Q4 2020 Kimball International Inc Earnings Call
Conference call facilitator today.
Time, I would like to welcome everyone to the Kimball International fourth quarter and fiscal year 2020, <unk> earnings conference call as with prior conference calls todays call August three 2020 will be recorded and may contain forward looking statements as defined under the private Securities Litigation Reform Act up 1995 actual.
Results could differ materially from the forward looking statements Respecters 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 earnings and earnings slide deck presentation that is available on the a bench.
Relations section of Kimball International's website.
Today's call is kristie Juster CEO of Kimball International and Michelle Schroeder Executive Vice President and Chief Financial Officer of Kimball International I would now like to turn the call over to Kristie Juster. Mr. You may begin.
Good afternoon, everyone. We appreciate this opportunity to review, our fourth quarter and full year 2020 performance and discuss our business outlook.
Our fourth quarter results demonstrated the resilience of Kimball international and its ability to execute effectively under difficult business and operating conditions.
I'm pleased to report that our adjusted operating income was stable with your ago levels in our adjusted EBITDA was slightly ahead of last years fourth quarter.
Hi, a cold weather related decline in revenue.
This performance reflects the success of our ongoing transformation plan, including phase one of our restructuring plan implemented in June of 2019.
Together these initiatives have driven substantial cost savings, while streamlining our operations and enabling collaboration across our family of brands.
You may recall set up the onset of cobot 19, we curtailed our business considerably to ensure that health and safety of our workforce and to comply with all state regulations.
Early in the fourth quarter, we operate it from only four of our 10 manufacturing facility.
Production health industry products.
Our teams did an excellent job serving this key vertical by providing critical puts chip products.
Nobody dealing with the health crisis, and then progressively bringing the rest of the facilities back online by early May.
In addition to the production shut down our fourth quarter revenues reduced by Cobot 19 impacts across our end markets as order rates mode and customers I suppose delivery.
And while we are pleased with our respectable showing given the environment in which we operate we recognize that the business environment is likely to remain difficult impurities ahead.
Therefore, we decided to accelerate the implementation of our next phase of our Kimball International connects strategy, which we call connect you pointed out.
And to move forward with phase two of our restructuring plan.
Before discussing this new chapter for our company, let's move to slide three and four which provides a summary of our fourth quarter and full year 2020 financials.
Here on slide three you can see the financial summary for the fourth quarter, which details the operating accomplishments I just referred to.
As you can see you next season, achieving significant margin improvement, which served to offset the revenue decline banks to cost savings driven by our transformation plan in restructuring program.
Moving to slide for his review at the same metrics for fiscal 2020, which provides an even better view of the significant operating progress we've made it only one year.
Our margins expanded considerably year over year with gross margins up 140 basis points in adjusted EBITDA margin up 220 basis points.
Total transformation plan cost savings were 26 million for the year.
And there's more to come.
Also our diluted EPS was $1.11 for the year.
5%, despite lower revenues in a higher effective tax rate.
We are very proud of this performance as it speaks to the strong foundation, we have at Kimball International.
Our performance in fiscal 2020 is a strong indicator that the first year of Kimball International next strategy has laid the foundation for continued success.
And I shared earlier, we believe now is the time to enter the next phase Oh connect two point, no which centers around accelerating our growth.
On slide five we outlined the four pillars of our strategy that remain constant.
Inspire our people with a purpose driven in high performance culture.
Built our capabilities by expanding our work on innovation and fuel our future through our dedication to cost savings.
All of this is done and service to accelerating the growth Kimball International.
Which is the step change in our connect you probably know strategy.
Our plan is designed to enable us to effectively manage through the current economic downturn by driving market share gains for Kimball international as well is yielding additional cost savings.
Specifically tripconnect, you probably know you'll be able to build a deeper more focused market expertise driving share gain.
Pivoting to maximizing the opportunity that are forming as we look to expose cobot market place.
Today, we're announcing a companywide reorganization into four new markets centric business units.
Place.
Okay.
Hospitality and E business.
As shown on slide six.
This new go to market plan designed to accelerate our growth in four major way.
First we will bring vertical product and brand expertise to the new workplace, including building the new work from home portfolio.
Second it will enable our build of additional expertise and help.
Third the won't give us the ability to expand our hospitality business into broader direct commercial sales environment.
For it establishes a new dedicated E business unit.
Which will be responsible for developing E commerce across our brands and end markets.
Our E business unit is it your signals our commitment to make E commerce, a meaningful revenue contributor over the next several years.
I'm also pleased to share the new business unit leadership role on our executive team.
President workplace is core eat Smith.
President Oh, it's still a ski.
President of hospitality is Kathy siegler.
And president of E business in Chief strategy, and innovation officer his career Sharkey.
Each leader brings a proven track record in their respective area of expertise.
We issued or at least this afternoon that announces the new organization and provides background information on each of these leaders.
The four business units will be supported by the agility and efficiency of global operations and the streamline center, let structure that we implemented in year one of our strategy.
And together, we will unlock new level of market share being off brands in our businesses.
In alignment with connect you probably know we're also announcing will move forward with phase two of our restructuring program, which will result in a total restructuring charge a between 17 and 18 million.
We expect the workforce reductions in facility optimization that comprise this program together with their ongoing operational excellence initiatives to drive cost savings of approximately 20 million fiscal 2021.
At this point I'd like to turn the call over to our CFO Michel Schrader for more detailed review of our fourth quarter fiscal year 2020 results Michelle.
Thanks, Christy and good afternoon, everyone.
Turning to slide seven I will give you a more detailed overview of our fourth quarter fiscal 2020 financial performance as well as share some color around our strong liquidity position.
Net sales this quarter decreased 20% to 156.1 million, reflecting the difficult business environment caused by the cope with my team health crisis.
Given the launch of our connect to point out strategy, we thought it would be helpful to break down our revenue performance by the new business unit designation, which you can see on slide eight.
Well placed revenues comprised of the commercial financial education and government vertical.
<unk>, 22% year over year and accounted for approximately 58% of our total revenues.
Health revenues declined 25% and represented 14% up our total fail.
Our third market hospitality fell 12% revenue decline and represented the remaining 28% of total sales.
We had unusually high hospitality backlog at the end of the third quarter, which is why your fourth quarter hospitality revenue was only down 12%.
Given how hard this market has been hit by covert 19, and the current lower order rates revenue from hospitality will decline further in future periods.
That said, we import approximately 75% of the hospitality volume, we sell and therefore, our fixed cost for this product category, a relatively low compared to our other two markets.
Despite the loss of leverage on the revenue decline gross margin actually expanded by 70 basis points year over year to 35% driven by ongoing cost savings from our transformation plan as well as higher pricing on selected product line.
We also saw lower health care costs during the quarter as employees delayed medical appointments an elective procedures.
We're very pleased though that this is the seventh quarter of consecutive year over year gross margin improvement.
Our transformation plans babies together with an aggressive focus on reduced spending and lower health care and incentive compensation costs resulted in an 11.3 million dollar reduction and selling and administrative costs.
41.6 million, which represented a 20 basis point, the quite an S. DNA as a percentage of sales to 26.8%.
On an adjusted basis, excluding CEO transition costs and the impact of our supplemental employee retirement plan.
Selling and administrative expenses decreased 130 basis points to 25.5% or by $12.5 million to 39.9 million.
Our effective tax rate in the fourth quarter fiscal 2021, 27.6% compared to only 21.6% in last year's quarter, primarily due to the deductibility of stock and other compensation.
This variation was equivalent to two cents per share.
We estimate our effective tax rate will average approximately 25% to 26% in fiscal year 2021.
Net income decreased 17% to $9.2 million or 25 cents per diluted share compared to 30 cents per diluted share in the fourth quarter fiscal 2019.
Excluding restructuring charges and CEO transition costs, adjusted EPS decreased 9% to 29 cents compared to 32 cents a year ago.
Please note that the current your fourth quarter net earning had a positive benefit of approximately 3.1 million pretax or 2.3 million after tax and onetime favorable adjustments to year to date annual incentive compensation accruals, which increased.
Adjusted earnings per share by six cents.
In addition, as mentioned earlier.
This year's fourth quarter was favorably impacted by lower incentive compensation costs.
The late spending across the company and reduced employee health care cost much of which was related to the cold 19 pandemic.
In light of the difficult business and buy or Matt. We're very pleased with the 1% increase in our adjusted EBITDA to $19.1 million, an EBITDA margin expanded 260 basis points to 12.2% compare to a year ago corridor.
Turning to slide nine showing our cash flow performance and our liquidity.
We generated $29.8 million in cash from operations in fiscal year 2020.
Capital expenditures for the year were 21.1 million, most of which were related to manufacturing equipment and upgrades to increase automation.
Headquarters renovation, which serves as a working show room for our products and technology.
For the year, we returned 15.9 million of capital to shareholders in the form of dividends and share repurchases.
Our return on invested capital for the year was 37.5%.
We finished the year in a strong financial position with 97.1 million in cash and cash equivalent.
As well as an additional 73.4 million and available credit, giving us the resources to not only whether the current economic downturn, but also to make the investments necessary to resume our growth once the crisis abate.
Christine mentioned phase two of our restructuring program, we estimate a total pretax restructuring charge of approximately 17 $18 million with 14 to 15 million expected to be incurred in fiscal year 2021.
The remainder will be incurred in fiscal 2022.
The other savings from our ongoing operating efficiencies, we expect total fiscal 2021 cost savings of approximately 20 million.
These savings will be split between gross margin savings and a reduction in our selling that admin costs.
As we navigate through the pandemic, we will reinvest some of the savings back into the business to move our growth initiative forward and take advantage of opportunities during and company now to click crisis.
I will now turn back the call to Christie to provide further insight on our path forward Christy. Thanks.
Thanks, Michelle please move to slide 10, which shows our business status within today's call that 19 environment.
I'm pleased to report that all 10 of our U.S. plants are operating with a reduce workforce scaled to the lower volume levels.
Order rates were soft in Q4 down 42% year over year led by 64% occurring in our hospitality vertical.
These trends together with the resurgence of cobot 19 in certain parts of the country caused us to expect that Kimball international well experienced lower year over year revenue comparisons over the next several quarters. The good news is that there is a reasonable level of quoting activity in the mark.
And we had a backlog of 150 wasn't really at the end of fiscal 2020.
Based on this visibility we expect first quarter 2021 revenue to be slightly below fourth quarter 2020 levels.
Lastly, on slide 11, arson key takeaways, we consider relevant.
Kimball International is moving forward in this challenging environment with a strong financial position in an improving cost structure.
Much of our business isn't small and midsize commercial markets, where employees are beginning to return to the workplace.
Our targeted verticals by multiple opportunities for long term share gains.
And our connect 2.0 strategy will enable us to capture new market opportunity.
We are design thinking organization in our developing solutions for national in personal works. They said that meet the need standardization and social distancing requirements.
Our company is culturally aligned to excel in a time a change in its proven our ability to execute effectively for our stakeholders.
We are inspired by the opportunity we see ahead for Kimball International.
Operator, now we'd like to open the call for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your touched on telephone. If your question that's been answered and you'd like to move yourself from the Q. Please press the pound key.
First question comes from wind up Greg Burns from Sidoti and company. Your question. Please.
Good afternoon.
So.
So the question regarding your ability to address the.
The growing work from home trend I think it's going to require the rights that are products and also.
The strong digital ecommerce presence and maybe that's some of that's what you're trying to address with the new organizational structure, but could you maybe talk about what are your stern, where you said just in terms of the product set to address work from home as well as maybe give us some background on your current ecommerce capabilities.
And what's you're hoping to Ah.
Develop with the new operating structure. Thank you.
Sure great. Thanks for the question.
So let me start by saying we have been working on this hot except our brain on just that is a.
A difference back and the business that furniture that we traditionally bring the commercial environment.
With that et cetera brand, we have been working on eight work from home assortment that phase one well actually launch at the end of August and then we'll be having a phase two assortment that will be coming out of before year end you had what actually been transpiring in it it plays out in our structure.
Is that some of the resources that we have had on our hospitality a product development has actually been working on that product portfolio. So we're excited about the Congress that we're making the work from home portfolio is going be designed specifically for E commerce.
And we've been working on that so well.
Time, and I'm pleased with the acceleration that we've seen lately.
We really when we think about our E commerce strategy. It really is geared to do three things one it is going to extend our reach within all the workplace and provide a broader market for us I. It is going to service as we as I, just said that work from home portfolio and then.
We're also working toward the direct selling arm for both our hospitality in our new business development efforts. So.
He calm in the business unit will play an important role for Oh, we are actually beginning that journey.
But I would say that over the last six months or so oh, we've been gearing up for the structural change that we just announced today, we do have some incremental resources.
It will be an experience that we've added to that and.
We believe that that business is going to grow through our relationship with dot com resellers and also appeared to be environment. So very pleased to have that be an article our portfolio going forward.
Okay. So just just so I understand the ecommerce strategy even more.
Is gonna be.
Like Kimball.
Branded ecommerce properties or is it going to be more through like.
Well.
Wholesale like through Wayfair, Amazon what is the exact strategy in terms of.
How you're going to address.
Commerce.
Sure. He business unit is will support all of our brands.
And each of those brands will have a distinct strategy.
How they go to market.
Except our brand, which is our newest brand is going to be geared toward the work from home portfolio that will be mainly in E commerce environment.
So that that kind of the initial charge that we're working on right now and then we won't be that that that capability and expertise that we well that we are building will actually be servicing all about friends and we do see an opportunity for those brands in a b to b relationship.
Okay. So okay, so kind of leveraging more digital tools to enable your traditional channel to interact with the branch.
Yeah, and and and reseller Dot com.
Okay.
Okay and then what are your thoughts I know you have a full of cash on the balance sheet well your thoughts on maybe.
Five versus build but going on buying media digital native brand or some digital ecommerce capabilities in the market rather than developing them internally.
We believe that we will go after E com, both organically and through acquisition and we bid.
Working on that.
I think that will be an important.
Our forward for us so.
Definitely won't be embarking on.
Sure.
Okay.
No they returning to.
The next phase of it.
The cost savings.
You mentioned youre going to be reinvesting some of the business. So the reinvest some back in the business and you have a lot of growth initiatives. So over the 20 million what do you expect.
Net and how should we think about.
That 20 million from a modeling perspective, more backend loaded or ratably across the year.
How should we model we'll see.
Yeah, Hi, Greg This is Michelle so we aren't going to see a little bit lower savings in the initial part of the year because the savings is really two different things, it's partly due to the restructuring actions that we're taking and partly due to just the normal operational excellence savings that we look.
Yes every year, so as we work on the restructuring actions and get those executed a the savings related to that will be a little bit here in the first quarter, but it'll ramp as we go through the year. So the first quarter the savings will not be as heavy as what we see in the back half of the year.
Okay, and then maybe you can help us because the fourth quarter seem to have had some one time items maybe.
Some greater cost savings due to cold visit some of that those savings might be coming back in terms of variable comp and maybe some other items you know employees on furlough coming back online. So we look at a few day in the <unk>.
In the fourth quarter, two Oh, how should we.
Thinking about that going into the first quarter, maybe for fiscal 21 like what what's a good level too.
<unk>.
Hey, Steve 20 million of savings you're projecting off.
Yeah. That's a good question because our SGN a in the fourth quarter were was unusually low we did have a 3.1 million of accrual adjustments that we pointed out in the press release, obviously those will not go forward with Covidien and our last quarter a way.
We had already accrued for nine months worth of incentive through the end of March we had a fairly large adjustment we had to make in the fourth quarter to reduce those accruals down to our actual yearend incentive.
That will not happen again.
And we as you know we aggressively put some actions into delay spending in the fourth quarter. As we tried to see you know what the impact of coal that was gonna be.
So as we said we aren't going to plan to pick up spending on growth initiatives as we go through the year now we will gate that spending you know as we see a revenues playing out through the year will well gate that investment with the level of revenue that we have so I would say bad SGN <unk>.
Not gonna be as low as it was in Q4, but it's not going to be us as high as it was obviously pre coated with the lower volumes going forward.
Okay.
Maybe help us think about it.
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Directionally or give us a range of an idea of baby.
What the decremental was based on your projected cost savings and investments you figure to make like.
Oh range of maybe decremental.
Operating margins that you might expect this year.
Yeah, you know, we talked about that a little in our quarter call last for the third quarter. In we had said 30% decremental on the marginal profit line. We ended up about 28% in Q4, but our EBITDA was actually up.
Compared to EBITDA last year. So we actually didn't have a document on the EBITDA line in Q4 now going forward you know looking at again marginal profit probably around that 25% to 30% is what we would anticipate going forward.
Okay. Great. Thanks is there anywhere else in the queue I can hop back in the cumulative that's no ones.
Cued up all keep on go.
We do have one person waiting okay, alright, all back into queue. Thanks.
Okay.
The Q and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes on line, though Thomas Forte from D.A. Davidson Your question. Please.
Great. Thanks for taking my questions. So the first question I had is how should investors think about the margins for your E Commerce and work from home efforts a relative to the other parts of your business.
Tom Thanks for the questions Christie.
Inc.
Oh ramping our E commerce business Theres no doubt that we will certainly be I'm looking at the margin accretive basis, as we start but that will not be the long term strategy. Ultimately, we're really excited about what that portfolio.
Okay who's out for us.
Different channels that we've talked about.
And so we can see that in our start making some incremental investments it working on our innovation.
She gives and all those things, but I feel very good about that long term perspective.
So then work from home versus the rest of the portfolio.
That's correct.
Same comments supply I guess for.
Sorry, Tom said again I couldn't hear.
The same comments supply on the relative margin.
My initial thought would be that for your work from home products.
I may have lower price points and some of your legacy products. So would the margin profile be the same for your work from home phone looks even if the pro sports or potentially lower.
I you know we are we're working through that now that.
That is the that is the objective that we would be in the same area. Although I do think we will have some initial.
Startup costs associated with lower volumes and other items as your start product portfolio like that.
But it from a strategic standpoint, I don't see there being a reason that we can't get too.
The margins of art.
Leads.
With that Kimball International.
Great and then add one more question. So can you talk about geographical trends in parts of the U.S. that of reopen versus others and then on the geographical trends can you also talk about your thoughts on maybe kind of the near term office landscape for major cities outside of maybe you know there.
Real major cities like New York.
Sure. So we do track geography.
Brands and how they progress.
The our portfolio in our business is definitely geared toward secondary markets that is always bed.
The strength of Kimball International we do see that those those markets.
Our making progress.
Actually as we see those markets are coming back online and entering back here.
So we continue to believe that the secondary markets or a key focus of ours and a you know we're continuing to grow that area.
Enforce our resources.
There's no doubt that trend of work from home.
It's here to stay.
But certainly as we're in conversations with our customers. We've seen a increased amount of activity. We're very pleased without on all is starting to be filled.
And we measure our year over year projects in quoting and we're seeing.
Increased number year over year in the project activity. So we can feel those markets starting to form a at a faster rate than we've seen.
Since the crisis.
Great sort of Christians show, Thanks for taking my questions through well and congrats to you or new business leaders. Thank you.
Great. Thanks.
Thank you. Our next question as a follow up from all I know, Greg Burns at Sidoti and company. Your question. Please.
Hi, just wanted to follow up in terms of the order patterns can you talk about.
How they evolve throughout the quarter or maybe what you're seeing here in the.
The early part of the first quarter through July Thank you.
Okay, Great I'll take that one so you know we saw our orders probably the lowest point was maybe you know I'm as the Copenhagen April there was still some activity going on that and that activity continued but then we saw a drop in war.
Orders in May as people try to understand what the impact of this was gonna be and then we did start to see a pickup in orders in June and the rate of June really curious over into July. So, we're still seeing that orders depressed but.
We're seeing orders higher in June and July than what we did in May.
Okay. So the June and July declines or lower than.
The consolidated <unk> declines for the whole quarter or.
Or meaningful was good and elsewhere.
Okay.
[laughter] <unk>.
<unk>.
And then go ahead.
What was the dynamic similar across the different business unit. So you know reporting or was there any one that maybe stay weak like hospitality or was there any.
Business units specific order trends that I want to point out.
Yeah. So you know our hospitality was down my feet 40, 64% for the quarter. We did see that biggest decline on hospitality earlier in the quarter and so we did see a little bit of improvement in hospital.
Pallet. He asked we went into June and into July.
Okay.
Okay. So it sounds like.
We're seeing some sequential.
Monthly improvement in the order patterns, but still a depressed levels sort of fair assessment.
Yes.
That's correct.
And then in terms of the backlog I guess this quarter you noted.
ER.
A large hospitality.
Project backlog that maybe benefited this quarter's ernie.
Anything specific within the backlog that's.
Whether it's more heavily weighted to anyone business unit or or another so you might want to point out.
No you know there's there's not you are backlog was down compared to last year, but the unusual nature that we had at the end of Q3, we don't have not the ended Q4 is pretty normal.
Okay, and then maybe one last one in terms of hospitality I know suites.
Next six to nine months, you were talking about a lot of large projects and the hospitality vertical that youre expecting at the end of year those been canceled delayed like what is the.
Maybe to the outlook here for the hospitality business in general and maybe as it pertains to some of those large projects that you had talked about previously.
Yes, Greg its Christy I'll I'll go ahead.
Take a couple comet one you know we have not.
He cancellation.
Tell any business, but we have seen some push outs.
That hospitality business.
As we talked about before a that business will be slower ramp.
Both our office this.
And our health business.
I will say, we're starting to see some more.
Activity.
Through the leisure is tied to that business.
Yeah, we have confidence in the hospitality business in the long term, especially that domestic hospitality business, but we're going to have to go through a slow ramp.
And we're working very closely with our partners it working order by order.
Some of those orders are delayed further out the year.
Okay, and definitely I'll just yet.
Just.
One more you mentioned that you your lover <unk> in your prepared remarks about leveraging your capabilities from the hospitality industry and the other commercial direct sales markets well what exactly.
Does that mean or what are your referencing there in terms of the market opportunity. Thank you could expand that hospitality capabilities.
Sure. So youre hospitality has been business has been mainly geared toward hotels.
And that is a direct sale it happens in conjunction with.
Designers and.
But by product that we create designer and the brand or or end market.
There are other end markets that operate that exact same way senior living operates that way multi family housing operates that way luxury student housing operates that way and we Ben on the fringes of those end markets before and now we're actually dedicating resources.
Review.
We're calling it new new warm up new business development that will be forming those new markets for us in the near term.
So we just started and just incremental resources through this new structure it out on those end markets.
Okay.
Would you be able to maybe size.
The incremental addressable market opportunity or is that too early to work. We are just in the the beginning stages. So formally doing our resource research and market sizing and insights. So we'll be happy to share with that it is fear that with you as we become to formulate our opinion.
Okay, great. Thank you.
Thanks, Greg appreciate it.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your touched on telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key once again that star one to ask a question.
And once again that star one to ask a question.
And I'm not showing any.
Further questions in queue at this time I'd like to hand, the program back to Kristie Juster opt for any further remarks.
Great Jonathan Thank you very much well first of all we appreciate everybody joining the call today on behalf of Kimball International Oh, we're very proud of our progress.
Close 2029, we came into the the crisis.
With a lot of momentum we're pleased with how we've managed through the crisis or taking very decisive action and our announcement to connect to point now and the phase two of our restructuring and we certainly have a lot of confidence in our decision to head for Kimball International. So thank you so much for joining us today and look forward to stay.
Connect everybody.
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Thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.
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