Kimball International, Inc.

Good afternoon, ladies and gentlemen. My name is Rocco, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International First Quarter Fiscal 2023 Earnings Conference Call. As with prior conference calls, today's call, November 3rd, 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 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 site. 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. Christy Juster, you may begin.

Good afternoon, everyone, and thank you for joining today's call. We are pleased to report a strong start to fiscal 2023, which marks our third consecutive quarter of industry-leading performance and continues to demonstrate the value of our unique set of strategic choices, differentiated market positioning, and the resilience due to our leadership position in faster-growing geographies and categories. First quarter sales to our core workplace and health end markets increased 20%, driven by our focus on ancillary products and secondary markets. Ancillary products, which are critical to the flexibility, collaboration, and privacy needs of today's developing workplace and health settings, continue to see the most robust demand across all categories and accounted for 87% of our trailing 12-month sales. At the same time, secondary geographic markets, which are experiencing the highest levels of employment and population growth, along with a faster return to office, represented 78% of our shipments over the last 12 months. Our focused strategy, customer excellence, and applied research are enabling us to deliver the products and solutions our customers are seeking in the geographies and end markets with the highest growth and resiliency, resulting in continued revenue growth and market share gains. This was also our third consecutive quarter of substantial year-over-year profitability growth. Sustained top-line growth, a commitment to operational efficiency gains, and timely actions to mitigate inflationary pressures continued to drive margin improvement and enabled us to convert 14% revenue growth into 136% increase in adjusted EBITDA. Taking a closer look at our key end markets, workplace sales increased 22 percent in the first quarter, with a double-digit growth achieved across most verticals led by commercial and education. Workplace order rates were slightly ahead of last year's levels, while we experienced a mid-quarter slowing of the return-to-office pace, mostly in major metropolitan markets, and cycled a 57 percent year-over-year growth comp from last year. Recent market data shows continued increases in the return to office trend, and while major metropolitan areas remain behind secondary markets, the gap has begun to narrow. Finally, we continue to see a sustained high level of upstream dividend signals, including inquiries, showroom visits, and A&D activity. While all of these data points are encouraging, We also appreciate that recessionary concern remain a headroom to future demand, and we are closely monitoring the market for signs of change in order and project patterns. This quarter also marks year one of perfect harmony, the implementation of our harmonized selling model into a multi-branded selling organization, which continues to yield very positive results. In Q1, incremental sales for this new multi-branded approach represented more than 25% of our year-on-year increase in sales growth. We are also pleased to announce that all of our Kimball International showrooms have been refreshed and upgraded over the last year to showcase this combined Perfect Harmony product offering of all five workplace and health brands, including a new pop-up showroom in New York City. These efforts have been well received in the market with an increased number of showroom visits, customer inquiries, and influencer events. Our teams and dealer community have been actively connecting in person this quarter, learning new products and sharing best practices at our national sales meeting and select dealer conference, all in our newly harmonized headquarters in Jasper, Indiana. Poppin's first quarter sales were flat year over year, constrained by heavy brand reliance on metro markets due to the lower than expected return to office. Our newer growth initiatives, Poppin Pro, the Pod category, and our expansion into secondary markets continued to perform above our expectations and are a very important part of Poppin's growth acceleration into the future. Our three new Poppin showrooms and secondary markets open during fiscal year 2022 are scaling well and all placed in the top 10 of Poppin's markets for the quarter. In addition, Poppin's original five showrooms are in the process of being refreshed with a newly relocated showroom in the LA market to Culver City. Poppin's pod category revenues are up 38% year on year, and our Poppin Pro dealer channel accounted for 15% of Poppin sales for the third consecutive quarter. Poppin's work-happy approach to product design and in-stock ready-to-ship model will allow us to capitalize quickly on increased demand in core markets while providing a platform for continued expansion into new territories. Moving on to our health markets. sales were up 13% year-over-year in the first quarter, while orders were up slightly year-over-year, as hospitals and health systems re-engage on projects that were delayed throughout the pandemic. Our Interwoven Health brand continues to perform well in the market, with sales up 27% year-over-year, and we are gaining share in the federal government health business, which is benefiting from increased funding. This vertical makes up more than 10% of our overall health bookings. We just returned from the Healthcare Design Expo in San Antonio, where we proudly received the Nightingale Award for our EverySpace modular solution and showcased how our family of brands support spaces throughout the entire healthcare facility and puts the focus back on patients, caregivers, and family members. We continue to build on our expertise in health through investments in applied research, product development, and partnering with our health-focused dealer community and health systems. We are also pleased to share our new Creating Places to Belong campaign, addressing both our workplace and health markets. This program is a culmination of our research, insights, conversations with customers, and a reflection on our own journey around what it takes to create an equitable, inclusive, flexible, and safe workplace. Creating places that foster a deep connection, productivity, and well-being is more than just providing a space for working, learning, and healing. It is about reinvigorating spaces to a place of belonging and is based upon four fundamental elements. Balancing hybrid environments, prioritizing flexibility, focusing on inclusion and belonging, and supporting health and well-being. Combined with our deep expertise and broad ancillary product portfolio, this new design thinking will allow us to become the trusted partner in our customers' return to office and employee re-engagement efforts and their pursuit to create environments that promote a personalized sense of belonging. In combination with creating Places to Belong, we have also launched nine new product introductions and enhancements in October, ranging from nesting chairs to accessory tables, as well as enhancements to many of our most successful solutions. These new introductions are directly related to the latest research and insights that continue to guide our view on collaboration, connection, flexibility, and hybrid environments. In hospitality, we are realizing the return of some property improvement mandates as brands are positioning themselves for a post-pandemic travel environment that is comprised of pent-up demand for leisure travel and a realization of the value of in-person business meetings. While still early, the renewed optimism in the sector makes us cautiously optimistic regarding a return to growth in this end market in the second half of fiscal year 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 sector and future demand trends. To sum up, our first quarter performance represented a solid start to fiscal 2023, and it set the stage for another year of growth for Kimball International. Now I'll turn over the call to our CFO, T.J. Wolf, for review of our first quarter financials and a discussion of our outlook for fiscal 2023. T.J.?

Thanks, Christine. Good afternoon, everyone. We began the new fiscal year with solid first quarter results, giving us confidence in our strategic priorities and keeping us on track to achieve our full year guidance. Net sales increased 14% to $177.8 million, led by our workplace and health end markets. Sales and workplace increased 22 percent, mainly in the commercial and education verticals. Health revenue increased 13 percent as providers in this sector have begun to reengage on projects that were postponed during the pandemic. As expected, the hospitality and market remained challenging, with revenue decreasing 21 percent compared to the year-ago quarter. Gross margin increased 220 basis points to 33.5 percent, reflecting proactive pricing actions to offset inflationary costs and supply chain pressures. as well as higher utilization from improved sales volume. The slight sequential decline in gross margin was mainly driven by higher freight and logistics costs. Selling and administrative expenses were 53.4 million, or 30 percent of net sales, a decrease of 210 basis points year over year. Excluding amortization from the pop-in acquisition totaling 1.5 million, as well as SERP adjustments, adjusted S&A was 52.4 million, or 29.4 percent of net sales, compared to 48.6 million or 31.1 percent a year ago. First quarter 2023 gap net income was 6.6 million or 18 cents per diluted share, inclusive of a 9 cent per share after-tax contingent earn-out gain. This compares to a gap net loss of 5 million or 14 cents per diluted share in the year-ago quarter. Excluding the gain, as well as the acquisition-related amortization or restructuring expense, adjusted net income was 4.8 million or $0.13 per diluted share, up from an adjusted net income of $1.9 million or $0.05 per diluted share in the first quarter of fiscal 2022. Adjusted EBITDA grew to $11.5 million, up significantly from $4.9 million in the fiscal 2022 first quarter. Adjusted EBITDA margin also more than doubled to 6.5% from 3.1% in the year-ago quarter. Moving to our order trends. Workplace orders were up 1% with price more than offsetting volume declines, supported by demand in the commercial vertical. Orders in the health end market were up 3% with price more than offsetting volume declines, recovering from a decline in the quarter ended this past June. Orders in the hospitality end market declined 4%. However, the cadence of order trends in hospitality suggests a bottoming of demand and potential return to growth in the next quarter. Our total backlog at quarter end was 180 million compared to 170.8 million in the first quarter of fiscal 2022, with lead times for all major product lines back within one to two weeks of pre-pandemic or normal lead times. Assuming no new supply chain disruptions, we would expect them to reach our desired lead times by Q4. And generally, our backlog is comprised of 75% workplace and health and 25% hospitality orders. Turning to the balance sheet and cash flow statement, We ended 2023 first quarter with total available liquidity of $75 million, consisting of $17 million in cash and $58 million from the unused portion of our credit facility. At the end of the first quarter, our net debt to adjusted EBITDA ratio was 1.2 times. In the first quarter, we generated $18.1 million in operating cash flow. Capital expenditures of $5.4 million consisted of investments in our warehouse in Jasper, which is now fully operational, updating showrooms, manufacturing equipment automation to drive our operational excellence programs, and enhancing the customer experience. We returned $4.3 million of capital to shareholders in the form of dividends and share purchases. We continue to focus on finding solutions for and eliminating running hot costs and supply chain disruptions, while also continuing to invest in more efficient operations. For instance, we have modified our warehouse network to provide for a single point of order dispatch, and we are halfway through the process of installing our metal automation infrastructure, which combined with lowering steel prices will drive further operational efficiencies. This project is expected to go online in April 2023. We have also initiated several initiatives to reduce our working capital levels, which we estimate reached its peak during the current quarter, and we anticipate will begin to ease over subsequent quarters. Improvement in our cash conversion will enable us to further reinvest in our business, reduce leverage, and return additional cash to shareholders. Now looking at our 2023 outlook, we reaffirm our 2023 revenue guidance of $750 million to $780 million, representing approximately 15% growth at the midpoint, and our adjusted EBITDA guidance of $48 to $52 million, representing approximately 47% year-over-year growth at the midpoint. We expect full-year revenue and adjusted EBITDA to be weighted toward the second half of the year, with the fourth quarter being the strongest. Our guidance reflects current order trends through October, additional price realization from actions already taken, and a reduction in backlog during the second half of fiscal 2023, driven by improved operational performance. We are planning for full-year capital expenditures of approximately $25 million and expect our full-year effective tax rate to be in the range of 25% to 27%. As for the second quarter, we expect revenue to be similar to Q1 levels and adjusted EBITDA to be slightly below Q1 levels, mainly due to a temporary increase in freight and logistics costs. With that, I will now turn the call back to Christy for her closing remarks.