Q3 2020 Earnings Call
Good morning, Ladies and gentlemen, my name is not working there will be your conference call facilitator today at this time I would like to welcome everyone to the Kimball International third quarter earnings Conference call.
Currently all participants are in listen only mode.
We will conduct a question answer session and instructions will be given at that time.
As with prior conference calls today's call May six 2020 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 afford looking statements can be.
Seen into Kimball International form 10-K.
During today's call the presenters will be making references twin earnings slide deck presentation that is available on the Investor Relations section of chemical International's website.
On today's call, our Kristie Juster, Chief Executive Officer of Kimball International and Michelle Schroeder Executive Vice President and Chief Financial Officer of Kimball International I would now like to turn the call today's call over to Kristie Juster mistrust or you may begin.
Good morning, everyone. We appreciate the opportunity to share with you our third quarter result.
All.
I told me 19 impact on our operation and discuss our business outlook.
[laughter] viewing our results I wanted to take a moment on behalf of Kimball International expressed our sincere appreciation to all the health care in the central workers on the frontline serving this crisis.
We hope you know that you were making a difference every single day.
And our thoughts are with those families directly impacted by the pandemic.
I am sure. We all feel it is the incredible I'm, hoping hearing that give us much confidence in our tomorrow.
I would also like to recognize the employees and leadership team at Kimball International for their dedication to keep our people in our community see during this unprecedented prices.
The team took swift actions that are outlined on slide three.
Plan has been designed around the key issues facing key stakeholders.
Namely our employees, our customers and the communities in which we operate.
At the onset, hoping 19, we immediately put in place a dedicated passport implement our innovation social dispensing and response for the call at all facility.
Adopted Hello, working protocols for professional staff, including training informal video conferencing capability.
We also took steps to care for though it was at higher risk getting sick I'm Cobiz 19, you are special care program.
And all those experiencing unique Archie <unk> dedicated employees on.
Additionally, we made important temporary shifts in our business operations to prioritize critically needed healthcare industry products for the pricing.
Our Kimball health ran watched a family of how price leadership.
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No says and teach in supporting.
Hair team work environment supporting temporary nurse station.
And the rapid response patient.
For makeshift facility.
Our National brand also watch approving a quick ship products, specifically targeting facility serving opened 19 crisis.
Our team also quickly came up with new ways to serve the immediate need for personal protective equipment.
Today, we have manufactured over 7000 reusable face masks and 10000 H. deal.
I'm pleased to say, we've been able to provide P.P. frying higher manufacturing workforce as well as for health care and government workers and nursing home resident in our community.
Moving onto our financial results.
On slide four is a summary, our third quarter performance.
I think they continued success of our transformation program designed to generate sales growth well, yielding significant cost savings.
Revenues for the period will modestly ahead of last years third quarter on a reported basis.
We had approximately 18 million in revenue that was originally scheduled to ship during the third quarter, but was oh to future orders due to Cobiz 19.
Approximately 7 million was related to the closing up our manufacturing in warehouse facility last two days of March to accommodate that shit to production of health care.
Its product will be shipped in the fourth quarter.
The remaining with shipments that were postponed by hospitality customers push outs duties supplier delays as a result, the topic 90 pricing.
He's the orders are different rules that will move into future quarters.
Despite only a modest revenue increase we were able to expand gross margin by 210 basis points.
Due to the execution of price increases in savings from our transformation plan.
This performance combined with only a slight increase in adjusted selling and administrative expenses resulted in a significant operating leverage driving a 19% increase net income in a 23% increase in adjusted yes.
Slide five outlines the four pillars of our Kimball International connect strategy.
The first is to create a winning corporate culture inspire our people and I can tell you that throughout this call bid 19 prices. It is our people set of inspired.
Hi, there its utility and innovative ways.
All in full support of their poly.
The company our customers into our community.
The next pillar is built our capability.
Sadly shopping center like functions and developing world class ways of working.
In January and now the decision to form global operations into one function at Kimball International.
During the pandemic, we have seen the power of this team and the speed and efficiency, which we can operate.
Our third pillar you our future is the foundation of how we are executing on our transformation cost savings plan.
Well, a rigorous program management and final approach, we have successfully implemented project in automation facility optimization in value engineering.
Right 7.2 million transformation savings in the third quarter.
Accelerating our growth is our fourth pillar.
Last earnings call, we shared our confidence in delivering growth in Q3.
I'm pleased to say without the approximate 18 million impact that some of it 19.
All three businesses.
It did contribute significantly to the growth.
Our innovative new workplace products continue to be in strong demand.
Which increased to 29% total commercial and institutional sales up from 27% in last years third quarter.
Before reviewing our current position with respect, hoping 19 impact on our business in our post Baltic 19 Hopper opportunities.
I will ask Michel briefly review third quarter financial performance Michelle.
Thanks, Christy and good morning, everyone.
I will give you a more detailed overview of our solid financial performance in the third quarter of fiscal 2020, as well as share some information on our strong liquidity position.
Sales this quarter increased to 178.2 million.
However, as Christie mentioned, we had approximately 18 million of cobot related impact relating to shipments pushed a future quarters.
Even with these push out we had year on year growth in our commercial markets and the health care and educational verticals in our institutional markets I.
As you've probably noticed in the release, we change the way we're recording revenue breakdown by combining several of our reported vertical into three end market categories, which we believe helps simplify our messaging.
Commercial market is now comprised of both commercial and financial markets.
We have group, the healthcare education and government verticals together as the institutional markets.
Together these two markets account for approximately 75% of our revenues.
The third market this hospitality, which represents the remaining 25%.
Our institutional and commercial markets delivered 4% and 5% growth over the last years quarter respectably.
Well sales in the hospitality markets declined 10% when compared to the third quarter of 29 teens due to shipment pushouts related to the cold, but 19 health crisis.
Gross margin expanded by 210 basis points year over year to 34%. This is our sixth consecutive quarter of year over year gross margin improvement.
Third quarter positive performance was mainly attributable to additional cost savings from our transformation plan.
Well, it's higher pricing on selected product line.
Reported selling and administrative cost a 45.6 billion were down 1.9 million also declining as a percentage of sales by 120 basis points to 25.6%.
On an adjusted basis, excluding CEO transition costs and the impact of our supplemental employee retirement plan.
Selling and administrative expenses increased 40 basis points to 26.5% or by 1 million to 47.2 million, despite our continuing investments and growth initiatives this quarter.
Net income increased 19% to 9.5 million or two.
Cents per diluted share.
Adjusted EPS increased 23% to 27 cents compared to 22 cents a year ago.
Adjusted EBITDA was up 21% to 17.5 million and resulted in a margin of 9.8% up 160 basis points versus a year ago quarter.
Turning to our cash flow performance, we generate the 4 million in cash flow perspiration.
Capital expenditures during the quarter were 5.6 million.
Most of which were related to manufacturing equipment upgrades to increased automation and our facility upgrades.
We returned 5.1 million of capital to shareholders during the quarter, including 3.4 million in dividends and 1.7 million in share repurchases executed in the third quarter.
We are temporarily helping share repurchases to preserve cash in light of the uncertain economic conditions.
Return on invested capital for the quarter at 29.4% growth in earnings and discipline and investing our capital over the years have contributed to this impressive performance and we continue to rank among the best in class on this metric relative to our public office furniture.
Ears.
We've spent a tremendous amount of time running multiple financial scenarios using various assumptions around the lengths and the impact of opened 19 on our business.
In general our contribution margin is around 30%.
So on incremental revenue changes, we would expect detrimental margin at approximately that rate assuming no actions taken.
We are scaling back discretionary expenses in evaluating additional actions for fiscal year 2021, as we prepare for near term uncertainty and make strategic choices to enable our ramp back up as we navigate through this crisis.
We are confident that our strong financial position and financial discipline will enable us to whether the current economic situation. We have a strong balance sheet with 90.3 million in cash and cash equivalents as well as an additional 73 million in available credit line.
I will now turn the call back to Christie to provide further insight on our path forward Christie.
Thank you Michelle we are all facing an uncertain economic environment, but a kimball international we had the benefit of our ongoing cost savings that we have dr. mark transformation fan in a strong balance sheet.
That's the staying power to weather the storm, all while continuing to invest in our future.
Slide nine provides an update on where we stand today. Currently we are operating in eight or 10, U.S. plants, which equates to about 95% of our toll manufacturing footprint.
However, because we are currently operating with a reduced workforce in light of our commitment to keep our we see our manufacturing facilities are running at about a 60% to 65% of our normal sorry.
While continuing to prioritize all health care orders, we are now able service all end market orders.
Recently order rates have softened throughout the month with our commercial and institutional markets down 23% from year ago end of April level in a 78% decline waters to our hospitality vertical.
Well there is consistent.
Coding activity in the promotional market delivery schedules vary depending on the impact.
Okay.
Mitigating the impact is our strong backlog, which amounted to 187 million and third quarter.
And at least 200 million of which is scheduled for delivery in the fourth quarter.
We also expect to drive additional cost benefits from our transformation plan during the fourth quarter.
Kimball International entered this crisis period in a strong position.
Well its diversified end markets and significant manufacturing agility and enables us to efficiently shift production to those products that are higher demand.
As Michelle noted, we have substantial liquidity or I mean.
That said, we need to anticipate tough times ahead, and its taking additional steps to reduce our cost structure and you are strong.
Sure.
Evening, we cutting or anticipated fourth quarter capital expenditures by 50%.
We're also reevaluating our spend.
2021.
Hearing back discretionary spending and closely managing our inventory level to reduce working capital requirements.
We've also made the decision to temporarily suspend our sure about buyback program. There are additional levers that we have identified in our closely monitoring market conditions.
Given the uncertainty surrounding the short term economic conditions, we considered it.
Pulled back on the long term financial targets. We set forth is full 2020 grew 2022 time period.
That said, we are confident once a recovery steps in our company has the structure in place to achieve consistent mid single digit revenue growth and grow adjusted EBITDA any P. S.
Faster sales.
Okay, the medium and long term, we believe this house prices caused many changes in the workplace environment that will provide additional opportunities Kimball international to gain market share leveraging our investments in innovation.
Manufacturing in rapid time to market.
On slide 10, we have provided our thinking on several aspects of the shift in our new workplace and are actively utilizing these insights to inform future planning.
First social distancing will make the workplace more fluid.
We'll be in the office at home and anywhere in between.
Second hygiene requirements will be Paramount, which will require changes in the way you design manufacture products.
Oh for design thinking is critical.
The races on to develop created solution for professional and personal work spaces.
Fourth b to B, well look like BDC, providing a tremendous opportunity incremental sale through E Commerce channel.
Our recent launch a big set are suffering national isn't fully but strategic the important step for us in this direction.
And fifth technology enablement will accelerate with the increase virtual school work.
Hello and show.
To sum up Kimball international strong balance sheet and newly optimized operating model provide us staying power to manage through the prices.
With me benefit.
The economic conditions.
And while we are planning framework impact you also have an eye on the opportunities ahead.
Operator, now I'd like to open the call for questions.
Yes, ma'am, ladies and gentlemen, if you like to ask a question might have of course not comment at this time. Please press Star then one on your telephone keypad.
If you would like to withdraw your question. Please press the pound <unk>.
Please standby, where we can probably because many roster again to ask a question. It is star and one on your telephone cheaper.
Our first question My comment comes from a line of Greg Burns from Sidoti <unk> Company. Your line is open.
Morning.
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Quantify.
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Fourth quarter and then.
Anyway, you can maybe quantify.
Some of these incremental items.
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Tie that back into.
You mentioned the 30%.
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The base case.
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Thanks, Greg its Christie.
Let's start by saying in our journey pre coated we've made significant progress on our gross margin expansion and that's been driven.
A significant portion of it but contributed by our transformation Sam savings.
And that we believe it's sustainable in nature.
Sure I'll talk about the six quarters of that we you know as we look at going forward.
We have been actively working on the funnel for additional transformation cost savings so that program and that work is very much intact.
And we've been working on that diligently through the crisis period, as we look to additional levers, we're kind of the pandemic and kind of though the space that we're in we are cutting discretionary spending in some make.
In some capex decisions to make sure that we can kind of endure for whatever is ahead. So we really are looking out into very separate ways and I'll, let michelle kind of comment on how that ties into our perspective for the full year.
So great we had about seven little over 7 million of additional transformation savings in the quarter now some of that transformation savings is variable cost and some of it it's fixed cost, but in the 30% contribution margin that was on a contribution margin level.
30%, but I mentioned that is assuming I mean, that's as of today. So that includes the transformation savings that we've seen to date, but as we go forward and we identify additional actions for fiscal year 21 that would be that would not be included in that 30.
First that sort of 30% of is as up where we are today and again as we're looking at transformation savings part of the transformation play these isn't fixed costs and part of it isn't variable.
Okay.
Oh.
Pretty healthy backlog.
We think about.
Fourth quarter.
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Fourth quarter.
Trends.
For the quarter versus.
Backlog.
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Right you you're right you know we came into the quarter.
With a very strong backlog and then just.
Just to remind you we have the two days a pause that we created as well that pushed some of the volume.
Q4.
And you know what are our challenge was in the Q4 was the fact that we were actually Oh, you know facilities were shutting down and we were ramping up back up and prioritizing health care orders in only servicing essential or.
We have so we'd gotten our facilities back up to commented on about 65% rate and we feel really good about how the facilities are ramping back up the social protocols that we put into place.
And so we are seeing ourselves kind of ramped back out.
And.
So the Q4 is gonna be impacted by more are our ability to ramp our manufacturing facilities.
Others.
Okay. We have also read Leon.
All of these orders in the Q4 time weighing on frame and are working through that and Michelle I welcome you to to comment as well.
Yeah. So we had disclosed in our press release also grade that.
787 million a backlog about 100 million of that would ship 'em. We thought in Q4 or we anticipate you know we did see some push outs from particularly hospitality customers.
And some of those push outs do go beyond Q4, so some of that backlog that you see at the end of March will fit in future quarters as well.
Okay.
And then.
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How much is project based versus maybe see today.
Refurbishment type business.
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So.
Yes.
Sure.
So in the hospitality market the majority of our business.
In hospitality is renovation and it is on a project basis. So there is very little.
Day to day business that really sets.
In the hospitality spectrum on the orders that we have seen impact than hospitality business is a delay in a push out in orders, we have not seen cancellation of orders.
And we're just seeing Dupont and timing the waters.
That we've had in our backlog and as you know we were very strong and hospitality and had quite a few quarters position for the back half a year.
And show you know, we do service C., we do see servicing that order base that backlog.
Throughout multiple quarters.
But we've not seen any cancellations to date.
And we are seeing some of the end users wanting to accelerate the renovations as the occupancy is like a due to the crisis.
Got it shows that you want to comment on anything.
No I think to cover the Christie.
Okay.
Slide.
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Great Yep, great. Thank you, we think there we see three choices.
For the corporations that are dealing with professional workplace. There is a kind of redo immediately.
I'd call that a retrofit.
There's a redesign for social thing and there is really an implementation around work from.
And I feel well in our dialogue with end users there really activating on all three.
And what we're seeing is a tremendous amount of activity in dialogue into the reentry of the professional workforce in kind of taking a shorter term the redo retro retrofit concept and then moving into a bit of redesign.
And enabling the work from home guidelines.
That are going out in many corporations.
Like I believe our did leave that we are situated to service all three of those.
Yes, we actually are you seeing the re entry of Kimball International we talk about the fact that we would you be done or headquarters Oh, we are using our own facility in our own personal re entry as.
As a guideline for what we're putting out in the market.
Yeah, I do we have groups working on a kind of near term retrofits that are really around shields and kind of easy installs in existing products.
Yes groups working on mid term that our new products that are about wellness stations and new finishes that are easy thing and then we have longer term innovation and then ultimately you know we started our E commerce still and that will be a critical component of what.
So why do you think we are situated to.
Help all over in users through these changes.
And I very much has been tremendously impressed with the agility of this organization.
During this crisis and I'm very very pleased on how were weak organizing our product roadmaps not priorities in order to address.
This opportunity in the market.
So I think it will impact us dramatically I think there's opportunities and I think end users will be looking at it very differently.
No I and I feel like if you think about what's different about Kimball International no. We are around the on and up our transformation journey.
So you know we talked about the fact that all of her hostile endeavors, our in service to gross.
And we've just started those investments and so we have the opportunity to deliver cost savings, we have the opportunity to take hold and some of our new initiatives like health care and we've just started work on our global operations. So we.
Has a significant opportunity going ahead, not only in our own efficiency, but in new ways to service the market.
Okay, great. Thank you.
Thank you again, ladies and gentlemen, if you ever question or comment at this time. Please press Star then one on your telephone keypad.
Our next question Mccormick comes from a lot of Tom Air from Hilton Capital. Your line is over.
Thank you hi, good morning, I have a a short term question of then maybe a longer term one as well.
In the short term given that we're probably going to see lower activity levels here I'm, just kind of curious how you see that flowing through work working capital and if that's going to free up some cash for the company.
And then my longer term question was and I apologize for my ignorance, but in terms of your manufacturing capabilities, how how fungible is it if the demand is coming from a different parts of your mix, meaning if some of the hospitality doesn't come back, but you know maybe she stronger in the institutional.
Space can you kind of shift over your manufacturing to meet that demand or is it a little bit harder to do then that thanks.
Great Tom Thank you for the questions Michelle do you want to take the question on looking at first and then I'll go over to longer term manufacturing footprint.
Yes, well.
Thanks for the question Tom So as we're looking at our working capital Amped up absolutely. It's something that we're very focused on with the economic condition. So we do anticipate and we are seeing a little bit already where we're having some customers asking for extended lead times.
And so on payments. So we are working through that with our customers were working through that on a case by case basis, but we put some new processes in place to really help us focus on collecting our receivables and then inventory as well you know with the the downturn in the orders that.
We saw on April we've got a really focus on our inventory and so we again, we've put different processes in place, we're looking at our stocking levels, reducing our stocking levels and just looking that everything to ensure that we keep a real focus manage on our working cap.
Capital as we go through this crisis.
Interest maybe just a quick follow up on that in terms of or the way that you had it moves that mix given the sort of immediate reaction here to cope it did that caused any inefficiencies in their manufacturing I mean buying sort of changing how the orders were slotted to get some of that health care up first and maybe take some hospitality out of the mix.
Yes, Yes, you know we we have.
Fourth it initially only for a bar 10 manufacturing facilities were open and we're back up to eight now. So we did have to do some reshuffling and we didnt have full oh workforce. So it did cause some inefficiencies until we got all of that situated and running.
Really.
Thanks, and then just on a longer term sort of fungibility of your manufacturing.
Right, Yeah, let me speak to that so in January we announced a going into a global operations structure previously to that Tom We would a three dedicated business unit that had their own manufacturing footprint.
All three of our businesses or incremental furniture commercial national grade furniture, and with the decision to go to a global operations. There is significant opportunity in just it would be optimization.
In regards to the flexibility of where our products can be manufactured.
And so we have started that work and we have a plan in place.
And we know there is tremendous opportunity and we do have the agility didn't move product throughout the manufacturing.
Print.
Just an example of that we had bought that David at work.
Oh, it's true facility eating facility were dedicated to that Kimball brain on but since we made this decision we're moving product through there that's both hospitality and Kimball branded products. So.
We're pleased with the opportunity to do that there are many like proxies and actually products that are being made in multiple facilities that we are now weak organizing for optimization going forward.
Terrific. Thank you.
Thank you are never scores are there.
Yeah, I was going to say there is one thing that I would add to that Tom how to ask about hospitality to maybe just to mention that our hospitality about 75% or so up our hospitality is purchased through supply partners. We don't actually manufacture. So it's more of a variable model on the hospitality.
Side.
So is that more of a that's assembly more for you.
It's actually were purchasing finished product okay. Okay, great. So the part that's probably the most challenged on the recovery that is more variable for you.
That's correct.
Okay. That's good to know thank you.
Thank you. Our next question or comment comes from the line Allison Peck from Peck wealth. Your line is open.
This back immediately on mute your phone.
Hi, This is Allison and thank you for taking my call I'm new to your.
The idea of your company and finding this call will be very interesting and I'm impressed with how you're managing in a challenging this very challenging time. My question has to do with your positioning from a competitive standpoint in terms of I know you've addressed some of this already so please don't repeat yourself, but in terms of your flexibility to just from a design.
Manufacturing marketing inexpensive be standpoint, and then finally would be my question has to do with your main competitors and for your markets your positioning.
Sure Allison. Thank you for listening in on the call. We appreciate it let me start.
Our market positioning for a moment so.
We have three brands the Kimball brand the National brand and then.
He brand and we have made some very distinct choices.
With that though is that brand portfolio. So.
One is that the Kimball brand is focused on health care arena to lose that the National brand is really focused on began to Larry.
Product categories, and then we have our hospitality business that makes kind of I'll call it hospitality grade.
Professional grade product and that gives us a lot of flexibility in the market. The difference that I feel from some of our peer set is that we've made distinct choices.
As to which markets that we are servicing in the total landscape of commercial furnishings, and we've made tremendous progress.
Each one of those markets.
I really like the choices that we made I know you know certainly through this prices the hospitality business is the most impacted about businesses. Michelle commented that is also on most variable business not only I'm up manufacturing standpoint, but that business also goes through I mean, you back.
Sales reps, so our selling side, it's also a variable.
On that business in that business is 100% domestic and so we service all of the U.S. hospitality sector. So I feel with our health care, our ancillary focused in our hospitality, we yours, we are well server.
Long term success business.
I also believe we're at a very different ways.
In our evolution that the company, we just started our transformation.
You and a half go we read distinct businesses and we did not have the agility that I spoke to earlier and so today, we are well under one corporate strategy and we have the opportunity to resources in investments.
And now with global operations product based off of where the demand is in where we see the opportunity in the future and so with our size of business in our agility, we feel like we have the opportunity to really lacks to the new workplace that.
I did about in the future and certainly playing your goal and thought leadership in that.
That's very helpful. Thank you.
Thank you.
Thank you I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
Thank you very much I just want to stay on behalf of Kimball International we very much appreciate you listening to the call and we wish everybody a safe and well path ahead have a nice day. Thank you.
Ladies and gentlemen, thank you for participating in todays conference. This concludes the program you may now disconnect everyone have a wonderful day Stacey.
Thank you.
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