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KBAL Kimball International

Participants
Bob Schneider Chairman and CEO
Michelle Schroeder Vice President and CFO
Steven Ramsey Thompson Research Group
Call transcript
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Operator

Good morning, ladies and gentlemen. My name is Tiffany, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Second Quarter 2018 Financial Results Conference Call. All lines have been placed on a listen-only mode to prevent any background noise. After the Kimball’s speakers opening remarks, there will be a question-and-answer period, where Kimball will respond to questions from analysts and investors. Litigation prior recorded today’s statements and under Private with XXXX February as As XXXX. the be of will may Securities Instructions] conference call calls, X, defined [Operator Act Reform contain forward-looking Actual results statements. from differ could materially forward-looking influence XX-K factors Form forward-looking statements Kimball today’s release. outcome can Risk the or seen be may in that and International of Vice Chairman Kimball International; of panel today’s President Chief The and CEO for call and is Kimball Financial Officer Michelle Bob Schroeder, International. Schneider, and to like now I call Schneider. today’s would to Bob turn over Mr. may begin. you Schneider,

Bob Schneider

Thank you, December quarter results call. yesterday Tiffany. And to ended our financial XXXX. XX, welcome We fiscal second everyone for the quarter conference year second our XXXX announced

Relations conference investor slide have As in has we call. prior website deck presentation calls, to accompany of section our the this been an Investor that posted to

our today you our As includes it to second before with information call the deck the I financial quarter. the for the in recently results. regarding past, financial I provide turn up sales our I over trends, acquisition a trending highlights and completed that slide quarter as pull start who with the on outlook, with will along second us of key few the comments and Michelle quarter order important suggest will

we and Sales to year, growth by of six in second led second acquisition We consolidated We hospitality November D’style Revenue markets in will increased in a the call record demand five increased vertical XXXX. on was quarter. markets in hospitality quarter. prior the the then which of sales organic open and on questions vertical of four also increase pickup in by was out investors. analysts in the the hospitality vertical for the acquisition. quarter from overall X, in encouraged basis experienced over the the orders D’style, X% vertical six orders record in the completed X% in out without in in Inc. the record report -- our in resulted quarter, an an sales the the were The second

our as recall, was so quarter, getting you to start and the nice around quarter we in a good first off quarter, If to from the third over trend ago. look up orders were year quickly to this we’re with our in a it orders turned see XX% down January

growth way, D’style, excludes organic a that’s Now start. it very by the strong

United agreement will the forward. extension health product States X,XXX improvement east Premier. west providers utilizes the blank leading During our periods take allows awarded of was that systems, with the furniture members and over provide awarded National to National and Navy are region This a National a during purchasing of that quarter, recent pricing a going from provide outside to Also contract Navy on special National contract advantage examples of two contractors continental U.S. approximately which hospitals just company U.S. XXX,XXX in terms contract region, and pre-negotiated the the benefits These and brand Premier all approximately extension wins allows that multiple of alliance to healthcare quarter, is installations organizations. was other three-year by Premier, an and

more won heavily more compared to the includes in second when product year. margins as business Systems during that project-based were the quarter project-based has product discounting Open associated which more margins quarter with challenged business and Our lower that Plan sales were towards it. carried last higher weighted We

providing operations hotel November nicely a a this and I is faster Their this D’style by believe the fit the proceeding in guest is improves. quarter The mentioned our second industry our Xth, some activity D’style which the are we pieces. very market will acquisition our and well, marketplace, in will glass with and marketing is detail. furniture automation we continuing since of in good results drive name passage are include the initiatives, furnishings the our overall impacted with diligently cost the in have and to spaces guest of remain us how design in industry. The are hospitality room forward we was In room our the acquisition. effect working owners also network steel, public as projects we our customers capabilities Allan will quarter acquisition enhance the on positive positive operations with acquisition was will charge integration the economy Kimball complements profitability customers. to respected very completed very for to December Act and headquarters. a will the and that other well optimistic. custom initiatives. brand designers which Hospitality win and development, the costs long-term for sentiment D’style goals, distribution investment, the mentioned as furnishings alive earlier, automation, previous keep we product very brand, more the which in the D’style to on of invest brand that as providing our date. I other materials exceptional in of in the Designs with our Kimball in which We received additional the pleased our is We with brand. in saving look public offset in quality last other am our were hospitality our productivity known improvements pending call, capabilities I very discuss As processes we as these back-office the Reform growing financial presence Hospitality strength well day-to-day strategic a focus and space. and strategically providing There furnishings. even further design already Michelle Tax very are nicely D’style environment will macroeconomic the in with of mixed space smoothly for California in to more position high market will D’style Copley remains and the And achieve and provide integrate hospitality factories factors accent

a our mid-single on in grow we set As financial target achieving average XXXX, with long-term income growth margin on fiscal organic are exceeding With sales a sales operating digits. X.X% level XX.X% for reminder, targets capital of this to of return XX%. to

target operating improvement. operating in referred We a hit be investor XX to continue to income to page I believe for XXXX. see able Please we deck margin our will slide that our recent earlier this of trend in

of call to your over for we Michelle? before the the turn will I Michelle to open results the Now call financial questions. brief a overview

Michelle Schroeder

Bob. Thank you,

income that a operating completed Before results, I post-closing second price The a during approximately further to in deal. which so earn-out, price an which will acquisition the of is be I results, upon $X.X finalize quarter. door $XX multiple. adjustments, The The provide get million. equates was times cash subject This out acquisition the and quarter to the was little million soon. into contingent bit with the purchase the million that a quarter certain million is $XX.X financial six price to purchase EBITDA price final also purchase am $XX on was all-cash of D’style includes information going

November of to included Operating net sales two because a D’style $X.X reported sales of do That our consolidated results. and the closing but million were quarter income income ownership Xth material not about second results under D’style. positive, in not for Our impact date. months have for represented quite our

not was quarter. to the the $XXX.X that organic in XX% an this pace we increase see the very Bob increase over Now as decline sales the excluding up in And Overall recorded quarter. X%, of acquisition. was the increased significant second a trend or previous first X%, was our pleased financial as excluding with an level quarter, X%, growth orders the the organic we reversed strong it well, from orders quarter. lower of are January order that in orders as to And It Bob a while moving nice were million given following results, year the the in encouraging the increase, ago. acquisition of our consolidated mentioned, Kimball of the activity second increased orders see International in and of experienced X% to sales mentioned,

X% Our backlog the of which an end was of December, at December over last $XXX.X increase million ended at acquisition. the including year

hospitality, introducing new as a both markets, when exclude quarter. stronger optimism of XXXX concentrated products area. paid growth Looking up that’s and by even vertical in hospitality level market sales vertical were a education hit the market, orders increased in acquisition, still in we really orders on increased lot you of the Sales see the off many continue in in experienced double-digit market the solid various for this second record and finished percentage focus overall The and and sales and marketing and efforts year sales calendar growth hospitality education for to quarter-after-quarter to anticipated vertical years quarter the government second calendar XX%. XX% geared year put than this XX% The year at grow markets the towards prior couple the creating last XXXX. market XX% vertical significant vertical increased We orders. over exist the the this and

few market The last entities. increase to This improvement, XX% from state this market. only has team a declined awarded leadership brand off. long vertical been as have Most the it’s so of meaningful make sales progress. and We efforts the with our for are was brand. coming continue we us been larger Health XX%. we beginning during but government pay couple increasing and to Sales market see This increasing orders orders to within Kimball growth healthcare where experienced declined the sales in market sales of taken within XX% projects to see and has notoriously are a quarters, quarters government The quarter both in really the a couple well, some starting for Health recently down the cycle, a we decline market new orders the vertical of Kimball that new local steady and the X%. of was

fiscal in We project some remain fourth begin Healthcare pipeline strong. awards to looks the for but see third expect The quarter ‘XX year shipping quarter. larger sluggish, expect sales Healthcare to in

of And total high quarter, on product products of the last of product all distribution our those category, and products are depending new some products category, strategic sales help were still mark they quarter seeing focused mark building are three-year ramp introduced mentioned metric initiatives hospitality markets. and the ramp design products specific. in this and gap. quarter. that market around we up included upon when new products new sales selling starting during recently exclude metric hotel to fully. of selling This products and well well, fill Last second to as as when on up fallout from our the delivery the the and new of out are I longer hit do primarily reminder, hospitality no a the product timing the And vertical fluctuates As three-year that in XX% developing of hit just share Sales further we extremely our longer. innovative vertical fell metric are are product are gain to network any brand products in new our we the

that basis percentage few last lower mentioned sales our ended This Now has we from in Bob start year. which Open quarter. that the Systems items gross compared our There We discounting X.X% The the XXX a product, biggest decline profitability ended of which normally margins. moving in profit, piece quarter for the were Plan quite income income, had Operating with earlier. lowered the in points approximately gross percent X% income impacting by XXX margins with this prior sales gross the below was disappointed operating shift and margin X.X% I’ll higher to basis to at impacted were and mix profit year. a higher profit points. operating

gross discounting profit we monitoring in news XX costs higher In our cost closely quarter, release lower addition, alternatives impacted increase been recently, product reductions in that the profit was to them points. adjustments for percent mentioned valuation a costs are as or freight higher the in gross to these by the to higher elsewhere. offset basis with select we by reported this significant approximately look experienced what’s press degree points, that and LIFO smaller combined negatively XX our basis negatively Then to and on impact we similar this approximately a inventory

compared decreased quarter administrative partially second these to expenses impacts, XXX of Now last price X% negative margins during and Selling gross by offsetting realization basis year. increases points. favorably the the quarter, in approximately impacted

building million acquisition We then was second The in and included offset costs $X.X have mostly related additional as that have D’style administration offset gain some unusual well quarter sale but quarter year the of that on costs during a not the items other. the they to administrative the here selling current we by each completing the for year. and did prior that

exclude down incentive resulting you selling of in profitability X%. which unusual more offset us almost was higher were comparable all if quarter So lower a costs salary items comparison, the costs compensation during and from administrative decline gets the A expense. these by

expenses significant you change noise. pull from the a not when admin last out So, year selling in and all

well cost on productivity improvements, Bob working initiative. as and As mentioned, as we automation are other savings

XX.X% normal rate Act effective our a not we hit of had of the X.X% XX.X% unusual So adjustment some target believe quarter indicative operating to tax fiscal The we with quarter Tax margin still December passage in is second the the income Reform the in during quarter. of XXXX. year for will

First tax to the rate will we due statutory tax a in from future in XX% now to reduction XX% was assets an turn the Xst. that lower benefits at effective the on rate tax sheet. adjustment federal are the our have that future January deferred These to balance

tax a have during As result, rate. in This tax resulted $X a deferred value expense lower the lower one-time these tax quarter. million adjustment assets of at

rate June tax have is the for fiscal to and XX.X% end, to blended our as year our The we year fiscal tax a effective adjusting half second year, reduction with company year XX% XXXX. to tax will adjustment XX.X%, for of in a because statutory are related federal result, federal the only we year-to-date rate fiscal the XX rate of a

tax the So this rate XX.X% decrease reported a to $X.X million. to benefit resulted from December in XX% of we year-to-date and the adjustment statutory federal

the $XXX,XXX additional numerous net rate. basis. Kimball for were and the changes expense we of and complex analyzing The these which tax a tax the was on about So the two during forward impact quarter, International in caused effective of higher adjustments go the still are law overall

For have fiscal by of blended lower federal will somewhat that certain year XX.X% of and the be credits and versus of the reduction we the the a rate XX% full remainder benefit tax will reduction XXXX, of in offset deductions.

in significantly was $X.X of the tax beyond not for loss looking So when that income a million fully will the deductions to prior fiscal we our second [ph] we expect year total. that negative XXXX new tax and analysis have completed quarter And fiscal lower do impact we we the year million, benefit credits of the expect but at (XX:XX) federal not realize have under will significant rate $X.X fully impact yet, regulation. XX%, reduced compared for XXXX rate the will Net the year. and the in reductions offset to of

cash end million to balance decrease Now million December. the compared driven the moving flow $XX.X second the at second million, quarter and of payments, December. our paid by our changed timing were the in payout year, incentive now throughout cash a our payments annual change incentive incentive of structure by the are of previously payments this cash all the $XX.X primarily to cash our sheet, investments The short-term cash equivalents $X.X in fiscal quarter. was and end balance in cash, was year was out spread Operating we annual

outflow the fiscal -- result, approximately we a in additional second of previously had would have that year. $X the we half in of million cash quarter that prove occurred As second the

in third during the this in any paid In impact that we approved of beginning August, quarters those fourth should during a because -- second year. dividend XX Board see dividend payments and in the We dividends we positive not the XX% quarter. $X.X the the will was quarter quarter. this second So million have quarter, with a increase paid

investments. be amortization office showroom better normal our We put and Our total of million, to reflect approximately capital for in perspective. expenditures the for higher continue annually to to in CapEx will as totaled capital $XX.X million Depreciation quarter, corporate way these renovation. the for $X.X the spend the XXXX by and than estimate renovation which related headquarters primarily our approximately we fiscal expected year $XX to $XX million automation, is today million investments is manufacturing

little as Our strong balance December remains sheet with debt of very XXst.

and the in $XX the that, question? facility we We questions. open million With anyone Tiffany, to compliance credit with are have all with covenants. we’d call like to do have

Operator

go Thompson Group. question your first of [Operator Thompson question. Please from with comes Research Instructions] The ahead Kathryn

Steven Ramsey

This guys. Steven Hi, is Kathryn. for on

Bob Schneider

Good morning, Steven.

Steven Ramsey

during competitors more environment out first, saying I couple relating But, called is there I if competition, business if the -- ask or more a comments. you this factor a of are out? more pushing and guess, want are industry in you this for project-type that to space, your to you some smaller had just the into competitors you wondering smaller the questions, -- for are competitors

Bob Schneider

not Steven, saying a the seeing that in a much there The year significance. competitive entries, a compete set. and today. the intense that but we terms we is players, nothing in new of very against It terms competitive working players ago of are small large against, are of change we environment, was

Steven Ramsey

is your the in of elevated commentary project then you business was And guys an more you that environment more discounting assessment going on to nature there’s the on elevated it would Okay. discounting, that due more the say discounting quarter on? of or had

Bob Schneider

the we come really to quarter, margin we where I good that pressure had happens right market types driver. distribution of often more that that won. now. that had don’t on some to a We It more typically. quite that but we margin size orders projects of less the is the this that those of in intensity mean and the and of downplay in product the comes was won typically lot of matter that We that Open with of was mix we System relative more had Plan discounting the do had pricing, orders tighter that with have a that

Steven Ramsey

near Right. and the environment, and discounting others have elevated would of And so it that you the far competitive pass the away describe above stated the somewhat factor to an as or works, intense if if signs you -- if that steady then medium-term? as you see which as but industry normal there persist as in way are is do will state

Bob Schneider

for planning experience and quite to our we facilities, aspects past and the is that of are everything what some our processes. from We that administrative internal this quarter for continue, discount in really been process we’ve seeing time at environment to what out terms improvement, our leaning look drives

under continue. going experiencing what and will for we the are been pretense just we So we’ve saw long time that a what

Steven Ramsey

part that Then Excellent. answer in of can had you environment? products talked on my leads margins of shift about part I of carry products. the kind margin operations, there to is of Did of the will kind next better question that do sorts to different way to have some better you to the this anything of lower adapt this you that, need

Bob Schneider

satisfy we it are had what that continued occur. a and we lot you same of you very we are you products. going, the that the filled look and we pretty continue. I calls Steven. we They done. do introductions But that driving necessarily distribution pedal and system if so mind, tone is Well, higher event of trying in a new dealer are areas, based sure are end money win go product had past, mostly working past big happening That hitting run terms you and come time choppy in we -- gas on have a that number discounting will recognize just where and in seating imply putting the going the to the has with time orders all have that also with some than prior projects every and the Keep said doesn’t have the you very, have you margins see years, new creative almost boy, quarter dealers business and and quarter can is and type products three as at we got the and we our back next situation. that’s get in that nature in of of generally the designers to of that make up big new are same and other the And and a with focused, have in that, that to of business really exact offering our tough

Steven Ramsey

steady-state so, this, still next Right. let’s if say is stays And achievable? your mid-term then guidance would sort -- months XX environment the to or -- of

Bob Schneider

and The new things that at my prepared different mid-term, what incentives, fully to is I is as we doing we be to had are and the that are at able this indicated point believe that products, Steven distribution look with in we’re obtainable we doing we think all comments I of that. with going achieve

Steven Ramsey

format you last there’s in few seller? coming tax as manufacturer the industry both M&A few acquisitions recent Excellent. theme this some and code then effect, response an new years. think your outlook does office into even as this the announced has acquirer past M&A the that a the in or change Do And for with activity a new in for side office question, the been months on to been past

Bob Schneider

with have said distribution fill the sense As our out that perhaps at focused our product that very in can over with the on enhance are what we might looking acquisition design we makes past, line lean community. share one we be that to very,

So We one for vertical. found in hospitality the good we’ve recently already been looking D’style fit. in

are office We with our to deals respect looking come desk furniture at across the constantly industry. that

So that is to going continue.

the As go look I as what does code forward. we at tax

even drive going of it’s certainly could out is companies drive offering and product we that a economy the drive it’s that to help fill at doing to looking in what our continue faster. potential think and to I us terms sales been going bullish aspect us primary have

Steven Ramsey

you. Excellent. Thank

Bob Schneider

Thanks, Steven.

Operator

over any I call back Thank to no remarks. for there you. Schneider are closing questions. [Operator further Bob turn Okay, the will Instructions]

Bob Schneider

I second joining the year. you call. are forward heading encouraged environment on us Kimball today. and International speaking We Tiffany. and have a your a you optimistic of quarter, interest to and very our was appreciate am orders half economic great our into strong start in Thanks for next Thank fiscal but It second we overall look the day. the everyone challenging QX by with Thank for you, about

Operator

At call. this time, up from have nice you listeners, and may day. or simply disconnect the you Thank hang a