Kimball International, Inc.
Q4 2013 Earnings Call Transcript

Published: 2 Aug 2013

[Operator:]

Good morning, ladies and gentlemen. My name is Caroline and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Kimball International Fourth Quarter Fiscal 2013 Financial Results Conference Call. All lines have been placed on listen-only mode to prevent any background noise. 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, today's call, August 1, 2013, will be recorded and 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; and Bob Schneider, Executive Vice President and Chief Financial Officer. I would like to turn today’s call over to Mr. Jim Thyen. Mr. Thyen, you may now begin.

[Jim Thyen:]

Thank you, Caroline. Welcome everyone to our fourth quarter conference call. Our earnings release was issued this morning on the results of our fourth quarter ended June 30, 2013. We have posted a financial summary presentation to our website to accompany this conference call. That presentation can be found on our Investor Relations website along side the webcast link. We will start with my overview comments followed by Bob’s financial review, we will then open the call to questions. We have a strong finish to fiscal year 2013 with a 10% increase in consolidated sales and higher net earnings in the fourth quarter compared to last year, led by robust performance during the quarter in our EMS segment. As we reflect back on the past year, it was a year filled with significant accomplishments in our EMS segment. As referenced in the press release, heading into fiscal year 2013 one of our top priorities in the EMS segment was growth and continued diversification of our customer base. We had double-digit sales growth in each of the four quarters in fiscal year 2013 when compared to the prior year quarter. The result in a 14% growth for the entire fiscal year in this segment. As mentioned in the previous calls, our business development team has been very successful over the last couple of years in landing new customers and new programs with existing customers. As you know, it can take several quarters for new programs to be launched and reach full production. These efforts are now reflecting in the sales growth we saw in fiscal year 2013. An encouraging fact about this sales growth is that it is very broad-based. It is not the result of a single vertical market or just a handful of customers. We experienced growth in all four of our vertical markets during the quarter. Our package of value of durable electronics with outstanding customer service and a global footprint is resonating very well in the marketplace. The increased volume drove improved profits in this segment as we were better able to leverage our fixed costs. We also focused on improving our working capital metrics particularly our inventory metric to reduce our cash cycle days in this segment. Despite the increased sales, our June 30th, inventory level in the EMS segment was actually down compared to June 30th of last year, resulting in a much improved production days inventory supply on hand metric of 59 days for the fourth quarter of this year compared to 66 days for the fourth quarter of last year. We gained momentum in the EMS segment in fiscal year 2013, with our very capable management team, track record for quality and reliability, and highly integrated global footprint along with excellent process discipline, we are very encouraged about our build it to execute well in fiscal year 2014. Within the Furniture segment, two key trade shows occurred in the fourth quarter, the Hospitality Design show in Las Vegas and the NeoCon show in Chicago. Both shows were well attended. Our product exhibits garnered a significant attention and excitement as we showcase new seating and case good products, which enhanced our already broad portfolio of offerings. In addition, both shows affirmed very positive customer feedback on our marketing strategies, our product development and our excellent service levels. The pace of incoming orders in the Furniture segment improved during the fourth quarter of fiscal year 2013 after a lackluster third quarter. Total Furniture segment fourth quarter new orders were up 15% compared to last year with an increase in all furniture verticals except for the federal government. While orders received from the federal government in the fourth quarter declined compared to last year, we did see a positive trend from the third quarter to the fourth quarter of this year as both sales to the federal government and orders received from the federal government increased. BIFMA’s most recent outlook for office furniture growth in calendar year 2013 is forecasted at approximately 3.6%. Growth was at a slow pace in the first half of the calendar year with a more aggressive growth forecasted for the latter half of the year. Market projections for one of the key leading indicators in the hospitality industry RevPAR or revenue per available room show an increase of approximately 6% for the calendar year 2013. This along with increased occupancy rates causes us to be bullish for this industry. While the Furniture segment recorded a loss in the fourth quarter, we did show sequential improvement from the most recent third quarter. As we discussed in our conference call last quarter, we have identified and are implementing corrective actions to address the challenges within this segment to improve margins, one of which started with management reorganization within our hospitality brand that we announced back in February. Some of those actions are complete while others are still in the works. As we move forward into fiscal year 2014, our persistent emphasis on continuous improvement efforts has now led up as we continue to see pricing pressures in both of our segments. We are confident in our management teams to tackle the challenges, but also take advantage of the opportunities in fiscal 2014. Our consolidated balance sheet remained strong, with a cash balance at June 30th of over $100 million. We will continue to maintain a strong financial position, managing working capital will remain a key. We continue to seek opportunities to invest in initiatives that will drive growth with improved profitability. Capital expenditures will be highly supportive of greater utilization of our footprint capabilities. Now, I will turn it over to Bob to discuss our fourth quarter results in more detail. Bob?

[Bob Schneider:]

Thanks Jim. Our fourth quarter consolidated net sales were $318.3 million, which is an increase of 10% from the fourth quarter of last year. Net sales in our EMS segment increased 17% compared to the fourth quarter of last year with double-digit percentage sales increases in the automotive, medical, industrial and public safety markets. The automotive market continues to benefit from the relative strength in the U.S. market and an uptake in the Chinese market. The industrial market demand is improving, but continues to reflect lower demand for heating, cooling and ventilation products, then historical levels. Demand in the medical and public safety markets remains stable. In the Furniture segment, sales increased slightly in the fourth quarter compared to last year. Sales of office once your product increased during the quarter on the strength of the professional and business services sector, as well as the financial services sector. Once again, we saw a decline in office furniture sales to the federal government. Sales of hospitality furniture declined in the fourth quarter compared to the last year. With the notable increase in furniture orders received during the fourth quarter that Jim mentioned, our open order backlog in this segment as of June 30, 2013 stands at $95.7 million, which is up a strong 33% compared to June 30, 2012. Now that’s a year ago comparison, the back order level is also up 26% from March 31. The increase is in both office and hospitality furniture. We saw a decline in our fourth quarter consolidated gross profit as a percent of net sales compared to the prior year. Improved margins in the EMS segment were offset by a reduction in margin in the furniture segment. Also impacting our consolidated margin was our sales mix between segments. As a reminder our EMS segment margins are lower than our furniture segment margins. In the fourth quarter we had a greater mix of sales from the EMS segment compared to last year, which had the natural effect of lowering our consolidated gross profit percentage. In our EMS segment, gross profit as a percent of sales increased 1.5 percentage points compared to the fourth quarter of last year. With the 17% increase in sales we were better able to leverage our fixed cost during the quarter. Our Furniture segment gross profit as a percent of net sales declined 3.6 percentage points in the fourth quarter compared to last year. In the fourth quarter of last year, we had a favorable LIFO inventory reserve adjustment of $2.1 million, which negatively impacts the gross profit comparison. Also, we have some projects shipped in the fourth quarter at lower margins and our freight costs were higher this year. Consolidated selling and administrative expenses increased 15% in the fourth quarter compared to the prior year. The largest contributor to the increased expense was higher employee compensation costs including incentive compensation. In addition, we had higher sales and marketing costs in the furniture segment related to growth initiatives and we recorded an allowance for credit risk of a note receivable in the EMS segment. Our fourth quarter effective tax rate was unusually low for the quarter ending at 2.4%. The effective tax rate was favorably impacted by a few items. First, a higher percentage of our fourth quarter earnings came from our foreign business units, which have a lower tax rate than the U.S. We also had a favorable state tax accrual adjustment in the fourth quarter of approximately $300,000. And the last item relates to the annual estimation of the effective tax rate. Each quarter the accounting rules require us to estimate our annual effective tax rate and apply that tax rate to our year-to-date pre-tax income. As we are now at the end of the fiscal year our actual annual effective tax rate ended lower than what our estimate was at the end of the third quarter in part due to the higher profits overseas requiring a year-to-date favorable adjustment in the fourth quarter. Given the mix of earnings this quarter, if you strip out the last two unusual items I just mentioned, the state tax adjustment and the annual effective tax estimation approach, our tax rate would have been closer to 15% to 20% in the quarter instead of the 2.4%. But that can vary of course from quarter-to-quarter depending on the mix of where our earnings are generated. While operating income declined $4.6 million for the quarter compared to last year related to lower earnings in the furniture segment, net income improved $1 million for the same time-period primarily for two reasons. First, we had other non-operating income of $665,000 in the fourth quarter of this year compared to $2.1 million of other non-operating expense last year. The expense last year primarily related to a $1.2 million pre-tax loss we recorded on a minority interest investment we hold. And second, the lower tax rate I just mentioned favorably impacted the current year fourth quarter bottom line. Net income in the fourth quarter was $7.1 million compared to $6.1 million in the fourth quarter of last year. After-tax restructuring costs were $166,000 in the fourth quarter of this year compared to $558,000 in the prior year. On a segment basis, our EMS segment recorded net income of $7.4 million in the fourth quarter, which was a significant improvement compared to net income of $4.1 million last year. We had a net loss of $642,000 in the furniture segment for the fourth quarter of this year compared to net income of $3.2 million last year. The loss in the furniture segment was due to the lower margins and the higher selling and administrative cost I discussed earlier. Our cash and cash equivalents at June 30, 2013 rose to $103.6 million compared to $75.2 million at June 30 of last year on our strong consolidated operating results. Operating cash flow in the fourth quarter was a positive $22.5 million compared to $29 million in the fourth quarter of last year. We continue to focus on managing our working capital metrics. Days sales outstanding increased slightly from 42.4 days for the fourth quarter of last year to 43.7 days for the fourth quarter of this year. Our production days supply on hand inventory measure improved from 54.6 days for the fourth quarter of last year to 52.4 days for the fourth quarter of this year. The improvement resulted from ongoing successful inventory management initiatives primarily in our EMS segment. Capital investments for the fourth quarter totaled $6.6 million mostly for new machinery equipment in both segments. We continue to have almost no long-term debt which stood at $300,000 at June 30, 2013 and our total availability to borrow under our credit facility was $81.6 million at June 30. Our balance sheet remains very strong. With that, I’d like to open it up today’s call to questions from analysts. Caroline, do we have any analysts with questions in the queue?

[Operator:]

Thank you. (Operator Instructions) One moment please for the first question, which comes from the line of Josh Borstein from Longbow Research. Please go ahead.

[Josh Borstein:]

Hi, Jim and Bob, thank you for taking my questions. Just on the office furniture side, generally what are you detecting in terms of the level of confidence from your customers right now? Do they seem any more confident relative to where we were a quarter ago?

[Jim Thyen:]

Generally, Josh, there is a hemisphere of cautious optimism out there in the marketplace, but we’re seeing pretty solid confidence from our customer base. They’re being very deliberate, very determined about their decision making, but there is many signs that they are investing in the future.

[Bob Schneider:]

And reflecting that is our 15% increase in orders this year versus last year.

[Josh Borstein:]

Yeah, that’s an impressive number. Is there anything in that number one-time related that may be skewing results whether it’s easier comps or projects? I’m just trying to get a sense for the core, the core growth right now in your orders?

[Bob Schneider:]

Josh, nothing significant, it’s pretty broad-based.

[Josh Borstein:]

Okay.

[Bob Schneider:]

Except for the federal government.

[Josh Borstein:]

Okay. And how much exactly was GSA down in the quarter?

[Bob Schneider:]

GSA was down around 10% or so.

[Josh Borstein:]

Okay. I know you had made some positive trends that you noted in GSA. Could you just repeat what those were again?

[Bob Schneider:]

The positive trend goes to the fourth quarter sales to the federal government were actually up from the third quarter and, Josh, we haven’t released what that dollar amount is, but it’s encouraging that the slide is not contingent; it actually bottomed in Q4 relative to what it was in Q3.

[Josh Borstein:]

Okay. That’s great. And just one more from me. Could you talk a little bit about the product mix in office furniture, you mentioned some negative gross margin impact there on shipments from lower margin projects. Is that coming from a particular vertical or is it more related to project size?

[Jim Thyen:]

It’s more related to the individual projects. It’s not coming from any particular vertical although it’s well publicized in the press that cost choices that are coming on all businesses from changing government regulation, dialog in the press on interest rate outlook, those are all coming together and starting to build some price pressures where customers are concerned about the value and that translates into some margin pressure, but it’s project by project.

[Josh Borstein:]

Okay. And the pricing pressure that you had mentioned was that in a particular vertical is that kind of across the board as well?

[Jim Thyen:]

Well, we’ve certainly seen it start in automotive and medical verticals whether it’s electronics components or furniture. I think it will spread to other verticals as frankly every business will have changes in their cost structure particularly in the burden area for a regulation and taxation and all these other moving pieces. They generally will look to collaborating heavily with our suppliers on how they can adjust cost structure. And it’s pretty prominent in the press now in the automotive and the medical but I think it will spread to the other verticals.

[Josh Borstein:]

Okay. I really appreciate taking my questions. Thanks and good luck.

[Jim Thyen:]

Thank you, Josh.

[Operator:]

Thank you. The next question we have comes from the line of Todd Schwartzman from Sidoti & Co. Please go ahead.

[Todd Schwartzman:]

Hi, Jim. Hi, Bob.

[Bob Schneider:]

Good morning.

[Jim Thyen:]

Hey, Todd.

[Todd Schwartzman:]

Jim, on the pricing pressure I think from the release it sounded as though perhaps both segments were about equally affected by pricing pressure. What are you seeing on the furniture side and what’s the outlook there?

[Jim Thyen:]

We're seeing the same thing across the markets, so just about every vertical whether its electronics or furniture is the customers as we are. We’re keenly focused on how the components of our cost structure are changing or going to be changing and we are also watching the interest rate outlook and what our various governments will do. I think we’re all pretty well convinced that there is going to be forced cost choices that enter our balance sheets and we are going to have to look at other elements of our cost structure to offset that to retain margin. And we see our customers looking to us to collaborate; we are looking to our suppliers to collaborate on how we are going to be able to manage that and maintain our margin so that we can all stay healthy in this climate.

[Todd Schwartzman:]

Is that focus among the customers more keen now then it was three months ago?

[Jim Thyen:]

Yes, it’s increasing in the last three months.

[Todd Schwartzman:]

And to what do you attribute that?

[Jim Thyen:]

The - what I just said I think the reality of changes in the overhead structure of all companies is becoming real and it’s becoming visible.

[Todd Schwartzman:]

Okay. Just couple of our housekeeping type items first. Bob, would you kind of take a stab on the fiscal ’14 full year tax rate?

[Bob Schneider:]

Todd, it’s always difficult to do but it’s we'll probably be in the high 20s, probably 25% to 30%. And again that the challenge on that is how much we have in China, profitability, how much we have in Thailand versus roughly 40% effected tax rate in the U.S.

[Todd Schwartzman:]

Sure, and maybe because of the uncertainty of the country mix would you want to give a kind of a best case, worst case scenario?

[Bob Schneider:]

Well, Todd, I really don’t know. My estimation it’s going to be somewhere in the high 20s but there is huge room for variation as we saw in the quarter we just ended.

[Todd Schwartzman:]

Right. So the 25%, 30% could be sounds like maybe at a midpoint of a pretty wide range, is that accurate to say?

[Bob Schneider:]

Yeah, certainly. Again, with the experience we’ve just seen is a good example of it.

[Todd Schwartzman:]

Okay. And the FX gains during the fourth quarter those were primarily versus which currencies?

[Bob Schneider:]

Well, it’s happening in with the Polish Zloty, it happens with China, it happens in Thailand. Essentially, we are short local currencies and all of those countries and so, we hedge our needs of those short positions. And really nothing unusual in terms of the quarter we just had and the gains we’ve had, but it’s always important to note when we have foreign currency gains and losses we are hedging positions. And so, effectively in the quarter we just had in terms of the accounting in the geography on the P&L, we show gains in the other income section. There are losses throughout the P&L because we are hedging a position. So, the point being there is not speculation there, we are hedging what our needs are for those currencies in those countries.

[Todd Schwartzman:]

Okay. Regarding SG&A, does -- this is on a consolidated basis. Does OpEx remain in that 16.5 to 16.7 kind of range in this fiscal year?

[Bob Schneider:]

I think that’s pretty closed to it, Todd.

[Todd Schwartzman:]

Okay. Care to throw out any numbers in terms of you guys mentioned couple of times that all of the verticals grew in the quarter. Can you, if not quantify each, maybe give a pecking order tell us what was I guess they are probably all pretty much double-digits, right?

[Bob Schneider:]

In electronics you are referring to?

[Todd Schwartzman:]

Yeah.

[Bob Schneider:]

Yeah, electronics overall was up 17% and the it was pretty broad based, as Jim mentioned. So, they were all up, yeah, double-digit.

[Todd Schwartzman:]

Okay.

[Bob Schneider:]

It was not dominated by anyone vertical.

[Todd Schwartzman:]

So which was -- which had the best delta? Which of the four performing the best in the quarter?

[Bob Schneider:]

Todd, I don’t have that in front of me but they were all four good.

[Todd Schwartzman:]

Okay. And that was in the face of that the pricing pressure, was that I know you said it was worst than Q3 but it was a fairly constant throughout the quarter or what was the pace of that pricing pressure throughout Q4?

[Jim Thyen:]

We are seeing the pricing pressure increase throughout the fourth quarter.

[Todd Schwartzman:]

Okay. And how should we think about EMS sales sequentially from Q4 to Q1?

[Jim Thyen:]

I think you should think about it in terms of all of our markets were positive, but we are cautiously optimistic. I think we have to see how some of these cost trends evolve in terms of regulation in interest rates, how quickly they come up through the entire customer value chain.

[Todd Schwartzman:]

Okay. I’m curious to learn a little more about the efficiencies that are really driving the business on EMS. Maybe if you could quantify some of these efficiencies, you talk about global purchasing efforts as well, and probably more importantly, definitely more importantly, how much benefit has yet to be realized on that efficiency front in the EMS segment?

[Jim Thyen:]

Well, of course, we talked about the progress we made in our case cycle and our inventory efficiencies.

[Todd Schwartzman:]

And where do you go from here?

[Jim Thyen:]

We think that we still can and should improve our inventory efficiency a little bit in terms of days supply on hand. We believe it’s going to take pretty intense collaboration with our customers and with our supply chain, but that’s a challenge that we’ve issued for this next year because this business is contract based. And as you know from understanding that market that brings in a lot of variation and sometimes shortens the visibility. So, we are confident about this next year. We still have an operating income margin goal of in the EMS of 4% and we are going to work hard to retain that.

[Todd Schwartzman:]

On the furniture side, the total furniture order, just want to make sure I’ve got this right, total furniture orders of the full segment orders were up 15% year-over-year that includes the government that’s all in?

[Bob Schneider:]

That’s correct.

[Todd Schwartzman:]

Okay. If you strip out the government I realize that the decline there was only 10% so things seemed to be getting better, but just looking at the commercial side, commercial customers plus hospitality, what was the delta in orders for the quarter?

[Jim Thyen:]

We're looking at our notes here, Todd.

[Todd Schwartzman:]

Sure.

[Bob Schneider:]

I got it here, Todd.

[Jim Thyen:]

17%.

[Bob Schneider:]

Yeah 17% if you strip out the federal government. So, again, the other verticals very, very strong and reflecting in open orders from the beginning of the to the end of the quarter and furniture being up 26% and that’s in spite of what’s happening with the federal government.

[Todd Schwartzman:]

It doesn’t sound as though you guys are ready to call it bottom with the GSA, but it certainly seems that we’re well along that continuum that it’s probably starting to see the light at the end of the tunnel. Would you care to comment on that or take a stab as to timing.

[Bob Schneider:]

Well, we certainly hope so. Hoping that is the case, Todd, but the other aspect is the federal government has gotten to a very small percentage of our business and has less impact which is fortunate. As I mentioned, the volume of business we did in Q4 versus Q3 actually upticked a little bit, hopefully we’ve hit bottom but who knows what the actuals to happen over the next several quarters.

[Todd Schwartzman:]

And in the fourth quarter, Bob, what was that percentage to total well, let's say, total segment sales that was federal?

[Bob Schneider:]

Don’t have it of the segment. Of office furniture it’s now less than 10%, it’s in single-digits.

[Todd Schwartzman:]

Okay. And what about CapEx for this year, it looks like it was 28, if my math is right, for fiscal 2013?

[Bob Schneider:]

That is correct. Depreciation runs about $31 million. We have been low CapEx relative to depreciation for a period of time. Our expectation as we look at 2014 is that CapEx will be somewhere in the mid 30s, a little bit heavy relative to depreciation. And no one area specifically, some of that is going a long period of time not replacing equipment that we feel now needs to be replaced.

[Todd Schwartzman:]

Okay. And just shifting back to EMS for a second that there is anything in a way of meaningful programs to roll off in the next couple of quarters?

[Bob Schneider:]

Nothing significant in the next few quarters.

[Jim Thyen:]

No.

[Todd Schwartzman:]

Are most of them tied to the end of your fiscal year, the contracts?

[Jim Thyen:]

They vary throughout the year. They’re really tied to the rhythm of the end product, the program that the various companies award us. They’re spread throughout the year.

[Todd Schwartzman:]

Okay. And in with respect to freight cost as I'm sure affects the furniture more, but since the end of the quarter, so in July, how has that trended and what’s your – what do you anticipate there for this year?

[Bob Schneider:]

No significant change, Todd. If you look at the quarter we just ended we made reference to higher freight cost. The change actually happened during the fiscal year. So, relative to a year ago Q4 freight was up roughly $0.5 million or so but of the recent trend that hasn’t – has not changed a lot in spite that there was a fresh change that would manifest itself in the future.

[Todd Schwartzman:]

Okay. Got it. With regard to the fourth quarter that you just reported the fourth quarter gross margin on the furniture side, can you speak to the projects that you called out that hurt the margin a little bit, which verticals are those are in, maybe what was the average size of those projects and maybe how many of them also would be helpful as well that skew the gross margin?

[Jim Thyen:]

There was not real concentration in any given vertical. Much of it had to do with the late uptick in the orders. We had anticipated and occur at the beginning of the fourth quarter and it really didn’t manifest itself until later that time. And then, of course, we had the key changes that we made in our hospitality unit starting with the very senior management. We use that as an opportunity to really revisit and refocus on the basics. We looked at the organizational alignment for accountability and responsibility and service to the customer. We’ve examined many of our policies around order acceptance, order acknowledgement, all with the intent on and improving our operating performance at the operating income level. That goal remains an 8% margin. We’re confident about lot of the corrective actions that we’ve taken. We do need a continued order uptake in hospitality, we feel it coming, we think that industry is turning around so we’re cautiously optimistic that, that economy will stay. We’re going to be profitable in the first quarter of fiscal year '14. And our operating goal of 8% remains very viable and reachable.

[Todd Schwartzman:]

Okay. So, first quarter expecting a profit for the segment?

[Bob Schneider:]

That’s correct.

[Jim Thyen:]

Yes.

[Todd Schwartzman:]

Okay. So but, Jim, thank you for that. I'm still not clear though regarding the cause of the margin erosion due to several projects that shipped lower margins. Is that really a price issue, is it product mix, is it purely volume or what are the specifics there that called you -- that had you calling out that handful, that unspecified number of projects that affected the margin in the first quarter?

[Jim Thyen:]

I guess I would headline them in two areas one is price, the price of which we accepted the orders and extremely competitive marketplace that was under a lot of flux and a lot of change. And the other was our execution. Our ability to execute those projects and programs to our cost structure quoted in that price.

[Bob Schneider:]

Jim, I’d elaborate. The lead time in hospitality is three to four months. And so, we took orders in December and January that we’re at pricing levels that we don’t seek to repeat.

[Jim Thyen:]

And we made deliberate conscious decisions to serve our customers to honor our promise and honor our warranty.

[Todd Schwartzman:]

And in terms of improving this furniture bottom line you spoke to reorganizing the management within hospitality. How much of that’s in the past, what’s forward looking there and what are some of the other benefits that don’t pertain to that reorg that you see as catalyst for the coming year?

[Jim Thyen:]

I think much of it in terms of the organizational structures in the past it’s done. I think we have very good alignment, we’re focused on serving our customers, we’re market driven. We have very good accountability and responsibility in that organizational structure alignment. Much of the problems that we deliberately chose to stand behind and make sure we would serve our customer whether there be lead time or execution issues I believe are substantially behind us. This is a project industry. There is a lot of variability project to project and I guess sometimes you never know what the next phone call may bring in terms of opportunity or cost change, but we’re positive on the go forward. We’re seeing good uptick in the industry. We’re seeing our customers and design firms and architect firms and major brands in the hotel industry invest in their organizations and in their projects. And so, customer visits are up, request for quotations are up. We’re seeing a move up into the upper stars, four star, five star hotel where it’s for number of years it’s been down in the two star and three star. So those are all positive indicators that it was confidence. Now we need that to follow through, we need the industry to stay optimistic, we need the RevPAR rate to continue to go up, the occupancy rate to continue to go up. We need -- I don’t mean this is any kind of a excuse, we need our regulations and our taxes and things like that to support that industry. If that uptick does not happen then we have to reassess where we are and where we go.

[Todd Schwartzman:]

So the mix of four and five star business with from four and five star hotels was greater in the quarter than for the two and three?

[Jim Thyen:]

It wasn’t in the fourth quarter but we see the outlook being positive in those categories of that marketplace.

[Bob Schneider:]

The order rates in the four and five are better, Todd.

[Todd Schwartzman:]

Okay.

[Bob Schneider:]

The shipments will happen in the future and a lot of what we shipped out in the fourth quarter is that the lower end of the market.

[Todd Schwartzman:]

And what was the increase in customer visits in Q4?

[Bob Schneider:]

We’ve -- I don’t have the exact number but we’ve greatly increased in hospitality the number of customer visits and that will continue we think in this coming year. Office furniture I don’t know specifically, Jim, I don't know --

[Jim Thyen:]

It’s significantly up for both of our brands Kimball Office and National, but I can’t give you specific number per month or per week.

[Todd Schwartzman:]

Well, is it just roughly commensurate with the increase in orders for the segment for the quarter?

[Jim Thyen:]

Yes, little higher than that.

[Todd Schwartzman:]

Okay. All right, that’s helpful. And the final question, what’s the annual benefit in dollars of the reorganization of the hospitality management?

[Bob Schneider:]

That is very difficult to put your finger on. Lot of it goes to process changes, effectiveness of how our team or the team is working within their respected areas. Todd, it’s really difficult to put our finger on that.

[Todd Schwartzman:]

Okay.

[Bob Schneider:]

But highly confident that the actions we’ve taken are positioning us very well for the improvement that Jim referred to in terms of the first quarter getting to profitability for the segment.

[Todd Schwartzman:]

Okay. Thanks a lot gentlemen. I appreciate it.

[Bob Schneider:]

Thank you.

[Jim Thyen:]

Thank you.

[Operator:]

Thank you for that question. Ladies and gentlemen, that concludes your question session. Now, I would like to call the – turn the call back over to Jim for closure.

[Jim Thyen:]

Thank you. That brings us to the end of today’s call. We very much appreciate your interest and we look forward to speaking with you on our next call. Thank you and have a great day.

[Operator:]

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