Kimball International, Inc.

Thank you, Valerie, and welcome to today's conference call to discuss our second quarter results and business outlook. In reviewing our results for the quarter, there are four key takeaways on Slide 3 that I'd like to share.

First, the Kimball International organization continues to demonstrate resilience within a difficult operating environment. The combination of our focus and expertise in health and secondary markets for workplace is proving our ability to gain share and operate in end markets that are emerging faster than the overall industry.

Second, we closed on the Poppin acquisition on December 9 and are moving quickly on our stage one priorities to capture revenue synergies. Third, we made meaningful progress on our Connect 2.0 strategy in the quarter, investing in areas such as health and work from home, meeting our facility optimization plan targets, in setting up a step change in our eBusiness and strategy with the closing of Poppin.

Fourth, based on backlog and current order rates, we expect third quarter revenues to be similar to second quarter levels, but we are seeing increased bidding activity around the new forming workplace. It is too early to know when this activity will translate into firm orders, but we are encouraged by the possibilities we see on the horizon.

There were some headwinds that impacted us in the second quarter, namely the $6 million in hospitality shipments that were delayed due to port congestion. Margin pressure we experienced due to spiking freight costs and the inflation impact on raw materials.

On balance, however, second quarter business trends unfolded in line with our expectations. Now let's talk about Kimball International's target end markets and their different stages on the path to recovery.

Beginning with the Health end market on Slide 4, as we expected, this market is ramping out of COVID more quickly than our other end markets, reflecting a more rapid return of health administrative workers, expansion in areas such as academic medical centers, behavior wellness, specialty hospitals, and increased public health funding. We are pleased to announce the official launch of our new health brand Interwoven.

This is a dedicated team with extensive expertise and understanding of the health industry and the home for our specialized clinical products. This team will have access to the full Kimball International portfolios, allowing us to offer unparalleled full facility solutions.

The initial results have been encouraging. In the second quarter, Health sales were up 31% sequentially and accounted for just under 20% of total company-wide sales.

The double-digit sequential growth in order rates of 23% is a strong sign of momentum in the business, and we have just gotten started. Six new clinical product platforms will be launching in the coming months.

Our focus on the top 28 health systems and federal health environments such as the Veterans Administration has resulted in both large project awards and sustaining program expansion. And we are developing significant partnerships for the design community through research and innovative solutions.

Health represents an increasingly important growth market for Kimball International, and we look forward to sharing more details of our long-term growth potential as we see the market performing post-COVID. Slide 5 provides an update on our Hospitality end market, which we expect will be the last of our markets to recover from the COVID impact.

In the second quarter, Hospitality accounted for 16% of total sales, down from 22% in the first quarter of this year, reflecting a significant sequential revenue decline. Our team has been highly focused on partnering with our customers to both navigate their fluid time lines on projects and the disruption of ocean freights.

We expect to see much of the same challenging dynamics in Q3. At the same time, we are starting to see the opportunity funnel develop for leisure travel and custom product design as lower occupancy periods provide a productive time to renovate.

As we look longer term, we are making progress on the development of our new Kimball Hospitality living sub-brand and product portfolio for senior living and luxury student housing. We believe our unique custom product development and program management capabilities and direct selling expertise can be expanded to reach a broader market.

Now let's move to a review of Workplace, which you can find on slide 6. The resurgence of the virus has extended its impact or workplace furniture spend, but we believe we are making the right choices to merge as a stronger competitor in the post-COVID environment, and we are seeing some positive signs.

While second quarter sales to the workplace end market were down sequentially, order rates were up from Q1 levels, showing an uptick in the commercial, finance and government subsectors. Also, it is important to note that Kimball International has a strong presence and name recognition in secondary markets.

Our own data indicates that these geographies are rebounding more quickly than the larger metropolitan areas. Sequential order rates of combined Workplace and Health reflect a 20% improvement in secondary markets, compared to a 3% recovery rate in larger markets.

This is consistent with many bodies of research highlighting the growing appeal of secondary markets due to both the business climate and people's desire for more space, comfort and less density. As we're speaking with our clients, the majority are engaged in long-term planning, critically analyzing their businesses and contemplating new guidelines, structures and real estate strategies.

The workplace model is clearly changing to a hybrid model, comprised of office, work from home, and satellite office environments. Employers will be looking to provide a seamless work experience for every location, headquarters, satellite, co-working, health facilities and work from home.

Our deep knowledge in residential design, our multi-brand portfolio and new omni-channel capabilities will enable us to provide solutions for the broader new workplace. The Workplace team continues to focus and deliver on both new products for the changing office environment and a new expanded assortment of the Etc.

brand to address work from home. In the second quarter, 27% of our sales were delivered through new products, even under the current market conditions.

This work and our continued investment in research and design will be critical to setting us up for success as the market returns. Meeting the employee where they want to work is exciting new thinking for Kimball International.

Please move to Slide 7. The acquisition of Poppin is an important move to set up Kimball International to address the broad new forming, work from home and work from office environments.

Our accelerated growth plan is designed to support both the opportunities for growth within the Poppin brand and work on the opportunities to drive synergies and opportunities across Kimball International. You may recall, we identified several stage one priorities when we announced the Poppin acquisition.

The first is to scale Poppin marketing playbook into secondary markets, and these activities are fully underway. In addition to Kimball International's long-standing presence and relationships in these markets, we believe that these are the geographies where the Poppin brand is the perfect solution for our simplified customer experience, in-stock assortment and all at approachable price points.

The site selection process is underway for showrooms and our lead generation plans are being built for each specific market. We look forward to announcing our first set of new secondary locations as we confirm the details.

The second priority is to accelerate our work from home business and corporate partnerships for Poppin in our Etc. brand.

While our priority is to reach the growing work-from-home demand by expanding relationships with corporate clients, long term, we plan to build a meaningful direct-to-consumer work from home business as well as to utilize a limited number of resellers where we see good traction. Our third priority is to offer Poppin products through Kimball international's existing distribution network.

We already have put in place an interim program that gives our dealer network access to Poppin to facilitate immediate sales. The distribution plan for poppinpro and poppinpod will be completed this quarter, with full-scale market launches in the first quarter of our fiscal 2022.

I'm pleased to report that we've already seen substantial interest in Poppin products from our dealers in the A&D community. We continue to validate the interest in the unique application of the privacy pod category in the new workplace.

Slide 8 provides a look at what we see on the horizon with respect to additional revenue and expense synergies related to Poppin. Poppin comes to us with expertise in digital marketing, drop-ship capabilities and industrial design.

Over time, we believe these capabilities and experiences can be leveraged across the broader Kimball international end markets. We also have begun connecting our experts in sourcing, manufacturing and logistics and are very motivated to share best practices and synergy projects.

I am very pleased to formally welcome the Poppin team to Kimball International. We are confident that the Poppin business, the Poppin leadership team and Kimball International make a great combination that will accelerate growth in the result in significant market share gain over time.

Now, I will turn the call over to our CFO, T.J. Wolfe for a financial review of our second quarter results.

T.J.?

Thanks, Kristie, and good afternoon, everyone. I'll discuss Kimball International's financial performance during the second quarter of fiscal 2021 and our forward expectations.

Let's turn to Slide 9, which shows the key financial highlights that were also noted in the release. Net sales decreased 29% year-over-year to $136.2 million, primarily reflecting the ongoing impact of the COVID-19 health crisis.

Sales during the quarter were also reduced by approximately $6 million due to port congestion delays that impacted shipments in our hospitality end market, as Kristie mentioned earlier. Sequentially, our net sales declined 8%.

And I'll discuss sequential revenue and order dynamics by end market in a moment. As Kristie mentioned, sales of new products in the second quarter for Workplace and Health were both 27% of the total sales of each respective end market compared to our internal target of 25%.

This reflects the success we are having developing innovative products that fit the needs of the new forming workplace and health environments. New products are defined as those that were introduced in the last three years.

After eight successive quarters of year-over-year gross margin improvement, our gross margin declined slightly to 33.4% from 34% in the year ago quarter, mainly due to the negative margin impact of a lower revenue base along with higher domestic and ocean freight costs that reduced our gross margin by 190 basis points. Transformation plan savings related to our operational excellence program were $4.1 million and helped to mitigate the margin pressure.

As many of you are aware, freight volumes are at unprecedented levels outpacing industry capacity. We believe the market will remain tight for the remainder of the fiscal year and have taken selective price increases in our Workplace and Health product lines effective March 1, 2021, to help offset this impact.

Our freight costs in the second quarter were approximately 10% of net sales. Sequentially, our gross margin declined 200 basis points for the same reasons.

Our transformation program yielded an additional $2 million in selling and administrative savings and helped to reduce our selling and administrative expense by $3.8 million to $46 million. However, as a percentage of revenue, selling and administrative expense amounted to 33.7% compared to 25.9% in the prior year.

Excluding non-GAAP items, primarily acquisition-related charges, adjusted selling and administrative costs amounted to $40.7 million or 29.9% of sales compared to $48.8 million or 25.4% in the prior year. For reference, included in those non-GAAP items is $3.4 million of pretax costs in the second quarter related to completing the acquisition that will not repeat in the third quarter.

Our total transformation savings in the second quarter were $6.1 million. We remain on track to achieve $20 million in transformational program savings by year-end.

Our net loss was $0.8 million or negative $0.02 per diluted share, including $4.1 million or $0.11 in after-tax special charges, which are primarily acquisition and restructuring related. This compared to net income of $11 million and earnings of $0.30 per diluted share in the second quarter of fiscal 2020.

Excluding acquisition and restructuring related charges, EPS was $0.09 compared to $0.33 in the year ago quarter. Adjusted EBITDA decreased 56% to $9.1 million in the second quarter of fiscal 2021.

Adjusted EBITDA margin declined 420 basis points year-over-year to 6.7% due to negative operating leverage given lower volumes. Our effective tax rate for the second quarter was a negative tax rate of 34.1% as nondeductible costs related to the Poppin acquisition and nondeductible compensation more than offset the tax benefit from the small pretax loss during the quarter.

We expect our effective tax rate for the full year fiscal 2021 will be approximately 30% to 32%. Although we reported a year-over-year revenue decline, we had sequential improvement in one of our key end markets, as shown on Slide 10.

Health sales increased 31% sequentially and accounted for just under 20% of our total revenue this quarter. While Workplace revenues, which represented 64% of our total sales, declined 8% sequentially.

Within Workplace, we're pleased with sequential improvement in our commercial vertical revenue from Q1 2021. Hospitality saw a 32% sequential revenue decline and represented 16% of sales as we see a continued impact from COVID.

Slide 11 shows positive sequential momentum in new orders in our two largest end markets. Orders in Health grew 23%, while Workplace orders increased 10% sequentially.

Hospitality orders declined 46% from the first quarter of 2021, partially due to the large order we received in the first quarter. Moving to Slide 12.

On the last earnings call, we announced our acquisition of Poppin, and we closed on December 9. For the period that we have owned Poppin, the Company contributed $2.7 million to net sales.

Similar to other fast-growing industry disruptors, Poppin has made aggressive investments in channel development, resulting in negative EBITDA. However, we still expect Poppin to be EBITDA positive by the second half of fiscal 2022.

As a result of this acquisition, Kimball amortized $3.4 million of intangibles over the remainder of fiscal year 2021. There will be additional Poppin historical and pro forma financials in the 8-K, which we will file later this month.

Now let me switch to the balance sheet and cash flows on Slide 13. During the second quarter, we consumed $2.4 million of cash from operations compared to $2.3 million generated in operating cash flow in the comparable period of fiscal 2020.

Capital expenditures were $5 million compared to $6.2 million in the year ago second quarter. The majority of our capital spend was directed toward technology investments and product specification tools to simplify the ordering process and manufacturing upgrades to increase automation.

We expect our full year CapEx to be approximately $25 million. This quarter, we returned $3.3 million of capital to shareholders in the form of dividends.

Additionally, we reinstated our share buyback program and repurchased 62,000 shares for $750,000 in the second quarter. In January, we repurchased an additional $750,000 for a total of $1.5 million since we reinstated our share repurchase program in November.

We will continue to repurchase shares opportunistically for the remainder of FY '21. We ended the quarter with $41.2 million in cash and cash equivalents.

Following the acquisition closing, our net debt-to-EBITDA ratio was 0.7x, including the liability for the earn-out payments to Poppin. Our backlog at the end of December was $144.9 million, up 3.9% sequentially.

We expect $80 million of this backlog will be shipped in the third quarter of fiscal 2021. Based on this, we expect third quarter organic revenue to be similar to second quarter levels.

We also expect freight costs will continue to negatively impact gross margins in the short term, resulting in a temporary sequential decline in the third quarter. As we start to see the benefit of our price increases in the fourth quarter, along with more clarity on the new forming workplace, we expect a sequential increase in gross margin in the fourth quarter.

I will now turn the call back to Kristie for her closing remarks. Kristie?

To sum up, we are navigating a difficult business environment, but we see improvement on the horizon in the two markets that currently accounts for close to 85% of our total sales, Health and Workplace. Our Connect 2.0 strategy has strengthened our ability to gain share in our target markets.

The Poppin acquisition closed only eight weeks ago, and we already are making progress against our stage one priorities. That is a testament to the tremendous potential that lies ahead as well as the exemplary ways in which our combined organizations embrace change in diversity.

We are well positioned and motivated for the path ahead. Operator, now I'd like to open the call to questions.

You talked a lot about the freight costs impacting your gross margins. But steel has been -- as the [indiscernible] increased pretty significantly recently.

Can you just talk about your exposure there? And in terms of the price increase, what is typically the lag on actually the realization of that price increase?

Does it take a couple of quarters before we see the benefit?

Yes, Greg, this is T.J. On the first point around steel and input costs, so yes, we talked about freight.

But also we're seeing inflationary pressure in metals, so steel, aluminum as well. And I think that's going to persist for probably the next two quarters or the first half of this calendar year.

I think what we'd like to see is, as again, the market starts to normalize, just as we're hoping the freight market normalizes after the next two quarters, we're looking at something, hopefully similar in those kind of input costs. When you talk about the price increase, so we said the price increase goes into effect on March 1.

And so we'll see very, very little of that impact in our third quarter. We would see a significant amount in our fourth quarter and then full realization in Q1 of the next fiscal year.

So it is a lag, but we begin to realize significant benefits in Q4. And that's where we talk about the margin evolution and how we see the margins, the temporary compression we see in Q3, beginning to ease in Q4 as that price increase comes into effect.

Okay. And then you talked about getting to the $20 million of cost savings by the end of the year and you had $6.1 million total this quarter.

Where are you cumulatively? What's left to get to that $20 million?

Yes. So again, tracking roughly halfway there, and so, I think when we look at the delivery for the second half, we see a similar trajectory of where the pipeline of projects will continue to deliver quarter-on-quarter similar amounts.

And I think what we're focused on now is just kind of thinking about beyond this fiscal year, what we can do in 2022.

Okay. And then I just want to understand the guidance you gave for the revenue for next quarter.

So organic was $133.5 million this quarter. We assume that for the next quarter plus whatever contribution we get from Poppin.

Can you help us out with like what you expect Poppin to contribute next quarter?

Yes, absolutely, Greg. So that's right.

So the guidance would be organic revenue at similar levels. So the $133.5 million, you quoted there, is organic revenue for this quarter, and just a little bit on that.

We talked about Hospitality to $6 million delay in shipments from Q2. That will ship in Q3.

However, again, logistics and the network is still tight. So there's some risk in the quarter there.

Workplace and Health, when you look at order volumes as we move into January, so we've just wrapped up. We're basically seeing, again, similar order trends to what we saw at the end of the previous quarter there.

So, those two things combined lead us to that organic revenue picture. As far as Poppin, Poppin contributed $2.7 million to our revenue during the period December 9 through the 31st.

So for the period we owned them, we would see that run rate directionally to continue through this quarter as well. So again, as we've talked about while their showrooms are open by appointment, they are seeing similar challenges in order rates and the pressure that we're seeing, but I would say their run rate from December would continue into Q3.

Okay, great. Okay.

Can we maybe talk about some of your end markets, Hospitality, what are the conversations like with your customers? Like are they -- is there any green shoots?

Or are we just kind of in a holding pattern? Just what are you seeing on your [indiscernible].

Sure. Greg, it's Kristie.

I think there's two themes that we would say the customers are talking about. One is this ocean freight kind of congestion and impact on Hospitality is fairly significant, and it is taking a lot of work from the customers and our teams in order to make sure that we're bringing in those orders on time and getting those organized.

So, there's a significant amount of work that's being done in regards to that. The -- I would say the green shoots that we are seeing is under custom in the luxury market.

There is no doubt that, that is coming back faster than what we would call the program business that is more geared toward the business traveler.

Okay. And as you look to, I guess, expand that with the living brands into senior living and student housing, could you just compare and I guess like how those markets are similar maybe to Hospitality?

Like why is that a natural extension from the Hospitality market? And what kind of incremental TAM do you get by moving in that direction?

So, there's two dynamics that make it very similar. One is a direct sale.

So, our selling organization goes direct to the designers or the developers and work to create a portfolio that is unique to them. So it's a direct sale, and that's what our hospitality group does, that is there to market.

And then in -- they are organized to create custom products for dedicated end markets, which would be student housing, luxury student housing and senior living. So each of the properties by a significant amount of custom products to put in their environment.

So, those are the two things that have that sitting in our hospitality business. I will tell you that our Health expertise is helping our Hospitality group in the senior living environment.

So that expertise does matter in that environment. And our Workplace group is opening up opportunities in luxury student housing.

So there is crossover that occurs within the business units, and we like that a lot. We think, there's opportunities to share that expertise.

So just to clarify on Poppin. I guess, does that mean it's sort of $35 million $40 million run rate right now or I don't know if there's seasonality in the business?

Just trying to extrapolate from the one-month you had it.

Yes, Tom, this is T.J. So based on what we saw from December, if you extrapolated that out, you'd come up with something in that range.

I think what we're looking at is how we can ramp that as quickly as possible. And again, it depends upon the market conditions and this general market recovery, but I think that's the run rate implied from December.

What we're focused on is really the priorities we outlined for Poppin and how we can scale that again, our dealer network, looking at the work-from-home opportunities and again, poppinpod. So, we just -- I think the degree at which we can push those priorities forward will really dictate the revenue trajectory beyond the next quarter.

And then other than the product line, I think there's some reference here in terms of their digital marketing capabilities. And could you guys sort of expand on that?

Do they bring more of an e-commerce sort of capability? Or it's more just the ability to more effectively exploit those marketing channels?

I'm just kind of curious what you're kind of fully referring to there with Poppin.

Sure. So, let me just explain the Poppin business model for a moment.

It's a great model. So, it is a digitally enabled lead generation model that occurs and then quite sophisticated conversion funnel that the opportunities are pushed through.

That includes sales development, account executives and showrooms, so that they can convert those digital leads into some nice sales. And I'll just give you a couple of facts.

80% of the leads do start online. When we look at -- when the leads get to the account exec, over 60% of those leads are actually converted and about 70% of their business is repeat customers, because they're very, very dedicated to this simplified customer experience of in-stock product and services that they offer.

So, it's a digitally native lead gen machine that has a series of conversion opportunities through the funnel. And as T.J.

was mentioning about the Poppin volume, we knew Poppin was in a metropolitan market. They have five showrooms better in metropolitan markets.

We knew that when we purchased Poppin. We're excited about taking that capability into secondary markets, because a lot of the opportunity for Poppin is creating that conversion at the local market.

And they could leverage the existing, I guess, Kimball presence in those markets, I guess? Yes.

Yes, there's two methods that were -- two opportunities. One is to expand the direct capabilities with that Poppin already has in the secondary markets.

Numbers are very different. It's a stock product.

It's a different looking product. It's a simplified assortment.

A direct shift and then also, we're bringing it into the more sophisticated kind of dealer community where they work at larger end consumers. So we'll be doing both of those activities with the Poppin brand.

Got it. Okay.

And then my other question, a little bit different, but in terms of your Workplace business. I don't know if you'd have visibility on this, but do you see people sort of ordering -- there's a lot of conversation about sort of reconfiguration, more hoteling, people working three days in the office and two out or whatever you have it.

So, are you seeing -- are the orders sort of specifically tied to those kind of changes in terms of their furniture needs or layout of the office? Or is it more still sort of just the sort of replacement or normal cycle of the existing office space as its configured?

Yes. So I'll tell you, two themes that we're definitely looking into.

One, the projects that are coming into the funnel right now are either projects that are kind of in the works already. And they've just had some small tweaks kind of practical changes based off of a new landscape, or they are kind of new major projects based off of the environment and the experience that corporations really want to deliver their employees.

And so, we're seeing some varying activity that's happening in the project funnel. But there is no doubt that we feel that corporations are now thinking about the workplace in regards to kind of where work is getting done.

So, it's headquarters, it's co-working environment, it's satellite offices and it's work from home. And so one of the things, as you kind of tick down all the places and the choices that we're making at Kimball International, it's really to be able to service that much broader market.

And so, we think that for us, it does represent significant opportunity for us going forward as those new markets perform.

Thank you very much. Well, I'd like to thank everybody for joining the call today, and we look forward to keeping you informed on how we're doing.

Again, we're seeing early indicators that we're excited about, and we certainly think that we're set up in order to maximize the opportunities ahead. So thank you very much, and have a nice evening.