Q1 2021 Kimball International Inc Earnings Call
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Okay.
Good morning, Ladies and gentlemen, my name is Valerie I'll be your conference call for two years ago.
I think Donald will like to welcome everyone I'm worried about the fourth quarter fiscal year 2021 are you.
I think last conference call today's call November 20 planes will be recorded and make it very well one of the things are defined under the private Securities Litigation Reform Act in like 95.
Actual results could differ materially from the forward looking statement.
I think I may have to do the outcome of the board and sales and he's been an example, I read outs on form 10-K.
During today's call that today, well be making lucky, but right around five Jack the other thing that is available on Investor Relations section.
NASA website.
On today's call are could be Dr., CEO Camborne gossipy, They walk executive Vice President and Chief Financial Officer, Pete I'm wondering now so amateur all trader senior director of Investor Relations.
I would like to the call over to proceed Johnson <unk> Johnson you may begin.
Thank you Valerie and good afternoon, everyone. We appreciate your participation in today's call to review, our first quarter fiscal 2021 results.
Discuss our business outlook and do a deep dive into the top an acquisition, which we announced in a separate release simultaneous with our earnings.
We will first review the operating and financial highlights and then direct most of our prepared remarks to the strategic fit that happened represents for Kimball International.
Before I begin I would like to remind you that this will be the last call. So Michel Schrader as CFO.
Well informed us of her decision to step back from her role as CFO due to personal reason.
The good news is that the show will continue as a senior leader at Kimball International and we will continue to direct all our Investor relations efforts.
Those of you who know Michelle no. She has tremendous knowledge of Kimball International and I personally want to thank her for meaningful work as CFO and we're thrilled to have remained at the company.
At the same time weve been fortunate in attracting TJ will who became our new CFO effective October 19, TJ has deep experience in global consumer branded organization and brings more than two decades of experience.
Excluding expertise enacting large steel organizational transformation as well as managing M&A integration and strategic planning activity most.
Most recently he served as Chief financial Officer of the Great Britain unit of Coca Cola European Partners.
TJ is with us on today's call and we look forward to getting to know him and her upcoming investor calls and meetings.
On slide three we start our discussion on the quarter.
Our company continues to execute effectively within a challenging environment for our industry, we entered the quarter with order rates down 42% year over year and as expected revenues declined 5% sequentially from fourth quarter levels.
Despite a year over year revenue decline of 27%, we were able to drive a 50 basis point increase in gross margin.
Lapping the success of our transformation plan and well be benefits from the restructuring program, we announced last quarter.
I am pleased to report that we are on target to achieve our expected cost savings of 20 million. This fiscal year on the heels of the 26 million in cost savings that we reported in fiscal 2020.
These savings provided the resources to reinvest in our business to drive growth and continue to generate operating efficiency.
I'm also pleased to report that first quarter order rates were 16% higher than they were in fourth quarter and while it is too early.
To call a bottom we believe this is a good sign.
Activity levels are up in both workplace and held in our hospitality business is doing an excellent job of winning in engaging in longer term projects.
Other key take away, we introduced our new house brands reinstated our share repurchases and we'll share with you shortly information on our Coppin acquisition.
Slide four reviews, our connect 2.0 strategy, which we announced in August as a step change to accelerate our growth.
The plan is designed to enable us to effectively manage through the current economic downturn by driving market share gains for Kimball international as well as yielding cost savings.
And most notably sets us up for sustaining success in the new forming marketplace.
A key element of connect 2.0 had been a reorganization into four new market centric business units workplace health hospitality any business, enabling us to effectively integrate vertical product and brand expertise into a compelling go to market.
Strategy.
It also allows us to get dedicate focused resources and he business across our brands and end market.
Since our launch of connect you probably know we have made significant progress within each of our four business units.
Specifically, we launched our new house brand inner well one interval than brand allows us to leverage a group of 23 health experts.
<unk> 20 top health systems Government Agency and Association.
This team will represent the full multi brand portfolio from Kimball International and at the same time develop innovated new health specialty products under the interval than brand.
We are seeing immediate results in both our ability to more quickly penetrate the market and to access new health environment, such as retail health clinics.
The health industry is undergoing a tremendous transformation in the utilization of space to improve the safety in delivery of care and interwoven team is dedicated to just that.
Additionally, we expanded and introduced a second phase of arc set our brand within our workplace business unit is fine doesn't work style in lifestyle with simplicity excel.
He said her features affordable ancillary heating index configuration that target work from home satellite offices co working environment as well as student housing.
Et cetera isn't important brand to accelerate our offering to address the new hybrid home in office workplace.
Q1 demonstrated our ability to navigate the quoted market softness and our ability to focus on the opportunities that we believe are so important to our future.
Before I share our announcement on the pop 'n acquisition I'd like to turn it over to Michel to summarize our financials for the quarter.
Thanks, Christine and good afternoon, everyone I will now provide an overview of our first quarter fiscal 2021 financial performance.
Let's turn to slide five.
Net sales decreased 27% to 147.9 million, reflecting the ongoing impact of the COVID-19 health crisis.
One area, we did see growth in the quarter was in the government vertical within the workplace and market.
Sequentially net sales declined only 5% in line with our expectations.
Despite the revenue decline, we were pleased with the eighth consecutive quarter of year over year gross margin improvement.
In the first quarter gross margin expanded by 50 basis points to 35.4%, reflecting cost savings from our ongoing transformation plan.
Our transformation plan savings in the first quarter totaled 4.8 million split between cost of goods sold and selling and administrative costs.
The savings from our transformation plan together with disciplined cost management resulted in a 9.2 million reduction in selling and administrative costs to 41.7 million.
On an adjusted basis, excluding CEO transition costs and the impact of our supplemental employee retirement plan selling and administrative expenses amounted to 40.8 million or 27.6% of sales.
Our effective tax rate in the first quarter of fiscal 2021 was 25.7% compared to 27.4% in the prior year, we estimate our effective tax rate will average approximately 25% to 27% in fiscal year 2021.
Net income was 5.4 million or 14 cents per diluted share compared to 31 cents per diluted share in the first quarter fiscal 2020.
Excluding restructuring charges and CEO transition costs adjusted EPS was 23 cents compared with 40 cents in the year ago quarter.
Our adjusted EBITDA was 15.8 million compared to 23.8 million in first quarter of fiscal year 2020.
Adjusted EBITDA margin declined 110 basis points year over year to 10.7% due to the leverage lost on fixed costs with the lower volumes.
We generated 27 million in cash from operations.
Capital expenditures were 4 million most of which were related to technology investments in product specification tool to simplify the ordering process and manufacturing upgrades to increase automation come.
Compared to 7.4 million in the year ago quarter.
This quarter, we returned 3.3 million of capital shareholders in the form of dividends.
Although we reported a year over year revenue decline. We are pleased that we saw some sequential leveling in a couple of our key markets as shown on slide six.
Within workplace sales to the education and government verticals increased sequentially, while sales to the finance vertical showed only a slight decline in the first quarter, resulting in a 5% increase when compared to the June quarter end.
Workplace accounted for approximately 64% of our total revenue in the first quarter of fiscal 2021.
Health revenues declined 5% sequentially and represented 14% of our total sales.
The talent he saw a 26% sequential revenue decline and represented the remaining 22% of sales.
Slide seven shows that similar to the positive momentum seen in our sequential revenue trends. We're also seeing positive sequential momentum in new orders, which increased 15% from fourth quarter levels.
By end market health orders grew 23% well work place orders declined 10% sequentially, primarily due to seasonality within the education vertical.
We were pleased with the substantial sequential growth in hospitality orders of 149%, but no that was primarily driven by a single large order during the quarter.
Our backlog at the end of September was down 7% versus September of last year, which is similar to the 7% year over year decline in backlog, we had at the end of the fourth quarter.
Now a quick look beyond Q1 first quarter orders were down in both health and workplace compared to the prior year.
And with October just wrapping up we were encouraged to see the year over year rate of decline in orders subside a bit in October in both health and workplace compared to the year over year first quarter decline.
Orders were still down versus last year, but at a lower rate or.
Orders and how started to stabilize at a lower rate of decline in August and have held at the lower rate since then.
Well the rate of decline in workplace orders was lower in October and project quoting activity remains high we are still seeing fluctuations from week to week and order rates.
We remain cautious in the near term outlook anticipating a period of continued softened activity before returning to growth.
We are starting to see pressure on our freight and distribution costs caused by the significant increase in demand for shipping services created by the cobot pandemic and port congestion, we are working to mitigate the impact of these cost increases.
Close by saying, our first quarter financial performance demonstrated the resilience of our business and the efficiency of our operation I'm excited about the opportunities that the acquisition of pop and will bring for Kimball International I will now turn the call back to Christie to provide further insight on the pop in acquisition.
Christy.
Thanks, Michelle now the Big news, which is our definitive agreement to acquire poppen attack enabled market, leading b to B commercial furniture design company that has been on our radar for some time, particularly for its ability to help us jumpstart our E business.
On slide eight you will see the financial terms of the transaction, which are 110 million initial cash payout plus contingent payment of up to 70 million based on the achievement of certain milestones over the next three plus years.
We will fund the purchase price with a combination of cash on hand in our credit facility, which we have amended to increase our borrowing capacity to 125 million.
What we are paying for it is a significant growth engine that aligns with our connect to Plano strategy and with our long term vision to create an omni channel commercial furnishing design powerhouse supported by a robust manufacturing and sourcing infrastructure.
Slide nine illustrates how well the pop in acquisition aligns with connect to Plano strategically it literally check all the boxes.
Happened brings us new products and new categories that we can offer to our existing channels.
Immediately expands our direct channel business establishes a real presence for us in the fast growing corporate sponsor in direct to consumer work from home category and provide digital capability that can be scaled across our portfolio.
Hi, Brian.
Slide 10 provides a closer look at the top and the company was founded in 2009 and over the last five years has become one of the Industrys leading disrupters.
They design fresh and clever commercial furniture that is in stock and ready to ship with a simplified ordering process, which will be even more important in the new workplace environment.
Supporting its digitally native platform is a sales force in five children located in major cities.
Pop in strategy includes a mixture of online and offline customer conversion huh with approximately 80% of the b to b business, starting with digital qualifications.
Leading to a 60% close rate.
Topic is easy way to allocate your office.
After experiencing a 40% compounded annual annual growth rate from 2014 to 2019 topping had to close it durbin showrooms to comply with the cold it related lockdown, which significantly reduced sales.
Since the onset of coated pop and has expanded its work from home portfolio developed corporate partnership programs reopen showrooms expanded focus on direct to consumer and started targeted campaigns in secondary markets.
With over 71% of the revenue from repeat business and being fully engaged with clients to assist them in navigating the new hybrid workplace.
Happened is uniquely situated to accelerate both returned to work at headquarter location in satellite offices and work from home.
On Slide 11, you detailed the complimentary nature of our two businesses.
Today, there was minimal or no overlap in the combination of the two business models.
This immediately broadens our market from large corporation two micro businesses.
Secondary to urban market.
Both direct and traditional channels with an expansive selection of prices products and categories.
<unk> happened strings are data dependent business development industrial design sourcing in brand marketing.
Whereas at Kimball International our core competencies or around manufacturing interior design and industry expertise.
Overtime, we believe uniting these capabilities will result in a commercial furniture design powerhouse.
Slide 12 summarizes the specific areas that we've identified to create revenue and operating synergies.
The bold actions are ones that we consider stage one priority.
Our near term priorities are revenue acceleration with four specific actions to new.
One scale happens marketing playbook in the secondary markets, where Kimball international is well known would be marketplace expertise and relationships.
To leverage pop and experience in the work from home category through direct to consumer and developing corporate sponsored programs for both top and et cetera.
Three develop a complimentary dealer expansion program called happened from within the Kimball International traditional dealer network.
Leveraging the selling in dealer partner expertise and relationships from Kimball international with the pop in brand and simplified assortment in buying process.
And fourth we launched a new category of pop in pod across the Kimball international selling and dealer network.
He privacy pods are small mobile units that enable privacy in an open office environment and our uniquely adapted for a post pandemic workplace and allow for immediate set up satellite offices.
We also see happens hogs as adaptable for use in or health and hospitality markets.
In terms of operating synergies, we see significant medium term opportunity in design logistics sourcing and manufacturing.
These are just some of the areas that start to illustrate the ongoing value from the acquisition.
Slide 13 gives you a sense of the financial impact of pop and based on each company's results for the nine months ended September thirtyth.
On a pro forma basis, the acquisition adds about 10% to our revenue line.
But similar to other fast growing industry Disruptors popping has made aggressive investments in channel development, resulting in negative EBITDA.
Host acquisition, our net debt to EBITDA ratio will be approximately 0.5.
This allows us to retain the same capital allocation priorities that we have spoken about in the past sales.
Slide 14 details those priorities, which include organic growth investments strategic acquisitions in the context of connect to play to capital expenditures to drive efficiency dividend payment.
In share buybacks.
And as stated in our press release.
I have read Instated, our share repurchase program affected this quarter.
Finally, slide 15 summarizes the reasons why the top end is a strategically compelling acquisition for Kimball International.
By acquiring happened, we believe Kimball international will be uniquely positioned in the evolving commercial furnishings marketplace.
We will immediately move to being one of the leading omni channel players built through a combination of expansion is market brand product category and capabilities.
I want to acknowledge and welcome Randy nickel now in the pop in team to the family at Kimball International.
Happened will continue to be run by Randy in the highly qualified leadership team.
Our connect to Plano strategy together with the pop 'n acquisition gives us great confidence in our ability to create significant value for all Kimball international stakeholders.
Now I'd like to open up the call for questions.
Thank you again, ladies and gentlemen, I'd like to ask the question a star then one on your touch tone telephone.
One moment please.
Our first question comes from Greg Burns the voting somebody your line is open.
Good afternoon.
I'm just trying to enrich hi, just wanted to start off I guess lithia pop in acquisition, well what percent of pop and current businesses.
Contracts versus residential consumer.
Yep.
Right now we the B to B business on the pop inside is just under 75%.
Okay.
And the the revenue decline they experienced this year I mean.
As to the BTC was that growing just not offsetting the b to B decline just help us understand a.
The revenue decline ever just because no other some other digitally native branch, but the work from all that right ecommerce growth you know they've been going pretty well you just discussed that the revenue decline that often.
Sure, Greg I'm going to let TJ comment and then I'll add anything again, hey, Greg its TJ good to be true for Yapping as Christie mentioned, you know that the majority of Poppins portfolio. At this point is b to B and so as we moved into Q2 and saw the slowdown saw I'm, not only workplaces shut down, but but pop and being forced to show.
Down their showrooms that was what led to the revenue decline in Q2, which will again their calendar year Q2, which rolled over into Q3 as well. So again I think it's it's a it's a function of the market that they're serving and the channels that they are accessing but you saw a differential between there and maybe some of the other.
Ecommerce place you were talking about.
I was also just.
Yeah, Greg I'm, just a little more color. The other thing I would say papillon was running at a growth rate of about 80% going into the.
Cobra decline and so they had a really exciting business model that they were running b to b and what their urban showrooms.
And now they made some really significant pivot to focus on direct to consumer or secondary markets.
And so there is you know we're excited about what the opportunities are ahead with that model.
Okay and.
When you think about some of the revenue.
Potential revenue synergies, how do you see you.
Being able to accelerate yeah, maybe even accelerate the growth of the brand here by leveraging your particular leveraging your your distribution channels with with their products and is there opportunity here for baby to leverage the pop in infrastructure to sell like et cetera, or other brands like what are the cross sell opportunities.
Yeah, that's right that's exactly what we're excited about so there's a there's a set of initiatives that will accelerate.
Kimball International and then there's a set of big initiatives that will accelerate comping. So let me just make some comments around that one.
No we believe that there's new categories and new products.
That we will put through our existing channels. One of those examples is pumping has recently launched the pods category or that.
We will put across the the dealer channel that we have their capabilities will also expand our direct channel as you know we do have a direct channel in hospitality, but that does not go outside that that vertical today. They also have their building the capability and work from home they have a whole.
Corporate sponsored program that will expand a with both CCOP and et cetera.
And then when we look at it their digital capabilities can go across all of Kimball International when you look at the pump inside you know, it's really about scaling them into secondary markets.
Brean pop and throw into traditional trade and then helping them to access the larger on in customers that they don't access today. So there's a there's a really rich set of opportunities that sit on both sides.
Okay, and then when we think about maybe from the profit cost perspective, it sounds like you're pretty pretty compelling revenue synergies do you are you going to still be on the business side of Lawson focused mainly on growth how should we think about.
Margin synergies going forward and what the margin profile of this business will look like in the near to.
Long term yes.
Yes.
Sure Greg towards TJ again, so I think that's been maybe we can start with kind of the EBITDA evolution and this past year in what we see going forward. So we already talked about the revenue decline during the middle of this year I think what we saw was pop in maintaining their their sales force their infrastructure and investing to be able to ramp quickly.
Out of coal did so I think that's what we see as driving the EBITDA loss that we talked about earlier I think when you look at the gross margin level you see a similarity to what what Trimble has demonstrated today and then I think as you begin to scale. This business. Then you begin to see all the opportunities and leveraging common interest.
Structure again across both digital platforms, Kibbles manufacturing capabilities, and we would see that being a key value driver in this transaction.
Okay. So is there.
Hey, it's kind of.
Model or target in terms of margins I mean, how are you.
It's operating at a loss now just because of cold like was that this business profitable at some point prior articles and I guess looking forward.
Is there kind of a target on getting this to profitability.
Yes, so Greg I think as far as forward looking what we see is you know a reasonable estimate would be it would be EBITDA positive during the second half of our fiscal year 22. So again. This is taken into account the current cobot crisis, what we see as the revenue evolution and the opportunities and again.
Adopt positive at that point.
Okay. Okay.
Okay, great. Thanks, and then.
In terms of you gave some good color on the the order patterns and improvements you're seeing there I was just wondering if you could maybe dig in on the hospitality side, a little bit because it sounds like you had a big project.
Well go into backlog will not ship next quarter, and then we kind of see a return to the to the previous quarter's trends or are you seeing any kind of improvement in the hospitality side of the business.
So we did great good luck.
We did get a larger order during the quarter hospitality as you said that will not ship in the second quarter part about order will ship in the back half of our fiscal year as you recall hospitality has a longer lead time. So part of that project will ship the second half of our fiscal 21.
And part of it will shift into fiscal year 22.
Okay, and I guess aside from that large order or are there other broader trends in the industry.
Similar to what we saw in the last quarter or have you seen any.
Any improvement in that that market.
You know that market continues to be very choppy.
You know, there's there's project work that we're quoting there was some activity out there, but it just continued it continues to be very choppy in the hospitality, we are seeing pockets of improvement in that industry you know b.
Resort and hotel areas those are not coming back as quickly as like leisure.
Leisure activity people are traveling more from leisure versus business, we're seeing that pick up a little bit but it continues to be very choppy and very competitive.
Okay, and then and lastly on the hospitality side that they you talked about the.
Freight and shipping costs kind of increasing is that mainly tied to.
So to the hospital on the hospitality side of the business, but what's going to be the impact on margins from from those.
Rising costs.
Yes, so with the freight the ocean freight is primarily hospitality, we have a little bit on the Uh huh other health and workplace, but the ocean freight as primarily hospitality, but were also seen increases in our domestic freight because of all the shifting that's going on in the U.S. well.
Seeing that demand is very high so we're starting to see pressure on our domestic freight costs, as well, which that impacts the workplace and the health vertical.
Okay great.
Inc. In key yeah.
Yeah, I was just going to say in Q1, the impact of freight was about a negative 40 basis points.
So we'll see that going into Q2 buckets teams are working really hard to try to mitigate those costs as much as we can.
Okay, great. Thanks for taking the questions.
All right. Thanks, Greg.
Again, I'd like to ask the question purple bar than one.
I'm showing no further questions at this time I will turn the call back over to Christi death or for any closing remarks.
Great. Thank you very much well. Thank you for joining our call. Today. This is an incredibly exciting time for Kimball International.
We've proven our ability to manage effectively in a challenging time, we're making very significant progress on our long term organic growth priorities.
And we're excited about embarking upon our new acquisition and the business that we believe that the south for such and such success in the future. So thank you to everybody and have a nice evening.
Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
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