08 May Kimball International Inc (KBAL) Q3 2019 Earnings Call Tran…
Kimball International Inc (NASDAQ:KBAL)
Q3 2019 Earnings Call
May. 8, 2019, 11:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good morning, ladies and gentlemen. My name is Dylan, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Third Quarter 2019 Financial Results Conference Call. (Operator Instructions)
As with prior conference calls, today’s call, May 8, 2019, 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’s call is a Kristie Juster, CEO 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 Kristie Juster. Ms. Juster, you may begin.
Kristine L. Juster — Chief Executive Officer
Thank you, Dylan. Good morning, and welcome to the Kimball International third quarter 2019 earnings call. We announced our results yesterday after market close for the quarter, which ended March 31, 2019.
On our last earnings call, we committed to unveil our new growth and transformation strategy this quarter and I’m excited to share the details of that with you today, which we are calling Kimball International Connect. But first, we’ll cover the market and our third quarter financial results. Before we get started, I wanted to inform you that we will be referencing the slide deck on our IR website throughout the call.
With that, let’s begin by turning our attention to slide four. We experienced a strong quarter as we captured growth through solid execution in a market with favorable conditions. Sales growth finished at 10%, 8% of which was organic, as we saw demand for several of our key verticals, most notably healthcare.
Overall, order activity was strong as evidenced by our 16% increase during the quarter. Adjusted EBITDA finished at $14.5 million or 8.2% of sales, up 18% year-over-year. These positive results were primarily due to price yields, leverage from higher volume and savings realized from cost initiatives. EPS was also up a strong 38%, finishing at $0.22 a share. We are tracking to our plan of reducing costs by $10 million during the fiscal year 2019. Michelle will discuss third quarter financial results in more detail in a few moments.
Now let’s turn to slide five. Several of the macroeconomic indicators we monitor closely are signaling continued growth in the market. BIFMA, which is the office furniture market industry association, is forecasting 3.3% growth in fiscal year 2019. The Architecture Billings Index by AIA, which serves as a leading indicator of non-residential construction activity, was 47.8, which fell below 50 for the first time in over two years. While a score below 50 indicates decreasing firm billings, other employment indicators remain positive and it is contrary to what we are experiencing in the market. That said, we will continue to watch this along with other metrics to determine if it’s a beginning of a trend or more of an anomaly.
RevPAR, or revenue per available room, is a leading indicator for our hospitality business and showing estimated growth of 2.3% in calendar year 2019. Overall, the US lodging outlook remains stable, driven by continued increase in consumer spending, business investment and a relatively strong consumer confidence. Specific to our market, Las Vegas is strong driven by the move of the Las Vegas Raiders from Oakland, causing new construction and refurbishment in advance of the 2021 football season. We feel very good about the hospitality market, with activity and growth both remaining strong.
Turning to slide six. As you know, we’ve been focused on new product development over the past few years. Sales of new products, excluding hospitality, remains a key fuel to our growth. And we’re very pleased with the traction, up 29% during the quarter, resulting in new products representing 27% of our total products sold excluding hospitality. That’s up 500 basis points year-over-year.
We introduced five new products this quarter, which are pictured to the left. We expect the design of these new products to resonate well with the marketplace as they are integrated into our distribution. And we’re excited about the launch of the Greer recliner as we continue to expand our reach into the patient room with healthcare facilities. While product innovation has always been a focus, it’s of even greater importance with the market shift to ancillary furnishings and with our intent to accelerate growth in our healthcare vertical.
Now let’s turn to slide seven, and our sales and orders by vertical. As you see, sales growth was broad based with expansion in five of our six verticals. Healthcare led the way, up $9.2 million or 47%, followed by hospitality, up $5.2 million or 12%. Healthcare growth was assisted somewhat by a weaker comp as it was down 14% in the year-ago period. Despite that, if you look over the two-year period, healthcare sales are still up 27% from Q3 two years ago.
Strategic focus in this marketplace, which includes aligning resources, building relationships and introducing new healthcare products continue to fuel this growth. We continue to feel bullish on this vertical, given the favorable long-term macro trends, specifically the changing demographics in the US.
Hospitality had a tough comparable where the vertical experienced prior year growth of 20%, which makes the 12% growth this year even more impressive. The only vertical that did not experience growth was finance, which was down less than $1 million on nearly $17 million base due to normal project volatility.
With that, I’ll turn the call over to Michelle to provide more details on the financial results. Michelle?
Michelle R. Schroeder — Vice President, Chief Financial Officer
Thank you, Kristie, and good morning, everyone. I’d like to turn your attention to slide eight, as I discuss our third quarter financial performance in more detail. Our sales ended at $177 million for the quarter, and as Kristie mentioned, that was an increase of 10%, or 8% on an organic basis. Sales were up across all verticals except finance with healthcare and hospitality leading the way.
Gross profit improved 80 basis points during the quarter driven by the benefits of price increases, cost reduction initiatives and leverage from higher sales. These improvements were partially offset by inflation and tariffs as well as the performance of our recently acquired David Edward operation, which we had anticipated. Inflation, which I’m including commodity, transportation and tariff, was up $1.7 million over the prior year. We are starting to see some pullback in fuel prices and transportation has stabilized, although at a higher level.
With regards to David Edward, our operation team continues to successfully execute on the operational improvement plan that we developed during our due diligence to eliminate the drag on our gross margins. Selling and administrative expenses increased $6 million or 15% during the quarter due to higher incentive compensation on the higher profits and commissions associated with the higher sales. Additionally, we experienced increases in compensation costs. And we also had selling and administrative expenses associated with the David Edward acquisition, which we didn’t have in the prior year. We also invested $600,000 in strategic growth investments and incurred $300,000 in CEO transition costs.
Our adjusted EBITDA of $14.5 million, increased 18% or 60 basis points. We were really pleased with the margin expansion we had this quarter. On that note, we have made the decision to place greater emphasis on EBITDA as a key measure. We are going to continue to focus on operating income, but believe EBITDA is a more appropriate metric to measure the health of our business. A couple of reasons for making this shift; first, EBITDA is closely aligned to cash earnings, which correlates to shareholder value. Second, EBITDA is more often used by our investors to evaluate our performance. And third, we believe it enables better comparability to our peers, especially when acquisitions are a part of the mix, which they have been and will continue to be for us. We will continue to report on operating income, but we’ll be placing greater emphasis on EBITDA going forward. Earnings per share grew 38% or $0.06, with $0.04 being driven by improved earnings and $0.02 because of the lower effective tax rate resulting from the Tax Cuts and Jobs Act.
Now turning to slide nine. I’d like to review quarter-to-quarter trends for some key financial metrics. Before I do, as a reminder, our third quarter is our seasonally low period, which is why you see the pullback in both sales and orders sequentially during the quarter. This quarter is not only slow for us, but is also seasonally slow for our industry as well.
Now turning to sales. We’ve seen strong organic growth in each of the last four quarters. Similarly, we have seen growth in organic orders in each of the last four quarters, with orders outpacing sales growth in each quarter except for the second quarter. Overall, our growth and demand remains strong. While our gross margins have been pressured by commodity inflation, transportation inflation and tariff over the last several quarters, we’ve been successful at offsetting these headwinds beginning last quarter with price increases, with improved efficiency, with leverage from…