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.

Thank you, T.J., We are very pleased to have reported a step change in our profitability in the second half of fiscal 2022. This demonstrated our ability to achieve substantial operating leverage and effectively manage through industry-wide headwinds. We are looking forward to continuing the positive momentum in our business into fiscal 2023. As our guidance reflects, we expect another year of robust growth. Our confidence is supported by the relevance of our product portfolio to the workplace and health end markets that account for almost 90% of our revenues, our ability to gain share with our emphasis on ancillary products and fast-growing secondary markets, and the many opportunities we see on the horizon to scale and leverage PopEd. Most importantly, the biggest boost to our confidence are the people of Kimbell International. We are dedicated to delivering well-designed, high-quality products and to bring the customer at the center of everything we do. Kimball International strives every day to be a sustainable and socially responsible company. We encourage all of our stakeholders to visit our website to learn more about our recognitions for environmental responsibility, the commitments we have made to diversity, equity, inclusion, and belonging, and our strong corporate citizenship. We want to thank you for dialing into today's call and now would like to open the call to questions. Operator?

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Greg Burns from Sudoti. Your line is open.

Good afternoon. In terms of the order trends in the workplace segment, have you seen any change or slowdown more recently given the deteriorating macro environment?

Hey, Greg. You know, through July, if we look through the current data we have, we didn't see any noticeable change from where we finished Q4 through July. I think the point that I would highlight, as Christy mentioned in her comments and I did, that, you know, I think the one change over the quarter we did see is in the large metropolitan markets. You know, that is where we did see some, I would say, just kind of flatlining of the trend. We saw a continued return to office in secondary markets, and that was reflected in our order rates, but I would say the large metropolitan markets were where we see it kind of, you know, really just flatline and stay at the current levels.

Okay. Are you seeing any difference between not just geographies, but by customer size, like, you know, the SMB, shorter cycle, kind of end of the market, any slowdown there versus maybe the larger, more contract side of the business?

Yeah, I think what we have seen is, as you know, you know, when you think about large projects that have a large horizon, many of those still in flight are continuing. I think what we have noticed is if you look at a particular sector such as tech or certain kind of, you know, areas in venture capital, those, you know, some of those smaller projects and outfitting to office have slowed somewhat as people look at their investments and look to conserve cash. So that's someplace where we have noticed a slowdown in the recent months.

Okay. The gross margins this quarter were very strong. You mentioned more favorable LIFO. How much was the lower LIFO adjustment benefiting this quarter, and kind of how should we think about the gross margins that are baked into your guidance?

Yeah, sure, Greg. So I think let's look at this quarter just past for a moment. I think At a high level, we would say this quarter was the first quarter where we had achieved price that largely offset inflation. So, if you think about those two things relatively matched up in the quarter. And so, what led to the expansion, and I'll put these in order of priority for you, our operational excellence programs and operating leverage, those two delivered a similar contribution. And that was, I would say, the bulk of that gain. To a lesser degree, next in line would be mixed. And so this would be the business unit mix between hospitality and workplace and health. So hospitality quarter over quarter was down as a percent of mix. And then coming in fourth, there would be LIFO. And on a year over year basis, LIFO contributed 60 basis points to gross margin expansion. And so that is one that we would see would revert back. We expect to revert back to more historical levels and be a headwind in at least the coming quarter in Q1 of or you're 23.

Okay, great. Thanks. And then, okay, I'll hop back in the queue, but if there's no one else, I'll keep on going.

Yeah, I think we have a few extra people in the queue, Greg, so maybe we'll cycle back. All right, great.

Thanks. Thanks, Greg.

Your next question comes from the line of Ruben Gardner from the Benchmark Company. Your line is open.

Thank you. Good evening, everybody. Hi, Ruben. Maybe, let's see. So, appreciate the guidance for this coming fiscal year. I wanted to kind of walk through what your assumptions are there. If you could kind of start with the top line, what kind of, end market expectation do you have to get that level of revenue growth? And then if you could break out how much of that is pricing versus volume, I guess, at the midpoint of your outlook.

Sure, Ruben. So I think if we look at our end markets first, you know, what we would expect to occur next year and somewhat similar to this year is that pop in as, you know, in percentage terms would be the fastest growing part of the business. And I think when you look at hospitality, we've said, you know, that is going to be a delayed recovery. And so we, you know, would really expect that to begin at the end of the fiscal year. And that workplace and health would be, you know, kind of seeing growth at similar levels. And so when you look at kind of the composition of that between unit growth and price growth, you know, as a result of our pricing actions, we would say that it's a mixed plan, but skews slightly towards pricing for the coming year. And those would be actions that we've already announced and taken in the marketplace. So it doesn't contemplate any new actions, although we'd monitor that and take them as needed given the inflationary environment.

So, I mean, not to oversimplify it, but is this, I mean, would a low to mid single digit kind of workplace or office industry with some share gains and some price gets you to where you are, or do you need the industry to do better than that to get to those kind of forecasts, if that makes sense?

Yeah, well, when you say low to mid-single digit, are you talking about unit growth, Ruben, in workplace?

Yes, yes, unit growth.

Yeah, I think if kind of the point you're getting at is do we need to see a step change in return to office or return to learning, I think the answer is no. What we need to see is a continuation of the trends we're seeing and that that level of volume growth combined with the price would be what's implied in our plan. So it does not contemplate some significant step change or movement in return to office that hasn't happened yet.

I would also add that That one of the unique things about our business is that we really are, you know, 75% of our volume sits in secondary markets and over 85% of it is in ancillary products. And we've seen that intersection of secondary markets and ancillary products being very consistent for us. And certainly that's what we're predicting as we go into 23.

Perfect. And then on the margin front, similar line of questioning, what do you need to see to meet your guidance in terms of material costs and shipping and maybe even ocean freight? I know you don't have a ton coming from overseas, but what's kind of embedded in the outlook?

Sure, Ruben. So I think that one of the key assumptions we would say is that we don't assume that there is any significant pullback in the inflationary environment. So we don't assume that you know, everything normalizes and all those costs come off. I think what we assume is that we'll be able to maintain that kind of catch-up that we did with price costs in Q4, and so we'll maintain that, and that we'll be able to see these improvements in operational excellence, leverage, and to some extent, mix over the course of the year. So, no significant pullback in inflation. We assume inflation stays with us, but just that we're able to keep pace with it through our pricing actions.

Okay, and I think the, bear with me here, I think that the midpoint points to EBITDA margins kind of in the 7% range. I think if I did that, if I punched that in Excel, right? So your revenue now is back to kind of pre-COVID levels at the consumption. Just kind of thinking about maybe a little bit longer term revenue I guess what's the delta? I think you were in the low double digits at your peak in EBITDA margins. What do you need to see to get there? What kind of time horizon do you think? Or do you have, I guess, bigger aspirations over the next few years than just kind of returning to what the margins were pre-2020?

Yeah, sure, Ruben. So I think if we start with the first question, and your math is directionally correct to get back from this implies something in the range of 7% EBITDA, Prior to the pandemic, pre-COVID, we were in the low double digits, so say 11. I think to get there, the two things that need to happen are, again, further gross margin expansion. So the full-year gross margin this year needs to expand, let's say, two points. And then we also need to get the top line back to where our SG&A leverages back to where it was prior to the pandemic. Now, we said with the addition of pop-in, it was going to settle slightly higher than it was. And so I think what we're looking for there is just the continued growth of the business to get that leverage down. But right now, we're still at the phase of popping where we're investing in its accelerated growth, which are the showrooms and the innovation. So I think that will come over time. But those are the two things you'd want to see, expansion of the gross margin line, and then just us gaining further leverage in the business as we grow.

Okay, I'm going to sneak one more in on popping. So I guess two-part question. How do you think about the investments in growth if there is a soft patch or a downturn here over the next year? Would you continue to invest through it? And then secondarily, are these investments ongoing? Is it something that eventually you'll get to the other side and see more leverage and the benefits from those investments?

Yeah, Ruben, let me take the first one and then TJ, I'll have you take the second. When we think about the opportunities with Poppin' Ahead, you know, we are investing, we've been really pleased with the three kind of incremental focused areas that we have for Poppin'. So one is that we've opened the new showrooms and secondary markets. We're very pleased with how those showrooms are ramping, how the market is responding to our lead gen activity, the number of showroom visits. Then we have our pop-in pro, which we've told you is 15% of the pop-in business today. And then we have the brand new category of pods, which is an exciting category for pop-in direct, but also for the pop-in pro dealer channel. So all of those things give us a lot more diversification within the pop-in portfolio. So we're not only relying on the core showroom direct market, But now we have the opportunity with this new growth initiative. And frankly, we do see more of those that we're starting to work on for 23 and beyond.

And Ruben, as far as the investments, I think, and kind of the leverage of those, just a reminder, our traditional business, which is really our made-to-order domestic product, when that business grows, we gain that leverage at the gross margin line. Popin, that's a source model. And so that we really gain our leverage at the S&A level when we begin to leverage these investments like the showroom and like our digital lead gen. So I think that's where you'll see that really begin to perform.

And just one more comment. Some of those initiatives like Popin Pro or the pod category, those investments aren't just for the Popin business. Those investments actually go across Kimball International's and the opportunity to actually expand that brand and that portfolio into Kimball International Traditional Dealer Network. So that's the sweet spot of what we're starting to see with the acquisition of that business.

Great. Thank you, guys. Congrats on the progress and good luck.

Thanks, Reuben. Thanks, Reuben.

Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of Bud Baggett from Water Tower Research. Your line is open.

Good afternoon, Christy and TJ. Congratulations on your progress. Can you hear me okay? We can, Bud. Thank you.

Thank you, Bud.

Yeah, a couple of questions on that topic. on the overall environment for Poppin, the Poppin pods. Talk a little bit about who the customer is on that and what you're seeing on that in terms of new customers and how that's getting distributed.

Sure. Well, one word, you know, the pod category had just started with Poppin when we did the acquisition. Actually, they had just launched the category in March, January before the pandemic and they were starting to see some really good traction. There's no doubt that that pod category fits really well into kind of in stock, ready to ship, setting up short term leases and with speed in creating kind of private environments in very open spaces. So it's done very well in the direct pop in channel. But certainly that's been a very important part of Popin Pro. And so we've seen that our dealer community is taking that product line and putting it in layouts and open floor plans, kind of in the more longer lead time projects that we see on the side of the more traditional Kimball International business. It's a great category. There's a lot of innovation that's going on in that category, and we're very pleased to be in that category, and that acquisition allowed us to do that very quickly.

And pricing of that versus competition, you are significantly below or equivalent to? How do you find yourself competing in that market?

Yeah, I think what we would say, Bud, is when you look at the pot category, there is quite a range as far as what the products can offer and different enhancements. So I think for what we are trying to do, we think we're competitively priced in the market, we're where we want to be, and we think the amenities offered for that fit the price point. So again, there's a wide range of you know, kind of from more entry level and basic to higher level. But I think when you look at how the pods are positioned within the total Poppin portfolio, it fits very nicely with the rest of the kind of pricing architecture within Poppin.

Okay. And TJ, if I heard you correctly, you said that it's fiscal 23. You're looking to improve gross margins by about 200 basis points. That would make it close to 30, 34. Is that right? Do I get that right?

No, we didn't give any guidance. I would say when Ruben asked that question, he was thinking about the longer term. What do we need to aspire to to get back to an 11% EBITDA margin? What I guided Ruben towards in his question was over time, 34% was what we were historically as far as gross margin for the business. To get back to that 11% EBITDA from what's implied in the 7% in our guidance, you need a couple of you know, a couple hundred basis points expansion of the gross margin line and similar improvement in SG&A leverage. I think for this year, you know, we didn't give any specific gross margin guidance. We would certainly expect expansion over where we finished fiscal year 22 for the full year. But I think what we want to point out, as I indicated with the LIFO, is it won't necessarily be linear over the four quarters. So, you know, certainly improvement for the full year, just thinking about the volatility still in the market and how we'll manage through that.

But I would just add that we're very pleased with the team's work around gross margin, and we will continue that work. One of the areas that we are accelerating is kind of our reliability and making sure that we're moving through our backlog quickly. delivering against our customers' expectations. And so, you know, we've been pleased with the progress that we've made on gross margin. You'll see us starting to really focus on moving to our backlog, servicing, getting lean times back in line. And I think that's really exciting for us. I think, you know, we're very focused on the secondary markets and delivering with the products that we believe in. And that will be a piece that we talk to you about in the future.

Now, price gap, price costs were in balance in the fourth quarter. Where were they for the year? What was cost minus price for the year? What did it cost you in either dollars or basis points or however you want to characterize it?

Yeah, but, and interesting, I know, you know, some of our industry kind of talks in those terms a lot. We haven't really talked about the price cap, price cost gap in dollar terms throughout the year. You know, I think what we've pointed people towards is You know, again, historically, gross margin was 34%, roughly, pre-pandemic. Over the past three quarters, we saw the low 30s, you know, in the 31% range. And so, what I would tell you is, you know, this quarter, as I mentioned, as you said, first time that we matched those two up, which led to the benefit from the elements I mentioned before, operating excellence, leverage, and mix into some degree LIFO.

Well, cost has continued to accelerate in the in the fourth quarter. Certainly energy costs have been unpleasant. So I would think you have pricing yet to get for fiscal 23. Am I wrong in reading that?

No, but I think that's a fair point. What I would say is what you'd have to think about is the cadence of our pricing actions and how, as you know, those take a delayed effect through the backlog. So we still have additional benefit to realize year over year in the first quarter of this fiscal year from pricing actions previously taken. So when you look at the comps, we will be realizing incremental price in the first half of this fiscal year from actions already taken. So, yes, those will deliver more benefit.

So in the first quarter, price minus cost should be positive for you, I would think. I would be surprised if it weren't for comps. based upon just ceteris paribus unless costs continue to accelerate.

Mel? Yeah, I think the last part of your question, last part of your comment, but is the important one, just thinking about will costs continue to accelerate. So I think, you know, we hope to continue to make progress in gross margin and hold our gains that we had in Q4, but certainly it depends on what the inflationary environment holds going forward.

Okay. Just a few more for me. Going just to the balance sheet, if I could. inventories are obviously notably up and that's been the fact that they were not up was a problem earlier in the year. Are they at where you want them to be? They look like they're at maybe four or five times turn somewhere in that range. Where do you want inventories to be and what's the quality of the inventory?

Yeah, no, that's right. But so I think there's a few points on this. There's two things about it that, you know, obviously increasing as our business does, but two things specifically deliberately increase. Number one is safety stocks for raw materials. As Christy mentioned, we want to improve our operational performance and liability. So safety stocks are above where they would, I guess, say traditionally be to kind of balance things out. And then in pop-ins, That's been a significant inventory build. As Christy mentioned, we're new in the pod category, so building inventory for that category and just making sure, as you mentioned, we were out of stock earlier in the year, so making sure that inventory is there. So those are two things that we would say we like about the inventory build. One element that I would say we want to work on is we are carrying larger than normal stocks of made-to-order finished goods. So these are made-to-order products that we are still holding in our warehouse, because we're waiting for them to match up for a complete shipment. And so that is something we traditionally did not have any significant inventory balances in because we would really make it and ship it out the door. But because of the supply chain disruption, that's one area we'd like to see decrease over the coming quarters.

I'm a bit confused by that then. Where will target inventories be at the end of either half year, full year? next year. And I understand the backlog is somewhat extended for everybody in the industry for lots of reasons. So you're alone with that inventory.

I think, I think we'd want to, yeah, I think, I think we would want to say we would want to improve the terms from where they sit today. We don't have a specific target, but I would say, although it's higher and some of all notes of that are deliberate, I would say we'd want to improve working capital efficiency and, from where we stand today across the balance sheet, not just in inventory.

Okay, because owned inventory looks like about $17, $18 million, as I would calculate it right now. So you've got high payables as well. And are they going to stay at that level? Yeah, we haven't had them.

Yeah, no, I think the area we look to work, when you look at our accounts receivable, accounts payable, no significant change in any kind of terms on either side there. So I think the one place that we'd put the most work into would be inventory. And that's the place where you could release cash from the balance sheet and look to reinvest.

And so this year we had kind of negative free cash. Next year, what are we going to have in terms of

Yeah, so I think, and if you look at the free cash flow for the full year, the majority of that was invested in working capital. That was by far, you know, the biggest consumption. I think when you look at next year, we said that capital expenditures of, you know, 25 million, that's slightly up versus what the net of disposals number was this year was roughly 20 million. So I think slightly higher investment in CapEx next year, but then we would see cash relieved from working capital and plus just the improved business performance. So, again, didn't provide free cash flow guidance, but certainly free cash flow positive next year. So CFO will or will not exceed $25 million, I guess. Yeah. No, fair. I'm trying to, you know, kind of stick with the guidance we've given.

Okay. I'm trying to see if we have positive free cash next year.

Understood.

Yes. Yes. Okay, that's fair enough. Where are we on the Yarn Act? You only have about $3.2 million left on the liability. That's all popping, I take it, right? There's nothing left on anything else? That's correct, Bud. Okay, and all right, so that's fine. Okay, great. Well, thank you very much, and thank you for taking my questions. Congratulations on the progress, and I look forward to monitoring the continuing progress. Thank you. Thank you, Bud.

There are no further questions at this time. Ms. Christy Jester, I turn the call back over to you.

Great. Well, good evening, everyone, and thank you so much for joining our call this evening, and we really look forward to keeping you up to date in our progress in fiscal 2023. Thank you.

This concludes today's conference call. You may now disconnect.