KBALB

Kimball International, Inc. (KBALB)

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Kimball International, Inc. (KBALB)

Q3 2013 Earnings Call

May, 02, 2013, 11:00 am ET

Executives

Jim Thyen - President & CEO

Bob Schneider - EVP & CFO

Analysts

Todd Schwartzman - Sidoti & Company

Josh Borstein - Longbow Research

Presentation

Operator

Good morning ladies and gentlemen. My name Charlene and I will be your conference allocator today. At this time, I would like to welcome everyone to the Kimball International Third 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 a question-and-answer period where Kimball will respond to questions from analysts. (Operator Instructions)

As with prior conference calls, today’s call May 2, 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 now to turn today’s call over to Jim Thyen. Mr. Thyen you may begin.

Jim Thyen

Thank you, Charlene. Welcome everyone to our third quarter conference call. Our earnings release was issued this morning on the results of our third quarter ended March 31, 2013. We have posted a financial summary presentation to our website to accompany this conference call. Presentation can be found on our Investor Relations website, alongside the webcast link. I will start with an overview comments followed by Bob’s financial review. We will then open the call to your questions.

Overall, Kimball International results for the third quarter improved nicely over last year, led by strong performance during the quarter in our EMS segment. This is an exciting time for our EMS segment. The overall EMS market is healthy and growing. Manufacturing Market Insider or MMI is predicting approximately 6% growth for the EMS market in calendar year 2013. MMI also recently reported the top 50 EMS providers for 2012 and Kimball Electronics was ranked 18th largest in the world. We were ranked 20th last year. We are delighted with the sales growth we have been experiencing that allowed us to move up two spots in the ranking.

If you remember from past discussions, we had a contract expire at the end of fiscal year 2011, which impacted our sales by approximately $41 million per quarter. In the two years since that contract expired, our business development team has been working diligently to diversify and replace that lost revenue. This quarter we are happy to say we have been successful in that effort. Sales in our EMS segment in the third quarter are back to where they were prior to the expiration in that contract with significantly more diversification and balance in the book of business.

Along with that revenue growth, we are very pleased with the much improved margins we have seen within this segment over the past five quarters. Back in fiscal year 2008, we set a long-term operating income goal of 4% for this segment. Unfortunately, the recession delayed our progress in meeting this goal until now. Our EMS segment operating income has as a percent of sales is 4.9% in the third quarter. I am very proud of the accomplishments this team has achieved over the last two years. We will work hard to sustain these gains and continue to focus on our growth and diversification strategies as well as continued operational excellence.

Looking overall at the furniture industry forecast, BIFMA’s most recent outlook for office furniture growth in calendar year 2013 is growth of approximately 3% with weaker growth in the first half of the year and stronger growth towards the end of the calendar year. Industry orders were soft during the quarter, although forecasted order activity remained strong. On an industry-wide basis, customers have continued to defer the purchase of new furniture particularly with larger projects.

Market projections for one of the key leading indicators in the hospitality industry, RevPAR or revenue per available room are to increase approximately 6% for the calendar year 2013. This is a positive sign for this market. A majority of the market growth in hospitality is now existing in hotel renovations. New hotel construction remain slow. Also the luxury segment of the market is recovering while there is continuing price sensitivity and discounting in the lower portions of the market.

Orders received during the third quarter within the furniture segment increased approximately 4% over the prior year on increased orders for hospitality furniture. We spoke at our last conference call about the reduced government spending. That continued in our third quarter. The reduction in federal and state government office furniture orders are being partially offset with increases in the other market verticals. While overall office furniture orders slowed during the third quarter, the order pace has picked up in the early part of the fourth quarter.

As you saw in the press release, our furniture segment incurred a loss of $2.5 million for the third quarter. Tighter margins coupled with seasonal low sales of office furniture drove the loss. We were disappointed with the furniture segment results and have identified and are implementing corrective actions to address the challenges within this segment to increase our topline growth and improve margins.

Now Bob will discuss our third quarter results in more detail. Bob?

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