Kimball International, Inc.
Q4 2008 Earnings Call Transcript

Published: 7 Aug 2008

[Operator:]

Good afternoon, ladies and gentlemen. My name is George and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International fourth quarter fiscal 2008 financial results conference call. All lines have been placed on a listen-only mode to prevent any background noise. As a reminder, today's call, August 7, 2008, will be recorded. After the Kimball speakers' opening remarks, there will be a question-and-answer period, where Kimball will respond to questions from analysts. (Operator instructions) As with prior conference calls please be aware that today's call may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball Form 10-K and today's release. The panel for today's call is Jim Thyen, President and Chief Executive Officer of Kimball International; Bob Schneider, Chief Financial Officer of Kimball International; Dan Miller, President, Furniture; and Don Charron, President, Kimball Electronics Group. I would now like to turn today’s call over to Jim Thyen. Mr. Thyen, you may begin.

[Jim Thyen:]

Thank you, George. And welcome everyone to our fourth quarter conference call. We hope you had an opportunity to review our earnings release issued this morning on the results of the fourth quarter ended June 30, 2008. As in our last conference call, our format today will start with my overview comments on the quarter, followed by Bob's financial review. We will then open the call to your questions. As in prior calls, I have asked Don Charron, President of our Electronics Group, and Dan Miller, President of our Furniture companies, to join us in support of disclosure, complete understanding of our results, and to provide you with the appropriate information. In today's release, we noted how our net sales for the quarter ended June 30 were flat on a consolidated basis when compared to the prior year. Electronics net sales were up 3%, while furniture was down 4%. Although consolidated net sales were flat, our earnings declined due to a reduction in gross profit margins in both segments. This has been the most significant driver of our earnings trend the last several quarters. Our gross profit margin declined from 20.4% in the fourth quarter of last year to 17.1% in the most recent quarter. As with all companies and markets at this time, we are experiencing rapidly changing economic and competitive conditions. These conditions along with higher commodity costs and freight costs are squeezing margins. Oftentimes, these conditions favor scale players initially because of their immediate leverage. We haven’t continued to closely monitor these costs. We’ve taken actions to mitigate the margin erosion with price increases, productivity improvements, and supply chain cost outs. Our gross profit margin improved during the fourth quarter compared to the preceding third quarter. The improvement was driven by both segments. The administrative restructuring announced last quarter has been implemented and is substantially complete. We will continue to review our processes and our entire cost structure to eliminate complexity, redundancy, and inefficiencies to continue the profitability improvement required. Selling, general and administrative costs during the fourth quarter were $8.4 million lower than a year ago. This reflects our lower incentive compensation costs and cost reduction initiatives started during the past 12 months. We had some fourth quarter benefit from the administrative restructuring announced in March. The first quarter of fiscal 2009, we’ll realize most of the $3 million pretax cost reduction per quarter we planned from the administrative restructuring. While we have placed a lot of emphasis in scaling our cost structure and we will continue to do so, it is much more important for us to grow revenue at a good margin. We are making substantial investments in both segments in sales and marketing to drive our profitable growth. We have seen competitive challenges increase in all of our markets as a result of the economic uncertainty. We do not expect that competitive landscape to lessen within either the Electronics segment or the Furniture segment. Overall, the electronic manufacturing services market remained healthy, although there is growing concern over end market softness due to the slowing economy. The office furniture industry in the US has weakened the last couple of quarters, which is the main driver of our lower fourth quarter furniture segment sales when compared to the prior year fourth quarter. Clearly, the indicators of the BIFMA forecast for commercial office furniture market is generally flat to down. BIFMA has not yet revised their May forecast of a negative 7% annual pace for the calendar year of 2008. The RevPAR rate, a published leading indicator of the hospitality industry, is starting to point to a decline for the market in general. The refurbishment market, of which we are a very strong competitor, continues to show positive demand as hotel re-branding has not indicated any slowdown. Overall, we see for Kimball – we see upside for Kimball in the furniture markets. As with any market, there are opportunities for growth that favor skilled players with agility and ability to execute. We believe that placed our strength. Our furniture request for quote activity remains strong and our furniture open orders are strong. Electronic automotive sales declined 19% in the fourth quarter when compared to the year earlier. Automotive sales in the fourth quarter were flat with the third quarter of this year. Electronic medical and industrial sales remain solid and are showing strength. Public safety is also showing strength in electronics, but it remains a small portion of our book of business. In our conference call last quarter, we discussed the added cost we experienced in the second and third quarters in our Electronics segment as we were exiting the Gaylord, Michigan facility and transferred product to other locations. The Hibbing, Minnesota closure and the transfer of work was accomplished in the fourth quarter of fiscal ’08. It was handled very effectively with no customer interruptions and no repeating of the internal problems experienced previously with the Gaylord project. The transfer of products supporting both the exit of Hibbing, Minnesota, and Gaylord, Michigan sites was completed in the fourth quarter of fiscal ’08. With that, I would like to turn the call over to Bob to discuss our fourth quarter results in a little bit more detail. Bob?

[Bob Schneider:]

Thanks, Jim. I’d like to drill a little deeper on a few areas of our P&L and balance sheet that may not be totally clear. I’ll start with the consolidated P&L review that we provided in today’s earnings release. Jim mentioned consolidated sales were flat in the fourth quarter compared to the prior year fourth quarter and that our gross profit margin declined 3.3 percentage points. This equates to approximately $11 million of lost gross profit during the quarter. Some of this is driven merely by the fact that our Electronics segment grew during the quarter while the Furniture segment declined. But the primary driver of the change is lower gross profit at each segment. A significant cause of the lower gross profit is higher commodity costs. We have been attempting to offset these cost increases with greater productivity, changes in our supply chain, and price increases where appropriate. We further attempted to offset the gross profit decline with reductions in SG&A costs. Our SG&A was 16.8% of sales in the fourth quarter compared to 19.2% in the same quarter a year ago. In dollar terms, our SG&A declined $8.4 million. Much of this reduction was driven by restructuring activities to take out cost this past year. While about $900,000 of the reduction was due to lower incentive compensation expense. As Jim noted, we are expecting to realize most of the benefits of our recent administrative restructuring in Q1 of fiscal 2009, which will further improve our SG&A percentage. We had only a part of the benefit in the quarter just ended. In summary, our reduction in SG&A expenses was not enough to offset the reduction in gross profit, resulting in the $2.8 million reduction in income from continuing operations excluding restructuring charges. I need to note that the $2.8 million reduction in income from continuing operations excluding restructuring is a non-GAAP financial measure. See our press release for a reconciliation to the reported GAAP loss from continuing operations including restructuring. We received 36.2% tax benefit on our fourth quarter loss compared to a 20.7% tax expense in the prior year fourth quarter. We received a higher benefit due to the amount of restructuring cost deductible in the United States, which has a much higher statutory tax rate than in other countries in which we have operations. Moving to our balance sheet, cash, cash equivalents and short-term investments, less short-term borrowings on our revolving credit facility totaled $29.8 million as of June 30. This compares to $80.4 million at the start of the fiscal year with the decline resulting from our stock buyback totaling $24.8 million and higher receivables and inventory. Our DSO, days sales outstanding, was 46 days compared to 44 days in Q4 of last year, while our production day supply on hand of inventory was 63 days compared to 55 days in the prior year quarter. We are closely monitoring our inventory as it is still high from the planned duplicative inventories related to transfers of work between business units. We expect our electronics inventory to improve as we have now completed the exits of the Gaylord and Hibbing locations. Our accounts payable days, however, have increased to 57 days in the fourth quarter of this year compared to 49 days last year, which is a substantial improvement and helped to offset the negative cash effects of the increased accounts receivable and inventory. With that, I’d like to open up today’s call to questions from analysts. George, do we have any analysts with questions in the queue?

[Operator:]

(Operator instructions)

[Jim Thyen:]

Okay, George, thank you. That brings us to the end of today’s call. Our results for the fiscal year and particularly the second half of the fiscal year are not acceptable. Our position relative to competitive benchmarks is not where we wanted to be or where we believe it should be. While our strategies are well received in our core markets, we do face significant challenges. Rapid shifts in the economy, reduced consumer confidence, as well as significant and rapid commodity cost increases affecting both our segments. These factors drove competitive and market pressures to which we should have reacted with greater speed. Corrective action has been taken and will continue to be applied. Our gross margins improved in the fourth quarter compared to the third quarter of fiscal ’08. We intend to continue this trend. Our RFQ activity, quotation activity and win rate remain high. Our open orders remain strong at this time. As we move into our new fiscal year, it’s much more important that we grow with healthy gross margins. We appreciate your interest in Kimball and we look forward to speaking with you on our next call. Thank you. Have a great day.

[Operator:]

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