Q3 2021 Kimball International Inc Earnings Call

May 4, 2021

[music].

Yeah.

Good morning, ladies and gentlemen at this time I would like to welcome everyone to Kimball International third quarter fiscal year 2021 conference call.

Just on a conference call today's call May for 2021 will be recorded and may contain forward looking statements as defined under the private Securities Litigation Act of 1995 actual results could differ materially from forward looking statements risk factors that may influence the outcome of forward looking statements can be seen in the Kimball.

Form 10-K during today's call the presenters will be making references to an earnings slide deck presentation that is available on the Investor Relations section of Kimball International's website on today's call are kristie Juster CEO of Kimball International and T. J Wolfe Executive Vice President and Chief Financial Officer.

I would now like to turn the call over to Kristie Juster Miss Juster you may begin.

Thank you everyone for joining us to review, our third quarter results and discuss our business outlook.

The third quarter was our most challenging period since the pandemic began due to several key factors that I will review and are outlined on slide three for.

This is our seasonally lowest quarter for contract furniture industry normally experiences a drop off in orders and revenue in our fiscal third quarter.

Second revenues came in below our forecast due to slower than anticipated order rates early in the quarter and third as expected inflationary pressures on our raw materials and continued high logistics costs were most pronounced in the third quarter ahead of our price increases.

That said there were several data points in the third quarter supporting our view that the industry is showing signs of recovery and that Kimball international is well positioned to capture market share gains as business conditions.

Conditions progress.

Most significantly is the cadence of order rates in our workplace and health business unit, which accounts for close to 80% of Kimball International year to date revenues.

Although order rates in these two end markets declined in the third quarter. They improved progressively throughout the period and into April, indicating a pickup in the conversion of bidding activity into hard orders.

At the same time bidding activity in both workplace and health increased at a strong double digit rates compared to Q2 levels another indication of better market conditions ahead.

We also expect a considerable sequential recovery in our gross margin in the fourth quarter as our March price increases begin to take hold and will contribute to a substantial rebound in gross margin compared to the third quarter.

Importantly, we continued to execute well on our connect to Plano strategy.

In terms of gaining traction in our targeted end markets, achieving our cost savings targets and making meaningful progress on the stage one priorities that we have identified to drive revenue growth and synergies within our Pap and acquisition.

Now, let's review Kimball International end markets, and our relative positioning with respect to a business recovery.

Beginning with health on slide four we continue to see this market ramping out of the pandemic more quickly than our other end markets, reflecting a faster return of the health administrative workers increased public funding and expansion of areas such as behavioral health academic.

Call centers and specialty hospitals.

The previously announced the official launch of our New Health brand interwoven has brought together a dedicated team of professionals with extensive industry knowledge and experience, which is enabling us to engage in key strategies within targeted health organizations, including the expansion of projects.

<unk> services and geographies.

Order rates in health increased progressively throughout the third quarter and we saw a meaningful pickup in the number of orders and are bidding opportunities compared to Q2.

Also in the third quarter, we had significant sales for the veterans administration, where the government has announced an $18 billion program to modernize VA hospitals across the country.

We have over 600 products qualified for purchased by the VA and consider public health to be an important growth driver for the business.

The recently passed stimulus bill allocated substantial funding to support mental health services, behavioral education, and training as well as telehealth and improved veterans' care.

New product introductions accounted for approximately 21% of our total health sales in the third quarter.

The interwoven health specialty products provide solutions for caregiver stations exam rooms treatment areas inpatient rooms on.

All designed around the improvement of the delivery of care.

We recently launched <unk>, a thoughtfully designed family of lounge seating that make people feel more at home and at ease and health care spaces.

The modular design allows for flexibility in space, all customized with elements of storage lighting and power and provide the warmth of a residential aesthetic.

Our progress in health is driven by both on expansion of new product solutions and targeting of the new markets such as the veterans administration.

Slide five provides an update on the hospitality market.

Third quarter sales in this end market were up sequentially as we work off our backlog.

But orders were down considerably reflecting the continued impact of the pandemic on travel and leisure activities.

Custom products, which carry higher margin accounted for 50% of our year to date hospitality sales.

Up from 30% one year ago.

We expect to build on this trend as we navigate what is likely to be an uneven recovery in hospitality with leisure business and international travel each ramping at a different pace.

We are closely miniature on costs in this business, where our fixed costs tend to be much lower given that we source approximately 75% of our hospitality products.

Ocean freight costs, However had a significant impact on Q2, Inc. Q3 results.

We expect the margin in Q4 to show improvement from Q3, as we are able to partially offset higher costs with pricing.

As we have stated previously we continue to see increased activity in leisure travel, but I anticipate a later ramp for the broader business and international travel.

Now, let's move to slide six where we begin our discussion of the workplace market, which represents the largest portion of our business.

Although the pandemic impact on workplace furniture spending continues to be felt across the industry.

See early indications that our market recovery is insight on.

Our order rates progressively increased through the third quarter and that trend continued into April.

Additionally, the number of new opportunities that we are bidding on increased at a double digit rate from Q2 levels as did the dollar value per opportunity.

These data points signal that employers are engaged in the development of the new forming work environment, which our research indicates will be comprised of a combination of the office satellite locations and work from home.

Kimball International's, new omni channel capabilities put us in a strong position to gain share of the new hybrid workplace.

On slide seven we share our outlook on the future of work, which is the product of our proprietary research.

At the center of the new forming hybrid model is the concept, thereby providing flexibility in where you work employers will be able to attract retain and retain and develop the most qualified and diverse workforce.

It is clear the office plays a crucial role as a centralized hub for collaboration learning and teamwork complemented by both work from home and in some areas its satellite locations.

The pandemic has taught us that well work can happen anywhere offices play an important role in corporate culture, creating community and driving innovation.

Moving to slide eight you can see how well Kimball international is positioned to take advantage of the transitioning workplace market.

Approximately 85% of our workplace products are in the ancillary category.

Which in contrast to systems are ideally suited for the collaborative atmosphere of the new office environment.

And approximately 80% of our workplace business is derived from secondary markets.

Where office reentry is taking place at a faster rate than in larger metropolitan areas. Additionally.

Additionally, these secondary markets like Austin, Nashville, and Miami are gaining an appeal due to the favorable business climate and the attractiveness of a less dense more comfortable living situation.

The pop in acquisition, which we completed in mid December of 2020 is a key driver of our ability to accelerate future market share gains on.

On slide nine is a summary of our stage one priorities, we outlined when we announced the acquisition and have been focused on over the last several months.

First we have identified 10 markets for pop and showroom expansion and plan to open five in fiscal 2022.

These locations will be in secondary markets, where Kimball international has long standing relationships.

Second we are expanding our work from home portfolio with new product introductions scheduled for late summer and alongside scaling our corporate sponsorship program.

Third the proppant pro dealer program will officially launch later this month for over a thousand existing Kimball international dealers.

Providing them full access to <unk> suite of products, new categories and services.

Slide 10 provides a closer look at top and pro.

Which will provide our Kimball international network with an assortment of innovative products that are tailored to meet the needs of the post pandemic workplace.

This program includes two new categories of pop in pods in Patton's basis, each provide flexibility and adaptability and an open space environment for individual private and group use.

All enabling productive teleconferencing pop up offices and meeting spaces.

The just launched popping spaces is a simple flexible system, a freestanding rooms that gives our customers the ability to add collaboration meetings and private workspaces for their employees without the cost of construction.

Dealers in the A&D community are excited about the launch of proppant pro because they will get access to the new product categories benefit from the simplicity and speed in the transaction again quality products at an affordable price.

And all with a unique design colors and fun offered by the <unk> brand.

To sum up on slide 11, Kimball International supports work in life wherever it happens with a portfolio of high quality products and solutions that are well suited to today's dynamic marketplace.

Now I'll turn the call over to T J.

Our Chief Financial Officer for financial review of the third quarter and our guidance for the June quarter T. J.

Thanks, Kristine and good afternoon, everyone I will provide more details about Kimball international financial performance for the third quarter of fiscal 2021 on our guidance for the fourth quarter, which includes a significant rebound in gross margin.

Let's start on slide 12, with key financial highlights net.

Sales increased 2% sequentially to $138 7 million, including $8 9 million contribution from Pavan.

Climbed 22% year on year I'll describe sequential revenue order dynamics for end market in a moment.

Our gross margin was 28, 7% 530 basis points below last year's third quarter levels, mainly due to logistics and raw material inflation higher health care costs on the <unk>.

Loss of leverage on a lower revenue base of.

Of the total $6 million of transformation plan savings in the third quarter $4 million relative to our operational excellence program, helping to mitigate part of these margin pressures.

As a reminder, we announced selective price increases on our workplace on health product lines that went into effect March one to help offset for the industry wide inflationary cost pressures.

Given the timing of the price increase we did not see a material benefit in the third quarter, but expect to see a more meaningful contribution during the fourth quarter, which will benefit gross margin with the full realization of pricing in the first quarter of fiscal 2022.

Selling and administrative expense declined by 0.7 million from $44 9 million benefiting from cost management and savings from our transformation program with $2 million.

Excluding certain adjustments acquisition related charges and $1 $7 million on amortization from the pop on acquisition adjusted selling and administrative costs were $42 6 million or 34, 8% of sales compared to $47 2 million or 26, 5% in the prior year.

Our total transformation savings in the third quarter was 6 million for you.

Year to date cost savings for $16 8 million, which puts us firmly on track to achieve $20 million and transformational program savings for fiscal year end.

We plan to reinvest a portion of these savings in the fourth quarter as we increase our SG&A spend in anticipation of a business recovery in fiscal 2022, and the continued expansion of province.

Our GAAP net loss was $4 5 million or negative <unk> 12 per diluted share, including $3 5 million or nine cents, an after tax special restructuring charges as well as amortization related to the pulp on acquisition.

This compared to net income of $9 5 million and earnings of <unk> 25 per diluted share in the third quarter of fiscal 2020.

Adjusted diluted EPS was negative <unk> <unk> compared to earnings per share of <unk> <unk> in the year ago quarter.

Adjusted EBITDA was $1 9 million.

Now, let's take a closer look at our sequential revenue performance by end market on slide bridges, keeping in mind that the third quarter is our seasonally lowest quarter.

Hospitality sales increased 61% sequentially as we work through our backlog and accounted for 25% of total revenue this quarter.

Health sales increased 9% sequentially and accounted for just under 18% of our total revenue this quarter.

Workplace revenues, which represented 57% of our total sales declined 10% sequentially and new product introductions for workplace accounted for approximately 27% of total workplace sales in the third quarter.

As Christie mentioned earlier, the contract furniture industry normally experiences a seasonal decline in revenue during the reporting quarter.

Historically for us for has been around a 10% decline in revenue from Q2 for Q3 for workplace and health, which is the rate of decline we saw this year.

Slide 14 shows positive sequential momentum in new orders and workloads, which increased by 2%, including a sequential improvement in pop in orders as possible as part of our results for a full quarter in Q3 versus only a few weeks of Q2.

With the workplace, we see a particular ramp of order rates in the education vertical.

Orders in health declined, 4% and hospitality orders decreased 40% sequentially.

It is worth noting that order rates in both the health and workplace and markets improve progressively throughout the quarter and this positive trend continued into April as well.

For a 6% increase in total orders for health and workplace in April compared to March.

What were the trends in the third quarter were quite strong there were definite signs of improvement throughout the period and into the first month for fourth quarter.

It is too early to call. This a trend we are cautiously optimistic for the signals the beginning of an industry recovery.

Now, let me switch the balance sheet and cash flows on slide 15.

We ended the quarter with $44 million in cash and cash equivalents.

In the third quarter, we generated $2 8 million of operating cash flow compared to $4 million on a comparable period of fiscal 2020.

Capital expenditures were $5 million compared to $5 $6 million on a year ago third quarter.

The majority of our Capex for the machinery and equipment in our manufacturing facilities and investments in technology.

Year to day capital expenditure for $13 9 million and we expect full year capex to be approximately $20 million.

This quarter, we returned $4 8 million of capital to shareowners in the form of dividends and share repurchases, bringing the year to date figure to $12 million.

Based on our backlog of $129 6 million at the end of Inc. Third quarter and the tenor of our order rates, we expect a sequential increase in workplace and help revenue to be offset by a decline in hospitality revenue due to the lower hospitality backlog entering the quarter resulted in a fourth quarter revenue to be in line with third quarter <unk>.

<unk>.

We are projecting gross margin to rebound significantly expanding by approximately 300 basis points from Q2 levels at the March price increase takes hold offsetting a portion of the continued commodity and freight pressures in Q4.

We are planning to selectively increase selling and administrative investments in the fourth quarter around our growth initiatives, including pop and return to work and incremental health resources we.

We will continue to monitor incoming orders throughout the quarter and adjust planned investments if needed.

I'll now turn the call back to Christie for her closing remarks.

Thank you T J to wrap up on slide 16 early indications are that business conditions are on the upswing.

For workplaces, changing and we believe Kimball international is in the right geographies for right verticals and the right product categories with a new digital lead generation machine. We are on a strong position to capture market share at an accelerated pace.

And our cost efficiencies will enable us to deliver long term value as we ramp.

I would also like to take a moment to comment on Kimball International company wide approach to ESG. We currently are compiling data across our organization that supports our commitment to being responsible stewards of the environment, maintaining a diverse and caring culture that emphasizes employee safety and wellbeing and.

Having strong corporate governance practices.

Our board of directors and executive leadership demonstrate our meaningful commitment to diversity and we look forward to sharing more information and reporting on our broader ESG focus in the coming months.

I'd now like to open the call for questions.

Thank you and as a reminder to ask a question you will need to press star one on your Touchtone telephone once again Thats star one on your touched on telephone to ask for questions to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Greg Burns of Sidoti <unk> Company. Your question. Please.

Good afternoon.

In terms of like some of the green shoots.

<unk> share their early signs of improvements.

Youre seeing can you just talked about.

Hi.

Translating in terms of maybe maybe.

Alright.

For the quoting activity.

What youre seeing there.

Is it centralized looks like smaller business are you seeing with smaller businesses first.

And maybe larger larger projects with longer sales cycles.

And any signs there that you might see that start to pick up in the second half of the year.

And so share Greg.

What we talked about this when you look at the progression throughout the quarter clearly it was a slow start to January and orders, which translated to a slow February as shipments, but what we saw throughout the quarter was this progressive strengthening from January through March and then into April. We noted it was a 6% increase over the previous month and workplace on health and I think.

When you look down on kind of to your question at what we would call day to day orders. So those less than 50000 value versus project orders, which are longer and larger longer duration.

We saw a significant increase in the day to day orders in April and actually our strongest performance on over the past year and so I think those are very encouraging signs about the types of activities. We are seeing so again the size of orders and this was our kind of hypothesis from the beginning that we begin to see the day to day orders come back first before larger.

So that is playing out and I think within the verticals, we talked about this but the education buying season also starts during Q3 and we saw the signs of that picking up as well. So I think those are two specific data points. We look to that are the green shoots we feel.

Okay.

When you look at the.

The work from home.

Opportunity.

You see that playing out is it mostly going to be through.

Are you, mostly addressing that through company sponsored programs or do you have any plans on further digital investments around.

Maybe like a.

Yes.

A website or.

B to C type channels.

Yes, Greg this is Christie.

We focused our efforts on the <unk> environment and our corporate sponsorship program, we've talked about on.

Our initiative with top end again corporate sponsorship we have over 100 corporations that have signed up for that now.

And so we do see that it is early stages in that process.

Although we do have some DTC business, because <unk> actually able to transact from a BDC basis, that's not the focus on.

Our initiatives.

And so we feel we feel very good about where we're focusing we feel that we're in the front end of that market.

Reform as this new hybrid model is forming in the workplace.

Okay, and then in terms of the.

The <unk> guidance in terms of SG&A I guess theres. Some additional savings to be had on your 20 million for Youre talking about some incremental investments back into the business. So relative to the third quarter do you expect.

Between those two dynamics SG&A to be up sequentially or flat.

Yes, Greg that's right. So if you think about it we will have additional savings come through from operational excellence. The majority of that will fall in cost of goods as it as it has but youre right. We will have a sequential increase in SG&A and really what we're looking at is we have been engaged in these investments as.

As we evaluate the market looked for the ramp to occur and now we feel is the right time to make some of those and we mentioned those are in health expertise related to the to the VA the launch of pop in pro and around the new for me workplace on how we can support that from a research design and innovation standpoint, So that will all result in a sequential improvement for.

Our sequential increase from Q3.

Okay.

In terms of the.

The first phase priorities for for pop and can you just talk about.

Where you are in terms of implementing those when we might see those.

So to have some impact on pop in sales growth.

Sure. So we're very pleased with the progress that we've made with pop and.

On the pop in total launch is actually happening. This month, we are starting with a full launch to over 1000 dealers.

The team has done just an outstanding job of putting launch plans together. The launch plans are actually for our internal sales force for our dealer community and then for the A&D community. It's completely activated through digital tools. So <unk> has been very.

<unk> engaged in creating these launch plans and then we will have kind of a customized approach with key dealers that are going into what we're calling this pop in class Pro plus program.

They'll actually have some support on the ground in the local markets. So that is sooner than we anticipated so very pleased there.

Categories that are the dealers will have access to the flow.

Pop in portfolio the categories that we're focused on are the new pod category and also the brand new spaces categories that just launched last month under pop in direct as well and Thats. The flexible walls program that we talked about that's so critical to open office environment.

<unk> a quick ship setting up short term leases so great progress there great engagement across Kimball international in and pop on to make that happen.

I will also say, we're very excited about.

What we're going to do with the pop in showrooms we.

Stated debt, we have 10 kind of.

On the secondary markets in our view five of those are going to happen as quickly as we can in 2002 and really we are we are working diligently on making that a reality.

And it's been really fun for the team and then the last piece that I would say is.

We really think there is some product.

Manufacturing synergies.

On the opportunities in our future and the teams are starting to work on that as well so very pleased with the progress.

And really excited for you guys to see it in the market and for us to see it in the the growth build a popping and Kimball international.

Okay, great. Thank you.

Thank you once again to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question. Our next question comes from the line of Kara Anderson of B Riley Securities. Your question. Please.

Hi, guys.

Hi, Jeff.

So I just wanted to dig a little on the price increase so you called out raw materials third quarter on a more meaningful pickup in the fourth quarter on 300 basis points improvement and.

In total realization in one Q of next year, but if I recall the price increase won't really Olivier alleviate all the pressures you're seeing from guests staying on.

Kind of what does it look like to take you back to the 35% growth margin level and is that insight for Kimball over the course of the next year.

Yes.

Great question, So, let's kind of go back on the facts of the price increase. So this is across the workplace and health portfolios broadly on kind of Directionally.

On the low single digit range shows, 3% to 4%, but it wasn't specifically.

It wasn't it wasn't that uniform way. So there were deviations from for that was the broad direction of it because of the backlog on the order cycle.

Again, you don't always see that much at all on this quarter in Q3, you'll begin to see it in Q4, but debt as the backlog works for Youll see the full realization in Q1, but as you point out on.

The margin compression created by freight and the commodity cost increases.

Those exceed the price increase that we took I think when you begin to look at the past back towards historical margins. The big lever that youll begin to see is the loss of leverage reversing itself once volumes recover and if you actually kind of look order of magnitude of order magnitude in this previous quarter loss of leverage was.

Actually the biggest drag year over year, because we were cycling really what was a non COVID-19 quarter in Q3 of 'twenty. So I think that was the biggest drag this quarter.

Great and commodity certainly material to the margin compression, but the past backward.

Pat back up will certainly include a recovery of leverage in the P&L.

Okay. So is it fair to say like if were projecting.

Yes that volume return three four quarters out debt. We would also expect you to get that level.

If our timelines are correct.

Yes, you would find it marry up with the return of volume.

Okay and then on can you talk about how <unk> is progressing in comparison to the sort of the order rates bidding activity trends that you've talked about for the whole business.

Yeah sure. So when you look at pop and Christy just comment on the progress we've made with made with our stage one priorities. When you look at what we'll call as kind of the legacy core business that <unk> had.

Prior to our acquisition it remained at depressed levels as we have seen so pumpkins markets in major cities.

Remain depressed as ours debt, so and Thats kind of the performance that you saw this quarter again $9 million on revenue.

<unk> significantly below what pop ins rates were prior to COVID-19, so that drag and kind of depressed top line still continues we would look for their ramp to follow Kimball International's kind of workplace health ramp with some deviation is given that they're in metro markets and what we've said is secondary markets will begin to <unk>.

Cover one.

Followed by large metro markets. So I think they are experiencing the same macro environment we are on.

And we will look to see their revenue again begin to grow as we come out of the ramp in the next quarters.

Got it and then I wanted to ask on the pop and pause on the pop in space day, new product categories for Kimball.

For the superior operating bought there I guess I'm just wanted to get a handle on the.

The significance of those.

Yes, so theyre brand new categories for Kimball for the traditional dealers and they will be serviced through the tappin Pro program. The pop in pods launch for right before COVID-19. So popping really has not experienced the benefit of that cash.

<unk>, although they they were very pleased with the initial launch and then we went into COVID-19, we do feel that those products have significant application to the post pandemic work environment, that's going to take place and then stated are brand new and.

It's really quite an exciting category for us we actually just rolled out our spaces to our health team today and I heard a lot of excitement about it.

It's the ability tick and strapped with flexible walls offices.

Small meeting rooms, and so you can literally set up an office without any type of construction and of course, what we keep hearing in our.

Feedback on the new workplace is all about the flexibility that's needed in the interiors of these spaces.

So those two product categories support that research wholeheartedly and we're excited to take them and then there are new product pipelines that will support those two categories. Both in the direct path and model and through our traditional network with proppant pro.

Got it on and then do you have any data points around the success you've had in that corporate sponsored work from home.

Category that you can share.

Yes.

We're just learning that category I think I.

Sure. It's about 100 100, a little over 100 corporate sponsorships that we have engaged upon and those are literally employees ability to order the product directly and we are seeing the volumes ramp over time, but it's still a new learned behavior for the <unk>.

For <unk> to actually go on their internet and learn how to purchase product. It's also a new behavior for the employer to actually require the employee to purchase the product through.

Through their organization. So I think it has a significant going forward and we're kind of building that as we go so we have confidence in what it will be but it's still early on in the stages.

Got it. Thank you that's it for me.

Thanks Kara.

Thank you at this time I would like to turn the call back over to Kristie Juster for closing remarks.

Yeah, I'd like to thank everyone for joining us on the call today, and we certainly look forward to keeping everybody informed on our progress.

We continue to share the just the.

<unk> believes that what we've done during the COVID-19 times will set us up for tremendous success going forward and that we truly are maxim are ready to ramp out of COVID-19 with the opportunities that we've been working on I also want to thank all of our employees at Kimball International for what they have done to get us through.

This pandemic and we then we've invited all of our employees back to our offices and we've experienced that over the weekend. We can frankly, we can feel the excitement and the reconnection that everybody has so we're really pleased about our path ahead, and we think so thank you all so much for your time this evening.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good morning, ladies and gentlemen at this time I would like to welcome everyone to Kimball International third quarter fiscal year 2021 conference call.

For a conference call today's call May 4th 2021 will be recorded and may contain forward looking statements as defined under the private Securities Litigation Act of 1995 actual results could differ materially from forward looking statements risk factors that may influence the outcome of forward looking statements can be seen in the Kimball international.

Form 10-K during today's call the percentage will be making references to an earnings slide deck presentation that is available on the Investor Relations section of Kimball International's website on today's call are kristie Juster CEO of Kimball International and T. J Wolfe Executive Vice President and Chief Financial Officer.

I would now like to turn the call over to Kristie Juster Miss Juster you may begin.

Thank you everyone for joining us to review, our third quarter results and discuss our business outlook.

The third quarter was our most challenging periods since the pandemic began due to several key factors that I love you and are outlined on slide three for.

This is our seasonally lowest quarter the contract furniture industry normally experiences a drop off in orders and revenue in our fiscal third quarter.

Most significantly is the cadence of order rates in our workplace and health business unit, which accounts for close to 80% of Kimball International year to date revenues on.

So order rates in these two end markets declined in the third quarter. They improved progressively throughout the period and into April, indicating a pick up in the conversion of bidding activity into hard orders.

At the same time bidding activity in both workplace and health increased at a strong double digit rates compared to Q2 levels another indication of better market conditions ahead.

Importantly, we continued to execute well on our connect to Plano strategy in terms of gaining traction in our targeted end markets, achieving our cost savings targets and making meaningful progress on our stage one priorities that we have identified to drive.

New growth and synergies within our property acquisition.

Now, let's review Kimball International end markets, and our relative positioning with respect to our business recovery.

Beginning with health on slide four we continue to see this market ramping out of the pandemic more quickly than our other end markets, reflecting a faster return on the health administrative workers increased public funding and expansion of areas such as behavioral health academic.

<unk> centers and specialty hospitals.

The previously announced the official launch of our new health brand interwoven.

Together, a dedicated team of professionals with extensive industry knowledge and experience, which is enabling us to engage in key strategies within targeted health organizations, including the expansion of projects services and geographies.

Order rates in health increased progressively throughout the third quarter and we saw a meaningful pick up in the number of orders and bidding opportunities compared to Q2.

Also in the third quarter, we had significant sales to the veterans administration, where the government has announced an 18 billion dollar program to modernize VA hospitals across the country.

We have over 600 products qualified for purchased by the VA and consider public health to be an important growth driver for the business.

The recently passed stimulus bill allocate substantial funding for sport mental health services, behavioral education, and training as well as telehealth and improved veterans' care.

New product introductions accounted for approximately 21% of our total health sales in the third quarter.

Interwoven health specialty products provide solutions for caregiver station exam rooms treatment areas and patient rooms.

All designed around the improvement of the delivery of care.

We recently launched Edinburgh, a thoughtfully designed family of lounge seating that make people feel more at home and at ease and health care spaces.

The modular design allows for flexibility in space.

Customized with elements of storage lighting and power and provide the warmth of a residential aesthetic.

Our progress in health is driven by both on expansion of new product solutions and targeting of the new market such as the veterans administration.

Slide five provides an update on the hospitality market.

Third quarter sales in this end market were up sequentially as we worked off our backlog.

But orders were down considerably reflecting the continued impact of the pandemic on travel and leisure activities.

Custom products, which carry higher margin accounted for 50% of our year to date hospitality sales.

From 30% one year ago.

We expect to build on this trend as we navigate what is likely to be an uneven recovery in hospitality with leisure business and international travel each ramping at a different pace.

We are closely managing our costs in this business, where our fixed costs tend to be much lower given that we source approximately 75% of our hospitality products.

Higher Ocean freight costs, However had a significant impact on Q2, Inc. Q3 results. We expect the margin in Q4 to show improvement from Q3, as we are able to partially offset higher costs with pricing.

As we have stated previously we continue to see increased activity in leisure travel, but anticipate a later ramp for the broader business and international travel.

Now, let's move to slide six while we begin our discussion of the workplace market, which represents the largest portion of our business.

Although the pandemic impact on workplace furniture spending continues to be felt across the industry.

We see early indications that our market recovery is in sight.

Our order rates progressively increased through the third quarter and that trend continued into April.

Additionally, the number of new opportunities that we are bidding on increased at a double digit rate from Q2 levels as did the dollar value per opportunity.

Kimball International's, new omni channel capabilities put us in a strong position to gain share of the new hybrid workplace.

On slide seven we share our outlook on the future of work, which is the product of our proprietary research.

For collaboration learning and teamwork complemented by both work from home and in some areas satellite locations.

The pandemic has taught us that well work can happen anywhere offices play an important role in corporate culture, creating community and driving innovation.

Moving to slide eight you can see how well Kimball international is positioned to take advantage of the transitioning workplace market.

Approximately 85% of our workplace products are in the ancillary category, which in contrast to systems are ideally suited for the collaborative atmosphere of the new office environment.

And approximately 80% of our workplace business is derived from secondary markets, where office reentry is taking place at a faster rate than in larger metropolitan areas.

The pop in acquisition, which we completed in mid December of 2020 is a key driver of our ability to accelerate future market share gains.

On slide nine is a summary of the stage one priorities, we outlined when we announced the acquisition and have been focused on over the last several months.

First we have identified 10 markets for pop and showroom expansion and plan to open five in fiscal 2022.

These locations will be in secondary markets, where Kimball international has long standing relationships.

Second we are expanding our work from home portfolio with new product introductions scheduled for late summer and alongside scaling our corporate sponsorship program.

Third for proppant Pro dealer program will officially launch later this month for over a thousand existing Kimball international dealers, providing them full access to <unk> suite of products new categories and services.

Slide 10 provides a closer look at top and pro.

Which will provide our Kimball international network with an assortment of innovative products that are tailored to meet the needs of the post pandemic workplace.

This program includes two new categories of pop and pods and tarpon spaces, each provides flexibility and adaptability and an open space environment for individual private include piece.

All enabling productive teleconferencing pop up offices and meeting spaces.

Dealers in the A&D community are excited about the launch of <unk> pro because they will gain access to the new product categories benefit from the simplicity and speed in the transaction again quality products at an affordable price.

And all with a unique design colors and fun offered by the <unk> brand.

To sum up on slide 11, Kimball International supports work in light wherever it happens with a portfolio of high quality products and solutions that are well suited to today's dynamic marketplace.

Now I'll turn the call over to T. J <unk>, our Chief Financial Officer for financial review of the third quarter and our guidance for the June quarter T. J.

Thanks, Kristine and good afternoon, everyone I will provide more detailed for Kimball International financial performance in the third quarter of fiscal 2021 on our guidance for the fourth quarter, which includes a significant rebound in gross margin.

Let's start on slide 12, with key financial highlights net.

Net sales increased 2% sequentially to $138 7 million, including $8 9 million contribution from Portland, but declined 22% year on year I'll discuss sequential revenue order dynamics by end market in a moment.

Our gross margin was 28, 7% 530 basis points below last year's third quarter levels, mainly due to logistics and raw material inflation higher health care costs and the loss of leverage on a lower revenue base of.

Of the total $6 million of transformation plan savings, Inc, third quarter $4 million relative to our operational excellence program, helping to mitigate part of these margin pressures.

As a reminder, we announced selective price increases in our workplace and help product lines that went into effect March one to help offset for the industry wide inflationary cost pressures.

Selling and administrative expense declined by <unk> 7 million from $44 9 million benefiting from cost management and savings from our transformation program a $2 million.

Excluding certain adjustments acquisition related charges and $1 $7 million on amortization from the pop on acquisition adjusted selling and administrative costs were $42 6 million or 38% of sales compared to $47 2 million or 26, 5% in the prior year.

Our total translations for the third quarter was $6 million for you.

Year to date cost savings for $16 8 million, which puts us firmly on track to achieve $20 million and transformational program savings by fiscal year end.

We plan to reinvest a portion of these savings in the fourth quarter as we increase our SG&A spend in anticipation of a business recovery in fiscal 2022, and the continued expansion of pavon.

Our GAAP net loss was $4 5 million or negative <unk> 12 per diluted share, including $3 5 million or <unk> and after tax special restructuring charges as well as amortization related to the pop on acquisition.

This compares to net income of $9 5 million and earnings of 25 per diluted share in the third quarter of fiscal 2020.

Adjusted diluted EPS was negative <unk> <unk> compared to earnings per share of <unk> 27 in the year ago quarter.

Adjusted EBITDA was $1 9 million.

Now, let's take a closer look at our sequential revenue performance by end market on slide 13, keeping in mind that the third quarter is our seasonally lowest quarter.

Hospitality sales increased 61% sequentially as we work through our backlog and accounted for 25% of total revenue this quarter.

Health sales decreased 9% sequentially and accounted for just under 18% of our total revenue this quarter.

As Christie mentioned earlier the contract furniture industry normally experiences a seasonal decline in revenue during this reporting quarter install.

Historically for us for has been around a 10% decline in revenue from Q2 for Q3 for workplace and health, which is the rate of decline we saw this year.

Slide 14 shows positive sequential momentum in new orders and workplace, which increased by 2%, including a sequential improvement in profit ordered as Todd was part of our results for a full quarter in Q3 versus only a few weeks of Q2.

We can workplace, we see a particular ramp of order rates in the education vertical.

Orders in health declined, 4% and hospitality orders decreased 40% sequentially.

It is worth noting that order rates in both the health and workplace end markets improved progressively throughout the quarter and this positive trend continued into April as well.

For a 6% increase in total orders for health and workplace in April compared to March.

What were the trends in the third quarter were quite strong there were definite signs of improvement throughout the period and into the first month for fourth quarter.

While it is too early to call. This a trend we are cautiously optimistic that it signals the beginning of an industry recovery.

Now, let me switch the balance sheet and cash flows on slide 15.

We ended the quarter with $44 million in cash and cash equivalents.

In the third quarter, we generated $2 8 million of operating cash flow compared to $4 million on a comparable period of fiscal 2020.

Capital expenditures were $5 million compared to $5 $6 million on a year ago third quarter.

The majority of our Capex with the machinery and equipment at our manufacturing facilities and investments in technology.

What are your day capital expenditures were $13 9 million and we expect full year capex to be approximately $20 million.

This quarter, we returned $4 8 million of capital to shareowners in the form of dividends and share repurchases, bringing the year to date figure for $12 million.

Yes.

Based on our backlog of $129 6 million at the end of the third quarter and the tenor of our order rates, we expect a sequential increase in workplace and help revenue to be offset by a decline in hospitality revenue due to the lower hospitality backlog entering the quarter, resulting in a fourth quarter revenue to be in line with third quarter levels.

We are planning to selectively increased selling and administrative investments from the fourth quarter around our growth initiatives, including pop and return to work and incremental health resources.

We will continue to monitor incoming orders throughout the quarter and adjust planned investments if needed.

I'll now turn the callback for Christie for her closing remarks.

Thank you T J to wrap up on slide 16 early indications are that business conditions are on the upswing.

The workplace is changing and we believe Kimball international is in the right geographies, the right verticals and the right product categories with our new digital lead generation machine. We are on a strong position to capture market share at an accelerated pace.

And our cost efficiencies will enable us to deliver long term value as we ramp.

I would also like to take a moment to comment on Kimball International company wide approach to ESG.

Currently our compiling data across our organization that supports our commitment to being responsible stewards of the environment, maintaining a diverse and caring culture that emphasizes employee safety and wellbeing and having strong corporate governance practices, our board of directors and executive leadership demonstrate.

Our meaningful commitment to diversity and we look forward to sharing more information and reporting on our broader ESG focus in the coming months.

I'd now like to open the call for questions.

Thank you and as a reminder to ask a question you will need to press star one on your Touchtone telephone once again Thats star one on your touched on telephone to ask a question to withdraw your question press the pound key.

These standby, while we compile the Q&A roster.

Our first question comes from the line on Greg Burns of Sidoti <unk> Company.

<unk> please.

Good afternoon.

In terms of like some of the green shoots.

The improvement share their early signs of improvements.

You're seeing I mean can you just talked about.

Hum.

Translating in terms of maybe maybe.

Order on.

For the quoting activity.

What youre seeing there.

Is it centralized with like smaller business or you're seeing it with smaller businesses first.

And maybe a larger larger projects with longer sales cycles.

And any signs there that you might see that start to pick up in the second half of the year.

Sure Greg.

I think what we talked about this when you look at the progression throughout the quarter clearly it was a slow start to January and orders, which translated to a slow February shipments, but what we saw throughout the quarter was this progressive strengthening from January through March and then into April. We noted it was a 6% increase over the previous month and workplace and health.

And I think when you look down kind of to your question, what we would call. It day to day orders, so those less than 50000 value versus project orders, which are longer and larger longer duration.

We saw a significant increase in the day to day orders in April and actually our strongest performance over the past year and so I think those are very encouraging signs about the types of activities. We are seeing so again the size of orders and this was our kind of hypothesis from the beginning that we begin to see the day to day orders come back first before larger projects.

So that is playing out and then I think within the verticals, we talked about this but the education buying season also starts during Q3 and we saw the signs of that picking up as well. So I think those are two.

Specific data points, we look to that are the green shoots we feel.

Okay.

You look at the.

The work from home.

Opportunity.

How you see that playing out is it mostly going to be through.

Or are you, mostly addressing that through company sponsored programs or do you have any plans on like further digital investments around.

Maybe like a.

Okay.

Yes.

Website or.

B to C type channels.

Yes, Greg this is Christie I.

We focused our efforts on the <unk> environment and the corporate sponsorship program, we've talked about on.

Our initiative with top end again corporate sponsorship we have over 100 corporations that have signed up for that now.

And so we do see that it's early stages in that process.

Although we do have some DTC business, because <unk> actually able to transact from a BDC basis, that's not the focus of our initiatives.

And so we feel we feel very good about where we're focusing we feel good were in the front end of that market.

For them as this new hybrid model is forming in the workplace.

Okay, and then in terms of the.

For Q guidance in terms of SG&A, I guess theres some additional savings to be had on your your $20 million for you're talking about some incremental investments back into the business. So relative to the third quarter do you expect between.

Between those two dynamics SG&A to be up sequentially or flat.

As we evaluate the market looked for the ramp to occur and now we feel is the right time to make some of those and we mentioned those are in health expertise related to the to the VA the launch of pop in pro and around the new forming workplace on how we can support that from a research design and innovation standpoint, So that will all result in a sequential improvement for.

Our sequential increase from Q3.

Okay.

In terms of the <unk>.

The first phase priorities for for pop and can you just talk about.

Where you are in terms of implementing those when we might see those.

<unk>.

Start to have some impact on pop in sales growth.

Sure. So we're very pleased with the progress that we've made with pop and the.

Pop in total launches actually happening. This month, we are starting with a full launch to over 1000 dealers.

The team has done just an outstanding job of putting launch plans together. The launch plans are actually for our internal sales force for our dealer community and then for the A&D community. It completely activated through digital tools. So <unk> has been very.

Much engaged in creating the launch plans and then we will have kind of a customized approach with key dealers that are going into what we're calling this pop in class Pro plus program that they'll actually have some support on the ground in the local markets.

That is sooner than we anticipated so very pleased there.

Categories that are the dealers will have access to the flow.

Poppen portfolio the categories that we're focused on are the new pod category and also the brand new spaces categories that just launched last month under pop in direct as well and Thats. The flexible walls program that we talked about that's so critical to open office environment.

A quick ship setting up short term leases so great progress there great engagement across Kimball international in and pop on to make that happen.

I will also say, we're very excited about.

What we're going to do with the pop in showrooms we.

Stated debt, we had 10 kind of.

The secondary markets in our view five of those are going to happen.

As quickly as we can in 'twenty, two and really we are we are working diligently on making that a reality.

And it's been really fun for the team and then the last piece that I would say is.

We really think there is some product.

Manufacturing.

The synergies and opportunities in our future and the teams are starting to work on that as well so very pleased with the progress.

And really excited for you guys to see it in the market and for us to see it in the growth build a pop in and Kimball International.

Okay, great. Thank you.

Okay.

Hi, guys.

Hi, Kara.

So I just want to dig a little on the price increase so you.

You called out net material Beckman third quarter on a more meaningful pickup in the fourth quarter for 300 basis points improvement.

In total realization in <unk> of next year, but if I recall the price increase won't really Olivia alleviate all the pressures you're seeing from guests staying on.

Kind of what does it look like to take you back to the 35% growth margin level and is that insight for Kimball over the course of the next year.

Yes.

Great question, So, let's kind of go back on the facts of the price increase. So this is across the workplace and health portfolios broadly kind of Directionally.

On the low single digit range, so 3% to 4%, but it wasn't specifically.

It wasn't it wasn't that uniformly so there were deviation from it but that was the broad direction of it because of the backlog on the order cycle.

Again, you don't really see that much at all in this quarter in Q3, you'll begin to see it in Q4, but debt at the backlog works through you will see the full realization in Q1, but as you point out.

The margin compression created by freight and the commodity cost increases.

<unk> exceed the price increase that we took I think when you begin to look at the path back towards historical margins. The big lever that youll begin to see is the loss of leverage reversing itself once volumes recover and if you actually kind of look order of magnitude of order magnitude in this previous quarter loss of leverage was <unk>.

Actually the biggest drag year over year, because we are cycling really what was a non COVID-19 quarter in Q3 of 'twenty. So I think that was the biggest drag this quarter.

Freight and commodity is certainly material to the margin compression, but the path.

<unk>.

Back up will certainly include a recovery of leverage in the P&L.

Okay. So is it fair enough day like if were projecting.

Yes, Matt.

<unk> returned three four quarters out the day without actually at that.

That level is.

Our timelines are correct.

Yes, you would find it marry up with the return of volume absolutely.

And then on can you talk about how <unk> is progressing in comparison to the startup of order rates bidding activity trends that you've talked about for the whole business.

Prior to our acquisition it remained at depressed levels as we have seen so pumping markets in major cities.

We remain depressed as ours debt, so and Thats kind of the performance that you saw this quarter again $9 million in revenue.

Significantly below what pop ins rates were prior to COVID-19, so that drag and kind of depressed topline still continues we would look for their ramp to follow Kimball International's kind of workplace health ramp with some deviation given they're in metro markets and what we've said is secondary markets will begin to recur.

<unk> one.

Followed by large metro markets. So I think they are experiencing the same macro environment we are on.

And we will look to see their revenue again begin to grow as we come out of the ramp in the next quarters.

Got it and then I wanted to ask on the pumping pause on the proppant space a.

New product categories for Kimball and how do you for the superior offering bought there I guess I'm just wanted to get a handle on.

The significance of those.

Yes, so theyre brand new categories for Kimball for the traditional dealers and they will be serviced through the Tappin Pro program, the pop and POS launched right before COVID-19. So popping really has not experienced the benefit of that cash.

<unk>, although they were very pleased with the initial launch and then we went into COVID-19, we do feel that those products have significant application to the post pandemic work environment, that's going to take place and then spaces are brand new and.

It's really quite an exciting category for us we actually just rolled out our spaces to our health team today and I heard a lot of excitement about it.

It's the ability tick and strapped with flexible walls on.

Offices.

Small meeting rooms, and so you can literally set up on office without any type of construction and of course, what we keep hearing in our.

Feedback on the new workplace is all about the flexibility that's needed in the interiors of these spaces and so those two product categories support that research wholeheartedly and we're excited to take them and then there are new product pipeline that will support those two categories.

Both in the direct pop in model and through our traditional net with proppant pro.

Okay.

Got it on and then do you have any data points around the success you've had in that corporate sponsored work from home.

Category that you can share.

Yes.

We're just learning that category I think.

Sure it's about 100 100 <unk>.

Little over 100, corporate sponsorships that we have engaged upon and those are literally employees ability to order the product directly.

We're seeing the volumes ramp over time, but it's still a new learned behavior for the employee to actually go on their internet and learn how to purchase product. It's also a new behavior for the employer to actually require the employee to purchase the product through.

Through their.

<unk>. So I think it has a significance going for them, we're kind of building that as we go so we have confidence in what it will be but it's still early on in the stages.

Got it. Thank you that's it for me.

Thanks Kara.

Thank you at this time I would like to turn the call back over to Kristie Juster for closing remarks.

Yeah, I'd like to thank everyone for joining us on the call today, and we certainly look forward to keeping everybody informed on our progress.

We continue to share that just the.

I believe that what we've done during the COVID-19 time will set us up for tremendous success going forward and that we truly are maxim are ready to ramp out of COVID-19 with the opportunities that we've been working on I also want to thank all of our employees at Kimball International for what they've done to get us through.

Yeah.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 Kimball International Inc Earnings Call

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