Kimball International, Inc. (KBAL) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen. My name is Valerie, and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Second Quarter Fiscal Year 2021 Earnings Conference Call. As with prior conference calls, today's call, February 4, 2021, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball International's Form 10-K. During today's call, the presenters will be making references to an earnings slide deck presentation that is available on Investor Relations section of Kimball International's website. On today's call are Kristie Juster, CEO, Kimball International; and T.J. Wolfe, Executive Vice President and Chief Financial Officer. Kristie Juster: Thank you, Valerie, and welcome to today's conference call to discuss our second quarter results and business outlook. In reviewing our results for the quarter, there are four key takeaways on Slide 3 that I'd like to share. First, the Kimball International organization continues to demonstrate resilience within a difficult operating environment. The combination of our focus and expertise in health and secondary markets for workplace is proving our ability to gain share and operate in end markets that are emerging faster than the overall industry. Second, we closed on the Poppin acquisition on December 9 and are moving quickly on our stage one priorities to capture revenue synergies. Third, we made meaningful progress on our Connect 2.0 strategy in the quarter, investing in areas such as health and work from home, meeting our facility optimization plan targets, in setting up a step change in our eBusiness and strategy with the closing of Poppin. Fourth, based on backlog and current order rates, we expect third quarter revenues to be similar to second quarter levels, but we are seeing increased bidding activity around the new forming workplace. It is too early to know when this activity will translate into firm orders, but we are encouraged by the possibilities we see on the horizon. There were some headwinds that impacted us in the second quarter, namely the $6 million in hospitality shipments that were delayed due to port congestion. Margin pressure we experienced due to spiking freight costs and the inflation impact on raw materials. On balance, however, second quarter business trends unfolded in line with our expectations. Now let's talk about Kimball International's target end markets and their different stages on the path to recovery. Beginning with the Health end market on Slide 4, as we expected, this market is ramping out of COVID more quickly than our other end markets, reflecting a more rapid return of health administrative workers, expansion in areas such as academic medical centers, behavior wellness, specialty hospitals, and increased public health funding. We are pleased to announce the official launch of our new health brand Interwoven. This is a dedicated team with extensive expertise and understanding of the health industry and the home for our specialized clinical products. This team will have access to the full Kimball International portfolios, allowing us to offer unparalleled full facility solutions. The initial results have been encouraging. T.J. Wolfe: Thanks, Kristie, and good afternoon, everyone. I'll discuss Kimball International's financial performance during the second quarter of fiscal 2021 and our forward expectations. Let's turn to Slide 9, which shows the key financial highlights that were also noted in the release. Net sales decreased 29% year-over-year to $136.2 million, primarily reflecting the ongoing impact of the COVID-19 health crisis. Sales during the quarter were also reduced by approximately $6 million due to port congestion delays that impacted shipments in our hospitality end market, as Kristie mentioned earlier. Sequentially, our net sales declined 8%. And I'll discuss sequential revenue and order dynamics by end market in a moment. Kristie Juster: To sum up, we are navigating a difficult business environment, but we see improvement on the horizon in the two markets that currently accounts for close to 85% of our total sales, Health and Workplace. Our Connect 2.0 strategy has strengthened our ability to gain share in our target markets. The Poppin acquisition closed only eight weeks ago, and we already are making progress against our stage one priorities. That is a testament to the tremendous potential that lies ahead as well as the exemplary ways in which our combined organizations embrace change in diversity. We are well positioned and motivated for the path ahead. Operator, now I'd like to open the call to questions. Operator: Our first question comes from Greg Burns with Sidoti & Company. Your line is now open. Greg Burns: You talked a lot about the freight costs impacting your gross margins. But steel has been -- as the increased pretty significantly recently. Can you just talk about your exposure there? And in terms of the price increase, what is typically the lag on actually the realization of that price increase? Does it take a couple of quarters before we see the benefit? T.J. Wolfe: Yes, Greg, this is T.J. On the first point around steel and input costs, so yes, we talked about freight. But also we're seeing inflationary pressure in metals, so steel, aluminum as well. And I think that's going to persist for probably the next two quarters or the first half of this calendar year. I think what we'd like to see is, as again, the market starts to normalize, just as we're hoping the freight market normalizes after the next two quarters, we're looking at something, hopefully similar in those kind of input costs. When you talk about the price increase, so we said the price increase goes into effect on March 1. And so we'll see very, very little of that impact in our third quarter. We would see a significant amount in our fourth quarter and then full realization in Q1 of the next fiscal year. So it is a lag, but we begin to realize significant benefits in Q4. And that's where we talk about the margin evolution and how we see the margins, the temporary compression we see in Q3, beginning to ease in Q4 as that price increase comes into effect. Greg Burns: Okay. And then you talked about getting to the $20 million of cost savings by the end of the year and you had $6.1 million total this quarter. Where are you cumulatively? What's left to get to that $20 million? T.J. Wolfe: Yes. So again, tracking roughly halfway there, and so, I think when we look at the delivery for the second half, we see a similar trajectory of where the pipeline of projects will continue to deliver quarter-on-quarter similar amounts. And I think what we're focused on now is just kind of thinking about beyond this fiscal year, what we can do in 2022. Greg Burns: Okay. And then I just want to understand the guidance you gave for the revenue for next quarter. So organic was $133.5 million this quarter. We assume that for the next quarter plus whatever contribution we get from Poppin. Can you help us out with like what you expect Poppin to contribute next quarter? T.J. Wolfe: Yes, absolutely, Greg. So that's right. So the guidance would be organic revenue at similar levels. So the $133.5 million, you quoted there, is organic revenue for this quarter, and just a little bit on that. We talked about Hospitality to $6 million delay in shipments from Q2. That will ship in Q3. However, again, logistics and the network is still tight. So there's some risk in the quarter there. Workplace and Health, when you look at order volumes as we move into January, so we've just wrapped up. We're basically seeing, again, similar order trends to what we saw at the end of the previous quarter there. So, those two things combined lead us to that organic revenue picture. As far as Poppin, Poppin contributed $2.7 million to our revenue during the period December 9 through the 31st. So for the period we owned them, we would see that run rate directionally to continue through this quarter as well. So again, as we've talked about while their showrooms are open by appointment, they are seeing similar challenges in order rates and the pressure that we're seeing, but I would say their run rate from December would continue into Q3. Greg Burns: Okay, great. Okay. Can we maybe talk about some of your end markets, Hospitality, what are the conversations like with your customers? Like are they -- is there any green shoots? Or are we just kind of in a holding pattern? Just what are you seeing on your . Kristie Juster: Sure. Greg, it's Kristie. I think there's two themes that we would say the customers are talking about. One is this ocean freight kind of congestion and impact on Hospitality is fairly significant, and it is taking a lot of work from the customers and our teams in order to make sure that we're bringing in those orders on time and getting those organized. So, there's a significant amount of work that's being done in regards to that. The -- I would say the green shoots that we are seeing is under custom in the luxury market. There is no doubt that, that is coming back faster than what we would call the program business that is more geared toward the business traveler. Greg Burns: Okay. And as you look to, I guess, expand that with the living brands into senior living and student housing, could you just compare and I guess like how those markets are similar maybe to Hospitality? Like why is that a natural extension from the Hospitality market? And what kind of incremental TAM do you get by moving in that direction? Kristie Juster: So, there's two dynamics that make it very similar. One is a direct sale. So, our selling organization goes direct to the designers or the developers and work to create a portfolio that is unique to them. So it's a direct sale, and that's what our hospitality group does, that is there to market. And then in -- they are organized to create custom products for dedicated end markets, which would be student housing, luxury student housing and senior living. So each of the properties by a significant amount of custom products to put in their environment. So, those are the two things that have that sitting in our hospitality business. I will tell you that our Health expertise is helping our Hospitality group in the senior living environment. So that expertise does matter in that environment. And our Workplace group is opening up opportunities in luxury student housing. So there is crossover that occurs within the business units, and we like that a lot. We think, there's opportunities to share that expertise. Operator: Thank you. Our next question comes from Tom Maher with Hilton Capital. Your line is now open. Thomas Maher: So just to clarify on Poppin. I guess, does that mean it's sort of $35 million $40 million run rate right now or I don't know if there's seasonality in the business? Just trying to extrapolate from the one-month you had it. T.J. Wolfe: Yes, Tom, this is T.J. So based on what we saw from December, if you extrapolated that out, you'd come up with something in that range. I think what we're looking at is how we can ramp that as quickly as possible. And again, it depends upon the market conditions and this general market recovery, but I think that's the run rate implied from December. What we're focused on is really the priorities we outlined for Poppin and how we can scale that again, our dealer network, looking at the work-from-home opportunities and again, poppinpod. So, we just -- I think the degree at which we can push those priorities forward will really dictate the revenue trajectory beyond the next quarter. Thomas Maher: And then other than the product line, I think there's some reference here in terms of their digital marketing capabilities. And could you guys sort of expand on that? Do they bring more of an e-commerce sort of capability? Or it's more just the ability to more effectively exploit those marketing channels? I'm just kind of curious what you're kind of fully referring to there with Poppin. Kristie Juster: Sure. So, let me just explain the Poppin business model for a moment. It's a great model. So, it is a digitally enabled lead generation model that occurs and then quite sophisticated conversion funnel that the opportunities are pushed through. That includes sales development, account executives and showrooms, so that they can convert those digital leads into some nice sales. And I'll just give you a couple of facts. 80% of the leads do start online. When we look at -- when the leads get to the account exec, over 60% of those leads are actually converted and about 70% of their business is repeat customers, because they're very, very dedicated to this simplified customer experience of in-stock product and services that they offer. So, it's a digitally native lead gen machine that has a series of conversion opportunities through the funnel. And as T.J. was mentioning about the Poppin volume, we knew Poppin was in a metropolitan market. They have five showrooms better in metropolitan markets. We knew that when we purchased Poppin. We're excited about taking that capability into secondary markets, because a lot of the opportunity for Poppin is creating that conversion at the local market. Thomas Maher: And they could leverage the existing, I guess, Kimball presence in those markets, I guess? Yes. Kristie Juster: Yes, there's two methods that were -- two opportunities. One is to expand the direct capabilities with that Poppin already has in the secondary markets. Numbers are very different. It's a stock product. It's a different looking product. It's a simplified assortment. A direct shift and then also, we're bringing it into the more sophisticated kind of dealer community where they work at larger end consumers. So we'll be doing both of those activities with the Poppin brand. Thomas Maher: Got it. Okay. And then my other question, a little bit different, but in terms of your Workplace business. I don't know if you'd have visibility on this, but do you see people sort of ordering -- there's a lot of conversation about sort of reconfiguration, more hoteling, people working three days in the office and two out or whatever you have it. So, are you seeing -- are the orders sort of specifically tied to those kind of changes in terms of their furniture needs or layout of the office? Or is it more still sort of just the sort of replacement or normal cycle of the existing office space as its configured? Kristie Juster: Yes. So I'll tell you, two themes that we're definitely looking into. One, the projects that are coming into the funnel right now are either projects that are kind of in the works already. And they've just had some small tweaks kind of practical changes based off of a new landscape, or they are kind of new major projects based off of the environment and the experience that corporations really want to deliver their employees. And so, we're seeing some varying activity that's happening in the project funnel. But there is no doubt that we feel that corporations are now thinking about the workplace in regards to kind of where work is getting done. So, it's headquarters, it's co-working environment, it's satellite offices and it's work from home. And so one of the things, as you kind of tick down all the places and the choices that we're making at Kimball International, it's really to be able to service that much broader market. And so, we think that for us, it does represent significant opportunity for us going forward as those new markets perform. Operator: I'm not showing any further -- and I see a question from Spiro Gianniotis with Alphatec. And I'm not showing any further questions at this time. I would now like to turn the call back over to Kristie Juster for closing remarks. Kristie Juster: Thank you very much. Well, I'd like to thank everybody for joining the call today, and we look forward to keeping you informed on how we're doing. Again, we're seeing early indicators that we're excited about, and we certainly think that we're set up in order to maximize the opportunities ahead. So thank you very much, and have a nice evening. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.KBAL Ratings Summary
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Kimball International Reports Strong Q3 Results
Kimball International, Inc.(NASDAQ:KBAL) reported its Q3 results, with revenue coming in at $180.9 million (up 30% year-over-year), above the consensus estimate of $171.8 million. Non-GAAP EPS was $0.21, beating the consensus estimate of $0.03.
Workplace and Health sales remained robust, growing 52% and 8% year-over-year, respectively. Hospitality sales declined 2% year-over-year, due to continued softness in travel levels. Orders grew across all segments, with Workplace, Health, and Hospitality delivering 36%, 2%, and 43% year-over-year growth, respectively.
Analysts at Berenberg Bank shared their views following the earnings announcement, expecting demand strength for Workplace orders to continue, given the ongoing population growth in secondary geographies (Kimball’s target market), and the emerging use of well-designed offices to attract and retain talent.
