Kimball International, Inc. (KBAL) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to Kimball International Third Quarter Fiscal Year 2021 Conference Call. As with prior conference calls, today's call, May 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 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 the Investor Relations section of Kimball International's website. On today's call are Kristie Juster, CEO of Kimball International; and T.J. Wolfe, Executive Vice President and Chief Financial Officer. Kristine Juster: Thank you, everyone, for joining us to review our third quarter results and discuss our business outlook. The third quarter was our most challenging period since the pandemic began due to several key factors that I will review in our outline on Slide 3. First, this is our seasonally lowest quarter. The contract furniture industry normally experiences a drop-off in orders and revenue in our fiscal third quarter. Second, revenues came in below our forecast, due to slower than anticipated order rates early in the quarter. And third, as expected, inflationary pressures on our raw materials, and continued high logistics costs were most pronounced in the third quarter, ahead of our price increases. That said, there were several data points in the third quarter supporting our view that the industry is showing signs of recovery, and that Kimball International is well-positioned to capture market share gains as business conditions progress. Most significantly is the cadence of order rates in our Workplace and Health business units, which account for close to 80% of Kimball International's year-to-date revenues. Although order rates in these two end markets declined in the third quarter, they improved progressively throughout the period and into April, indicating a pickup in the conversion of bidding activity into hard orders. At the same time, bidding activity in both workplace and health increased at a strong double-digit rates compared to Q2 levels, another indication of better market conditions ahead. We also expect considerable sequential recovery in our gross margin in the fourth quarter. As our March price increases begin to take hold and will contribute to a substantial rebound in gross margin, compared to the third quarter. Importantly, we continue to execute well on our Connect 2.0 strategy, in terms of gaining traction in our targeted end markets, achieving our cost saving targets, and making meaningful progress on the stage one priorities that we have identified to drive revenue growth and synergies within our Poppin acquisition. Now let's review Kimball International's end markets and a relative positioning with respect to a business recovery. Beginning with Health on Slide 4, we continue to see this market ramping out of the pandemic more quickly than our other end markets, reflecting a faster return of the health administrative workers, increased public funding, and expansion of areas such as behavioral health, academic medical centers, and specialty hospitals. T.J. Wolfe: Thanks, Kristie, and good afternoon, everyone. I will provide more details about Kimball International's financial performance in the third quarter of fiscal 2021 and our guidance for the fourth quarter which includes a significant rebound in gross margin. Let's start on Slide 12 with key financial highlights. Net sales increased 2% sequentially to $138.7 million including an $8.9 million contribution from Poppin but declined 22% year-on-year. I will discuss sequential revenue order dynamics by end market in a moment. Kristine Juster: Thank you, T.J. To wrap up on Slide 16, early indications are that business conditions are on the upswing. The workplace is changing and we believe Kimball International is in the right geographies, the right verticals and the right product categories. With a new digital lead generation machine, we are in a strong position to capture market share at an accelerated pace. And our cost efficiencies will enable us to deliver long-term value as we ramp. I would also like to take a moment to comment on Kimball International's company-wide approach to ESG. We currently are compiling data across our organization that supports our commitment to being responsible stewards of the environment, maintaining a diverse and caring culture that emphasizes employee safety and wellbeing, and having strong corporate governance practices. Our Board Of Directors and executive leadership demonstrate our meaningful commitment to diversity, and we look forward to sharing more information and reporting on our broader ESG focus in the coming months. I would now like to open the call for questions. Operator: Thank you. Our first question comes from the line of Greg Burns of Sidoti & Company. Your question please. Greg Burns: In terms of some of the green shoots of the improvements, are there early signs of improvements you are seeing? I mean, can you just talk about how that’s translating in terms of maybe order quoting activity, what you are seeing there? And is it centralized with like smaller business -- are you seeing it with smaller businesses first, and maybe larger projects with longer sales cycles? Any signs there that you might start to see that pick up in the second half of the year? T.J. Wolfe: Sure, Greg. I think when we talked about this, when you look at the progression throughout the quarter, clearly it was a slow start to January in orders which translated to a slow February in shipments. But what we saw throughout the quarter was this progressive strengthening from January through March, and then into April we noted it was a 6% increase over the previous month in Workplace and Health. And I think when you look down kind of to your question at what we would call day-to-day orders, so those less than $50,000 in value versus project orders which are longer and larger -- longer in duration. We saw a significant increase in the day-to-day orders in April, and actually our strongest performance over the past year. And so I think those were very encouraging signs about the types of activities we were seeing. So again, the size of orders, and this was our kind of hypothesis from the beginning that we would begin to see the day-to-day orders come back first before larger projects, so that is playing out. And I think within the verticals we talked about this, but the education buying season also starts during Q3, and we saw the signs of that picking up as well. So I think those are two specific data points we look to that are the green shoots we feel. Greg Burns: Okay. When you look at the work from home opportunity and how you see that playing out, is it mostly going to be through -- are you mostly addressing that through company sponsored programs or do have any plans on, like, further digital investments around maybe like a website or B2C type channels? Kristine Juster: Yes, Greg, this is Kristie. We've focused our efforts on the B2B environment and the corporate sponsorship program. We've talked about our initiative with Poppin to gain corporate sponsorship. We have over a hundred corporations that have signed up for that now and so we do see that it's early stages in that process. Although we do have some B2C business because Poppin is actually able to transact from a B2C basis, that's not the focus of our initiative. And so we feel very good about where we're focusing. We feel good we're in the front end of that market and it will form as this new hybrid model is forming in the workplace. Greg Burns: Okay. And then in terms of the 4Q guidance in terms of SG&A, I guess there's some additional savings to be had on your $20 million, you are talking about some incremental investments back into the business. So relative to the third quarter, do you expect between those two dynamics, SG&A to be up sequentially or flat? T.J. Wolfe: Yes, Greg, that's right. So if you think about it, we will have additional savings come through from operational excellence. The majority of that will fall in cost of goods as it has, but you're right, we will have a sequential increase in SG&A. And really what we're looking at is we have been gating these investments as we evaluate the market, look for the ramp to occur, and now we feel is the right time to make some of those, and we mentioned those are in health expertise, related to the VA, the launch of PoppinPro, and around the new forming workplace and how we can support that from a research, design and innovation standpoint. So that will all result in a sequential improvement from -- sequential increase from Q3. Greg Burns: Okay. And lastly, in terms of the first phase priorities for Poppin, can you just talk about where you are in terms of implementing those, when we might see those start to have some impact on Poppin sales growth? Kristine Juster: Sure. So, we're very pleased with the progress that we've made with Poppin. The PoppinPro launch is actually happening this month. We are starting with a full launch to over a thousand dealers. The team has done just an outstanding job of putting launch plans together. The launch plans are actually for our internal sales force, for our dealer community, and then for the A&D community. It's completely activated through digital tools so Poppin has been very much engaged in creating these launch plans. And then we will have kind of a customized approach with key dealers that are going into what we're calling this Poppin Plus -- PoppinPro Plus program that they'll actually have some support on the ground in the local markets. So that is sooner than we anticipated, so very pleased. The categories that are -- the dealers will have access to the full Poppin portfolio. The categories that we are focused on are the new Pod category and also the brand new Spaces categories that just launched last month under Poppin Direct as well, and that's the flexible walls program that we talked about that's so critical to open office environments, quick ship, setting up short-term leases. So great progress there, great engagement across Kimball International and Poppin to make that happen. I will also say we're very excited about what we're going to do with the Poppin showrooms. We stated that we have 10 kind of secondary markets in our view. 5 of those are going to happen as quickly as we can in '22 and really we are working diligently on making that a reality, and it's been really fun for the team. And then the last piece that I would say is we really think there's some product manufacturing VAVE synergies and opportunities in our future, and the teams are starting to work on that as well. So very pleased with the progress and really excited for you guys to see it in the market and for us to see it in the growth build of Poppin in Kimball International. Greg Burns: Okay, great. Thank you. Operator: Our next question comes from the line of Kara Anderson of B. Riley Securities. Your question please. Kara Anderson: Hi, guys. T.J. Wolfe: Hi, Kara. Kara Anderson: So I just want to dig a little on the price increase. So you called out no material benefit in the third quarter, a more meaningful pickup in the fourth quarter, 300 basis points improvement and full realization in 1Q of next year. But if I recall the price increase won't really alleviate all the pressures you're seeing so I'm guessing on kind of what does it look like to take you back to the 35% gross margin level? And is that in sight for Kimball over the course of the next year? T.J. Wolfe: Yes, Kara, so great question. So let's kind of go back on the facts of the price increase. So this is across the Workplace and Health portfolios broadly. Kind of directionally in the low single-digit range of 3% to 4%, but it wasn't specifically -- it wasn’t that uniformly so there were deviations from it, but that was the broad direction of it. Because of the backlog in the order cycle, again, you don't really see that much at all in this quarter, in Q3. You will begin to see it in Q4, but then as the backlog works through you will see the full realization in Q1. But as you point out, the margin compression created by freight and the commodity cost increases, those exceed the price increase that we took. I think when you begin to look at the path back towards historical margins, the big lever that you'll begin to see is the loss of leverage reversing itself once volumes recover. And if you actually kind of look order of magnitude in this previous quarter, loss of leverage was actually the biggest drag year-over-year because we were cycling really what was a non-COVID quarter in Q3 of '20. So I think that was the biggest drag this quarter. Freight and commodity certainly material to the margin compression, but the path backward -- path back up will certainly include a recovery of leverage in the P&L. Kara Anderson: Okay. So is it fair to say like if we are projecting that volume return three, four quarters out, then we would also expect you to get back to that level, if our timelines are correct? T.J. Wolfe: Yes. You would find it marry up with the return of volume, absolutely. Kara Anderson: Okay. And then can you talk about how Poppin is progressing in comparison to the sort of the order rates, bidding activity trends that you've talked about for the whole business? T.J. Wolfe: Yes. Sure. So when you look at Poppin, and Kristie just commented on the progress we've made with our Stage 1 priorities, when you look at what we will call as kind of the legacy core business that Poppin had prior to our acquisition, it remained at depressed levels as we have seen. So Poppin's markets in major cities remained depressed as ours did. So when that's kind of the performance that you saw this quarter, again $9 million in revenue, significantly below what Poppin's rates were prior to COVID. So that drag and kind of depressed top line still continues. We would look for their ramp to follow Kimball International's kind of Workplace, Health ramp with some deviations given they're in metro markets. And what we've said is secondary markets will begin to recover first, followed by large metro markets. So I think they're experiencing the same macro environment we are. And we will look to see their revenue again begin to grow as we come out of the ramp in the next quarters. Kara Anderson: Got it. And then I wanted to ask on the PoppinPods and the PoppinSpaces, are those new product categories for Kimball? And how do you compare those to peers offering about there? I guess, I just want to get a handle on the significance of those. Kristine Juster: Yes. So they are brand new categories for Kimball, for the traditional dealers and they will be serviced through the PoppinPro program. The PoppinPods launched right before COVID. So Poppin really has not experienced the benefit of that category. Although they were very pleased with the initial launch, and then we went into COVID. We do feel that those products have significant application to the post-pandemic work environment that's going to take place. And then Spaces are brand new. And it's really quite an exciting category for us. We actually just rolled out Spaces to our Health team today. And I heard a lot of excitement about it. It's the ability to construct with flexible walls, offices, small meeting rooms. And so you can literally set up an office without any type of construction. And of course, what we keep hearing in our feedback on the new workplace is all about the flexibility that's needed in the interiors of these spaces. And so those two product categories support that research wholeheartedly and we are excited to take them. And then there are new product pipelines that will support those two categories, both in the direct Poppin model and through our traditional network with PoppinPro. Kara Anderson: Got it. And then do you have any data points around the success you've had in that corporate sponsored work-from-home category that you can share? Kristine Juster: Yes, we are just learning that category. I think I shared, it's about a little over a 100 corporate sponsorships that we have engaged upon. And those are literally employee's ability to order the product directly. We are seeing the volumes ramp over time, but it's still a new learned behavior for the employee to actually go on their internet and learn how to purchase product. It's also a new behavior for the employer to actually require the employee to purchase the product through their organization. So I think it has significance going forward, and we are kind of building that as we go. So we’ve confidence in what it will be, but it's still early on in the stages. Kara Anderson: Got it. Thank you. That’s it for me. Kristine Juster: Thanks, Kara. Operator: Thank you. At this time, I'd like to turn the call back over to Kristie Juster for closing remarks. Kristine Juster: Yes. I would like to thank everyone for joining us on the call today. And we certainly look forward to keeping everybody informed on our progress. We continue to share just the beliefs that what we’ve done during the COVID times will set us up for tremendous success going forward, and that we truly are ready to ramp out of COVID with the opportunities that we’ve been working on. I also want to thank all of our employees at Kimball International for what they’ve done to get us through this pandemic. And we’ve invited all of our employees back to our offices and we’ve experienced that over the week, and we can -- frankly, we can feel the excitement and the reconnection that everybody has. So we are really pleased about our path ahead and we thank you all so much for your time this evening. Operator: 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.
