, reflecting a pause in current demand, which we anticipate to be short-term and to start improving in the new fiscal year. Orders in the hospitality and market declined 2% as business travel activity remained below pre-pandemic levels. Our total backlog at quarter end was $175.6 million compared to $141.4 million in the fourth quarter of fiscal 2021. On the balance sheet and cash flow side, we ended the 2022 fiscal year with total available liquidity of 66 million, representing 11 million in cash and 55 million from the unused portion of our credit facility. At fiscal year end, our net debt to EBITDA ratio of 1.8 times was well below our covenant levels. In fiscal 2022, we used 4.6 million of cash flow for operating activities due to working capital needs, particularly inventory, as sales expanded. This compares to cash provided by operations of $27.3 million a year ago. Full-year capital expenditures were $19.7 million, net of proceeds from the sale of our warehouse and in line with our expectations. The majority of our capex was invested in the aforementioned new warehouse in Jasper, new showrooms, manufacturing equipment automation to drive our operational excellence programs, and new technology. In fiscal 2022, we returned $16.3 million of capital to shareholders in the form of dividends and share repurchases. Now looking at our 2023 guidance. We expect 2023 revenue to range from $750 million to $780 million, representing approximately 15% growth at the midpoint. And we forecast 2023 adjusted EBITDA to range from $48 to $52 million, representing approximately 47% year-over-year growth at the midpoint. This guidance takes into account our current order trends through July, additional price realization from actions already taken, and a reduction in backlog during the second half of fiscal 2023 driven by improved operational performance. With respect to the cadence of the year, we expect full year revenue and adjusted EBITDA to be somewhat weighted toward the second half of the year, with the fourth quarter being the strongest. Additionally, we anticipate fiscal first quarter revenue will be similar to that of the fourth quarter in fiscal 2022, with adjusted EBITDA slightly lower than the fourth quarter due to higher labor and logistics costs and higher LIFO expense. We are planning for capital expenditures of approximately $25 million and expect our full-year effective tax rate to be in the range of 25% to 27%. While our business activity remains strong and secular trends are in our favor, we recognize the current macroeconomic uncertainty. During fiscal year 2022, we have demonstrated our ability to adapt our operations with the ever-changing external conditions and market environment. And in fiscal year 2023, we will continue to deliver consistent improvements in both operational performance and financial results as we remain focused on execution and success in the marketplace. I will now turn the call back to Christy for her closing remarks.