Kimball International Q1 2022 Earnings Call Transcript

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Provided by Quartr
November 3, 2021

There are 6 speakers on the call.

Operator

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. As with prior conference calls, today's call, November 4, 2021, will be recorded and may contain forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. First Quarter Financial Results Could Differ Materially From the Forward Looking Statements.

Operator

Risk Factors that may influence the outcome of forward looking statements can be seen Form 10 ks. 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 Christy Juster, Chief Executive Officer of Kimball International and TJ Wolf, Executive Vice President and Chief Financial Officer. I would now like to turn today's call over to Christi Juster. Ms.

Operator

Juster, you may begin.

Speaker 1

Thank you, and good afternoon, everyone. We appreciate your interest in Kimball International. I am pleased for Kimball International in fiscal 2022. There are several key takeaways from this quarter's results that I'd like to highlight. First, as anticipated, we experienced strong customer demand across our workplace and health end markets,

Speaker 2

firm with orders up 51%

Speaker 1

and together accounting for 86% of our net sales. This performance has more than offset the softness in hospitality, where we have been consistent in our beliefs that the recovery will lag until the end of this year. 2nd, within the workplace end market, POPPIN is ramping very well with sales up 22% sequentially firm. Our positioning in midsized metropolitan markets and our emphasis on new product development are all contributing to our ability to gain share Group in our targeted markets. And lastly, we have proven our agility and nimbleness during these difficult business conditions.

Speaker 1

Firm. We are navigating inflationary pressures, supply chain disruptions and labor availability challenges Taking a closer look at our business highlights in the Q1, workplace revenues increased 16% year on year, Virtual and Educational Verticals. Even more impressive, workplace orders in the Q1 were up 57% compared to Virtual Conference Call. At this

Speaker 2

time, I would like

Speaker 1

to welcome everyone to the Kimball International Group at last year's

Speaker 2

level and this growth

Speaker 1

was broad based, representing substantial year on year increase across the majority of our verticals. Direct 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. Virtual Conference Call. Additionally, our education vertical is benefiting from a boost in federal and state funding through the CARES Act and the America Rescue Plan, firm, which is expected to remain in place until 2024.

Speaker 1

A key highlight of the Q1 was the First Quarter. Importantly, approximately 60% of Poppins' 1st quarter revenue was generated through the core B2B channel, firm, which is an indication of its strength in its historical business model and which supports our expectations for the continued robust performance of this business. Our health market was the first to ramp after COVID and continues to be a strong performer for us. First Quarter. Net sales in the Q1 increased 18% year on year and orders were up 30%, firm, reflecting the traction of our interwoven dedicated health brand, our strong positioning in the government health sector, firm, where there is substantial federal funding and our development of relationships with large health systems.

Speaker 1

We continue to see a shift in the delivery of care production postponements due to the shortage of labor and materials. All indications are that the important structural trends will continue to accelerate Furniture. We are also pleased to share at last week's Healthcare Design Show, Kimball International Professional was selected as Women in Healthcare's recipient of the organization's award, recognized for promoting an environment where each employee is value, for the Q1 of 2019, and we are pleased to announce that we are well positioned to be in the position of our business. Just a few words on our hospitality market, which was especially hard hit by the pandemic. While orders received in the Q1 were below project to recover until the end of this fiscal year.

Speaker 1

In the meantime, we have taken steps to improve our margin profile firm in this market by closely managing costs and increasing our mix of customized products, which accounted for 73% of 1st quarter sales, up from approximately 50% in the similar period last year. Looking ahead, we are confident that Kimball International is very well positioned for accelerated growth and margin expansion program as the industry recovers and supply chain headwinds abate. Our strategic choices have been clear and consistent. Firm. We are well positioned geographically with strong relationships in secondary fast growing metropolitan areas Virtual Conference Call, where the post pandemic return to office has been underway and are expanding our position in these markets with the opening of 3 new pop in show Rooms in Miami, Austin and Atlanta this fiscal year.

Speaker 1

Kimball International specializes in ancillary products, Virtual Solutions, which are precisely the types of products and solutions that customers are looking for as they reconfigure their workspaces FirstNet to adapt to post pandemic working environment. These products accounted for 85% of our trailing 12 month revenues. First Quarter and Quartermark, an integrated go to market strategy for our 5 workplace and health brands. This is providing our dealers with access to an Extended and complementary 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.

Speaker 1

We validated our initial market insights, First Analysis, namely that the right spaces create connections, and we have identified 6 space types that we believe will define the post pandemic workplace Virtual Activity Space Culture Cafe, Brand and Customer Experience Virtual and Collaborative Space and Well plus Good Design for Employee Wellness. These 6 space types fueled 22 new products at the NeoCon Trade Show in October, with the largest being EverySpace, Virtual Solutions, a solution based system that addresses the constantly changing needs of the workplace, providing solutions that can span from open plan workstations Virtual Conference Call to Private Offices to Collaborative Environments. The flexibility and adaptability of every space provides users the ability to feel focused, First Quarter and Full Year's Q1 results. To sum up, we were pleased with the demand trends presentation. We are pleased to announce that the year on year revenue growth rate would have been twice as high if not for the supply firm and how well it is aligned with today's market needs.

Speaker 1

I'll now turn over the call to T. J. Wolfe, our Chief Financial Officer, to provide a financial review of the Q1 and discuss the current supply chain and labor issues we are navigating and our expectations for fiscal 2022 results.

Speaker 3

Thank you, Christy, and good afternoon, everyone. As you can see on Slide 7, 2022 Q1 net sales increased 6% year over year to $156,600,000 firm, including a $15,200,000 contribution from Poppin. We'll discuss each end market in the next several slides, but as expected, our growth in First Quarter came from workplace and health as these markets on a combined basis increased by 16% from the year ago quarter firm 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. First Quarter.

Speaker 3

However, our top line growth has been somewhat constrained due to the ongoing disruptions in our supply chain. Specifically, we've 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 4 10 basis points compared to last year's Q1, but Group expanded 70 basis points sequentially to 31.3%. The year over year decline reflects raw material inflationary pressures firm as well as higher freight and labor costs, partially offset by the price increase we implemented in March of 2021 firm along with improved production efficiencies and benefits from cost savings initiatives.

Speaker 3

We do anticipate gross margins will Group 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 $50,200,000 compared to $41,700,000 in the year ago quarter. Firm. This increase is primarily related to costs associated with the Poppin acquisition and incremental investments to support our sales growth and new product introductions. Excluding amortization from the Poppin acquisition totaling $1,600,000 as well as our supplemental employee retirement plan, First Analysis Services.

Speaker 3

Adjusted SON and administrative costs were $48,600,000 or 31.1 percent of sales compared to $40,800,000 for 27.6% in the prior year. For the current year Q1, our effective tax rate was 33.2%, firm, 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. First Quarter of Fiscal 2022, we reported a net loss of $5,000,000 or net loss per share of $0.14 which or $0.14 per diluted share in the Q1 of fiscal 2021. Excluding the earn out as well as the acquisition related non GAAP charges Permission, all totaling $2,400,000 adjusted net income was $800,000 or 0 point 0 $2 per diluted share compared to 8,600,000 for $0.23 per diluted share in the year ago quarter. Adjusted EBITDA was $4,900,000 compared to $15,800,000 in the fiscal 2021 Q1.

Speaker 3

Now let's move to Slide 9 and discuss in more detail our revenue and order trends by end markets. First Quarter. Net sales in workplace and health grew 16% 18% year over year respectively. Order activity in the workplace end market was strong and Within workplace, order trends were robust in a majority of our verticals, but most notably in education and commercial. Health orders increased 30% compared to the year ago quarter aided by robust end market demand and strong customer demand for our new product launches.

Speaker 3

Regarding price, during Q1, we announced a price increase that went into effect on October 1st covering the majority of our workplace and health products. Product categories that will go into effect on November 15. We will continue to monitor the inflationary environment and adjust our pricing as needed. Firm. However, we would expect to transition this temporary surcharge into a permanent list price increase sometime during the Q3.

Speaker 3

In the hospitality end market sales declined 32%, reflecting the ongoing depressed level demand, which firm with custom projects accounting for approximately 73% of our revenue in Q1. Our total backlog at the end of First Quarter was $170,800,000 compared to $141,000,000 in the prior quarter and $139,500,000 in the Q1 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 $111,200,000 firm representing cash and the unused portion of our credit facility. Operating cash flow was $11,900,000 and capital expenditures were 3,800,000 First Quarter, we returned $4,800,000 of capital to share owners in the form of dividends and share repurchases.

Speaker 3

We reaffirm our full year guidance for fiscal year 2022. As you can see on Slide 11, we expect year over year revenue to increase approximately 15 20% with significant growth occurring in the back half of the year. As sales growth accelerates in the back half of fiscal twenty twenty two and our pricing actions $25,000,000 unchanged from prior guidance. CapEx will be primarily directed toward the construction of our new warehouse in Jasper with a portion of this project funded by proceeds we received from the sale of our existing site as well as an investment in a new automated metal manufacturing capability in our Salem facility. Firm.

Speaker 3

We continue to anticipate operational excellence projects to yield cost savings of approximately $10,000,000 in fiscal 2022. Firm. These savings will partially fund our ongoing growth investments, namely the opening of new pop in showrooms as Christy mentioned earlier, firm as well as our marketing and promotional spend and building our sales force. As a result, we project higher overall S and A spend in fiscal 2022 firm compared to the prior year. We expect our full year effective tax rate to be in the range of 25% to 27%.

Speaker 3

Now turning to our Q2 guidance. We forecast year over year revenue growth of 10% to 15% firm with 2nd quarter gross margins ranging from 32% to 33% and S and A expenses totaling $51,000,000 to $53,000,000 First Quarter. Our revenue guidance reflects our current backlog of $170,800,000 which includes approximately $120,000,000 scheduled to ship in the 2nd quarter firm as well as current order trends and the expected impact from production capacity constraints and the potential for temporary operational challenges Conference related to complying with the vaccine mandate for government suppliers. With that, I will turn the call back to Christi for her closing remarks.

Speaker 1

Thank you, TJ. The choices we have made over the last 18 months have transformed how Kimball International goes to market, Virtual Retail and our new product designs have aligned our portfolio with a new forming workplace and the changes taking place in healthcare delivery. Firm. We are proud of these accomplishments of our industry wide reputation for high quality manufacturing and superior customer service firm that have been long standing attributes of this organization. In closing, I'd like to thank our employees for their hard work continued commitment to being responsible stewards of the environment, maintaining a diverse and caring culture and having strong corporate governance practices.

Speaker 1

The Kimball International journey over the last year and a half firm. This demonstrates not only our transformational mindset and our ability to navigate external factors, but also the power of our strategic choices firm to accelerate growth and value creation. Operator, now I'd like to open the call for questions.

Speaker 4

Thank you.

Operator

And our first question on the line comes from Mr. Greg Burns from Sidoti and Company. Please go ahead. Your line is open.

Speaker 5

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 So I want to start with Poppin. You mentioned in the release that 60% of the revenue this quarter came from the core B2B businesses. Does And where are you seeing the strength in POPPIN and the nice recovery you're seeing there?

Speaker 3

Yes, sure, Greg. It's a mixture of what we would say is the wholesale business And POPPIN Pro as well. So it's all the existing business that POPPIN had before in their wholesale channels, but also we added with Pro Wouldn't make up the remaining 40%, but again, B2B, the majority and continuing to grow the fastest.

Speaker 5

Okay. And then in terms of The incremental growth initiatives around POP and Pro, maybe bringing POP and into 2nd and third tier markets. And I think There might have been a call, 1 or 2 other kind of incremental growth initiatives. Can you just talk about the status of those, where you are in implementing those and

Speaker 1

So let me start with POP and Pro and just talk a little bit about, Pro is exceeding our expectations to date. We certainly enjoyed Having the Pop and Pro dealers and product with us at NeoCon, I'll just give you an example of kind of how that's for B. We had a large end user in Wisconsin that was with us at NeoCon, and they came in and explained to us how excited they were with Popp And they are an existing KII customer, yet they outfitted all of their work from home for their employees with Poppin. So we absolutely are seeing crossover, of the traditional Kimball International dealers working partnership with the Pop and Pro portfolio. The other thing that's been very interesting is we've talked about the categories of pods and spaces And we are seeing a different mix happen in POP and Pro.

Speaker 1

And so pods and spaces are for the largest categories that we're seeing from a mix perspective playing out, and that's what we were hoping for. Another Example was we brought both pods and 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 How the categories are growing. And then of course, we've announced the new showrooms, 3 showrooms. And the showroom in Atlanta is actually The bottom half is Poppin, the dedicated showroom and the top half is Kimball International, and the 5 brands represented under Workplace and Health.

Speaker 1

Group. So lots of good examples and we're very pleased with the progress even in the short term and how the core is rebounding.

Speaker 5

Okay. And then in terms of the healthcare market, you made a lot of investments in there and firm, very targeted, going after that broader market opportunity in the healthcare space. Can you just talk about Where you're seeing the growth? Is it still mostly administrative? Are you getting more into the clinical side of the business?

Speaker 5

Like what's the split of your revenue between The different segments of the healthcare market and how do you see that playing out over time like the in terms of maybe the growth opportunity for Kimball. Thank you.

Speaker 1

Sure. So let me go ahead and talk about how we think about the 3 different markets that we service with our health expertise. So we've talked about the 30 health systems that we have direct relationships with those end market health systems. And that has been a very important part of our growth. We also have talked about our Fed Gov service our dealer community in workplace.

Speaker 1

So those are kind of the 3 ways that that selling organization that expertise, we Health strategists are actually deployed across the health market and each of those segments are growing significantly. They're actually Each of those segments are actually pacing at or above what the total workplace health portfolio is. So we're pleased with that. We have also expanded our Health Specialty product Virtual platform. We talked about the award that we got at Healthcare Design.

Speaker 1

2 of our new product platforms were 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, T. J, if you want to add anything to that.

Speaker 3

Yes. I think that's the important point, Greg, is that the clinical products that we talked about while still the remainder of the portfolio is the majority, but the clinical product offering continues to grow and is a focus as we showcased at NeoCon. Okay.

Speaker 5

Great. And then, TJ, you made some comments around First Quarter SG and A being up in 2022. I didn't quite catch all those and I guess the guidance for the Q2 It will be up sequentially. So can you just talk about that? What's driving that?

Speaker 5

And is the second quarter Number a good number to think about for the rest of the year, is that going to continue to grow?

Operator

Sure. So I

Speaker 3

think when we look at Q1 year over year, Greg, the biggest difference would be So Poppin was not in our Q1 in the prior year and that was the biggest step up year over year. But you're right, we did guide to a sequential increase firm. And that's a variety of things. Number 1, the reintroduction of various elements of compensation that were pulled out in the prior year firm and now are kind of moving on throughout the year. But the investments in new product introduction, direct marketing, We mentioned the showrooms, the growth of our sales force.

Speaker 3

So what we are looking to do is as revenue scales throughout the year

Speaker 1

through is obviously the revenue line is up 6%, but we talked about 86% of the business, the orders are up 51%. That sits ahead of us. And so we are being very thoughtful, but certainly we're we want to scale with the order number, and we just got to do that step by step, and that's why the SG and A is moving up over time.

Speaker 5

Okay. So but production constrained now, so the order growth might not necessarily translate into revenue and we'll see the backlog grow. Is that how we should think about it in the near term?

Speaker 3

That's right, Greg. And if you look at the backlog that we talked about this quarter, the 170,000,000 That is again, it's grown because of the significant demand spike that we're seeing, but it's also being elevated because of the production constraints that we have in place. And But as Christy mentioned, when those orders are coming in, we still have design requirements. We're still assisting with the specification and getting The order into the system and all of that work is still coming through our system right now. So that's generating additional needs for investment in personnel.

Speaker 3

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.

Speaker 5

Okay. Okay. Okay, great. Thank you.

Operator

Thank you. Our next question online comes from Rudy Young from Berenberg. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking my questions. Hi, Rudy. So on margin headwinds, I guess, are you able Specifically quantify the impact you saw this quarter from higher material costs, supply chain instructions, shipping 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 areas you're seeing the most impacts right now?

Speaker 3

Sure, Rudy. So I would put it into 4 buckets. I would think we're talking about material inflation, Freight inflation, labor rates and then I would also throw, I know 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 in real time.

Speaker 3

So those were the components Actually operational excellence contributed more to our offset of those than price did. And this is because we again we talked about a little bit in our comments, The pricing is going to take time to work through the backlog. And so we see the majority of that pricing benefit happening in the second half of the year.

Speaker 4

That's super helpful. I appreciate that. And then could you just clarify a little bit about the price surcharge you're announcing? Is that increase of like the same magnitude compared to your previous price increases. And I'm sorry if I missed this, but was there a specific deadline you were expecting it to be temporarily into?

Speaker 3

Sure. So just to recap again, we had a price increase a list price increase on March 1st, for another list price increase on October 1 and this surcharge is effective as of November 15. And again, Just the mechanical difference is that with the surcharge, we don't adjust the actual list prices. It's incremental to those. So the list price or the surcharge, pardon me, is roughly equivalent to the combination of the prior two list price increases.

Speaker 3

So it is higher in for the remainder of the year. And again, the reason for that action is that we wanted to give ourselves flexibility to assess the inflationary environment

Speaker 4

And then could you kind of discuss the order trends on hospitality a little bit? Obviously, workplace and for the remainder of the year.

Speaker 3

Sure. 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 the orders in hospitality because many of them are rather large projects, it does tend to be a bit 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 for the 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

Speaker 4

Your point on POP and reaching kind of pre pandemic levels by the end of the year. I guess, do you see any kind of firm. Upside for that to kind of accelerate faster than your expectations? And if you do, what kind of areas would that mainly be in? Would that kind of be mostly firm B2B returning quicker or where do you kind of see that upside if possible?

Speaker 3

Yes, sure, Rudy. So I think what we were guiding towards is that If we continue as trajectory Poppin, we could be at the $80,000,000 revenue annual revenue run rate as early as this coming quarter in dealer network. Their core B2B business will certainly be a driver. And then I think again how quickly we can scale begin to produce get production out of these new showrooms that we're opening. So I would say those 3 are the things that I would look towards.

Speaker 3

And then beyond that, Things like the corporate sponsorship programs, those are more longer term plays, but it will still take time to develop.

Speaker 4

Perfect. I appreciate it. Thanks

Operator

for questions. We have a question online from Spiro Giannaudian. Please go ahead.

Speaker 2

Hi, good afternoon. Thanks for taking my question.

Speaker 3

Hi, Spiro.

Speaker 2

If you guys could please unpack the First Quarter, the government projects in your traditional business.

Speaker 1

Sure. So let me go ahead and talk about the business model that actually exists and then we can follow-up. TJ can talk a little bit about the mix of that business. So that is a direct the majority of that business is a Direct B2B Model. And it is a digital lead gen model.

Speaker 1

And we've talked about that Historically, Popin has been at about a 60% Perpet Customer Rate. And the reason I we look at that figure so closely is because, a lot of those which we're very pleased with. We're talking about the core business growth. But again, 60% of the business that we talked about 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 in lead gen So that's kind of how the model in general.

Speaker 1

I don't know, TJ, if I missed anything.

Speaker 3

I think that conversation.

Speaker 2

Great. And then one more about the stickiness of the price increase. Do you see that coming down after First Quarter. The demand spike is over or is that are those increases have those been priced into the existing contracts and option years are getting executed?

Speaker 3

Sure. So the list price increases that we have already taken, 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 within the company is that we want we see prices being 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 firm. With that, but I would say at the same time, despite these price increases, we remain, we believe, competitive in the market with not just the right product set, but again at a very the right value proposition for our customers and we haven't seen any noticeable change in our win rate as a result of that.

Operator

Firm. And I'm showing we have no further questions at this time. I'd like to turn the call over to Christy Juster for closing comments.

Speaker 1

Thank you, Richard. Well, I'd like to But actually grow and see the opportunities for the future of this business. So we appreciate the partnership that exists firm 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.

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