Q4 2021 Kimball International Inc Earnings Call

[music].

Good afternoon, ladies and gentlemen at this time I would like to welcome everyone to the Kimball International fourth quarter and full fiscal 2021 earnings conference call.

As with prior conference call today's call August for 2021 will be recorded and may contain forward looking statements as defined under the private Securities Litigation Reform Act of 1995.

Actual results could differ materially from the forward looking statements.

The 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 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 teacher, Wolfe Executive Vice President and Chief Financial Officer.

I would now like to turn today's call over to Kristie Juster with Joseph you may begin.

Thank you everyone for joining us to review, our fourth quarter and full year 2021 results and discuss our business outlook.

I am pleased to report that we ended of challenging year on a high note robust growth in the fourth quarter orders from our workplace and health end markets indicate that these markets are in recovery and that Kimball international is positioned well to benefit from the industry upturn.

Let me begin by covering the key takeaways from our fourth quarter performance on slide 3 for.

First this was the first quarter since the onset of the pandemic that revenues from our workplace and health markets increased year on year.

Workplace and help the accounted for 80% of our fourth quarter revenues and their expected double digit growth in the fiscal 2022 will boost these 2 end markets to at least 85% of our total revenues next year.

Second order rates in our workplace and health markets improved progressively throughout the quarter and this momentum continued into July indicating a pick up in the conversion of bidding activity into orders.

Our strong year over year orders were led by workplace and health day to day bookings as we anticipated.

Our leading indicator metrics quoting activity in mock ups in both workplace and health increased at strong double digit rates compared to Q3 levels of another indication of better market conditions ahead.

We are pleased with the consistent and continued development of orders in both workplace and health.

Third we reported of considerable sequential increase in our gross margin in the fourth quarter, although not as high as we had initially expected due to continued inflation T. J will discuss this in more detail later in the call.

Fourth we continued to gain traction in the choices, we have made in our connect 2 point of strategy.

Both in driving share in our targeted end markets and exceeding our full year of cost savings targets by over 10%.

And lastly, we are very pleased with our progress on the stage 1 growth priorities for the pop in the acquisition in summary before quarter represented what we believe is an inflection point in our business and confirmed our clear path forward to future growth.

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

Beginning with health on slide 4 as we have share of this market continues to ramp well post COVID-19, reflecting the faster of return of health administrative workers increased public funding and expansion of areas such as behavioral health academic medical centers and specialty.

Hospitals.

Fourth quarter sales to the health market increased 16% year on year and orders were up over 60% of.

All driven by <unk> 53 per cent increase in the number of orders and a 13% increase in order size compared to Q4 last year.

Our key Differentiators in this market are dedicated health brand interwoven our team of experts with extensive industry knowledge and experience.

Our focus on connecting with selected 32 health systems, our partnership with the fed government health sectors, such as the Veterans Affairs, and our full access to the Kimball international multi branded portfolio.

We have just concluded the proprietary research project that has given us tremendous insight to the future of health care delivery from the industry leadership and design health systems, and doctors and nurses.

The results can for confirm the importance of the physical environment and health.

For 72% said the hospital environment plays a key role in determining patients health outcomes.

90% said they are need of more flexible environment and 90% also said they were planning construction in the next 3 years.

The trend is changing the interior of environments range from blending in the benefits of the telehealth the importance of non clinical areas in behavioral health the need for our caregivers to work in an efficient and comfortable environment and of course, the required flexibility of space and adaptability.

<unk> of furniture.

The results in Q4 in the future indicators continue to give us confidence in our investment and focus in the health.

Now, let's move to slide 5 where we begin our discussion of the workplace market, which represents the largest portion of our business and what we also see firm indications that our market recovery is underway.

In the fourth quarter, we experienced a 27% year over year increase in workplace of orders led by education and commercial.

And we're pleased to report that the 26% sequential increase in workplace orders features of a considerable increase in demand for pop in products.

Our fourth quarter day to day business was significantly ahead of last year's fourth quarter and while large project sales are still lagging to last year, our returns of learning and educational buying season orders ramped up 30% year over year and reached pre pandemic levels for K through 12.

For fiscal year 'twenty 'twenty 1.

On slide 6 we share our outlook on the future of work, which is very consistent with our beliefs entering last quarter, the new forming hybrid model will be the center of the workplace strategy and although unique to each company the principles of attracting and retaining talent through flexibility.

In a highly collaborative space that is a centralized hub for teamwork community and culture are highly consistent.

For future success employers will need to entice staff back to work with wellness in mind create comfortable humans centric spaces focus on elements of connectivity and socialization and offer continued freedom and flexibility for focus work.

As return to work continues employees expect the more hybrid level of furnishings merging the comfort of home with the durability of the office.

Kimball International portfolio together with our recently released new product introductions and our best in class lead times support our confidence in our ability to gain share as the industry moves to furnish the blended office with comfort.

We believe the office will become more important than ever and attracting developing connecting and motivating talent.

Our multi branded selling approach our expertise in the ancillary open space product portfolio and commitment to winning and secondary markets is proving to be an exciting path as the industry ramps.

Our broad portfolio of brands provides the options for our dealers to provide tailored solutions for their customer depending on their specific needs and budget requirements.

Today over 85% of our workplace products are on the ancillary category, which 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.

Now to slide 8 for an update on popping, which we see as a transformational transaction for Kimball international bringing proven digital and direct expertise into our portfolio.

Revenue increased sequentially by 42% and bookings have increased sequentially by 16% and that should be recognized in the next 2 quarters.

We are seeing the return of projects with a higher average order value closer to pop ins pre pandemic metrics the.

Of the pop and digitally driven b to B commercial furnishings direct business model is leading out of COVID-19 at a faster rate than our traditional channel.

The significant growth has come from core pop and showroom markets in major metro areas.

Reigniting the model that we recognized at acquisition.

As well as our stage 1 priorities are well underway. We have identified 3 of the 10 markets for pop and showroom expansion in scope for fiscal 'twenty 'twenty 2.

These locations will be in secondary markets markets, leveraging our talent and long standing relationships.

Pop in pro reflected on slide 9 is the dealer program. We officially launched in late May providing full access to pop of the suite of products, new categories and services to over a thousand existing Kimball international dealers.

Our team has spent the past 2 months educating the dealer network and early indicators show strong traction to our internal plan.

We are also excited about the 2 new categories of pop and pods and pop in the spaces, each providing flexibility and adaptability and an open space environment for individual private and group use.

All in line with the strategy of where Kimball International excels and the market is forming.

Now moving to the hospitality markets Q4 performance and how we are thinking about for 'twenty 'twenty 2.

As we have shared we expect hospitality will be the last to ramp with no significant sequential sales improvement until end of fiscal 'twenty 'twenty 2.

Fourth quarter sales decreased 35% year on year, and we are managing the business very carefully as margins remain constrained due to high freight costs.

With longer lead times and the need for large group business travel to return we will take a similar approach into fiscal 'twenty 'twenty 2.

Managing our cost increasing our mix of more profitable custom products partnering with our customers and preparing for growth as the market returns.

To wrap up the timing composition and speed of the market recovery and workplace and health is tracking broadly in line with our expectations and we continue to gain confidence our strategy is setting us up for growth in fiscal 2022 and beyond.

Now I will turn the call over to T. J Walsh, our Chief financial Officer to provide the financial review of the fourth quarter talk about inflationary dynamics, we are experiencing and share our guidance for our fiscal 2022.

Thanks, Christy and good afternoon, everyone I'll spend the next few minutes, providing more details on our financial performance during the fourth quarter of fiscal 2021, and our expectations for the upcoming quarter of fiscal year of 2022.

As Christie noted we are confident that the recovery is now underway and while we expect some short term supply chain and inflation challenges. We are confident that the strategies. We have put in place over the past year of set us up for a year of growth in fiscal 2022.

Let's start on slide 10, with the key financial highlights.

Net sales were $146.2 million on the quarter, including the $12.5 million contribution from pavon.

Per the $156.1 million of the prior year on $138.7 million in the prior quarter, making this the first quarter of sequential organic revenue growth since the onset of the pandemic.

I'll talk in more detail about each end market in a moment, but as expected our growth in the quarter came from workplace and health, which account for approximately 80% of total sales with hospitality remaining of depressed levels.

Gross margin was 36% of 190 basis point sequential improvement from the third quarter.

These results were below our expectations, mainly due to an inflation related increase of our LIFO reserve the reduced our reported gross margin by 150 basis points year over year.

This quarters gross margin was also impacted by higher domestic and ocean freight costs and raw material inflation.

The price increase we implemented in March partially offset these negative pressures and we recently announced the price increase effective in October which of further mitigate the impacts from inflation.

I should note that we have begun to experience some modest production constraints driven by supply chain disruptions related to the availability of certain raw materials and shipping containers, which of extended product lead times.

We expect these issues to normalize over the next 2 quarters, having no impact on full year sales, but resulted in the revenue shift from first quarter to second quarter I.

I will provide more detail on Q1 and full year guidance in a moment.

Selling and administrative expenses were up $7.6 million to $49.2 million, reflecting the inclusion of expenses related to carbon.

Excluding the amortization from the pop on acquisition totaling $1.7 million as well as sort of adjusted acquisition related charges and the CEO transition cost adjusted selling and administrative costs were $46.5 million or 31, 8% of sales compared to $39.9 million or 25, 5% in the prior year.

<unk>.

Our total transformation savings in the fourth quarter amount of $5.5 million, bringing our full year cost savings to $22.3 million ahead of our 20 million projection.

A portion of these transformation savings have been reinvested to support our growth strategy as we exit the downturn.

We recorded a tax benefit during the quarter compared to 27, 6% tax rate in the year ago quarter benefitting EPS by approximately <unk> <unk> per share.

This was driven by certain permanent book to tax differences, including the pop and earn on adjustment of $11.6 million or $8.6 million net of statutory tax, which we recorded during the quarter.

The earn out adjustment represents the change in the fair value estimate of the contingent liability we recorded in our in conjunction with our acquisition of carbon and reflects the impact of the longer than anticipated decline in demand due to the pandemic.

This liability will continue to be revalued in subsequent quarters based upon the financial projections as.

We previously stated we expect topic to be EBITDA positive by the end of fiscal year 2022.

Yeah.

Fourth quarter 2021, GAAP net income was $7.4 million or <unk> 20 per diluted share, including the after tax contingent earn out gain of $8.6 million.

This compares to $9.2 million or <unk> 25 per diluted share in the year ago quarter.

Excluding this onetime item as well as after tax intangible amortization expense and restructuring charges totaling $2.9 million along with acquisition related costs. Among others. Adjusted net income was $2.1 million or <unk> <unk> per diluted share compared to $10.7 million for 29 cents per diluted share in the year ago quarter.

Adjusted EBITDA was $2.9 million compared to $19.1 million in the fiscal 2024th quarter.

Revenue in order trends by end market are provided on slide 12.

Net sales of workplace and health, which accounted for approximately 80% of total sales increased 2% and 16% respectively.

Workplace orders increased by 27%, reflecting the pop of the acquisition as well as overall improving business trends were.

We're going to work place, we saw particular strength on the education vertical as well as commercial being driven by a return to the office in many markets.

Orders in the government vertical also increased over the same period.

<unk> orders were up 64% validating our belief that this end market, which showed the earliest recovery.

Hospitality net sales and orders are made of depressed levels and while we see long term value of this market. We do not expect significant activity to return until the end of the fiscal year.

Our total backlog at the end of the quarter was $141 million compared to $130 million on the prior quarter and $151 million at the end of the prior year.

Although our total backlog remains below pre pandemic levels. It is important to note that the combined workplace on health backlog was $99 million at the end of the quarter versus $92 million at the end of Q2 fiscal year 2020, the most recent pre pandemic quarter.

Switching to the balance sheet and cash flows on slide 13, we ended the 2021 fiscal year with total available liquidity of $107.6 million representing cash on the unused portion of our credit facility.

For your operating cash flow was $27.3 million compared to $29.8 million a year ago.

For your capital expenditures were $19.5 million, just slightly below our expectations of $20 million.

The majority of our Capex was invested in manufacturing equipment to drive our operational excellence programs and investments of new technology.

In fiscal 2021, we returned $16.8 million of capital to shareowners of the form of dividends and share repurchases.

We're also taking this opportunity to initiate the full year guidance for fiscal year 2022, reflecting our expectation for a significant business recovery.

You can see on slide 14, we expect year over year revenue growth of approximately 15% to 20% increase in progressively throughout the fiscal 2022 with the highest year on year comparisons taking place in the second half similarly.

Similarly, we believe gross margins will increase sequentially throughout the year with more pronounced games in the second half.

Capital expenditures net of disposals will total approximately $25 million with the increase driven primarily by the construction of our new warehouse in Jasper offset by the sale of our existing site.

Operational excellence projects are expected to result in cost savings of approximately $10 million of fiscal 2022, and we expect our full year effective tax rate to be in a range of 25% to 27%.

We will continue to invest savings back into the business to support accelerating future growth. These investments include the opening of 3 new pop in showrooms in fiscal 2022, as Kristie mentioned earlier, increasing our marketing and promotional spend and building our sales force, which will result in higher <unk> spend than in fiscal 2021.

Yeah.

Based on our backlog of $141 million at the end of the fourth quarter with approximately 75 million scheduled to ship in the first quarter of fiscal 2022.

Current order trends as well as taking into account the production capacity constraints. I noted earlier, we expect first quarter of fiscal 2022 revenue to grow mid single digits year over year.

Sales in workplace on health end markets are projected to increase high single digits offset by continued softness in hospitality.

The first quarter gross margin should be in a range of 31% to 33% and SG&A expenses will increase slightly from the Q for 2021 level.

With that I will turn the call back to Christy for closing remarks.

Thank you T J turning to slide 15, what I'm. Most proud of in 2021 is we have taken this time to make bold moves to further set up Kimball international for sustaining growth and value creation.

We have reorganized into for end market business units.

We have created a multi branded selling organization.

We've expanded our expertise and commitment to health.

We have continued to focus on our new product pipeline delivering out of 25% vitality rate.

We have delivered a third year of exceeding our cost savings targets we.

We have purchased digitally native and direct business and all along we have kept our commitment to our culture of caring and purpose of creating possibilities.

And while there are certainly challenges on the horizon, we are confident in the industry upswing in in our guidance for fiscal 2022.

In closing I'd like to take a moment to comment on our company wide ESG summary report that we published on June 24th.

We have a longstanding commitment to being responsible stewards of the environment.

Maintaining a diverse and caring culture, and having strong corporate governance practices.

As part of our journey, we are reaffirming our commitment to a more sustainable future and making a difference in our in the communities we serve.

Our ESG strategy features 5 interconnected Marquis areas that focus our resources on areas, where we believe have the most social and environmental impact as shown on slide 16.

We very much look forward to reporting our practices and progress on a continual basis and 1 on encourage you to read our Kimball International ESG summary report.

With that I'd like to open the call for questions and turn the call back to the operator.

Thank you if you would like to ask a question you will need to press Star then 1 on your Touchtone telephone to withdraw your question. Please press the pound key.

Sam.

Okay.

Yeah.

Yeah.

Yeah.

Yeah.

Okay.

Yes.

<unk>.

Okay.

Yeah.

Yeah.

Thank you our first question will come from Rudy Yang with bearing Berg. Please go ahead.

Hey, guys. Thanks, so much for taking my question.

Yes.

Alright.

So my first question is on the price increase you announced.

For October I guess, how does that compare the magnitude with the 1 you previously issued in March Ann.

Any more of you can be considered in the future.

Sure I would characterize the October price increase is of similar magnitude to what we took in March and again as a reminder of the price increase will go into effect October 1, but its impact will be fully felt until our fiscal Q3. So the quarter began in January.

So you have very similar and then I think as far as when you look at the the pricing landscape for the remainder of the year I think we'll continue to monitor inflation continue to monitor input costs.

And labor inflation, and then make decisions throughout the year as those dictate.

Great Super helpful, and then kind of it.

All of up to that regarding the 150 basis point reduction in gross margin.

Could you help us better understand the shortfall there on kind of expectations for future impact that.

And then how should we think about the drivers of the sequential margin recovery over the next year, how much price increases with the draw.

Driving that.

Sure. So I think when you look at this quarter you of the 190 basis point expansion from the prior quarter was below the expectations of 300 basis points and we called out the 150 basis point year over year decreased slightly for the LIFO reserve and really what that is is just the fact that the inflation has been the immediately.

Reflected in our P&L on real time as it comes in and we see that as a headwind. It will continue on for the next several quarters. The price increase will offset a significant amount of that but that was really the shortfall was it the impact of inflation in the current quarter was above our expectations.

When you look at the gross margin evolution for fiscal year 2022, we talk about the fact that we see sequential improvement throughout the year and really that's going to be driven by.

And great part of our price increases, which will go into effect in October along with the recovery of operating leverage as volumes begin to grow and the continuation of our operational excellence programs. So those 3 things will contribute to the margin expansion, which will be offset again by inflation. The will experience we expect.

Your experience for the next several quarters. So that's sort of the waterfall. The fix you from last year to fiscal 2022.

Okay. That's super helpful. And then my next question is kind of on order trends in the conversations you've been having with customers. So I guess is there has there been anything sir.

Regarding the sales.

And then is the Densification of Workspaces still what customers want and I guess conversations right now about kind of catering consumption business model.

Sure I'll take that Rudy.

So let me let me start with the Delta variant and just kind of the work that we've done over the past few weeks to make sure we're understanding and learning about any impact of the business. So the first thing I would say is we have not seen any change to our early indicators. It also we are watching those very closely.

And so we we have not seen a chain of change in that area. We do you know I will say, we do respect that companies are making very unique choices you hear that very much in the market of all the different types of decisions that people are making.

When we talk to our dealers you know the amount of activity.

That our dealers are ramping up for is quite intense.

As you talk about D.

The kind of D are intensifying the workspace.

The thing that we do here is more about the hybrid work environment and making sure that the workspace is set up is more of a collaborative environment.

Managing through the workforce with more flexibility so that is definitely the dominant theme and that has.

Not changed at all of that's been very consistent.

Since we reported last quarter.

And so we.

We see everything staying on track, but I will also say, we reacted very well during the pandemic. We have all of our protocols in place and we are ready to react to anything that we see in the market.

Great Super helpful. And then the last question for me in the past you've disclosed the sequential changes in your order rates with the secondary market. So I'm. Just wondering if you still have the number for this quarter or if theres any other color you can provide.

On the day market sales during the current.

Yes.

I think 1 of the things where the we'd begin to see is we still see strength in the secondary but this quarter, we actually saw metro markets picking up significantly.

Quarter over quarter, I think that the large metro that's really just the fact that they were sort of depressed and had seen no recovery, but you really began to see them truly opening up an unlocking in this prior quarter. So I think we still hold that thesis that our strength in secondary markets will benefit us, but you did see metro of large metro <unk>.

<unk> begin to pick up and accelerate in the in the past quarter again, just due to the comps.

Really appreciate it thanks guys.

Thank you.

Thank you as a reminder of you would like to ask the question. Please press. The Star then 1 key on your Touchtone telephone. Our next question will come from Tom <unk> with Hilton Capital. Please go ahead.

Alright, thanks very much.

For the follow on question in terms of margins. When you guys discuss the inflation issues I'm just kind of curious I mean, obviously the freight pressure on then raw materials and not trying to put too fine a point on it but was it more raw material cost inflation or was it the freight issues because some of those seem to be perhaps a little more transitory.

Sure sure Tom.

So for the quarter of freight was actually had the largest impact and then second would be raw materials. So I think again as you say freight both ocean freight over the road trucking, we do see though is as transitory and having the ability to moderate so 1 of the things that we think about is when we look at our pricing plans for when we implement price increases.

The thing that we're trying to do first and foremost is offset what we think might be the debt will say stickier elements of inflation.

<unk> tried to cover as much as possible, but yes. The biggest impact was in the higher freight expense year over year.

Okay, and then as I look at the progression through for next year in terms of gross margins and I apologize for not knowing this but in terms of sort of the <unk>.

Manufacturing inefficiencies running below sort.

Of the potential output, how much will that sort of just naturally improve the margins on the tone or is that sort of not the right way to think about it for you.

No. It is I think in order of magnitude if we just kind of cast.

And rudy's question kind of the 3 elements.

As far as margin expansion or protection price would have the biggest impact and then both operational excellence and the recovery of leverage to your point those would be relatively equal, but they can kind of order of magnitude think price first and then operating leverage and cost savings as being similar magnitudes.

Okay.

Great and then I know, it's a little ways out but in terms of the hospitality market.

Any thoughts on.

When that market does sort of relaunch is it going to be with the revamped product line or or what do you have to do once they are finally back to health, where theyre looking to order any kind of thoughts on that thanks.

Yeah, I'll mention the hospitality market the.

Tom the in the market is still operating this the way that it has historically, we don't see any dramatic change.

In that market its just at significantly lower levels than we've had.

The the area that we are focused on is expanding the custom business versus the program business. So that's 1 of the initiatives of the team and I think they're doing a really good job of that and we'll see that play out in our 'twenty 2 financials the.

The biggest.

Indicator that we're kind of waiting to come to fruition is kind of large group business travel we are seeing smaller group individual business travel picking up we've seen personal travel pick up but we have not seen large group dynamics.

<unk> to pick up and that will be kind of of the true turning point of that hospitality market.

Yeah.

Thanks very much appreciate it.

Thanks, Tom.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to MS. Kristie Juster for any closing remarks.

Great. Thank you Sherry and I want to thank everybody for joining us on the call. Today, you know as we think about entering 2022, we feel very good about the defined set of choices that we've already made.

During the 21 pandemic and we do feel that it has set us up to excel as we enter 'twenty 2 I want to thank all of the Kimball international employees for their incredible commitment and diligence as we walk through that amount of change in the middle of the pandemic as we look at the early indicators.

And the orders that we're seeing across of our credit place on how we feel very confident that the market is returning and that we have a bright future. So we look forward to sharing our progress with everybody on the yeah going forward and enjoy your evening. Thank you.

Well, ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

[music].

[music].

[music].