Kimball International, Inc.
Q2 2015 Earnings Call Transcript

Published: 4 Feb 2015

[Operator:]

Good morning, ladies and gentlemen. My name is Matthew, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Second Quarter Fiscal 2015 Financial Results Conference Call. All lines have been placed on 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. [Operator Instructions] As with prior conference calls, today’s call, February 4, 2015, 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 Bob Schneider, Chief Executive Officer and Chairman of Kimball International; and Michelle Schroeder, Vice President and Chief Financial Officer of Kimball International. I would now like to turn today’s call over to Bob Schneider. Mr. Schneider, you may begin.

[Bob Schneider:]

Thank you, Matthew. And welcome everyone to our second quarter conference call. The financial results for our second quarter ended December 31, 2014 were released late yesterday. We also posted an Investor Presentation slide deck to our website to accompany this conference call. I will have a few brief comments before I turn the call over to Michelle Schroeder, who will provide us with the key financial highlights for the quarter. We will then open up the call to analysts for your questions. This has been obviously a pretty busy quarter for us. We completed the spin-off of our Electronic segment at the end of October and began our journey as a furniture-only company. On November 3rd, we announced several management promotions as we finalized our post-spin executive management team and the new team wasted no time. On November 5th, we announced the plan to consolidate our Post Falls, Idaho metal fabrication production facility into existing facilities in Southern Indiana. We also placed one of our two airplanes up for sale in November. Both of these actions are aimed at reducing our cost structure and excess capacity. The exit of the Post Falls facility will allow us to optimize our supply chain and manufacturing footprint to more effectively serve our furniture market. Activity around the consolidation began immediately after the announcement in November in an effort to ensure stability and no disruption with our customers, we are estimating, the consolidation will take a total of seven to eight quarters, which takes us to a quarter ending September 2016. The initial phase of the plan includes getting our existing facilities in Indiana ready for the metal fabrication production, along with working with our supply base to outsource some of the metal components. We will have a gross capital outweigh for new equipment and building preparations related to the Post Falls exit of approximately $9.5 million. Our net capital outweighs representing additional capital over and above what we would have purchased heavy estate in Post Falls is approximately $5 million. We are actively marketing the building and once sold we will reduce our capital. Once the consolidation is complete we estimate our pretax savings will be approximately $5 million per year going forward. So important point, when completed we believe our capital will be less than today and we will be saving $5 million per year thereafter. The sale of our corporate jet, which was used primarily for management travel will leave us with one airplane that will be use primarily for bringing customers into Southern Indiana to visit showrooms and manufacturing facilities. It is a very important thought of our selling process for us to be able bring customers to see our facilities. We anticipate annual pretax savings related to sell of the management used focus aircraft of approximately $800,000 per year and we are realizing this benefit beginning now our third quarter. The total both of these decisions will benefit Kimball $5.8 million per year when fully implemented. It is never easy to make decisions such as these that effect the lives of our employees, but our management team recognized that these two restructuring activities are a critical component of our journey to reach our 8% operating income goal. We are in the second year of our turnaround and as Michelle will discuss, we were at 2% operating income last fiscal year and we are making progress. But to reach our 8% goal we had to make these difficult decisions. These actions along though will not get us to our goal, our sales growth is another key element. We have solid sales growth of 9% in the second quarter compared to the prior year and growth in orders received during the quarter was also strong with an increase of 21% over last year. Both sales and orders were excellent. We were very excited to receive a $13.8 million order in our hospitality vertical market during the second quarter. Even excluding this one order, orders still grew a strong 11% during the quarter, reflecting solid growth in some of our key vertical markets. Our open order backlog at the end of December stood at $119.5 million or 20% ahead of December 2013. We are encouraged with this level of backlog heading into our third quarter, which is normally a seasonally low sales quarter for us. I would like to also mention our excitement with two new product ventures, Kimball Health, focused on the healthcare vertical and Essay focused on education. Both were announced last week and reflect innovative new product offerings. In summary, growing sales and improving operating results is our focus and our teams are collaborating across the company, ensuring best practices to drive improvement. We are very dedicated to reaching the 8% operating income level and our leadership team is making the important decisions that are positioning us to get there. Before I turn it over to Michelle, I want to quickly mention that while legally, the spin-off was complete on October 31st, there are still some transition activities that are occurring, particularly around splitting the IT infrastructure and the finance functions, which is very common in a spin-off. We are making great progress everyday but there are still resources being consumed in this activity. We expect most of that to be completed in the next, roughly six to seven months. Now, I will turn it over to Michelle for a brief overview of the financial results before we open the call up to your questions. Michelle?

[Michelle Schroeder:]

Thank you, Bob and good morning everyone. First, I do want to remind you that our GAAP financial results as reported in our earnings press release, but we do not provide a good comparison to prior year because of the spin-off. While this quarter, we are recording Electronics’ historical results as discontinued operations, which does help the comparison. The comparison to prior year is still distorted because there are costs that are included in our historical results that did not continue after the spin-off. And in particular, prior year costs associated with employees who retired with the spin-off are 100% allocated to Kimball International continuing operations and none at all to the discontinued electronics’ operations. And so therefore, similar to what we did last quarter, we included an operating income reconciliation on page 30 in the investor slide deck that was posted to our website. And these are the metrics that I'm going to primarily focus on this morning instead of the GAAP numbers because they really do reflect the economics of our company. Now as Bob mentioned, our sales were up 9% in the second quarter. This is the sixth consecutive quarter we’ve shown an increase in our quarterly sales over the prior year. And three of our vertical markets, the government vertical market, hospitality vertical market and the other commercial markets, they all had strong growth in the second quarter with double-digit growth in all three of those verticals. The current hospitality market is very strong. The latest industry statistics are forecasting RevPAR or revenue per available room to increase 7% in calendar year 2015. So again, that hospitality market is strong. And this is a third quarter in a row we've seen increased sales to the government, with both federal and state and local government increasing. The other commercial vertical market also increased, as we’ve increased our focus in this area as corporate businesses are financially strong. Now, sales to customers in the financial services, healthcare and education markets declined in the quarter compared to last year. Bob mentioned the 21% increase in orders received during the quarter. The order trend here really followed the sales trend orders when the hospitality vertical market were up with the $13.8 million order we received in November. And we do expect that order to ship primarily in our third and fourth quarters. In addition, orders increased in the government vertical market and the other commercial vertical market. Now, our second quarter non-GAAP adjusted operating income as reported in the press release, which does exclude restructuring costs and the costs incurred to complete the spin-off increased to 3.2% as the percent of net sales, compared to 2.2% in the second quarter of last year. However, those metrics do include three months of costs in the second quarter of last year related to those employees who retired with the spin-off, compared to only one month of these cost in the second quarter of this year, as the spin-off did occur on October 31st. So the improvement you see in this comparison is related primarily to that realignment of our team post-spin. And if you look one step further and adjust for those retirements that occurred with the spin-off, our second quarter adjusted pro forma operating income was 4% as a percent of sales, which was flat with the 4% in the second quarter of last year. And note that for the full year, last year, our operating income percent was only 2%. And again, you will find the reconciliation from our GAAP operating income on page 30 of the Investor Presentation. Now, our effective tax rate for the second quarter was really a little bit unusual at a 100 -- a little over a 100%. And the biggest item here was we have an adjustment to our deferred tax asset as a result of the spin-off. We are forecasting our effective state tax rate going forward will decline without Electronics in the mix, which is really great news. As a result though, we did have an adjustment to our deferred tax assets which are now going to turn at the new lower rate. And so we ended up recording tax expense of approximately $450,000 in the second quarter related to that. So this coupled with the relatively low pre-tax GAAP income that we had caused that unusual rate. Now partially offsetting this, the R&D credit was extended in December for calendar year 2014 and we had a favorable adjustment of approximately $160,000 in the second quarter related to that. But the credit was only extended for calendar year 2014. So we will not be getting that benefit going forward. We do expect our combined effective tax rate on average to be somewhere in the high 30s. Our adjusted pro forma net income after excluding all restructuring costs and spin-off costs and adjusting for the retirement related adjustments, that net income was $4.3 million in the second quarter of this year compared to pro forma net income of $3.6 million in the second quarter of last year, which was an increase of $745,000. Now looking at our pre-tax restructuring costs for the quarter, we did record $3.3 million of cost and that included $2.1 million that related to the Post Falls facility exit and that was primarily for accrued employee transition cost. And then we also had $1.3 million for impairment in employee transition costs related to the sale of our airplane. Now no savings from these activities were recognized in the second quarter. But we will start seeing the savings related to the airplane beginning in the third quarter, which will be approximately $200,000 per quarter. And we will not realized savings from the Post Falls facility exit until we get further along in the consolidation. But these restructuring plans, when they are complete will move us a long way to achieving our operating income goal. Now moving to the balance sheet, with the spin-off on October 31st, Kimball Electronics received $63 million in cash with $Kimball International keeping $54 million. And then as of December 31, 2014, our cash and cash equivalents was at $49 million. Our operating cash flow in the second quarter was $8.5 million, which did include one month of Kimball Electronics operations. Capital investments for the second quarter totaled $8.2 million, of which a little over $2 million was related to electronics prior to the spin-off. We continue to have almost no long term debt which stood at $273 million at December 31st. And with the spin-off complete, our previous $75 million credit facility was canceled and we did enter into a new $30 million credit facility for Kimball International. So our balance sheet remains very strong. With that, I would like to open it up now to call to questions from analyst. So Matthew, do we have any analyst with questions?

[Operator:]

Thank you. [Operator Instructions] And the first question comes from the line of Todd Schwartzman of Sidoti & Company. Mr. Schwartzman, please go ahead with your question.

[Todd Schwartzman:]

Thank you. Hi Michelle. Hi Bob.

[Michelle Schroeder:]

Good morning.

[Bob Schneider:]

Good morning.

[Todd Schwartzman:]

On the order rates in Q3 today that you would have back out the $40 million hospitality order, are those rates thus far consistent with what you saw in Q2?

[Bob Schneider:]

Todd, we don’t -- we haven’t released anything on the Q3 order rates. These are all Q2 and Q2 year-to-date.

[Todd Schwartzman:]

Right. I’m just wondering if the past, about five weeks or so thus far that were consistent with what you saw and of course, the fourth quarter of Q2.

[Bob Schneider:]

Yeah. Generally so, generally so. The order trend has been strong really for several months now. Obviously in Q3, it was on fire, 21% increase in orders. But we have normal seasonality when you look at the office side of the business when you get into January. It tends to slow a bit and so nothing out of the ordinary.

[Todd Schwartzman:]

And as far as the Q2 gross margin, you decided discounting in a mix shift. Can you talk a little bit about the -- what was going on with the discounting?

[Bob Schneider:]

We have a lot of projects that they are not day-to-day projects but not the very large projects and much more contested than they had been in the past and putting obviously more pressure on discounting. It impacted us a decent amount in the second quarter.

[Todd Schwartzman:]

Okay. And the large hospitality project that 13/08 order, is that in Las Vegas?

[Bob Schneider:]

Yeah, it is.

[Todd Schwartzman:]

Okay. With RevPar expected to grow at 7%, is there any -- are there any geographies that you play in that are -- that you expect will grow significantly faster than that?

[Bob Schneider:]

Important to note in terms of the RevPAR that growth in the profitability, effectively profitability of the various hotel flags is very, very strong and the growth in terms of new hotel construction remodelling often very much exceeds what RevPAR is. But the RevPAR is giving us a very good positive signal in that portion of the market that is at the higher end, which is where we play significantly with our capabilities and it is very, very strong. Geographically around the country, there is really no single area, Todd. We are very active quoting business all over the United States.

[Todd Schwartzman:]

And what were customer visits like in the quarter, Bob?

[Bob Schneider:]

It was flat with a year ago. We had 21 visits in the second quarter, same for year ago, up a little bit from the first quarter of this fiscal year. One thing to keep in mind, we bring people in often to see our facilities, see our showroom here in Indiana. And we are in process of remodelling our corporate showroom so that caused a little bit of a haircut in terms of the number of visits that we had in the second quarter and is haircutting a little bit what we’re doing right now in the third quarter.

[Todd Schwartzman:]

Okay. And with the entry to healthcare, Kimball Health, are these all brand new dedicated healthcare products initially, or is it existing products positioned for the healthcare market and how do you expect that will change over time?

[Bob Schneider:]

These products with Kimball Health are entirely dedicated to the healthcare industry. And they are not crossover products that we have used in the past when we have gone after healthcare, as it relates to Kimball Office, the Kimball Office Group of Kimball. But it’s important distinction because what we have sold in the past into that vertical has not always been dedicated healthcare furniture. And with Kimball Health, it is a 100% focused on that vertical. It’s a really significant introduction for us.

[Todd Schwartzman:]

Great. And within the finance vertical, sales were down 22% year-over-year. Now, that’s been kind of a mixed bag that sector for now it appears. Some are seeing some pickup here, but were there any major large projects a year ago that kind of maybe make that not a fair comparison, that $0.5 million that you did last year?

[Bob Schneider:]

It’s pretty much apples-to-apples. There is nothing really significant last year that didn’t repeat so to speak this year in terms of size. We are seeing Todd though sort of our larger finance institutions that standardized on our product. The orders that we’ve had in this past quarter were a little bit less than we had expected. And the orders that we have been receiving in large part are in a more dense footprint, which is a little bit less furniture to support that particular financial institution. And that’s something we are keeping our eye on. And frankly, it’s an issue in terms of the whole industry today in terms of the more dense footprint that we are seeing.

[Todd Schwartzman:]

And for the full year for fiscal '15, do you have any free cash flow goal?

[Bob Schneider:]

Not, we don’t have a free cash flow goal off-hand. I don’t know Michelle if you have an estimate of our cash flow for the year?

[Michelle Schroeder:]

I don’t have that number in front of me. No, I don’t.

[Bob Schneider:]

We don’t have it handy, Todd.

[Todd Schwartzman:]

Okay. And you say your operating margin goal still is 8%. I don’t think anybody expects it to halve an overnight. But as you continue to progress, is it your expectation that at some point in time you will tweak that to put a duration on that goal, a 3-year, it becomes a 3-year number or something that you’re going to achieve in 3 to 5 years or something a little more tangible?

[Bob Schneider:]

Todd, we have not indicated what our timeline is on that. I know we’ve talked about just looking at the CAGR rate over the last several years from the bottom of the recession to now and what it takes to get up to the $640 million a year in sales that we think will put us at that 8%. And that would put us somewhere around fiscal year '17. You mentioned 3-year as a -- we are very focused on doing as much quicker than 3 years, Todd. But at this point, we haven’t nailed down the exact date. And there is a lot of things that we’re looking at as we are basically turning around the company and making a lot of changes and timing, variability of timing is important. So we felt not something we wanted to publicly put out there in terms of the timeline.

[Michelle Schroeder:]

And the restructuring Bob, it’s a very key part of 8%, and so we are targeting that to be 7 to 8 quarters, which is our early part of our fiscal '17.

[Bob Schneider:]

Yeah. That is a very important thing in terms of getting the Post Falls restructuring behind us. But as you look at three years time, we fully expect that we’re not going to -- it’s not going to take three years to get there.

[Todd Schwartzman:]

In addition to Post Falls benefits, the accelerated product launches are big cornerstone of what you’re trying to achieve, right, to get to that 8% number if I’m not mistaken?

[Bob Schneider:]

That’s correct.

[Todd Schwartzman:]

So on that front, have there been any surprises positive or negative that you want to call out in terms of reception for specific products or product areas?

[Bob Schneider:]

The receptions have been really, really good. The heating a gas pedal or new product introductions has been new to you us starting roughly year and a half ago. And our dealer network is extremely excited about the new products, extremely excited in terms of what we’re doing in the education market, what we’re doing with the healthcare vertical that I mentioned earlier. Those have all been very, very positive. In terms of timing though and trying to get a sense of traction, it’s still early. We introduced just a Kimball Office as an example, these 12 new products and [Viacom] [ph] back in June and those new products are getting on the dealer showroom for us and we hadn’t anticipated a lot of traction up to this point. As we get into the quarter, we’re now third quarter and fourth quarter as when we expect to start seeing traction for those new products.

[Todd Schwartzman:]

Great. And finally, has there been any change in your thinking as far as use of cash for the coming year? Thanks.

[Bob Schneider:]

At this point in time, we are looking at our organic growth and how we’re going to fund to that growth. We clearly are looking at our capital structure and our Board is looking at our strategic planning to try to assess what our capital needs are going to be. No surprise to anybody with almost no long-term debt and the cash levels that we have and the business that throws off cash flow that we are very well-funded. And that’s going to be an issue that our Board is going to look at in terms of how we utilize that capital position. One question I often get is acquisitions. And my response to everybody’s been very, very consistent. And that is our focus is on turning around the furniture side of Kimball or Kimball International now and getting to that 8% goal, that’s requiring some capital to do that. It’s requiring capital to relocate from Post Falls to Indiana and Kimball Health, as one example, was and the new venture that we’re making that is requiring some capital. So we’re looking at all of that in terms of growing this company and getting to an 8% operating income. And at that point, our Board will have a better assessment in terms of what might we do in terms of acquisition. But unless we saw an acquisition that would be upon us that really hit our sweet spot, our focus right now is getting to that 8% and a big part of that is getting our sales up, which require some investment also.

[Todd Schwartzman:]

Got it. Thanks a lot guys. I appreciate it.

[Bob Schneider:]

Thanks, Todd.

[Michelle Schroeder:]

Thank you.

[Operator:]

[Operator Instructions] And your next question comes from the line of Robert Sassoon of R.F. Lafferty. Please go ahead, sir.

[Robert Sassoon:]

Good morning. Just a question on the gross margin and in the context of your operating margin target, they ended up of a couple of percentage points in the gross margin. You put it down to discounting and product mix? So I was trying to get sort of heads up on whether -- how much of that the drop is what you record is -- what you would regard as ten-fold and then bounce back, how much is could be structural due to the level of competition that you’re facing in the Indiana markets?

[Bob Schneider:]

Robert, in terms of the discounting, that aspect has an impact in our gross margin. I don’t know to what extent that’s structural, but I would tell you there is a lot of competition for the mid-size projects, not day-to-day projects and by a lot of our competitors and so its driving a lot of competition. How long that might last, time will tell. The other aspect impacting our gross margin and the mix of sales to a greater amount from hospitality, which grew faster than our office verticals, that business, that growth was in non-custom product and typically has a lower gross margin. And so in terms of your question of systemic and what might change, a very good example of that is, I’m going to shift from sales to orders. The orders that we just had in this past quarter in hospitality were very heavily dominated by opposite, which is the custom product. And so that abs and flows just will happen at the shipments we had in the second quarter had a lot of non-custom product that had tighter margin. All of that said though with respect to hospitality. Strip all of that out, our hospitality margins still are not where they need to be. We are taking a lot of actions to improve those margins, the hospitality business really at the start of our turnaround two years ago margins were really, really bad. We did tremendous improvement last year 2014 to get those margins up and the business is profitable right now and it just hasn’t really gotten to the level of margin that we think that business can do. So that part is not structural or systemic because we are taking actions to improve that.

[Robert Sassoon:]

Let me just take a step further, when you talk about your 8% operating margin targets respective of the time line, what [indiscernible] the underline gross margin assumption behind that?

[Bob Schneider:]

Very good question. Our gross margin that we had last year at this time was 32.9%, we just had 30.8%, which as I said, more haircut than we like impacted by a lot of things discounting, also what’s going on the hospitality, in that roughly 32% gross margin area is really a sweet spot that we think with higher volume, getting our cost structure in line with the restructurings that we are working through right now and getting to the $640 million in sales positions us very well to that 8%, roughly that 8%. I don’t know the numbers off top of my head, but roughly 32% is --it will get us very close to that number.

[Robert Sassoon:]

So basically you are really -- you are battling from -- on the cost side you are battling in operating margin both on two fronts now, the gross margin getting it up to 32% on average and the below the gross margin level to which you are addressing now in terms of consolidating manufacturing facilities. So are there any sort of risks that the gross margin may deteriorate further as competition intensifies and to get that growth that you are looking for, to be able to meet the revenue targets to achieve -- tends to achieve the operating margin target might actually mean that you may be -- there’s a risk of falling short of that because of the -- the more you try to push that revenue, the more pressure that might be on gross margin?

[Bob Schneider:]

The new products that were coming out with have very nice gross margins. And so I’m anticipating some help from that. Things we are doing at the hospitality vertical as I had alluded to earlier that I’m 100% confident that is going to help the profitability of hospitality. I’m totally confident of that. And in terms of your point in terms of couple of fronts here, one is the improvement in gross profit, the other is in the SG&A and the impact it has on operating margin. Just want to point out the changes that we are making with the Post Falls facility, a lot of that benefits the gross margin line. Some of it impacts and benefits the operating margin, the SG&A, the airplane exit clearly benefits SG&A. So any way that’s coming out a couple of different angles that the -- I think the key aspect of your question goes to the continuity of discounting and what might happen there as we -- as this inventory continues. And what kind of headwind that might go against us and time will tell. But I must tell you though the things we are doing in terms of new products with nice margins that we are introducing and also what we are doing with hospitality to improve that margin, I am very much expecting it gets us closer to that 32%.

[Robert Sassoon:]

All right. And the other question I have also relates to this is that on the hospitality front you are still going to -- you are importing most of the products for your hospitality customers. So are you -- have you benefited so from the strength of a dollar to -- for the period?

[Bob Schneider:]

Not significantly at this point. As we are -- it does have an impact with our suppliers in Asia. Our pricing with our suppliers is in dollars, but clearly gives us an ability to push a little bit more negotiating with our supply base. But one point I’d like to make you are right that most of what we are doing with hospitality is product coming in from overseas. We have a pretty decent amount of product that’s being made right now in the U.S. And we are in process of expanding production for domestic made product in an existing office furniture facility in Kentucky. That will allow us to better utilize the capacities we have that will help our gross margins in terms of utilizing that capacity and takes out a little bit about FX risk.

[Robert Sassoon:]

Great. So and just one final question typically the third quarter of your fiscal year as well as repeatedly quite course of it. But you mentioned that it probably was a big order that you got on the hospitality side, it will be delivered in the third quarter. Is that going to make a difference on this mix from this seasonal perspective this time around?

[Bob Schneider:]

Robert, it’s going to help a lot, but it’s got to be in the third quarter and the fourth quarter. So it will be spread between the two.

[Michelle Schroeder:]

And probably a little more heavily in the fourth quarter.

[Bob Schneider:]

Yeah. I think you’re right, Michelle. So it will have some benefit but not quite as much obviously, if all things settle in the third quarter.

[Robert Sassoon:]

Okay. All right. Thanks very much for answering my questions.

[Bob Schneider:]

Thank you.

[Operator:]

Thank you for your questions. Your next question comes from the line of Matt Sherwood with Cooper Creek Partners. Please go ahead.

[Matt Sherwood:]

Hi, guys. Great orders in revenue this quarter, even though the margins -- could improve. Just had a quick question. First of, what’s the run rate level of SG&A because it looked a little high and then also it looks like you’ve got some benefits in terms of lower accruals? I read in the press release.

[Michelle Schroeder:]

Yeah. If you are looking at our GAAP, from the press release, our GAAP SG&A…

[Matt Sherwood:]

No. I mean, like your adjusted, right. They both came out to be 41.7 or something like that.

[Michelle Schroeder:]

Yes. If you look at the adjusted, we did have lower incentive compensation costs in quarter compared to last year, but our employee benefit costs were up and that was primarily related to healthcare costs. And then we also saw some higher marketing costs in the quarter and that was primarily related to the product launches that Bob talked about earlier. As we were introducing and launching those products, we did have higher marketing costs related to that.

[Matt Sherwood:]

So, if you look at like $40 million in Q1 and $42 million or $41.7 million this quarter, is it somewhere in between that, or is just on the normal basis, is it seasonal or how do we think about it?

[Michelle Schroeder:]

As far as the dollars that’s probably a pretty normal quarter.

[Matt Sherwood:]

Okay. Okay. Great. Then just had a question, in the past, you sort of say okay, operating profit is here that if we’ve got x percent of incremental margins, we realized the savings from the consolidation, then this is how we get to 8% margins. But I guess when you look at this quarter, if you annualize the revenue in which -- I know you can’t do for this. From a topline perspective, you add six or five and you’re hoping to get 640, it seems like to you’d have to have an awfully high incremental margins to get 8% margins there?

[Michelle Schroeder:]

Yes. So if you do annualize this quarter results that is true. We did have a couple of those unusual items that we talk about in the quarter with the product mix and the higher discounting this quarter. But if you work -- I don’t even have the year-to-date numbers in front of me, but that gets a little bit better if you look at year-to-date numbers. But it is going to fluctuate from quarter-to-quarter as our sales volumes fluctuate.

[Matt Sherwood:]

Got you. So you view the discounting as having or the mix as having, picking you off track there per se, but you do need it to normalize to get there?

[Michelle Schroeder:]

Yes.

[Bob Schneider:]

Exactly correct.

[Matt Sherwood:]

Thank you.

[Bob Schneider:]

Thank you, Matt.

[Operator:]

Thank you for questions. I would now like to turn the call over to Mr. Bob Schneider for closing remarks.

[Bob Schneider:]

Okay. Thank you. And that brings us to the end of today’s call. We began a couple years ago, hitting the gas pedal on new product introductions. We talked about it a little bit here. And marketing and those efforts continue as we grow into international. Also you can see by the actions taken since the spin-off, our leadership team is eagerly taking actions needed to improve our earnings. Both, our growth efforts and margin focus will improve shareholder value. We appreciate your interest and 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 from the call. Thank you and have a nice day.