Q1 2022 Kimball International Inc Earnings Call
Good afternoon, ladies and gentlemen, my name is Richard and I'll be your conference call facilitator today.
At this time I would like to welcome everyone to the Kimball International first quarter fiscal 2022 earnings conference call.
Dissipated, we experienced strong customer demand across our workplace and health and markets with orders up 51% and together accounting for 86% of our net sales. This performance has more than offset the softness and hospitality well we have been consistent in our beliefs that the <unk>.
Every will lag until the end of this year.
Second within the workplace and market Poppen is ramping very well with sales up 22% sequentially and orders up 32%.
Third our business differentiators, including our dominance and ancillary products are positioning in mid sized metropolitan markets and our emphasis on new product development are all contributing to our ability to gain chair and are targeted markets.
And lastly, we have proven our agility and nimbleness. During these difficult business conditions, we are navigating inflationary pressures supply chain disruptions and labour availability challenges better constraining sales and margin in the near term, but we do see light at the end of the tunnel and the second half.
Of this year.
Taking a closer look at our business highlights in the first quarter.
Workplace revenues increased 16% year on year led by the commercial and educational verticals.
Even more impressive workplace orders in the first quarter were up 57% compared to last year's level and this growth was broad based representing substantial year on year increase across the majority of our verticals.
While the spread of the Delta variant has delayed the returned to office in some areas, we have not experienced any impact on either order rates or pipeline activity.
Clients are actively addressing the changing dynamics of work environments by reconfiguring their spaces to foster collaboration and incorporate flexibility and adaptability.
Additionally, our education vertical is benefiting from a boost in federal and state funding through the cares Act and the America rescue plan, which is expected to remain in place until 2024.
Promoting an environment, where each employee is value respected and treated with dignity alongside an intentional focus on increasing diversity of leadership.
Just a few words on our hospitality market, which was especially hard hit by the pandemic.
Orders received in the first quarter were below last year's first quarter. The dollar amount of orders was the highest it has been in a year. This was a bright spot in a market that we do not expect to recover until the end of this fiscal year in.
In the meantime, we have taken steps to improve our margin profile in this market by closely managing costs and increasing our mix of customized products, which accounted for 73% of first quarter sales up approximately 50% in the similar period last year.
Looking ahead, we are confident that Kimble international is very well positioned for accelerated growth and margin expansion as the industry recovers and supply chain headwinds abate.
Our strategic choices have been clear and consistent we are well positioned geographically with strong relationships and secondary fast growing metropolitan areas, where the post pandemic returned to office has been underway and are expanding our position in these markets with the opening of three new <unk>.
Up in showrooms in Miami Austin in Atlanta, This fiscal year.
Kimball International specializes in ancillary products, which are precisely the types of products and solutions that customers are looking for as they reconfigure their work spaces to adapt to post pandemic working environment.
These products accounted for 85% of our trailing 12 month revenues.
To further leverage the strength of our broad portfolio across the dealer network, we introduced perfect harmony and integrated go to market strategy, four or five workplace and health brands.
This is providing our dealers with access to an expanded and complimentary array of products that offer our customers a much broader set of design possibilities than in the past.
Additionally, in collaboration with a market research firm Ipsos, we conducted research we validated our initial market insights, namely that the right spaces create connections and we have identified six space types that we believe will define the post pandemic workplace and reinforce.
Sources, the important role of the office and the exciting changing environment.
The hub supports open and collaborative interaction.
Some health as these markets on a combined basis increased by 16% from a year ago quarter and together accounted for 86% of net sales.
It is important to note that demand for our products remains strong as reflected in our expanding orders and backlog. However, our topline growth has been somewhat constrained due to the ongoing disruptions in our supply chain spin.
Specifically, we have experienced challenges related to labor and material availability, along with dislocations across our logistics network.
We expect these challenges to persist at relatively the same level in the second quarter before conditions begin to improve in the second half of our fiscal year.
Gross margin declined 410 basis points compared to last year's first quarter, but expanded 70 basis points sequentially to 31, 3% a.
The year over year decline reflects raw material inflationary pressures as well as higher freight and labor costs, partially offset by the price increase we implemented in March of 2021, along with improved production efficiencies and benefits from cost savings initiatives.
We do anticipate gross margins will improve on a year over year basis in the back half of this fiscal year as our price increases work their way through the order book and offset the inflationary pressures we are currently experiencing.
Selling and administrative expenses were $50 2 million compared to $41 7 million in the year ago quarter.
This increase was primarily related to costs associated with the <unk> acquisition and incremental investments to support our sales growth and new product introductions.
Excluding amortization from the <unk> acquisition totaling $1 6 million as well as our supplemental employee retirement plan adjusted selling and administrative costs were $48 6 million or 31, 1% of sales compared to $40 8 million or 27, 6% in the prior year.
For the current year first quarter, our effective tax rate was 33, 2%, which is higher than the statutory rate due to an earn out adjustment as compared to a 25, 7% tax rate in the year ago quarter.
In the first quarter of fiscal 2022, we reported a net loss of $5 million or net loss per share of <unk> 14, which includes the after tax contingent earn out loss of $3 $4 million related to the <unk> acquisition.
This compares to net income of $5 4 million or <unk> 14 per diluted share in the first quarter of fiscal 2021.
This year.
In addition to these two price increases and in order to offset the continued inflationary pressures were experiencing related to raw materials and transportation costs.
We really announced a price surcharge across the same product categories that will go into effect on November 15th.
We will continue to monitor the inflationary environment and adjust our pricing as needed. However, we would expect to transition this temporary surcharge into a permanent list price increase some time during the third quarter.
And the hospitality and market sales declined 32%, reflecting the ongoing depressed level of demand, which we anticipate continuing for the remainder of the fiscal year. However, we have been successful in shifting the mix of our hospitality business from program to custom with custom projects accounting for approximately 73% of our revenue in Q1.
Our total backlog at the end of the first quarter was $178 million compared to $141 million in the prior quarter and $139.5 million in the first quarter of fiscal 2021.
Now, let's review our balance sheet and cash flows on slide 10.
We ended the quarter with total available liquidity of $111.2 million, representing cash in the unused portion of our credit facility.
Operating cash flow was $11.9 million in capital expenditures were $3.8 million.
In fiscal 2022 first quarter, we returned for $8 million of capital to shareowners in the form of dividends in share repurchases.
We reaffirm our full year guidance for fiscal year 2022.
As you can see on slide 11, we expect year over year revenues to increase approximately 15% to 20% with significant growth occurring in the back half of the year.
As sales growth accelerated from the back half of fiscal 2022, and our pricing actions are realized through sales, we anticipate a corresponding improvement in our gross margins.
We expect capital expenditures net of disposals will total approximately $25 million unchanged from prior guidance.
Capex will be primarily directed toward the construction of our new warehouse and Jasper with a portion of this project funded by proceeds will receive from the sale of our existing site as well as an investment in a new automated metal manufacturing capability in our sailing facility.
We continued to anticipate operational excellence projects to yield cost savings of approximately $10 million in fiscal 2022.
<unk> navigate external factors, but also the power of our strategic choices to accelerate growth and value creation.
Operator, now I'd like to open the call for questions.
Thank you.
We will now begin the question and answer session.
You have a question. Please press Star then one on your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign with a husky.
If youre using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again for any questions that Star then one on you touched on phone and we're standing by for questions.
And our first question on the line comes from Mr. Greg Burns from Sidoti <unk> Company. Please go ahead. Your line is open.
Good afternoon.
I missed a little bit of the beginning of the call. So forgive me if I'm repeating some things you went over already but just wanted to start with popping.
You mentioned in the release that 60% of the the revenue this quarter came from the core <unk> business is does that mean, the rest of the 40% is coming from new initiatives like pro or I'm, just trying to understand kind of.
Where the strength is and where you're seeing the strength in pop in and you know the nice recovery you're seeing there.
Yes sure Greg.
It's a mixture of what we would say is the wholesale business and popping pro as well. So it's all of the existing business that pop in had before there wholesale channels, but also we added with pro would make up the remaining 40%, but again be to be the majority of continuing to grow the fastest.
Okay.
And then in terms of the.
The incremental growth initiatives around partner pro maybe bringing pop it into second and third tier markets and I think.
It might've been a cold one or two other kind of incremental growth initiatives can you just talk about the status of those where you are in implementing those in.
If they're having any impact on the revenue yet.
Sure. So let me take that Greg how are you.
So let me start with pop and pro and just talk a little bit about our pro is exceeding our expectations to date.
We certainly enjoyed having a the popping pro dealers and product with us at Neocon I'll. Just give you. An example of kind of how that's playing out in a combination of our traditional market in and what happened really provide so an example would be we had a large end user.
In Wisconsin that was with us at Neocon and they came in and explain to US how excited they were with pop in and they are an existing <unk> customer yet they outfitted all of their work from home for their employees with pop and so we absolutely are seeing crossover.
Of the traditional Kimball international dealers working with a pop in pro our portfolio. The other thing that's been very interesting is we've talked about the categories of pods and spaces and where we are seeing a different mix happen in popping pro and so pods in spaces are the largest.
Corey is that we're seeing from a mix perspective, playing out and that's what we're hoping for another example was we brought both parts in spaces with us to the healthcare design show that was in the Kimball International Health Booth, So lots of.
Meaningful advancement in both how.
The distribution is growing how the categories are growing and then of course, we've announced the new showrooms three showrooms and then show them in Atlanta is actually the bottom half as partners popping a dedicated showroom in that how about a top half is Kimball international.
And the five brands represented under workplace and health. So lots of good examples and we're very pleased with the progress even in the short term and how the core is rebounding.
Okay.
In terms of.
The health care market.
Made a lot of investments in there and very targeted going after that broader market opportunity in the health care space can you just talk about.
Yeah.
But platform, we and we talked about the award that we got at Health care design two of our new product platforms. We're actually given what are called Nightingale Awards for design. So we're seeing it expand both in our distribution and route to market decisions and in our.
Product platform decisions I don't know TJ, if you want to add anything to that yeah. I think that's the important word greater clinical.
Clinical products that we talked about while still the remainder of the portfolio. The majority, but the clinical product offering continues to grow and is a focus as we showcased at neocon.
Okay.
Great and then.
Jay you made some comments around that.
<unk> being up in.
And 'twenty two.
Didn't quite catch all of those and I guess the guidance for the second quarter implies it'll be up sequentially. So you just talked about that what's driving that and is this the second quarter.
Number a good number to think about for the rest of the year or is that going to continue to grow.
Sure. So I think when you look at Q1 year over year, Greg that the biggest difference would be the acquisition of pop and so pop and what's not in our Q1 in the prior year and that was the biggest step up year over year, but youre right. We did guide to a sequential increase and Thats a variety of things number one the reintroduction of various elements of compensation that were pulled out in.
Second demand spikes that we're seeing but it's also being elevated because of the production constraints that we have in place and so you know, but as Christie mentioned when those orders are coming in we still have a design requirements, we're still assistant with a specification and getting the order into the system and all of that work is still coming through our system right. Now. So that's generated in addition.
<unk> needs for investment in personnel and then we're going to see that as we begin to remove the production constraints it will flow through into sales in the second half okay.
Okay, great. Thank you.
Thank you.
Our next question on line comes from Meridian from Bettenberg. Please go ahead.
Hey, guys. Thanks for taking my question.
Uh huh.
On a on margin headwinds I guess are you able to specifically quantify the impact of this lost corner on higher material cost supply chain disruption.
Shifting and labor and I guess, if you can't get that granular in detail what would you say the order of magnitude would be in terms of the areas you're seeing the most impact right now.
Sure Rudy so.
I would I would put it into into <unk>.
Four buckets I would think.
We're talking about material inflation freight inflation labor rates and then I would also throw I know, it's a it's an accounting convention, but the LIFO reserve and if you look at those four elements. They were roughly the same level of magnitude with material being slightly ahead of the others. So I would put material at the forefront.
And then equal parts labor freight and the LIFO reserve, which is something that we have to account for them in real time. So those were the components of the pressure again, the the offset to that was price and operational excellence.
Sure I think I think in hospitality as we've said, it's something that we expect to recover towards the end of the fiscal year and into the following year I think.
Orders in hospitality, because many of them are rather large projects. It does tend to be a bit choppy. So you can see some quarter over quarter volatility that doesn't necessarily indicate a trend. We were pleased with the highest order rate in 12 trailing 12 months that we've seen but we're still quite cautious and want to maintain.
The right margin profile for that business and ensure that we're setting up for success in the long run.
Got it and then lastly for me.
To follow up on your point on popping, reaching kind of pre pandemic levels by the end of the year.
Yes.
Any kind of upside for that to kind of accelerate faster than their expectations.
If you do what kind of areas with that mainly being without kind of being mostly in beta Peter turning quicker or where do you kind of see that upside as possible.
Yes, sure ready so I think what we what we're guiding towards is that if we continue on the trajectory pop and where it could be at the $80 million of revenue annual revenue run rate as early as this coming quarter in Q2 of the fiscal year I think when you look beyond that what are the accelerators that drive it pop and pro is certainly one as we've talked about.
Pop and expanding through the Kimball dealer network.
Beat their core B to B business will certainly be a driver.
And then I think again, how quickly we can scale and begin to Purdue get production out of these new showrooms that we're opening so I would say those three are the things that I would look towards and then beyond that you know things like the corporate sponsorship programs. Those are more longer term plays it will still take time to develop.
Perfect.
Thanks, guys.
Thank you once again for any questions or follow ups. That's star then one on your Touchtone phone.
A question online from Spiro <unk>. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
Oh sure.
If you could please unpack the pop in customer base, a little bit more and describe that sales cycle versus the traditional sales cycle from the government.
Projects in your traditional business.
Sure. So let me go ahead and talk about the business model that actually exist and then we can we can follow up.
Can you talk a little bit about the mix.
Of that business. So that is a direct the majority of that business is it direct to be to be model.
And.
Yes that is growing quickly and then we do have a direct customer business, but it's a small portion of that business and certainly all of our marketing dollars and lead Gen go into the <unk> environment.
So thats kind of how the model in general I don't know TJ, if I'm misunderstanding that covers it.
Great and then one more about the stickiness of the price increase.
Do you see that coming down after the demand spike is over or is that are those increases have been priced into the existing contracts.
And option years are getting executed.
Sure so the.
List price increases that we have already taken and we've had a great success in realizing those again, it's not 100% across our entire customer base, because we do have longer term contracts, where that's not always possible, but we've had a high rate of acceptance realization, we would say that those would remain in the long term and that's been typically.
The position that we've taken.
Within the company is that we want we see price has been.
Sticky and longer term and we have a good amount of realization with regard to the surcharge that we're going to evaluate month by month and quarter by quarter as the inflationary environment progresses to determine what we want to do next with that but I would say at the same time. Despite these price increases we remain we believe competitive in the.
A market with not just the right.
Product set but again at a very.
<unk> value proposition for our customers and we haven't seen any noticeable change in our in our win rate as a result of that.
Great. Thank you.
Sure sure.
Okay.
And I'm showing we have no further questions at this time I would like to turn the call over to Kristie Juster for closing comments.
Thank you Richard well I'd like to end the call by personally thanking not only the entire Kimball international team, but also our customers and suppliers.
And we are putting together that we can get through the short term challenges that we all face, but but actually grow and see the opportunities for the future of this business. So we appreciate the partnership that exists.
With all of our stakeholders.
And we very much. Thank you for joining our call today at Kimball International and wish everybody a good evening.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yeah.
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