Kimball International, Inc.
Q4 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good morning, ladies and gentlemen. My name is Denise, 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 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 July 31, 2015, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball International Form 10-K and today's release. The panel for today is Bob Schneider, Chairman and Chief Executive Officer 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 now begin, sir.

[Bob Schneider:]

Thank you, Denise. And welcome everyone to our fourth quarter conference call. The financial results for our fourth quarter and fiscal year ended June 30, 2015 were released late yesterday and Investor Presentation slide desk has also been posted 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 analyst and investors for questions. Similar to prior quarters our comments this morning will focus on adjusted pro forma operating income, which adjusts historical results for the unusual nature of the spinoff of our electronic segment last October. A reconciliation of GAAP operating income to non-GAAP adjusted pro forma operating income is included on page 34 in the investor slide deck that was posted to our website yesterday afternoon. Our fiscal year ended June 30th and capped off a huge year of change and transition for Kimball International. We started the fiscal year as a diversified manufacturer of both electronics and furniture products. With the spin-off of electronics on October 31 of last year, we ended the fiscal year as a focused furniture-only company in the midst of a turnaround. It has been a very busy year and I am thrilled with the significant strides our team has made throughout the fiscal year on many fronts, including improved financial performance, more focused strategies and enhanced corporate governance practices. We had a very strong finish to our fiscal year 2015 with our fourth quarter financial performance showing significant improvement over last year. Revenue increased a strong 15% and adjusted pro forma operating income as a percent of sales rose to 6.6% compared to last year 0.9% or slightly above breakeven last year. The 6.6% operating income is a level we had not seen in a decade. It was the best quarterly operating income percent we had in over 10 years for any quarter. Additionally the fourth quarter was the strongest quarter of this fiscal year after a strong Q3. We continue to gain traction and realize benefits from our own turnaround efforts throughout the year. None of this was possible without the involvement of everyone at Kimball. Our team is very excited about the increased traction we are all feeling. Last quarter, we provided guidance on when we will hit our 8% operating income goal. That guidance remains unchanged at this time. As a reminder, we said that we need both increased volume and cost reductions to hit the 8% goal. With the consolidation of our Post Falls Idaho facility into other existing Kimball facilities in Indiana, being a significant component of the cost reductions. We continue to execute that plan with an estimated completion by September of 2016. After the restructuring is complete for the quarter ending December 31, 2016 which is about 1.5 year from now, we expect our quarterly sales to be in the range of $170 million to $180 million and our operating income to be in the range of 7% to 8% depending on sales mix. At this sales and operating income level, our return on capital will be approaching 20%, which is among the best in the office furniture industry, very exciting level of ROC. I know our results for the fourth quarter were already approaching the lower end of our operating income guidance. As we move forward though between now and December of 2016, we expect to see continuing improvement in our margins, but we will likely have some volatility as we work through the restructuring and other margin improvement initiatives. Sales mix likewise could add some volatility from quarter-to-quarter. Therefore we are still estimating it will be December 2016 until we reach a sustainable 7% to 8% operating income. During the fourth quarter, we participated in two prominent tradeshows; the Hospitality Design Show in Las Vegas in May and the Office Furniture Show in Chicago in June. Both shows were very well attended. The products exhibited by all three of our brands; National Office Furniture, Kimball Office and Kimball Hospitality garnered a lot of attention and excitement as we showcased new seating, open-plan and casegood products, which enhance our current offerings. I've mentioned before that we hit the gas pedal in new products, starting a year ago and we continued that this year. In addition both shows affirmed very positive customer feedback on our new marketing strategies, our quicker speed to market with new products and our excellent service levels. By the way, we also had clear feedback on our past new product introductions with Office Furniture, new product sales in Q4 being up a strong 53%. This year's NeoCon show was particularly important for our Kimball Office brand, which builds upon last year's association with award-winning San Francisco-based design firm Studio O+A and their design of our Chicago showroom. Last year's show Health generated excellent sales momentum and to amplify that further this year Kimball Office introduced 10 new product collections; numerous product line enhancements and fresh workplace typologies to inspire customers to meet the challenges of today's agile workplace. With records showroom attendance NeoCon made for a great platform for Kimball Office to introduce its new brand direction of partnering with leading interior designers to guide its new product design initiatives. This design collaboration has proven to be a critical aspect of the Kimball Office strategy. This year showroom as well as, the new products really resonated with architects, designers and large end-users. I mentioned earlier that this has been a year of change for Kimball International as it relates to our corporate governance practices. As we reevaluated our governance practices and policies, we recognized the need to be more focused on the new single class structure following the revocation of Class A and Class B shares in conjunction with the electronic spin-off. We've taken many proactive steps to refocus and modernize our governance policies and practices around the single class share structure, many of which I discussed in last quarter's conference call. There was one additional item we finalized in June and that was the modernization of our change in control and executive employment agreements to add a double trigger for the change in control payout to remove the tax gross up feature for executives, to cap payout to reduce the risk of loss of tax deductions for Kimball and to reduce the CEO severance pay out multiple to be in line with other executives. It certainly is a new day after the spin-off and we felt it was important to modernize these agreements to better align perspective and focus with our shareowners. Finally, I am very pleased to report that Kimball has recently earned the Great Place to Work designation. The designation is based upon the completion of a review of our workplace culture by the Great Place to Work organization, which is the global authority on high trust, high performance workplace cultures. The review focused on five key areas; credibility, respect, fairness, pride and camaraderie. More than four out of five employees reported in the survey that they are comfortable being themselves at Kimball and are proud of what they do. It is the daily living of our guiding principles by all of our employees that makes this type of designation possible. We are very proud to display the Great Place to Work badge and we'll use this feedback received as part of this process to make Kimball an even better place to work. This designation is strategically important as it will be even more challenging to recruit top talent in coming years. Now I will it turn over Michelle for a brief overview of the financial results, before we open the call to your questions. Michelle?

[Michelle Schroeder:]

Thanks, Bob. As Bob mentioned, our operating income reference today is the adjusted pro forma operating income, which adjusts for the impact of the spin-off and reflects the economics of our post-spin furniture company. And operating income reconciliation is included on page 34 of the investor slide deck that was posted to our website. So our fourth quarter sales ended at $159.1 million, which as Bob noted was an increase of 15% over last year. This is the eighth consecutive quarter we've shown an increase in our quarterly sales over the prior year. Sales increased in four of our six vertical markets, including hospitality, other commercial, healthcare and finance. Sales were flat in the education market and sales to the government declined from last year on a reduction from the federal government. Sales in the hospitality vertical were up $10.7 million, or an impressive 36%. Earlier this fiscal year, we did receive a $14 million hospitality order and $9.5 million of that order shipped during the fourth quarter, which did contribute to the increased sales in this vertical. Most of that order has now shipped except for about $2.3 million, which is scheduled to ship in our first quarter of fiscal year 2016. The hospitality market does remain very strong at this time. The other commercial vertical, which includes corporate businesses and sales that don't fall under any of our other five verticals was up $10.5 million or 24% and this vertical does represents our largest. The economy and overall business conditions remain strong in both day-to-day and project business. Sales in the fourth quarter to the healthcare vertical increased $2.1 million or 15%, as we have a more focused marketing effort and several new products geared towards the healthcare market. Activity in this market is really robust and project sample requests have been strong in this vertical. We continue to see positive impact from our new product introductions, sales from new office furniture products introduced in the last three years were $26.8 million in the fourth quarter compared to $17.5 million in the fourth quarter of last year. As Bob mentioned, that was a 53% increase. We ended the year with strong orders in the fourth quarter with orders up 15% compared to last year led by increased orders in the hospitality vertical. Our order backlog at the end of June was $111.9 million or 15% higher than June of last year. So it's very encouraging that we're going to start the new fiscal year 2016 with such an strong order backlog. Fourth quarter non-GAAP adjusted pro forma operating income as shown on page 34 of the investor slide deck was 6.6%, which is a significant improvement from the 0.9% in the fourth quarter of last year. Leverage from higher sales volume, the benefit we received from price increases and operational improvements all contributed to the improved results. In addition, we recognized the $0.5 million write-down on a notes receivable in the fourth quarter of last year that is having a favorable impact on the comparisons prior year. The effective tax rate for the fourth quarter was 45.9%, the rate was a little higher than normal for the fourth quarter, primarily due to chewing up the annual effective tax rate estimate that was used during the year, to the actual rate for the fiscal year. We do expect our combined effective tax rate on average to normally be around 35% to 38%. Our adjusted pro forma income from continuing operations after excluding all of the restructuring and spin-off costs and adjusting the prior year for the pro forma retirement related adjustments was $5.8 million in the fourth quarter of this year compared to adjusted pro forma income of just $682,000 in the fourth quarter of last year. Pretax restructuring costs for the exit of the Post Falls Idaho facility were $1.6 million in the fourth quarter. As Bob mentioned we do remain on track for the restructuring activities to wrap up by September of 2016. Now looking at our balance sheet, as of June 30th our cash and cash equivalents was $34.7 million. Our operating cash flow in the fourth quarter was $1.8 million. Capital investments totaled $7.8 million. Now this is a little higher than normal due to some building renovation costs related to the spin-off and equipment purchases related to the Post Falls exit. We did pay $1.9 million in quarterly dividends during the quarter. We repurchased approximately 675,000 shares under our share repurchase authorization program during the fourth quarter at a cost of $8.2 million. Approximately 1 million shares remain under our program as of the end of June. We continue to review and discuss with our Board of Directors options around our capital structure including repurchasing additional shares. We continue to have almost no long-term debt, which stood at $268,000 at June 30. We also have a $30 million credit facility, so our balance sheet remains very strong. In closings, we are very pleased with the progression that we've made in fiscal 2015 and our journey to reach our 8% operating goal. We do have more work to do and I'm very encouraged with the benefits that we're realizing from our strategy and the initiatives we're executing. With that, I'd like to open up today's call to questions from analysts and investors. Denise, do we have anyone with questions in the queue?

[Bob Schneider:]

Okay, thanks Denise and thanks everyone that brings us to the end of our call today. We had a really good quarter. Its exciting time; sales up strong - strongly and op income best in decades. So our team is excited with what they're doing and very encouraged about the future. Appreciate your interest and look forward to speaking with you on our next call. Thank you and everyone have a great day.

[Operator:]

At this time, you may disconnect from the call. Thank you and have a nice day.