Q4 2022 Kimball International Inc Earnings Call

that we're starting to work on for 23 and beyond. And as far as the investments, I think and kind of the leverage of those, you know, just a reminder, our traditional business, you know, which is really are made to order domestic product that, you know, when that business grows, we gain that leverage at the gross margin line, pop in, that's a source model. And so that we really gain our leverage at the S&A level when we begin to leverage these investments like the showroom and like our digital regions. I think that's where you'll see that.

Really begin to perform. And just one more comment. Some of those initiatives like Pop and Pro or the pod category, those investments aren't just for the Pop and business. Those investments actually go across Kimball International and the opportunity to actually expand that brand and that portfolio into Kimball International traditional dealer network. So that's the sweet spot of what we're starting to be with the acquisition of that business.

Great, thank you guys for congrats on the progress and good luck.

Thanks very much.

Again, if you would like to ask a question, press star in the number one on your telephone keypad.

Your next question comes from the line of Bud Baguette.

from Water Tower Research. Your line is open.

Good afternoon, Christie and TJ. Good afternoon, everyone.

Can you hear me okay?

Jam, thank you. Thank you, bud.

Yeah, a couple of questions on that, on the overall environment for poppin, the poppin pods, or talk with a little bit about who the customer is on that and what you're seeing on that in terms of new customers and how that's getting distributed.

Sure. Well, one word, you know, the pod category had just started with Poppin when we did the acquisition. Actually, they had just launched the category in January before the pandemic and they were starting to see some really good traction. There's no doubt that that pod category fits really well into kind of in stock, ready to ship, setting up short term leases and with speed.

and creating kind of private environments in very open spaces. So it's done very well in the direct pop and channel, but certainly that's been a very important part of Pop and Pro. And so we've seen that our dealer community is taking that product line and putting it in layouts and open floor plans kind of in the more longer lead time projects that we see on the side. And so we've seen that our dealer community is taking that product line and putting it in the more longer lead time projects that we see on the other side.

of the more traditional Kimball International business. It's a great category. There's a lot of innovation that's going on in that category, and we're very pleased to be in that category, and that acquisition allowed us to do that very quickly.

And pricing of that versus competition, you are...

significantly below or.

equivalent to how does that how do you find you eating in that market

Yeah, I think what we would say, but is for the, when you look at the pot category, there is quite a range as far as what the products can offer in different hands. And so I think for what we are trying to do, we think we're competitively priced in the market, we're in where we're gonna be, and we think the amenities offered for that fit the price point. So again, there's a wide range of, kind of from more entry level and basic to higher level, but I think when you look at how the pods are positioned within the total pop and portfolio, it fits very nicely with the rest of the kind of,

to an 11% EBITDA margin. So what I've guided Ruben towards in his question was over time, 34% was what we were historically as far as kind of gross margin for the business. And so to get back to that 11% EBITDA from what's implied in the 7% in our guidance, you need a couple hundred basis points expansion at the gross margin line and similar improvement in SG&A leverage. I think for this year, we didn't give any specific gross margin guidance. We would certainly expect expansion over where we finished.

fiscal year 22 for the full year. But I think what we want to point out as I indicated with the life owe is it won't necessarily be linear over the four quarters. So, you know, certainly improvement for the full year, just thinking about the volatility still in the market and how we'll manage through that. But I would just add that we're very pleased with the team's work around Gross Margin. And, you know, that is we will continue that work. One of the areas that we are accelerating is kind of...

with the products that we believe in and that will be a piece that we talk to you about in the future.

Now price costs were in balance in the fourth quarter. Where were they for the year? What was the cost minus price for the year? What did it cost you? Indeed, or dollars or basis points or however you want to to bow?

Yeah, but and interesting, I know some of our industry kind of talks in those terms. We haven't really talked about the price cap, price cost gap in dollar terms throughout the year. I think what we've pointed people towards is, again, historically gross margin was 34% roughly pre-pandemic. Over the past three quarters, we saw the low 30s in the 31% range. And so what I would tell you is this quarter, as I mentioned, as you said, first time that we've matched those two up.

which led to the benefit from the almonds I mentioned before operating excellence leverage and next in the Sum degree life.

Well, cost has continued to accelerate in the fourth quarter. There certainly energy costs have been unpleasant.

So I would think you have pricing yet to get for fiscal 23. Am I wrong in reading that?

No, but I think that's a fair point. What I would say is, what you'd have to think about is the cadence of our pricing actions and how, as you know, those taken to late effect through the backlog. So we still have additional benefit to realize year over year in the first quarter of this fiscal year from pricing actions previously taken. So when you look at the comps, we will be realizing incremental price in the first half of this fiscal year from actions already.

to make progress in gross margin and hold our gains that we had in Q4, but certainly it depends on what the inflationary environment holds going forward.

Okay, I'll just a few more for me. I'm going just to the balance sheet if I could. Inventories are obviously notably up and that's been the fact that they were not up was a problem earlier in the year. Are they at where you want them to be? They look like they're...

maybe four or five times turn somewhere in that range. Where do you want inventories to be? And in which the quality of the inventory? And in which the quality of the inventory?

Yeah, no, that's right, Bud. So I think there's a few points on this. There's two things about it that obviously increasing as our business does, but two things specifically we've deliberately increased. Number one is safety stocks for raw materials. As Kristi mentioned, we want to improve our operational performance and liability. So safety stocks are above what they would, I guess, say traditionally be to kind of balance things out. And then in pop-in, that's been a significant inventory build. As Kristi mentioned, we're new in the pod category, so build.

a complete shipment. And so that is something we traditionally did not have any significant inventory balances in, because we would really make it and ship it out the door. But because of the supply chain disruption, that's one area we'd like to see decrease over the coming order.

bit confused by that then where is where will target inventories be at the end of either half year, full year, next year and I understand the backlog is

somewhat extended for everybody in the industry for lots of reasons.

So I'm going to be alone with that inventory. I think we would want to say we would want to improve the turns from where they said today. We don't have a specific target, but I would say although it's higher and some of all known to that are deliberate, I would say we'd want to improve working capital efficiency from where we stand today across the balance. She's not just an inventory.

Okay, because only inventory looks like about $17, 18 million because I would shock you later.

right now. So you've got a high payables as well. Are they going to stay at that level?

Um, I think we haven't had it.

Yeah, no, I think the area we look to work, you know, when you look at our counts receivable accounts payable, no significant change in any kind of terms on either side there. So I think the one place that we put the most work into would be inventory. And that's the place where you could release cash from the balance sheet and look to reinvest.

And so this year we had kind of negative free cash.

Next year, what are we going to have in terms of?

Yeah, so I think, and if you look at the free cash flow for the full year, the majority of that was invested in a working capital. That was by far, you know, the biggest consumption. I think when you look at next year, we said that capital expenditures of, you know, 25 million, that's slightly up versus what the net of disposal number was this year was roughly 20 million. So I think,

slightly higher investment in CapEx next year, but then we would see cash relief from working capital, plus just the improved business performance. So again, it didn't provide free cash flow guidance, but certainly free cash will be positive next year.

So CFR will or will not exceed 25, thank you. Nokdestashlwork, Yes sir.

Yeah, no fair. I'm trying to stick with the guidance we've given.

Okay, I'm trying to I'm trying to see if we if we have positive free cash next year. I understand. Yes. Yeah

Okay, that's fair enough. Where are we on the ARNOT? We only have about 3.2 million left on the liability. That's all company taken, right? There's nothing left.

That's correct, bud.

Okay, and all right, so that's fine. Okay, great, well thank you very much and thank you for taking my questions. Congratulations on the progress and we look forward to monitoring the continuing progress. Thank you.

Thank you, Bad.

I know for their questions at this time.

Mr. Seagester, I turn the call back over to you.

Well, good evening, everyone. And thank you so much for joining our call this evening. And we really look forward to keeping you up to date in our progress in fiscal 2023. Thank you.

This concludes today's conference call. You may now disconnect.

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