Q3 2022 Kimball International Inc Earnings Call

May 3, 2022

Good afternoon, ladies and gentlemen, my name is Didi and I will be your conference call facilitator today at.

At this time I would like to welcome everyone to the Kimball International third quarter fiscal 2022 earnings conference call.

As with prior conference calls today's call May three 2022 will be recorded and may contain forward looking statements as defined under the private Securities Litigation Reform Act of $19 95.

Actual results could differ materially from the 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 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, Chief Executive Officer of Kimball International and T. J Walsh Executive Vice President and Chief Financial Officer, I would now like to turn today's call over to Kristie Juster Miss Juster you may begin.

Good afternoon, everyone and thank you for joining today's call.

This report that Kimball International fiscal third quarter results marked a significant step change in our financial performance and we see this momentum carrying into the fourth quarter supporting our outlook for accelerated growth in fiscal 2023.

Quarters, 30% sales increase demonstrating the relevance of our product portfolio portfolio and the actively forming commercial spaces.

That's important.

Typically in digitally present, workforces and allow for the needed flexibility for today and the ever evolving trends tomorrow.

And particularly underlines the strength of our positioning in the workplace and health end markets, where we believe our 41% sales increase indicates that Kimball international continues to gain share.

NAND in these markets were strong across each vertical led by commercial education and E business and aligned with our expectations are returning to learning and return to hybrid workplaces.

Sales in our hospitality market, where similar to prior year levels, including shipments which were delayed from the second quarter.

Well this is our fourth consecutive quarter of double digit growth in order rates.

Is the first quarter, we've been able to fully convert the strong demand into significant revenue growth and meaningful profitability.

Price increases we implemented in October of last year and March of this year mitigated part of the supply chain labor any inflationary pressures and we will see increased benefits in the fourth quarter and into fiscal 2023.

Additionally, we succeeded in managing through supply chain disruptions and labor issues, allowing us to reduce lead times that constrained shipments in prior quarters.

These actions have resulted in Kimball international reporting industry, leading gross margins and underpin our confidence and the companys future performance.

Taking a closer look at our key end markets workplace revenue increased 52% in the third quarter representing growth across all verticals and orders were up 36%. These strong results reflect important strategic differences.

Mainly the alignment of our product portfolio with today's new forming workplace and our geographic footprint, which is geared towards smaller metropolitan areas that have experienced significant population and employment growth in recent years.

We have also realized a broad based recovery of our day to day business as a proof point of our continued consistency with workplace orders up 29% led by corporate and education end markets up 38, and 47% respectively.

Ancillary products accounted for 86% of our trailing 12 month sales and provide the collaboration flexibility in residential design that employers are looking for as they return to hybrid are fully in person settings and evaluate the most effective ways to me.

Manage their workplace footprint.

Kimball International vast collection of products offer designs that create an amenity rich workplace that help engage recruit and retain the best talent.

Innovative award winning products such as excellent in every space continue to resonate with our customers to do their custom configuration and flexibility.

At Pavon with increased inventory levels on hand sales bounce back significantly in the third quarter.

94% year on year and order rates climbed 64%.

Positioning us to end the year with an $80 million run rate.

The improved inventory position and our effective lead generation model have increased our new customer acquisition to 28% of total proppant sales.

Hopping in stock ready to ship business model is particularly appealing to companies looking to efficiently expand their current workplace footprint or quickly furnished a new satellite office in another market.

This design is fresh and clever and theyre simplified ordering process support speed and reliability.

Pop in pod business continues to grow representing over 20% of the overall <unk> mix.

And it is now <unk> second largest product category.

Our Charlotte expansion strategy is well underway as we open additional showrooms and Austin and Atlanta for a total of eight.

And are planning to open three more in fiscal 2023.

Additionally, <unk> pro which leverages the expertise of both top and NK II continues to exceed our expectations at over 15% of total sales.

Moving to our health market.

Third quarter revenues increased 8% and orders were up 2% ahead of fiscal 2021 levels.

As we shared last quarter, we detected a slight pause in this market due to the recent COVID-19 variance. However, we continue to be very confident that these issues are short term in nature.

In fact sales volumes in many of our territories are up significantly in the quarter and year to date led by the mid West Pacific Northwest and South.

Out west markets.

We are addressing emerging trends in healthcare through community spaces patient rooms exam areas and treatment areas that are designed to create a better more tranquil experiences for patients and families while maintaining an efficient workplace for caregivers.

We are achieving this by leveraging the power of our combined brand portfolio with our fastest growing territories fully adopting our multi branded go to market strategy.

As we have previously stated the hospitality market remained soft.

And international travel remaining well below pre pandemic levels. We are managing this part of our business very closely continuing to prioritize higher margin customized products.

We just returned from the hospitality design show in Las Vegas, where the energy activity and focus towards an industry recovery that is slated to begin in 2023.

And we are well positioned to benefit and its upswing.

We are also pleased with our strides on the ESG front.

You may have read our announcement that most of our shareholders have earned a well health safety rating through the international well building Institute.

We have also launched our sustainability data portal ingredient standards program.

At Forum for sustainable redistribution of furniture fixtures and equipment during times of workplace change.

Kimball International has also been named one of America's most trustworthy companies in 2022 by Newsweek.

We are very pleased with these accomplishments and continue to be dedicated to building a more sustainable future and making a difference in our communities.

In summary, the third quarter represented a period of very strong performance for Kimball International.

Clearly puts us on track to achieve our fiscal 2022 guidance.

Now I'd like to turn the call over to our CFO T. J Walsh for a financial review a discussion of our operating progress and fourth quarter guidance T. J.

Thank you Christy and good afternoon, everyone.

<unk> to share more details on our strong financial performance in the third quarter of fiscal 2022, and our forward growth expectations. As we believe our business has reached a financial inflection point.

Net sales in the third quarter of fiscal 2022 were up 30% to $180 9 million compared to the prior year's quarter, reflecting strong demand in our workplace health end markets accounted for approximately 81% of total revenue.

In addition, pulping contributed $17 $3 million of sales.

<unk> growth across our portfolio was driven by both volume increases and the pricing actions, we've implemented over the past 12 months.

Taking a deeper look into our end markets sales in workplace increased 52% with our commercial education and government verticals achieved double digit year over year sales increases and also benefiting from popping generated 94% revenue growth year over year.

Our experienced an 8% growth in net sales due to lack of business traveler.

In the hospitality market remains relatively soft leading to a 2% revenue decline in the third quarter.

We are very pleased with our 180 basis point expansion in gross margin to 35% year over year, despite ongoing industry wide supply chain inflation and labor challenges.

Although we have seen some improvement in supply chain and material availability inflationary pressures persistent materials pricing labor labor availability and logistics network.

To mitigate these cost increases we have implemented timely pricing and cost saving measures.

They will have to also be inflationary pressures across the supply chain, but I just mentioned.

Our disciplined cost controls and operational efficiency helped improve adjusted selling and administrative expenses as a percentage of revenue with adjusted SG&A declined to 26, 6% of revenue compared to 38% in the year ago quarter.

At the same time, we continue to make strategic investments to further expand sales growth such as the opening up of new pop in showrooms that Christie mentioned earlier, and our new product development and introductions.

Strong sales growth and expanded margins drove substantial earnings growth in the third quarter net income was $6 $3 billion or <unk> 17 per diluted share compared to a net loss of $4 5 million or <unk> 12 cents loss per diluted share in the prior year quarter.

Adjusted net income was $7 6 million or 21 per diluted share up from a net loss of $1.0 million or <unk> <unk> loss per diluted share in the third quarter of fiscal 2021.

Adjusted EBITDA grew to $11 5 million versus $1 $9 billion in the year ago quarter.

We experienced another quarter of robust order activity supporting our strong conviction in Kimball International's future sales growth.

We're placed orders with 36% higher compared to the year ago quarter, driven by double digit growth in our commercial and education verticals and the contribution from popping where orders increased 64% year over year.

Orders improved 2% year over year in orders in the hospitality market represented 43% increase over a significantly depressed market last year and one that will continue to underperform pre pandemic levels until the full scale return of business in international travel, which as Kristie mentioned, we expect to begin in 2023.

Our total backlog at quarter end was $178 5 million compared to $129 6 million in the third quarter of fiscal 2021.

Approximately two thirds of our backlog reflects the November surcharge, which turned into a further price increase in March with the remainder, including the previously announced price increases are.

Backlog declined sequentially, which underlines our ability to ship orders faster improving revenue and price realization as well as gross margins.

Now moving to the balance sheet and cash flow. We ended the quarter was $78 million of short term liquidity, which includes cash and cash equivalents plus the unused amount of our credit facility our.

Capital expenditures were $4 million, and we returned $3 billion of capital to shareholders in the form of dividends.

We also realized a $4 5 million gain from the sale of one of our warehouses.

Capital expenditures net of disposals were on track to total approximately $22 million, which is a slight decrease from our prior guidance.

Year to date, we achieved cost savings of $8 $1 million, putting us firmly on track to achieve our $10 million guidance.

We continued to reinvest these savings into high growth initiatives, such as marketing and promotion and in further building out our sales force having.

Having to open additional pop in showrooms in Atlanta, Austin, Miami, This fiscal year and given the demand trends for the <unk> brand. We are planning on opening a similar number of additional public showrooms in fiscal 2023.

Looking now at the fourth quarter, we forecast revenue of $180 million to $185 million, representing a year over year increase of 25% at the midpoint.

With sequential gross margin improvement of 100 to 200 basis points at approximately 31, 5% to 32, 5%.

We expect fourth quarter, SG&A expenses will range from $52 million to $54 million, reflecting investments in people and marketing as well as promotional spend as we strive to match SG&A investments, which realized revenues with that I will turn the call back to Christy for closing remarks.

Thank you T J as our discussion today outlines we believe we have reached an inflection point at the end of the third quarter, enabling us to report significant market share gain and profit growth.

Good visibility to our fourth quarter results and expect the positive demand trends that have driven the last four quarters.

Double digit order growth to continue.

Our focused approach to workplace and help end markets, our continued belief and commitment to ancillary products and secondary geographies and our confidence in scaling and leveraging the <unk> acquisition gives us a pathway to robust revenue and profit growth in fiscal 2023.

And I want to end the call with my appreciation and respect for our customers our suppliers and our employees and all that we've accomplished in proven together.

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

Thank you and to ask a question simply press star one on your telephone to withdraw your question press the pound or hash key.

Once again that is star one if you have a question.

First question comes from Greg Burns with Sidoti and company. Please go ahead.

Yes.

I wanted to focus first on the healthcare vertical.

Covid is not news anymore with kind of I think move past it as a country is there any reason.

Do you think that you're still not seeing a.

The stronger inflection in demand.

The health care market.

And I guess, we'll just start there thanks.

Sure, Greg I'll answer that as Christie.

No.

One of the things we will say is that the healthcare business is actually back to pre pandemic levels. So the health care business did not decline as much as the.

Base business did and when we look at where the market is growing we still see significant growth in the secondary markets, especially where we see the crossover of success in our workplace business with success in our health business. So we're very pleased with the secondary market, we do see the metropolitan markets lagging.

And so that's the piece of business that actually has to come back in.

In order to see the year over year increase that we expect in the future.

We look at but I will just say when you look at the long term indicators of that market. We are very confident that that market will come back.

We've said that over and over again with the growth in da the amount of investment that's going into that market.

So we feel very confident in how we're building our capabilities there and our expertise and we are seeing the funnel.

A REIT populating after the pause last quarter.

Okay.

And then in terms of pop and it looks like product availability improved significantly in the quarter, but now were seeing China market itself down again.

Poor congestion and other things that maybe might cause an issue for that business going forward. So can you just talk about what youre seeing there.

Any risk to.

<unk>.

Product availability for Pompe.

Yeah sure Greg It's T. J. So I think one of the things we talked about last quarter was that the slowdown in pop ins revenue was directly tied to the low inventory levels and so we were able to increase those significantly from I would say around $12 million at the end of last quarter up to around $24 million at the end of this quarter. So we had more.

<unk> doubled the on hand inventory.

Pop in and when you look at where kind of pop in sourcing occurs and again you have the situation with the Lockdowns in China is fluid and it does change from region to region, but what we've seen so far is we haven't been impacted as of yet more of our sourcing does occur.

In the south of China sourcing in Taiwan, as well and so we haven't been impacted today that was certainly something we need to keep an eye on and make sure that we're maintaining inventory levels, but we are trying to buy ahead ship ahead and keep more on had an anticipation of disruptions.

Okay, and I might have missed it but I think you.

You said a number in terms of.

We're popping would exit the year in terms of kind of run rate revenue.

<unk>.

Can you just repeat.

Repeat that.

Sure sure Greg So we were $17 three for the quarter and then for the run rate, we would say we're back above the $80 million run rate.

Q4 next quarter, so north of $20 million next quarter.

Okay perfect.

Alright, and then in terms of the gross margin improvements you're seeing.

What's your expectation I don't know how.

Forward looking you could be but your expectations looking past the fourth quarter as we go into <unk>.

Fiscal 'twenty three should we expect to see further sequential gains what's your view on price realization and any other initiatives that you have going on that might.

To help improve the gross margin.

Sure so.

We said in our guidance, we would see expansion happen in next quarter and Thats really the <unk>.

The reflection of our pricing actions finally, working their way through the backlog and as I mentioned, our backlog decreased this quarter for the first time in five quarters. So we're getting on top of that and getting shipments out the door that do have that new pricing. So we believe we've really called the bottom of the margin now we'll be able to expand next quarter and then we do.

The additional expansion into fiscal year 'twenty three I think the point, we'd make is it probably won't be a straight line it won't be perfectly linear throughout the year.

Or maybe you have kind of different.

Magnitude of expansion each quarter, and we're going to give guidance to that when we finished the fiscal year, but we do see further gross margin expansion in fiscal year 'twenty three beyond what we've guided for the fourth quarter.

Okay, great. Thank you.

Thanks, Greg.

Thank you. Your next question comes from Rudy Yang with Bamberg. Please go ahead.

Hey, guys. Thanks for taking my questions.

So I guess firstly congrats on the strong set of results and just curious if you could just talk a little bit more about some of the biggest changes this quarter versus the previous ones I know you mentioned.

Kind of reaching an inflection point as at the end of this quarter, but again what are some of the biggest changes that kind of drove this.

With an increase in demand momentum or more so than just improvements in being able to move your backlog better than previous quarters.

Surety its TJ I'll start off and then kind of maybe talk a little bit about the operational improvements we saw that I'll, let kristy to talk maybe about the market forming in demand I think operationally one of the things that we did see is that we were able to improve our production levels and so the supply chain is still constrained.

With some tangible improvements that we saw or that we were able to add.

Add to our workforce, our mat manufacturing workforce, increasing at approximately 5% from where we were.

At the prior quarter, we also have a higher level of safety stock some materials on hand, we still see shortages of outages, but we're able to mitigate those by expediting freight and so we've increased our safety stocks and the net effect of that is if.

If you look at our.

Product lead times versus standard so our standard lead times, what we hope to deliver to our customer and at the end of last quarter.

Approximately 45% of our products were on a standard lead time, we've improved that to 51% of the products on a standard lead time, so a six point improvement over the quarter still a long way to go to get back to all of our products being at standard but that is one of the improvements we saw.

So all of that allowed us allowed us to convert more of our orders and backlog into shipments. So that's really what drove.

A good deal.

Sequential and year over year revenue improvements.

Ill, let Chris talk about the demand formation.

Sure.

One of the things we see is the top of the success in the quarter and we're very pleased with the changes that we've seen as TJ said popping responded very quickly to the the increased inventory position, but even if you look at the strategic kind of actions that we've taken with that business, we've been very consistent.

About opening of our showrooms were very pleased with Austin and how Thats started popping pro which we told you last time was about 10% of the total mix is up to 15% of the mix.

Talk to you about the new category of pods, which is now 20% of the business. So we're seeing incremental new pieces of business that are coming into the kind of the core pop.

<unk> business that we have very much enjoyed and were seeing that business rebound.

On a nice rate. So we're feeling very confident around pop in and then I will just add that certainly our work with price getting price into the market and has certainly played a role in giving us confidence in both the revenue and the gross margin line in Q3 and Q4.

Great and then in terms of the backlog composition. So I think as John mentioned a portion of it still represents.

Orders under old pricing, just given what you've been seeing with improvements in lead times I guess is there any expectation of when the entire backlog should be reflecting the full effect of your price increases issued.

Yes, sure Rudy so so far.

Factors there I think one is that you've got some orders in the backlog that were you're obviously placed before the price increases occurred and so thats. One element. There is also an element that certain of our contracts and it's maybe 15% of our contracts have certain.

Requirements, where they would only accept a certain number or magnitude of price increase in a given period and so we have to work through those as well, but what I would say by the end of next quarter.

Absent those anomalies, we would be at full realization in the backlog of all the pricing actions we've taken.

Okay, and then just one more from me. So I think the high end of your sales guidance for Q4 puts you are slightly below your the higher end of the previous full year sales guidance, which I think was plus 20% just given I guess, how strong Q3 results where is there any reason.

Your expectations for Q4 wouldn't be higher kind of reaching the higher end of your full year sales.

Sales guidance range.

Sure Rudy the one thing I'd point you to is if we look at the mix between business segment. So we had a rather strong Q3 in hospitality.

And that really was the result of some Q2 shipments that got delayed into Q3.

And so that resulted in hospitality being 19% of our mix in Q3, we see hospitality being a smaller percentage of our mix in Q4 normalizing closer to the 15% range and so we expect to see strong strong improvement in pop in and workplace, our health end markets, but that's going to be.

We offset by return to a more normalized level in hospitality and again the hospitality market we got.

Tremendous belief and what that can deliver in the longer run. However, we do see that ramp as we said being delayed into 2023.

Great. Thanks, so much guys I appreciate it.

Thank you and I'm not showing any further questions in the queue I will turn the call back to Chris to Joseph for her final remarks.

Well. Thank you everyone for joining us. This evening, we certainly look forward to sharing our progress in Q4 and as T. J mentioned will certainly be coming forward with our perspective on 2023 B cure on the next call. So thank you and have a nice evening.

And with that ladies and gentlemen, thank you for participating in today's program and you may now disconnect.

Yes.

[music].

Good afternoon, ladies and gentlemen, my name is Debbie and I will be your conference call facilitator today at this time I would like to welcome everyone to the Kimball International third quarter fiscal 2022 earnings conference call.

As with prior conference calls today's call May three 2022 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.

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.

Good afternoon, everyone and thank you for joining today's call I'm pleased to report that Kimball International fiscal third quarter results marked a significant positive step change in our financial performance and we see this momentum carrying into the fourth quarter supporting our al.

For accelerated growth in fiscal 2023.

This quarters, 30% sales increase demonstrating the relevance of our product portfolio portfolio and the actively forming commercial spaces. That's important both physically and digitally present workforces and allow for the needed flexibility for today and the ever evolving trend.

As of Tomorrow.

Demand in these markets was strong across each vertical led by commercial education and E business.

And aligned with our expectations are returning to learning and return to hybrid workplaces.

Sales in our hospitality market, where similar to prior year levels, including shipments which were delayed from the second quarter.

Well this is our fourth consecutive quarter of double digit growth in order rates. It is the first quarter, we've been able to fully convert the strong demand into significant revenue growth and meaningful profitability.

Price increases we implemented in October of last year and March of this year mitigated part of the supply chain labor inflationary pressures and we will see increased benefits in the fourth quarter and into fiscal 2023.

Additionally, we succeeded in managing through supply chain disruptions and labor issues, allowing us to reduce lead times that constrained shipments in prior quarters.

These actions have resulted in Kimball international reporting industry, leading gross margins and underpin our confidence and the companys future performance.

Product portfolio with today's new forming workplace and our geographic footprint.

It is geared towards smaller metropolitan areas that have experienced significant population and employment growth in recent years.

We have also realigned our broad based recovery of our day to day business as a proof point of our continued consistency with workplace orders up 29% led by corporate and education end markets up 38, and 47% respectively.

Ancillary products accounted for 86% of our trailing 12 month sales and provide the collaboration flexibility and residential design.

All areas are looking for as they returned to hybrid are fully in person settings and evaluate the most effective ways to manage their workplace footprint.

Kimball International Bath collection of products offer designs that create an amenity rich workplace that help engage recruit and retain the best talent.

Innovative and award winning products such as excellent in every space continue to resonate with our customers to do their custom configuration and flexibility.

At Pavon with increased inventory levels on hand sales bounce back significantly in the third quarter up 94% year on year and order rates climbed 64%.

Positioning us to end the year with an $80 million run rate.

The improved inventory position and our effective lead generation model and increased our new customer acquisition to 28% of total proppant sales.

Top end in stock ready to ship business model is particularly appealing to companies looking to efficiently expand their current workplace footprints.

Sure quickly furnished a new satellite office in another market.

This design is fresh and clever and theyre simplified ordering process supports speed and reliability.

Pop in the pod business continues to grow representing over 20% of the overall <unk> mix.

And it is now pop in the second largest product category.

Our showroom expansion strategy is well underway as we open additional showrooms and Austin and Atlanta for a total of eight.

And are planning to open three more in fiscal 2023.

Additionally, pop in pro which leverages the expertise of both top and NK II continues to exceed our expectations at over 15% of total sales.

Moving to our health market third quarter revenues increased 8% and orders were up 2% ahead of fiscal 2021 levels.

As we shared last quarter, we detected a slight pause in this market due to the recent COVID-19 variance. However, we continue to be very confident that these issues are short term in nature.

In fact sales volumes in many of our territories are up significantly in the quarter and year to date led by the Midwest.

North West and southwest markets.

We are addressing emerging trends in health care through community spaces patient rooms exam areas and treatment areas that are designed to create better more tranquil experiences for patients and families while maintaining an efficient workplace for caregivers.

We are achieving this by leveraging the power of our combined brand portfolio with our fastest growing territories fully adopting our multi branded go to market strategy.

As we have previously stated the hospitality market remains soft with business in international travel remaining well below pre pandemic levels. We are managing this part of our business very closely continuing to prioritize higher margin customized products.

We just returned from the hospitality design show in Las Vegas, where the energy activity and focus.

At an industry recovery that is slated to begin in 2023 and.

And we are well positioned to benefit and its upswing.

We are also pleased with our strides on the ESG front.

You may have read our announcement that most of our showrooms have earned a well health safety rating through the international well building Institute.

We have also launched our sustainability data portal ingredient standards program.

Form for sustainable redistribution of furniture fixtures and equipment during times of workplace change.

Kimball International has also been named one of America's most trustworthy companies in 2022 by Newsweek.

We are very pleased with these accomplishments and continue to be dedicated to building a more sustainable future and making a difference in our communities.

In summary, the third quarter represented a period of very strong performance for Kimball International.

Clearly puts us on track to achieve our fiscal 2022 guidance.

Now I'd like to turn the call over to our CFO T. J Walsh for a financial review a discussion of our operating progress and fourth quarter guidance T. J.

Thank you Christy and good afternoon, everyone I'm pleased to share more details on our strong financial performance in the third quarter of fiscal 2022, and our forward growth expectations. As we believe our business has reached a financial inflection point.

Net sales in the third quarter of fiscal 2022 were up 30% to $180 9 million compared to the prior year's quarter, reflecting strong demand in our workplace and health end markets accounted for approximately 81% of total revenue.

In addition, pumping contributed $17 $3 million of sales the.

The sales growth across our portfolio was driven by both volume increases and the pricing actions, we have implemented over the past 12 months.

Taking a deeper look into our end markets sales in workplace increased 52% with our commercial education and government verticals achieved double digit year over year sales increases and also benefited from popping generated 94% revenue growth year over year.

I will have experienced an 8% growth in net sales and due to lack of business travel activity in the hospitality market remains relatively soft leading to a 2% revenue decline in the third quarter.

We are very pleased with our 180 basis point expansion in gross margin to 35% year over year, despite ongoing industry wide supply chain inflation and labor challenges.

Although we have seen some improvement in supply chain and material availability inflationary pressures persistent materials pricing labor labor availability and logistics network.

To mitigate these cost increases we have implemented timely pricing and cost saving measures that will enable us to offset the inflationary pressures across the supply chain that I just mentioned.

Our disciplined cost controls and operational efficiency helped improve adjusted selling and administrative expenses as a percentage of revenue with adjusted SG&A declining to 26, 6% of revenue compared to 38% in the year ago quarter.

At the same time, we continue to make strategic investments to further expand sales growth such as the opening of the new pop in showrooms that Christie mentioned earlier, and a new product development and introductions.

Strong sales drove an expanded margins drove substantial earnings growth in the third quarter net income was $6 3 million or <unk> 17 per diluted share compared to a net loss of $4 5 million or <unk> 12 cents loss per diluted share in the prior year quarter.

Adjusted net income was $7 6 million or <unk> 21 per diluted share up from a net loss of $1.01 million or <unk> <unk> loss per diluted share in the third quarter of fiscal 2021.

Adjusted EBITDA grew to $11 $5 million versus $1 9 billion in the year ago quarter.

We experienced another quarter of robust order activity supporting our strong conviction in Kimball International's future sales growth.

Workplace orders were 36% higher compared to the year ago quarter, driven by double digit growth in our commercial and education verticals and the contribution from pocket, where orders increased 64% year over year.

Our orders improved 2% year over year in orders in the hospitality end market represented 43% increase over a significantly depressed market last year and one that will continue to underperform pre pandemic levels until the full scale return of business in international travel, which as Kristie mentioned, we expect to begin in 2023.

Our total backlog at quarter end was $178 5 million compared to $129 6 million in the third quarter of fiscal 2021.

Approximately two thirds of our backlog of FERC reflects the November surcharge, which turned into a permanent price increase in March with the remainder, including the previously announced price increases.

Our backlog declined sequentially, which underlines our ability to ship orders faster improving revenue and price realization as well as gross margins.

Now moving to the balance sheet and cash flow. We ended the quarter was $78 million in short term liquidity, which includes cash and cash equivalent equivalents plus the unused amount of our credit facility.

Our capital expenditures were $4 million, and we returned $3 billion of capital to shareholders in the form of dividends.

We also realized a $4 5 million gain from the sale of one of our warehouses.

Capital expenditures net of disposals are on track to total approximately $22 million, which is a slight decrease from our prior guidance.

Year to date, we achieved cost savings of $8 $1 million, putting us firmly on track to achieve our $10 million guidance.

We continue to reinvest these savings into high growth initiatives, such as marketing and promotion and in further building out our sales force having.

Having opened additional pop in showrooms in Atlanta, Austin, Miami, This fiscal year and given the demand trends for the <unk> brand. We are planning on opening a similar number of additional public showrooms in fiscal 2023.

Looking now at the fourth quarter, we forecast revenue of $180 million to 185 billion, representing a year over year increase of 25% at the midpoint.

With sequential gross margin improvement of 100 to 200 basis points at approximately 31, 5% to 32, 5%.

Thank you T J as our discussion today outlines we believe we have reached an inflection point at the end of the third quarter, enabling us to report significant market share gain and profit growth.

Have good visibility to our fourth quarter results and expect the positive demand trends that have driven the last four quarters of double digit order growth to continue.

Our focused approach to workplace and health end markets, our continued belief and commitment to ancillary products and secondary geographies and our confidence in scaling and leveraging the <unk> acquisition gives us a pathway to robust revenue and profit growth in fiscal 2023.

And I want to end the call with my appreciation and respect for our customers our suppliers and our employees and all that we've accomplished in proven together.

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

Thank you and to ask a question simply press star one on your telephone to withdraw your question press the pound or hash key.

Again that is star one if you have a question.

First question comes from Greg Burns with Sidoti and company. Please go ahead.

Good afternoon.

Just wanted to focus first on the health care vertical.

Covid is not news anymore with kind of I think move past it as a country is there any reason.

We think that you are still not seeing a.

The stronger inflection in demand.

Health care market.

And I guess, we'll just start there thanks.

Sure, Greg I'll answer that as Christie.

So.

One of the things we will say is that the healthcare business is actually back to pre pandemic levels. So the health care business did not decline as much as the.

And so that's the piece of business that actually has to come back in.

In order to see the year over year increase that we expect in the future.

We look at but I will just say when you look at the long term indicators of that market. We are very confident that that market will come back.

We've said that over and over again with the growth in VA the amount of investment that's going into that market.

So we feel very confident in how we're building our capabilities there and our expertise and we are seeing the funnel.

Re populating after the pause last quarter.

Okay.

And then in terms of pop and it looks like product availability improved significantly in the quarter, but now were seeing China market itself down again.

Poor congestion and other things that maybe might cause an issue for that business going forward. So can you just talk about what youre seeing there.

Any risk to.

<unk>.

Product availability for Pompe.

Yes, sure Greg It's T. J. So I think what are the things we talked about last quarter was that the slowdown in pop ins revenue was directly tied to the low inventory levels and so we were able to increase those significantly from it I would say around $12 million at the end of last quarter up to around $24 million at the end of this quarter. So we have more.

<unk> doubled the on hand inventory.

In the south of China sourcing in Taiwan, as well and so we haven't been impacted today that would certainly something we need to keep an eye on and make sure that we're maintaining inventory levels, but we are trying to buy ahead ship ahead and keep more on had an anticipation of disruption.

Okay, and I might've missed it but I think you.

You said a number in terms of.

We're popping would exit the year in terms of kind of run rate revenue.

<unk>.

Can you just repeat.

Repeat that.

Sure sure Greg So we were $17 three for the quarter and then for the run rate, we would say we're back above the $80 million run rate.

Q4 next quarter, so north of $20 million next quarter.

Okay perfect.

Alright, and then in terms of the gross margin improvements you're seeing.

What's your expectation I don't know how.

Forward looking you can be but your expectations looking past the fourth quarter as we go into <unk>.

Fiscal 'twenty three should we expect to see further sequential games, what's your view on price realization and any other initiatives that you have going on that might.

To help improve the gross margin.

Sure so.

We said in our guidance, we would see expansion happening next quarter and Thats really.

The reflection of our pricing actions finally, working their way through the backlog and as I mentioned, our backlog decreased this quarter for the first time in five quarters. So we're getting on top of that and getting shipments out the door that do have that new pricing. So we believe we've really called the bottom in margin now we'll be able to expand next quarter and then we do.

You see additional expansion into fiscal year 'twenty three I think the point, we'd make is it probably won't be a straight line it won't be perfectly linear throughout the year and it will maybe have kind of different.

Okay, great. Thank you.

Thanks, Greg.

Thank you <unk>.

Question comes from Rudy Yang with Bamberg. Please go ahead.

Hey, guys. Thanks for taking my questions.

Firstly congrats on the strong set of results and just curious if you could just talk a little bit more about some of the biggest changes this quarter over some of the previous ones I know you mentioned.

<unk> kind of reached an inflection point as at the end of this quarter, but again, that's one of the biggest change that kind of drove this.

And with an increase in demand momentum or more so than just improvements in being able to move your backlog better than previous quarters.

Sure TJ I'll start off and then kind of maybe talk a little bit about the operational improvements we saw that I'll, let kristy to talk maybe about the market for them and in demand.

Operationally one of the things that we did see is that we were able to improve our production levels and so the supply chain is still constrained with some tangible improvements that we saw or that we were able to add.

Add to our workforce, our manufacturing workforce, increasing at approximately 5% from where we were.

At the prior quarter, we also have a higher level of safety stock some materials on hand, we still see shortages of outages, but we're able to.

Mitigate those by expediting freight and so we've increased our safety stocks and the net effect of that is.

If you look at our.

Product lead times versus standards. So our standard lead times, what we hope to deliver to our customer and at the end of last quarter.

So all of that allowed us allowed us to convert more of our orders and backlog into shipments so thats really what drove.

A good deal.

Sequential and year over year revenue improvements.

Ill, let Chris talk about the demand formation.

Sure.

One of the things we see is the <unk> success in the quarter and we're very pleased with the changes that we've seen as T. J said popping responded very quickly to the the increased inventory position, but even if you look at the strategic kind of actions that we've taken with that business, we've been very consistent.

About opening of our showrooms were very pleased with Austin and how that's started popping pro which we told you last time was about 10% of the total mix is up to 15% of the mix.

We talked about the new category of pods, which is now 20% of the business. So we're seeing incremental new pieces of business that are coming into the kind of the core.

<unk> business that we have very much enjoyed and were seeing that business rebound.

On a nice rates. So we're feeling very confident around pop in and then I will just add that certainly our work with price getting price into the market.

We played a role in giving us confidence in both the revenue and the gross margin line in Q3 and Q4.

Yeah.

Great and then in terms of the backlog composition. So I think as John mentioned a portion of it still represents.

Yes, sure ready so so two factors there I think one is that you've got some orders in the backlog that were obviously placed before the price increases occurred and so thats. One element. There is also an element that certain of our contracts and it's maybe 15% of our contracts have certain.

Absent those anomalies, we would be at full realization in the backlog of all the pricing actions we've taken.

Great and then just one more from me.

The high end of your sales guidance for Q4 puts you.

Slightly below your the higher end of the previous full year sales guidance, which I think was plus 20% just given I guess, how strong Q3 results or is there any reason that your expectations for Q4 wouldn't be higher kind of reaching the higher end of your full year sales.

Sales guidance range.

Sure Rudy the one thing I'd point you to is if we look at the mix between business segment. So we had a rather strong Q3 in hospitality.

And that really was the result of some Q2 shipments that got delayed into Q3.

<unk> offset by return to a more normalized level in hospitality and again the hospitality market we got.

Tremendous belief and what that can deliver in the longer run. However, we do see that ramp as we said being delayed into 2023.

Great. Thanks, so much guys I appreciate it.

Thank you and I'm not showing any further questions in the queue I will turn the call back to Kristy Juster for her final remarks.

Well. Thank you everyone for joining us. This evening, we certainly look forward to sharing our progress in Q4 and as T. J mentioned will certainly be coming forward with our perspective on 2023, when we speak to you on the next call. So thank you and have a nice evening.

And with that ladies and gentlemen, thank you for participating in today's program and you may now disconnect.

Q3 2022 Kimball International Inc Earnings Call

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