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Kimball (KBALB)

Q3 2014 Results Earnings Conference Call

May 5, 2014, 11: 00 a.m. ET

Executives

James Thyen – President and Chief Executive Officer

Donald Charron – President, Kimball Electronics Group

Robert Schneider –Chief Financial Officer

Analysts

Todd Schwartzman - Sidoti & Company

Presentation

Operator

At this time, I would like to welcome everyone to the Kimball International third quarter fiscal 2014 financial results conference call. [Operator instructions.]

As with prior conference calls, today's call, May 5, 2014, 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; Bob Schneider, Executive Vice President and Chief Financial Officer; and Don Charron, Executive Vice President and President of Kimball Electronics Group.

I would now like to turn today’s call over to Jim Thyen. And Mr. Thyen, you may begin.

James Thyen

Thank you, operator. Welcome everyone to our third quarter conference call. Our earnings release was issued this morning, reporting the results of our fiscal third quarter ended March 31, 2014. We have posted a financial summary presentation to our website to accompany this conference call. The presentation can be found on our investor relations website, alongside the webcast link.

I will start with my overview comments, followed by Bob’s financial review. We will then open the call to your questions. Don Charron, executive vice president and president of our electronics group, is joining us on the call today and will participate on the question and answer segment of this call.

We completed another quarter with increased sales and very nice improvement in our earnings over the prior year. Our overall third quarter sales were 3% ahead of last year, and our consolidated net income was almost double that of the prior year third quarter, with most of that net income improvement coming from the furniture segment.

Third quarter sales are normally a seasonally low quarter for the furniture segment, so it was encouraging to see that kind of profitability improvement in a quarter where we usually lose some of the fixed cost leverage due to that seasonality.

As we look at the current state of the furniture industry, we are seeing mixed demand in various furniture vertical markets. In the third quarter, we saw some strength in our order activity within the financial services and the state government vertical markets.

On the other hand, both shipments and orders for the federal government continue to fall below prior year levels. The federal government has become a much smaller part of our business, and so the impact of continued reductions is not as great as it has been in the past.

Our day-to-day office furniture business has been stable. Some customers, driven by the fiscal uncertainty that remains, are continuing to defer the purchases of new furniture for large projects. Forecasted order activities remain strong, which is encouraging.

The hospitality market is in a stable recovery, with continued strength in the higher end of the market. We’ve intensified the focus of our sales team and leaders on converting quoting activities into actual orders.

Looking at the industry forecast, BIFMA is currently forecasting an increase in office furniture sales of 4% for calendar year 2014, with most of the growth coming in the second half of the calendar year.

There are two key measures of the hospitality industry health and profitability: occupancy rates and RevPAR, or revenue per available room. Both are indications of hotel ownership’s propensity to renovate existing hotels and to construct new facilities. Both measures are at or near pre-2008 recession levels, indicating a strong market for in-room cased goods and seating orders.

New hotel construction in calendar year 2014 is projected to increase from the very low level by 37% according to the January 2014 report from PricewaterhouseCoopers. We are preparing hard for two key furniture trade shows in May and June: the Hospitality Design Show in Las Vegas, and the NeoCon Office Furniture Show in Chicago.

The workspace environment continues to change at a rapid pace. The change is creating opportunities in the marketplace. We have accelerated our new product development activities to capitalize on these workspace opportunities. We are looking forward to showcasing our new products and business solutions at the upcoming furniture shows.

In our EMS segment, most of the markets in which we compete remain stable. Our third quarter sales grew a little over 2% compared to last year. We were pleased with the operating income performance in this segment for the third quarter. Excluding proceeds received from the antitrust lawsuit, our operating income margin was 4.5% for the quarter.

The team remains focused on executing our strategic plan. January, the trade publication Manufacturing Market Insider, or MMI, released its annual list of the 50 largest EMS providers worldwide. Kimball Electronics was ranked 20th on the top 50 list, showing that we continue to be a strong player in the EMS market.

Activities related to the spinoff of our EMS segment are progressing very well. There is an extensive amount of work that is being done in order to successfully split Kimball International into two separate public companies. We are on plan as announced in January. We intend to complete our initial filing of the SEC Form 10 registration statement in mid-May.

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