Q2 2020 Earnings Call
Good morning, Ladies and gentlemen, my name is Crystal and I'll be your conference call facilitator today.
This time I would like to welcome everyone to the Kimball International second quarter Earnings Conference call. Currently all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
As with prior conference calls today's call February 5th 2020, well be recorded it 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 at the present us, we'll 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 or Kristie Juster, CEO of Kimball International and Michelle Schrader Executive Vice President and Chief Financial Officer of Kimball International I would now like to turn todays call over to Kristie Juster mistrust, Sir you may begin.
Thanks, Crystal and good morning, everyone welcome to Campbell Internationals second quarter earnings Conference call.
We are six months into the execution of our transformation plan that is fueling our Kimball international connect strategy.
I'm pleased to report card implementation in financial delivery is exceeding our expectations.
In today's call, we're increasing our estimated cost savings for fiscal 2020 from 16 million did 21 million.
This performance hates to ways to both improved profit and increased investment in growth as we move forward.
In our material today I will walk through the highlights of our Q2 performance comment on market, leading indicators and provide specifics around progress on Kimball International connect strategy.
Michelle will then provide details of our financial performance and I'll wrap up with color on our path ahead before we open the call to Q anyway.
Please turn to slide four for our Q2 highlights our net sales were in line with our expectations for the quarter.
But short of our overall long term growth guidance of 4% to 7% that we've included in our three year financial objectives.
We ended the quarter with revenues of 192 million, a 4% decrease year over year against a difficult comparison to 13% growth in the prior year.
Comps for the prior year from our three focused verticals were very strong with commercial up 29% hospitality up 16% in health care up 20%.
At the same time or Kimball brand experience unexpected reduction in revenues as we continued our planned realignment of the business in the first half of the year.
Now turning to orders orders were strong up 13% as we experienced broad based growth across all verticals.
We were particularly encouraged by the growth within hospitality up 31% assisted by strengthen in Las Vegas market.
Hope here was up 10%.
Against 22% growth in the prior year as our strategic focus and investment into this vertical I Didnt Campbell brand continues.
Our backlog finished the quarter at 173 million up 20% over prior year positioning us well for a strong start to the back half.
Growth will be led by hospitality in house and health care market, coupled with the continued traction on the national brand in the ancillary product categories.
Shell will provide more commentary on vertical market performance later in the call.
Operating income of 7.4% or 8.6% on adjusted basis increased 220 basis points.
Gross profit of 34% increased 170 basis points, giving us confidence in our sustaining improvement in gross margin.
At the same time, adjusted selling and administrative costs decreased 50 basis points, even well funding our strategic investments in Kimball International connect.
We expect our strategic investments will continue to ramp in the second half of our fiscal year in order to accelerate longer term growth.
We're very pleased with the adjusted EBITDA performance of 20.9 million up 23%, representing a margin of 10.9% of 240 basis points.
And finally, adjusted he P.S. increased 27% to 33 cents compared to 26 cents a year ago.
Turning to slide five for review of the macroeconomic indicators, we track for the industry.
Dismiss calendar year forecast for U.S. office furniture is 7.4% in 2019 and 2.2% in 2020.
This December forecasted and change from the prior October forecast I reviewed last call.
Deceleration of the 2020 forecast is attributed to the deceleration of the U.S. GDP from 2.3% in 2019 to 2.1 person in 2020.
The architecture Billings index by AJ, which serves as a leading indicator of nonresidential construction activity rose to 52.5 in December up from 49.7 in September with improvement in each of the last three months.
Improvement is attributed to the business conditions rebounding from a period of softness throughout much of the spring and summer.
We are encouraged with the improvement in this nine to 12 months, leading indicator of nonresidential construction activity.
[noise] Rev par or revenue per available room is a leading indicator for hospitality business.
Forecast for calendar 2020 estimate rose, 8.7%, which is in line with 0.9% forecasted growth in 2019.
We continue to see strong activity, especially as it relates to the second half of our fiscal year driven by the strength in the base Vegas market.
All these forecasted metrics were released prior to the recent Corona virus outbreak in China.
We are diligently managing this very fluid situation, the safety and well being of our employees is our number one priority and we are keeping in close contact with our small employee base in China.
We have implemented I travel ban cheese in from China.
With minimal sales outside of North America impacted area for us is our supply base.
Approximately 15% of our total material spend for office furniture is sourced from China.
In our hospitality business imports approximately 50% to 60% from our supply partners in China.
We have some buffer inventory because of our planning in anticipation of the Chinese new year.
The circumstances are very fluid at this time, it's always difficult to determine what level of impact. This may have on our business.
We are keeping in close contact with their employees suppliers in our customers well actively building contingency plans.
Setting aside this unique situation we're in a very healthy place supported by both our improving margins driven by our transformation work and available capital.
Setting us up to take advantage of the opportunities and at the same time manage the volatility.
We believe this landscape gives us a solid foundation for execution of our Kimball International connect strategy and related transformation plan as we pursue our three year financial objectives.
Moving onto our progress update in the deployment of our Kimball International connect strategy.
We introduced slide six in our last call, which is a depiction of our brand positioning relative size of the brands today and more importantly, the path and differentiation, we're driving through our connect strategy.
As a reminder, the vertical access is a continuum from standard to custom product type in the horizontal access reflects from commercial to hospitality environments.
You will continue to see how the actions, we're taking directly relate to the repositioning of our brands.
Our portfolio strategy is grounded in maximizing our expertise across the intersection of hospitality in resin merger.
Within expansion into higher growth markets and product platforms, such as custom.
Each of our brands in our business units play an important role in this evolution.
Turning to slide seven well, we will focus on the progress made in each of our four pillars of the Kimball International connect strategy during the quarter.
First is inspire our people.
On January 13th we announced the creation of two new executive positions at Kimball International.
First with the newly declared consolidation of our global manufacturing operations Redmond. Your has been promoted to executive price Vice President Kimball International Global operations.
Greg Deep experience gained over the course of is 31 year tenure with the company will be an incredible asset in the transition.
Greg's relationship with there are people and knowledge of our business will allow him to have an immediate impact on the significant opportunity we see ahead.
Second we are implementing a companywide approach to all corporate business practices, including legal compliance and environmental social and governance, Yes G.
Mark Johnson will be joining the company is chief legal governance officer and corporate Secretary.
Mark has deep experience in these areas and served as Deputy General counsel at a publicly traded Fortune 500 company.
I'm excited about the value that both of these individuals bring to our executive team lending both deep experience with fresh ideas.
Continuing with our focus on talent.
Wanted to touch on or elevate high potential development program.
As you May recall. This initiative was launched one year ago in focused on 14 of our top talent.
The proprietary program engage selected talent in executive level development action learning in a direct engagement with the executive team to actualize, our new strategy.
It was an overwhelming success both for the participants development and the value that this team brought our organization.
From this program for the participants have already been promoted to highly impactful rules that will be critical in successfully executing our strategy.
During our last call, we announced the opening of our newly redesigned corporate headquarters.
It is certainly exceeded our expectations with regards to creating a collaborative environment for our team well leveraging it isn't working showroom for customers.
Just one last quarter, we've shared our new stated the aren't working facility with our employees and families.
Hosted an open house for Jasper and the surrounding communities and held our global supply summit sharing our vision with representatives from our top 40 domestic strategic suppliers.
And this week Kimball brand is holding their national sales meeting into less dealer conference in our new home.
The customer tours are in full swing and the feedback from all of those interactions have been extremely positive.
We are so proud of her new home and know that this investment will provide ongoing return.
The second pillar of our strategy is build our capabilities.
As mentioned on January 13th we announced the streamlining of our manufacturing for all our brands into one World class Global operations group.
The global operations team will include manufacturing supply chain engineering logistics, R&D safety and environmental.
Repositioning this into a centralized function servicing the brand will enable us to leverage our manufacturing streams across the organization in line or capabilities with the needs of our evolving product portfolio in the most cost efficient way.
We announced a first step R. Kimball international manufacturing optimization to the organization this past week.
What was the David Edward acquisition for the Kimball brand 18 months ago is now being developed into a high end upholstered seating facility for both the Kimball brand and Kimball hospitality.
As part of this plan, we have announced that we are consolidating the red mine production facility into the Baltimore production facility.
Our focus is investing in new equipment in a redesign layout in Baltimore that will allow us to substantially increase capacity and reduce lead times.
All while delivering on the high design high quality products, but the David Edward brand is so well known for.
Expanding our Kimball health care before portfolio I think celebrating our expansion of Kimball hospitality seating.
One of the key cornerstones of our transformation has been our formal and rigorous approach to the build up the program management capability.
This expertise brings us consistency operating rigor efficiency in broad understanding in ways of working.
We've invested in these capabilities through external training in over 12 formal change management rollouts across the various parts of the organization. We're very pleased with our accelerated capability build in the area program management and it will serve our ongoing transformation efforts.
The third pillar of our Kimball International connect strategy is fuel our future.
Our company wide commitment to operational excellence and adoption of new enterprise wide processes has proven our approach to funnel delivery is working.
The early adoption not only gives us confidence to increase our fiscal 20 target, but also enables us to see our fiscal 21 plan, taking cheap and we are actively working on some of deals projects today.
The combination of our center led process approach to cost savings.
Capability build and program management and newly announced consolidation of global operations provide confidence in the ability to fuel our feature through ongoing cost saving efforts, we will share more specifics on this as we stress through our fiscal year.
All of these actions enabled the fourth pillar accelerate our growth.
Our ongoing commitment to new products has been the primary fuel for organic growth and we are pleased with the new product metrics displayed last quarter driving 29% of our combined brand sales.
As we entered the back half you will start to see organic growth agenda abroad, and with our entrance into two new product categories.
National launched a new assortment of task seating in December and our new ancillary sub brand et cetera in January.
Both of these platforms offer new incremental opportunities for our business.
Hi seating is one of the largest volume categories in North America office furniture and is a true match for the National brand.
And we believe the new et cetera collection of letters that product lead the perfect answer to the designers need for full were design reduce complexity shorter lead times, but still with the assurance that is consistently delivered by national.
For the Chemo brand, we announced the launch of the David Edward collection by Campbell at our sales meeting this week.
The team has been working on this since our acquisition the collection will be comprised of the signature David Edward products plus ongoing. New addition, supported by a new website marketing materials and they blended selling model through both independent reps in our own Kimball selling organization.
We're excited about the reinvigoration of the David ever brand in the role that can play in the Kimball brand portfolio portfolio.
Finally, I'd like to take a moment to update you on the focused initiatives to turn the Kimball brand into a sustaining growth driven business model.
As we stated last quarter, we anticipated these wholesale changes would closet drag on our revenue growth to the first half a 2020 into progress in the second half.
We had been very attentive on the same three initiatives to drive a different level of sustaining business performance for the Kimball brands.
The first initiative is the realignment of selling resources to higher growth markets. This reallocation of resources to higher growth markets is showing traction as we see orders ramping in the back half of this fiscal year.
The second is it initiatives isn't intense continuous improvement focus.
Correct margin issues within the systems category.
Well the Campbell brand made solid progress in the front half we do expect the newly established global ops team and our commitment to best practices drive additional Ben benefit.
The last initiative is a commitment to training development and talent within our healthcare vertical.
During the quarter, we hired a Kimball brand health care sales leader to drive focus on sale strategy and growth plan within this vertical.
Additionally, we have rolled out we'll be referring to as boot camp training to our field sales to increase the knowledge relate to our sales approach and products.
I was care sales are up 19% on a two year stack base basis, and we expect continued growth in this vertical going forward.
We're pleased with the progress on the Kimball brand realignment and no. It plays a critical role in our portfolio.
[noise] into wrap up I'd like to summarize our transformation savings in Q2, and our new full year target on slide eight.
Our operational excellence cost savings delivered 3.8 million through strong execution of our priority projects.
For example, quitting automation in one of our case goods facility in sourcing optimization of a top performing kimball seating platform and focused value engineering through material optimization.
Our center led cost savings was on track at $800000 in the quarter in our new ways of working through previously disclose showroom closures in a reduction of selling resources dedicated to low growth markets delivered expected savings of $2.5 million.
Fiscal year to date savings were 12.7 million as you can see we are ahead of our 16 million cost savings pace. We initially targeted in the year.
That said, we do see expected cost savings decelerating a bid in the second half as we anniversary portions of the 10 million savings generated in the prior year.
This let us to increase the savings target to approximately 21 million from the original 16 million.
Again, I'm very proud of our entire organization as we embrace this new way of working resulting in an exciting new cost efficient operating model.
With that I will turn the call over to Michelle where she will do a deeper dive into the quarterly financial results Michelle.
Thanks, Christy and good morning, everyone I'd like to turn your attention to slide nine as I discuss our second quarter financial performance.
We ended the quarter with 192.2 million in sales, which was a decrease of 4.4%. Our net income increased 17% to 11 million. Our adjusted EBITDA of 20.9 million increased 22.9% and resulted in a margin of 10.
<unk>, 9%, which was up 240 basis points versus a year ago.
Adjusted EPS increased 26.9% to 33 cents compared to 26 cents a year ago.
Turning to slide 10, I'll take you through the details of our financial performance in the quarter.
Gross margin improved 170 basis points to 34%.
We've made progress over the last three quarters in achieving sustaining year over year gross margin improvement.
Savings from our transformation plan have been a key contributor of that improvement as we realized a 3.8 million of savings this quarter, which resulted in a 200 basis point improvement in margin.
Pricing realization also contributed to the improvements to the tune up 200 basis points this quarter.
Partially offsetting this improvement was the loss of leverage on the more revenue and unusually high employee healthcare claims during the second quarter with an increase of 1.5 million over last year on the gross margin line.
We feel really good about where the improvement is coming from and that the improvement is real.
Selling and administrative expenses increased 30 basis points to 25.9% on an adjusted basis, where we exclude CEO transition costs and serve selling and administrative expenses improved 50 basis points to 25.4%.
Adjusted selling and administrative expenses decreased 3.3 million, despite investing 1.8 million and growth initiatives tied to our Kimball international connect strategy.
We expect growth investments to increase during the remainder of the fiscal year.
For the quarter benefits from the transformation plan of 3.3 million and reduce sales commissions of 1 million or partially offset by higher healthcare expense of 700000, which is in addition to the 1.5 million increase I mentioned earlier that's included in the gross margin line.
Fine.
We were happy with the level of earnings improvement over the prior year, considering the expected modest decline in sales.
We continue to anticipate some variability in our resolve.
We execute our strategy to realign the Kimball brand and invest for growth.
We believe the order growth experienced during the quarter the actions taken within our Campbell brand and the hospitality opportunity in the Las Vegas market.
Yes, well to deliver revenue growth in the second half of the fiscal year.
Our transformation plan gives us the ability to accelerate our pull back on growth investments.
The upon topline performance and the delivery of the benefits from our transformation plan.
All of this assumes no major disruption due to the Corona virus, which as Christie mentioned is very fluid right now.
Moving to slide 11, you will see the chart, indicating new product sales performance for our national and Kimball brands.
New product sales mix remained at a strong level of 29% of combined in national and Kimball brand sales and grew 2% over the prior year.
The national brand experience, new product growth of 28%, resulting from new ancillary product introductions.
New product development remains a key aspect of our growth plan.
Let's turn to slide 12 to the stuff sales by vertical.
More of the six product verticals reported sales declines led by a 12% decline in commercial and 8% decline in hospitality.
Both government and education delivered growth.
15%, an 11% respectively.
Christine mentioned sales declines were driven by difficult prior year growth comparisons of 29% and commercial 20% of health care and 16% in hospitality.
In the prior year quarter as the commercial verticals had a higher than normal concentration of projects contributing to that growth.
As we turn next to fly 13, you will see that all verticals reported order growth in the quarter, but hospitality, leading with 31% coming from strength with in the Las Vegas market.
The healthcare vertical grew 10% or 32% on a two year stack basis.
Driven by the Kimball brands continued investment and strategic shift to this higher growth vertical.
The strength in orders, along with the 20% growth and backlog positions us well for a solid Q3 and strong finish to our fiscal year.
Turning to our cash flow performance on slide 14, we generated 2.3 million in cash flow from operations and use 3.8 million in free cash flow.
Cash flow was negatively impacted in the quarter by a one time change in the payout timing of our annual cash incentive plan and the timing of our final accounts payable run at the end of December.
We continue to focus on working capital management Capex finished at 6.2 million for the quarter, which included completion of the headquarters remodel.
We returned a 4.6 million of capital to shareholders during the quarter, including 3.3 million in dividends and 1.3 million and share repurchases.
Our balance sheet remains strong with minimal debt.
Return on invested capital for the quarter finished at 38.4%.
Broken our earnings and discipline in investing our capital over the years have contributed to this impressive performance and we rank among the best relative to our public office furniture peers.
On Slide 15, you will see both our acquisition framework and acquisitions, we have completed over the last few years.
As a reminder, the key takeaway here is that we intend to grow our business, both organically and through acquisitions.
We look for acquisition targets that align with our purpose and R. Kimball International connect strategy.
These targets would have higher growth products that complement our existing portfolio, new product categories and or new channels of distribution.
An important financial consideration is that the expected return exceeds our weighted average cost of capital within three years post close of the transaction.
Turning to slide 16, we recap our three year fiscal 2020 through 2022 financial targets, which are unchanged from last quarter.
On the top line, we are expecting 4% to 7% organic growth.
We're targeting 150 to 250 basis points of improvement in adjusted EBITDA margin by 2022, and forecasting EPS growth of 10% to 15%.
Our outlook is based on assumptions for GDP growth of 1.5% to 2.5% flat share count and excludes the impact of any potential acquisitions.
I will now turn the call back over to Christie to provide color on our path forward Christy. Thanks.
Thanks Michelle.
Although we do not provide short term guidance I think it is important to provide some insight given Apache yes, we expect as we execute our transformation plan and best in our Kimball International connect strategy.
We expect our full fiscal year 2020 growth outpaced dismissed 2020 calendar year growth forecast of 2.2% supported by this strong growth in orders, we saw across all verticals in Q2.
Our Kimball hospitality growth will be back half loaded due to the installation timing of the Vegas projects.
We are now on track to deliver 21 million cost savings for the fiscal 2020 up from the original estimate of 16 million.
Organic growth agenda will start to take shape as we have strong proof in our ability to drive more cost efficient operating model.
Our growth investments year to date of 2.8 million will ramp to accelerate future growth.
We expect to invest approximately 30 million in Capex for the full fiscal year 2020.
Fiscal 2020 is shaping up to be a strong confirmation in our ability to deliver on our new Kimball International connect strategy.
And with that I'll turn the call over to Crystal and we'll be happy to take your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or are you wish or move yourself from the Q. Please press the pound ski and once again, ladies and gentlemen to ask the question. Please press Star and then one now.
And one moment for questions.
And I am showing no questions in the queue at this time I'd like to turn the call back over to Kristie Juster CEO of Kimball International.
Thank you Crystal and thank you for joining us today and we appreciate your continued interest in Kimball International and we look forward to keeping you informed on our progress have a nice day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a wonderful day.
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