Q2 2021 Kimball International Inc Earnings Call
Good morning, ladies and gentlemen, my name is value and I'll be your profit.
And today I think.
Welcome everyone for the Kimball International second quarter fiscal year, 'twenty 'twenty, One earnings conference call.
No.
As a power conference call today's call February for offline.
And what will be recorded and may contain forward looking statements as defined.
Private Securities Litigation Reform Act.
Actual results could differ materially from the forward looking statements.
Risk factors that may influence the outcome of forward looking statements and.
And I asked off one thing Paul.
During today's call because and that's what he's making rapid earnings wise debt.
And that is available on Investor relations.
Kimball International website.
On today's call are kristie Juster CEO of Kimball International if you didn't walk executive Vice President and Chief Financial Officer.
I'll now turn the call over to cookies out there, Jeff and you may begin.
Thank you Valerie and welcome to today's conference call to discuss our second quarter results and business outlook.
In reviewing our results for the quarter. There are four key takeaways on slide three that I'd like to share first the Kimball International organization continues to demonstrate resilience with and a difficult operating environment.
The combination of our focus and expertise and health and secondary markets for workplace is proving our ability to gain share and operate and end markets that are emerging faster than the overall industry.
Second we closed on the pop and acquisition on December nine and are moving quickly on our stage one priorities to capture revenue synergies.
Third we made meaningful progress on our connect to Plano strategy and the quarter investing in areas, such as health and work from home and meeting our facility optimization plan targets and setting up a step change and our E business capability and strategy with the closing of pop and.
Force based on backlog and current order rates, we expect third quarter revenue to be similar to second quarter levels, but we are seeing increased bidding activity around the new forming workplace and it is too early to know when this activity will translate into firm.
Orders, but we are encouraged by the possibilities we see on the horizon.
There were some headwinds that impacted us from the second quarter, namely the 6 million and hospitality shipments that were delayed due to port congestion.
Margin pressure, we experienced due to spike and freight costs and the inflation impact on raw materials.
On balance however, second quarter business trends unfolded in line with our expectation.
Now, let's talk about Kimball international target and markets and there are different stages on the path to recovery.
Beginning with and health and market on slide for <unk>.
As we expected this market is ramping out of Covid more quickly than our other end markets, reflecting a more rapid return of health administrative workers expansion in areas such as academic medical centers behavioral wellness specialty hospitals and increased public health funding.
We are pleased to announce the official launch of our new health brand interwoven and this is a dedicated team with extensive expertise and understanding of the health industry and the home for our specialized clinical products.
This team will have access to ducts, and Poles, Kimball and national portfolios, allowing us to offer unparalleled full facility solutions.
The initial results have been encouraging in the second quarter health sales were up 31% sequentially and accounted for just under 20% of total company wide sales.
The double digit sequential growth and order rates of 23% is a strong sign of momentum and the business and we have just gotten started.
<unk>, new clinical product platforms will be launching in the coming months.
Our focus on the top 20, and health systems, and federal health and environment such as the Veterans Administration has resulted in both large project awards and sustaining program expansion.
And we are developing significant partnerships with the design community to research and innovative solutions.
<unk> represents an increasingly important growth market for Kimball International and we look forward to sharing more details of our long term growth potential as we see the market performing post COVID-19.
Slide five provides an update on our hospitality and market, which we expect will be the last of our markets to recover from the Covid impact and.
And the second quarter hospitality accounted for 16% of total sales down from 22% in the first quarter of this year, reflecting a significant sequential revenue decline.
Our team has been highly focused on partnering with our customers to both navigate their fluid timelines on projects and the disruption of ocean freight.
We expect to see much of the same challenging dynamics in Q3.
At the same time, we are starting to see the opportunity funnel develop for leisure travel and custom product design as lower occupancy periods provide a productive time to renovate.
As we look longer term, we are making progress on the development of our new Kimball hospitality living sub brand and product portfolio for senior living and luxury student housing.
We believe our unique custom product development and program manager management capabilities and direct selling expertise can be expanded to reach a broader market.
Now, let's move to a review of workplace, which you can find on slide six.
The resurgence of the virus has extended its impact and workplace furniture spend but.
But we believe we are making the right choices to emerge as a stronger competitor in the post COVID-19 environment and we are seeing some positive signs.
While second quarter sales to the workplace and market were down sequentially and order rates were up from Q1 levels showing an uptick in the commercial finance and government sub sectors.
Also it is important to note that Kimball International has a strong presence and name recognition and secondary markets.
Our own data indicate that these geographies are rebounding more quickly than the larger metropolitan areas.
Sequential order rates of combined workplace and health and reflect a 20% improvement in secondary markets compared to a 3% recovery rate in larger markets.
This is consistent with many bodies of research highlighting the growing appeal of secondary markets due to both the business climate and People's desire for more space comfort and less density.
As we're speaking with our clients. The majority are engaged and long term planning and critically analyzing their businesses and contemplating new guidelines structures and real estate strategies.
The workplace model is clearly changing to a hybrid model comprised of office work from home and satellite office environments.
Employers will be looking to provide a seamless work experience for every location.
Headquarters satellite co working health facilities and work from home.
Our deep knowledge and residential design, our multi brand portfolio and new omni channel capabilities will enable us to provide solutions for the broader new workplace.
The workplace team continues to focus and deliver on both new products for the changing office environment, and a new expanded assortment b et cetera brand to address work from home.
In the second quarter, 27% of our sales were delivered through new products, even under the current market conditions.
This work and our continued investment and research and design will be critical to setting us up for success as the market returns.
Meeting the employee where they want to work is exciting new thinking for Kimball International.
Please move to slide seven.
The acquisition of pop and is an important move to set up Kimball international to address the broad new forming work from home and work from office environment.
Our accelerated growth plan is designed to support both the opportunities for growth within the pop and brand.
And work on the opportunities to drive synergies and opportunities across at Kimball International.
You may recall, we identified several stage one priorities, when we announced the pop and acquisition.
The first is to scale happens marketing playbook into secondary markets and these activities are fully underway.
In addition to Kimball international as long standing presence and relationships and these markets. We believe that these are the geographies, where the pop and brand is the perfect solution for a simplified customer experience in stock assortment and all at approachable price points.
The site selection process is underway for showrooms and our lead generation plans are being built for each specific market.
We look forward to announcing our first set of new secondary locations as we confirm the details.
The second priority is to accelerate our work from home business and corporate partnerships for pop and and our et cetera brand.
While our priority is to reach the growing work from home demand by expanding relationships with corporate clients long term, we plan to build a meaningful direct to consumer work from home business as well as to utilize a limited number of retailers, where we see good traction.
Our third priority is to offer pop and products through Kimball international existing distribution network, we already have put in place and interim program that gives our dealer network access to pop and to facilitate facilitate immediate sales.
The distribution plan for pop and pro and pop and pods will be completed this quarter with full scale market launches and the first quarter of our fiscal 2022.
I'm pleased to report that we've already seen substantial interest and pop and products from our dealers and the A&D community.
We continue to validate the interest and the unique application of the privacy pod category and the new workplace.
Slide eight provides a look at what we see on the horizon with respect to additional revenue and expense synergies related to happen.
Pop and comes to us with expertise and digital marketing drop ship capabilities and industrial design.
Overtime, we believe these capabilities and experiences can be leveraged across the broader Kimball international and markets.
We also have begun connecting our experts and sourcing manufacturing and logistics and are very motivated to share best practices and synergy projects.
I am very pleased to formally welcome the pop and team to Kimball International.
We are confident that the pop and business.
Pop and leadership team and Kimball International and make a great combination that will accelerate growth and the result, and significant market share gain over time.
Now I'll now turn the call over to our CFO T. J will for a financial review of our second quarter results T. J.
Thanks, Christy and good afternoon, everyone I'll discuss Kimball International's financial performance during the second quarter fiscal 'twenty and 'twenty, one and our forward expectations, let's turn to slide nine which shows the key financial highlights that were also lowered and the release.
Net sales decreased 29% year over year to $136 2 million, primarily reflecting the ongoing impact of the COVID-19 health crisis.
Sales during the quarter were also reduced by approximately $6 million due to port congestion delays that impacted shipments and our hospitality and market as kristie mentioned earlier.
Sequentially, our net sales declined 8% I'll discuss sequential revenue and order dynamics by end market and a moment.
As Christie mentioned sales of new products and the second quarter for workplace and health were both 27% of the total sales of each respective and market compared to our internal target of 25 per cent.
This reflects the success, we're having developing innovative products that fit the needs of the new forming workplace and health environments new.
Alex are defined as those that were introduced in the last three years.
After eight successive quarters of year over year gross margin improvement our gross margin declined slightly to 33, 4% from 34% and the year ago quarter, mainly due to the negative margin impact of a lower revenue base, along with higher domestic and ocean freight costs that reduced our gross margin by 190 basis points.
Transformation plant savings related to our operational excellence program were $4 1 million and helped to mitigate the margin pressure.
As many of you are aware freight volumes or an unprecedented levels outpacing industry capacity.
We believe the market will remain tight for the remainder of the fiscal year and have taken selective price increases and our workplace and health product lines effective March one 2021 to help offset this impact.
Our freight costs and the second quarter were approximately 10% of net sales.
Sequentially, our gross margin declined 200 basis points for the same reasons.
Our transformation program yielded an additional $2 million and selling and administrative savings and helped to reduce our selling and administrative expense by $3 8 million to $46 million.
However, as a percentage of revenue selling and administrative expense amount to 33, 7% compared to 25, 9% and the prior year.
Excluding non-GAAP items, primarily acquisition related charges, adjusted selling and administrative costs amounted to $40 7 million or 29, 9% of sales compared to $48 8 million or 25, 4% and the prior year.
For reference included in those non-GAAP items is $3 4 million and pre tax cost and the second quarter related to completing the acquisition that will not repeat and the third quarter.
Our total transformation savings and the second quarter were $6 1 million.
We remain on track to achieve 20 million and transformational program savings by year end.
Our net loss was zero point $8 million or negative <unk> <unk> per diluted share, including $4 1 million or 11, and after tax special charges, which are primarily acquisition and restructuring related.
This compared to net income of $11 million and earnings of <unk> 30 per diluted share and the second quarter of fiscal 2020.
Excluding acquisition and restructuring related charges EPS was nine cents compared to 33 and the year ago quarter.
Adjusted EBITDA decreased 56% to $9 1 million and the second quarter of fiscal 'twenty and 'twenty one and.
Adjusted EBITDA margin declined 420 basis points year over year to six 7% due to negative operating leverage given lower volumes.
Our effective tax rate for the second quarter was a negative tax rate of 34, 1% as non deductible costs related to the pop and acquisition and non deductible compensation more than offset the tax benefit from the small pre tax loss during the quarter.
We expect our effective tax rate for the full year fiscal 2021 will be approximately 30% to 32%.
Although we reported a year over year revenue decline, we had sequential improvement and one of our key end markets as shown on slide 10.
Health sales increased 31% sequentially and accounted for just under 20% of our total revenue this quarter.
And while workplace revenues, which represented 64% of our total sales declined 8% sequentially within workplace, we're pleased with sequential improvement and our commercial vertical revenue from Q1 2021.
Hospitality saw 32% sequential revenue decline and represented 16% of sales as we see a continued impact from COVID-19.
Slide 11 shows positive sequential momentum and new orders and our two largest and markets.
Orders and health grew 23%, while workplace orders increased 10% sequentially.
Fatality orders declined 46% from the first quarter of 2021, partially due to the large orders we received and the first quarter.
Moving to slide 12 on the last earnings call, we announced our acquisition of pop and and we closed on December 9th for.
For the period that we have one top and the company contributed $2 $7 million and net sales similar to other fast growing industry Disruptors pop and has made aggressive investments and shell development, resulting in negative EBITDA. However, we still expect top and to be EBITDA positive by the second half of fiscal 2022.
As a result of this acquisition Kimball amortized $3 for millions of intangibles over the remainder of fiscal year 2021.
There'll be additional pop and historical and pro forma financials, and the 8-K, which we will file later this month.
Now, let me switch for the balance sheet and cash flows on slide 13.
During the second quarter, we consumed $2 $4 million of cash from operations compared to $2 $3 million generated in operating cash flow and the comparable period of fiscal 2020 capital expenditures were $5 million compared to $6 $2 million and the year ago second quarter.
The majority of our capital spend was directed towards technology investments and product specification tools to simplify the ordering process and manufacturing upgrades to increase automation.
We expect our full year capex to be approximately $25 million.
This quarter, we returned $3 $3 million of capital to shareholders and the form of dividends.
Additionally, we reinstated our share buyback program and repurchased 62000 shares for 750000 and the second quarter.
And January we repurchased an additional $750000 for a total of $1 5 million since we reinstated our share repurchase program and November.
We will continue to repurchase shares opportunistically for the remainder of fiscal year 'twenty one.
We ended the quarter was $41 2 million and cash and cash equivalents.
Following the acquisition closing our net debt to EBITDA ratio was 0.7 times, including the liability for the earn out payments Department.
Our backlog at the end of December was $144 9 million up three 9% sequentially.
We expect 80 million of this backlog will be shipped and the third quarter of fiscal 'twenty and 'twenty one.
Based on this we expect third quarter organic revenue to be similar to second quarter levels. We.
We also expect freight cost will continue to negatively impact gross margins and the short term, resulting and a temporary sequential decline and the third quarter as we start to see the benefit of our price increases and the fourth quarter, along with more clarity on the new form and workplace, we expect a sequential increase and gross margin and the fourth quarter and I'll now turn the call back to Christie for her.
Closing remarks Christy.
To sum up we are navigating a difficult business environment, but we see improvement on the horizon and the two markets that currently account for close to 85% of our total sales health and workplace.
Our connect to Plano strategy has strengthened our ability to gain share and our target markets.
The pop and acquisition closed only eight weeks ago, and we already are making progress against our stage one priorities.
That is a testament to the tremendous potential that lies ahead as well as the exemplary ways in which our combined organizations embrace change and diversity.
We are well positioned and motivated for the path ahead.
Operator, now I'd like to open the call for questions.
Thank you to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
First question comes from Greg Burns with Sidoti and company. Your line is now open.
Good afternoon.
And.
<unk> talked a lot about the the freight cost impacting the gross margins.
And it still has been.
Sales increased pretty significantly recently can you just talk about your exposure there and in terms of the price increase.
What is typically the.
And the lag on actually the realization of that price increases and take a couple of quarters before we see the benefit.
Yes, Greg This is T. J how are you doing on the first point around steel and input cost. So yes, we talked about freight but also we're seeing inflationary pressure and metals. So.
Steel aluminum as well and I think that's going to persist for probably the next two quarters for the first half for this calendar year I think what we'd like to see it because again the market starts to normalize just as we're hoping the freight market normalizes. After the next two quarters, we're looking at something hopefully similar and those kind of input costs.
Hum.
And when you talk about the price increase so we said the price increase goes into effect on March one so we'll see.
Very little of that impact in our third quarter, we would see a significant amount and our fourth quarter and and full realization in Q1 of the next fiscal year. So it is a lag, but we can begin to realize significant benefits.
In Q4, and that's where we talk about the margin evolution and how we see the margins on.
The temporary compression AUC and Q3, beginning to ease and Q4 is that price increase comes into effect.
Okay.
And you talked about.
Getting to the $20 million of.
Cost savings by the end of the year and you had $6. One total this quarter, where are you cumulatively, what's left to get to that $20 million.
Yes.
And tracking roughly halfway there and so I think when we look at the delivery for the second half, we see a similar trajectory of where of where the pipeline of projects will continue to deliver.
And on quarter similar amounts and I think what we're focused on now is just kind of thinking about beyond this fiscal year and what we can what we can do and 2022.
Okay and then.
I just wanted to understand the guidance you gave on the for for the revenue for next quarter So organic.
133, and a half million dollars this quarter.
Assume that for the next quarter plus whatever contribution we get from popping.
Can you help us out with like for what do you expect pop into Sydney contribute next quarter.
Excellent growth. So that's why the guidance would be organic revenue at similar levels. So the $133 five quota carriers and organic revenue for this quarter and just a little bit on that.
We've talked about hospitality for $6 million delay and shipments from Q2 that will ship in Q3, However, again logistics and the network is still tight so there's some risk in the quarter there.
And workplace and health when you look at order volumes as we move into January. So we've just wrapped up and we're basically seeing again similar order trends for what we saw at the end of the previous quarter there.
And so those two things combined lead us to net organic revenue picture as far as pop in.
<unk> contributed $2 7 million to our revenue during the period December 19th through to 31, so for the Purion M.
And would see that run rate directionally to continue through this quarter as well so again as we've talked about while their showrooms are open by appointment they're seeing similar.
Similar challenges and order rates and the pressure that we're seeing but I would say the run their run rate from December would continue into Q3.
Okay great.
Okay.
And maybe talk about.
Some of your end markets hospitality, what what are the conversations like with your.
And your customers or are they.
Is there any green shoots or are we just kind of and a holding pattern you just what do you what do you see a pattern here.
And customers.
Sure Hi, Greg its Christine.
There's two things that we did we would say the customers.
And we're talking about one is new and this ocean freight.
And there's congestion and impact on hospitality is fairly significant and.
And it and taking a lot of work from the customers and our team in order to make sure that we're opening and those orders.
And then and getting things organized and there is yes.
There is a significant significant amount of work that's being done in regards to that.
The day I would say the green shoot that we are seeing is Linda touched on in the luxury market. There is no doubt that that is coming back faster than what we would call. The program business that is more geared toward the business traveler.
Yeah.
Okay.
And.
As you look to expand.
And expand that with the living.
And two senior living and student housing could.
Could you just compare and contrast.
The market share.
Are similar maybe to hospitality like why why why is that a natural extension from the hospitality market and what kind of.
Incremental.
Pam do you get by moving in that direction.
So there's.
There's two dynamics that make it very similar one it is a direct sale. So are our selling organization goes direct to the designers or other developers and.
And and worked to create and all.
A portfolio that is unique to them. So it's a direct sales mix at our hospitality group does that is the route to market and then they are designed they are organized to create custom products for dedicated and markets, which would be student housing student housing and see.
And you're living so each of the properties by a significant amount of custom products to put in their environment. So those are the two things that have that sitting and or hospitality business and I will tell you that are held for expertise is helping our hospitality group.
And the senior living environment, so that expertise does matter in that environment and.
And our workplace.
Is opening up opportunities and.
And luxury student housing. So there is crossover that occurs within the business units and we like that a lot we think there's opportunities to share that expertise.
Okay.
I'll hop back in the queue, but if theres no one waiting I'll just keep on going.
Okay. Thanks, Craig.
Alright. Thanks.
Thank you. Our next question comes from Tom made her with Hilton Capital. Your line is now open.
Alright, Thanks, a lot so just to clarify and pop and I guess does that mean, it's sort of a 35 $40 million run rate right now or I don't know if there is seasonality and the business just trying to extrapolate from one month you had it.
Yes.
So based on based on what we saw from December yet you extrapolated that out you'd come up with something in that range I think what what we're looking at is how we can ramp that as quickly as possible and and again it depends upon the market conditions and you know.
This general market recovery, but I think that's the run rate implied from December and what we're focused on is really the priorities, we outlined for profit and how we can scale that again.
The dealer network and looking at the work from home opportunities and again pop and pods. So we just I think the degree to which we can push those priorities for it will really dictate the revenue trajectory beyond the next quarter.
Thanks, and then other than the product line I think theres. Some reference here in terms of their digital marketing capabilities and.
And sort of expand on that and do they bring more of a and E commerce sort of.
Capability or it's more just the ability to more effectively exploit those marketing channels and I'm just kind of curious what your kind of fully referring to their reported.
Sure. So let me just explained net pop and business model for a moment. It is a great model. So it is a digitally enabled regeneration model that occurs and then quite sophisticated conversion funnel of that.
And the opportunities are pushed through that includes sales development account executives and showrooms. So that they can convert those digital leads.
And to some nice sales and I'll just give you a couple of facts.
80% of the leads do start online.
And when we look at the when the leads get to the account exec.
Over 60% of those leads are actually converted and.
About 70% of their business is repeat customers because they are they're very very dedicated to this simplified our customer experience and stock product and services that they offer so it's a digitally native lead Gen machine that has.
A series of conversion opportunities through the funnel and as T. J was mentioning about the top and volume we knew pop and wasn't metropolitan markets. They are five showrooms that are and metropolitan markets. We knew that when we when we purchase pop and we're excited about taking the adult back capabilities.
<unk> in the secondary markets because a lot of the the.
And the opportunity for pop and is creating that.
And that conversion at the local market.
And they could leverage the existing I guess Kimball press.
Presence in those markets I guess, yeah, yeah. There's two there's two methods that were two opportunities one is to expand the direct capabilities with that top and already has and the secondary market and remember, it's a very different and the stock product gets a different looking product with a simplified assortment it.
It's a direct ship.
And then also we're bringing into the more sophisticated kind of dealer community, where they will get larger and consumers. So we'll be doing both of those activities with the pop and brand.
Got it Okay and then my other question a little bit different but in terms of.
Your workplace.
Business I don't know if you would have visibility on this but do you see people sort of ordering and theres a lot of conversation about.
And sort of reconfiguration more hotel and people working three days and and the office and two out or whatever you have and so are you seeing are the orders sort of specifically tied to those kind of changes in terms of their furniture needs are and lay out of the office or is it more still sort of just sort of replacement and normal cycle.
For the existing office space as it's configured.
Yeah. So I'll tell you two things that we're we're definitely definitely came in Q1.
<unk> that are coming into the funnel right now are either projects that were kind of in the works to already and they just had some small tweaks and a practical changes based off for the new landscape or are there kind of new major project based off of the.
And the environment and they experienced debt that corporations really want to deliver.
There their employees.
And so we're seeing you know some varying activity that's happening and the project funnel, but theres no doubt that we feel that corporations are now thinking about the workplace and regards to kind of where work is getting done and so you don't have headquarters, it's co working environment and satellite office.
And it's a book from home and so one of the things you know as you kind of kicked down all day.
The places and the choices that we're making at Kimball international and it's really to be able to service that much broader market.
And so we think that for us it does represent significant opportunity for us going forward as those new markets for them.
Great I appreciate it thank you.
Thanks, Tim.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
I'm not showing any further and I see a question from Spiro <unk> with Alphatec.
And I'm not showing any further questions at this time I would now like to turn the call back over to Kristy adjusted for closing remarks.
Thank you very much what I'd like to thank everybody for joining the call today, and we look forward to keeping you.
Informed on how we're doing again, we are seeing early indicators.
And is that we're excited about and we certainly think that we're set up in order to maximize the opportunities ahead. So thank you very much and have a nice evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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