HNI Corporation (HNI) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Tony, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International First Quarter Fiscal 2016 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 and investors. [Operator Instructions] As with prior conference calls; today's call November 04, 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 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 Bob Schneider. Mr. Schneider, please proceed.

Thank you, Tony. And welcome everyone to our first quarter conference call. The financial results for our first quarter ended September 30, 2015 were released yesterday afternoon and Investor Presentation slide desk has also been posted to our website to accompany this conference call. If you typically do not view the slide deck I really suggest you look at it have some very good information that is trended and makes it much easier to see the progress that ‘s being made Kimball International. I will have a few brief comments before I turn the call over to Michelle, who will provide us with the key financial highlights for the quarter. We will then open the call up to question from analysts. As a reminder because prior year fiscal quarter results include costs that were eliminated from our cost structure after the spin off of the electronic segment. Our comments this morning we will focus on adjusted pro forma operating income which suggests historical results for these costs. The point is to give you an apples-to-apples comparison of the gets very complicated to do that with spin accounting. A reconciliation of GAAP operating income to non-GAAP adjusted pro forma operating income is included on Page 31 in the investor slide deck our website. I'd summarize our quarter with just a few key points. Office Furniture, new product sales were up a strong 33% I mentioned in prior calls it will take some time for our new product introductions to get traction and we are very happy to say that is now happening. Next our Office Furniture orders significantly outpaced BIFMA for the quarter and more on that shortly. Our order backlog at the end of September was a strong up 9% from last year. Our operating income results matched our recent fourth quarter which happened to be the best in over a decade and so we are sustaining the performance improvement. We are accelerating the completion of the Idaho consolidation into our Indiana facilities, which means we realize 1.25 million - $1,250,000 of savings one quarter sooner and finally we increase the dividend 10%. Overall I am very happy with the quarter in the traction that we are getting. I would like to now going to a little bit more detail on accelerating the timeline for completion of the consolidation of the manufacturing capabilities of our Idaho facility into our Indiana facilities which also brings with it the acceleration of our previously disclosed operating income guidance. Our team has been working diligently on this consolidation plan to complete the restructuring activities in order to reap the benefit of the cost savings as soon as possible. As a result of their efforts we now estimate the consolidation activities will be completed by June 30 a full three months ahead of our previous estimate of September 30, 2016. I'm so proud of the dedication of our employees to ensure a smooth transition while completing the consolidation ahead of schedule so we can realize the full cost savings a quarter sooner than expected. Our annual estimated savings is still projected to be approximately $5 million per year or $1,250,000 million per quarter, we should now see the full $1,250,000 million savings in the quarter ending September 30, 2016, a quarter earlier than we disclose previously. As a result we are also adjusting our operating income guidance previously we disclosed that when the consolidation is complete. Our sales would be in the range of $170 million to $180 million and our operating income would be in the range of 7% to 8% as a percent of sales by the quarter ending December of 2016, that’s the first full quarter after what we previously estimated to be the completion of the restructuring. The manufacturing consolidation does not impact our sales guidance but with the pull up of the completion of the restructuring activities, we now expect to reach the low-end of our operating income guidance of 7% to 8% operating income as a percent of sales by the quarter ending September 2016, which is again one quarter earlier than previously disclosed. This guidance is based upon assumptions concerning future market sales trends as well as general economic conditions with U.S. GDP growth in the range of 2.5% to 3%. This past weekend marked the one-year anniversary of the spin-off of our electronic segment, while the legal separation occurred on September 31 of last year; we still had a lot of work to do in the last 12 months to physically separate the companies. The last milestone occurred with the final separation of our IT systems in September, the spin-off from the time we announced it in January of 2014 until the final separation of the IT systems here in September was a 21 month journey. I can't say enough about the dedication of our employees to ensure a successful separation of the two companies all the while staying focused on providing exceptional service to our customers and greatly improving our financial results. It’s been a very busy and a rewarding first 12 months as a furniture focused company. I'm proud of what our team has been able to accomplish in a short period of time including the significant improvement in earnings that we achieved over the last four quarters. We had a very good start to fiscal year 2016 with our first quarter sales increasing 8% over the first quarter of last year and adjusted pro forma operating income improving to 6.6% and that compares to 4.6% a year ago. Sequentially, our adjusted pro forma operating income held steady with where we ended in the fourth quarter of fiscal 2015 which ended last June, which was the best operating income percent in over a decade. The improvement from last year would not have occurred without the passion and resolve of our employees. We recently announced the promotion of Kourtney Smith, as President of our Kimball Hospitality brand. Kourtney was previously Vice President of Marketing for our National Office Furniture brand where she led product development, marketing, sustainability, vertical markets, increasing brand awareness in the architect and design community and sales development in the EMEA. Kourtney has the vision leadership and ability to drive meaningful transformation at Kimball Hospitality. With the promotional of Kourtney I am confident the management team we now have in place leading each of our three brands will continue to transform the brands and improve our operating results. As you know all the stock market experienced significant volatility during this past quarter with the increased concern about the overall health of China's economy and the impact of China's slowdown on the overall global economy. So far we have not seen significant impact to our orders as a result of this uncertainty. Our orders in total for the first quarter were up 2% over last year; office furniture orders however which excludes the hospitality were up a strong 8% with only the government vertical declining, which compares to a 2% increase in orders for the industry according to the latest BIFMA report. BIFMA has reduced their forecast for office furniture consumption for the year, but it is still showing growth of 7% for calendar year 2015, which by the way may come down a bit with their next update given the calendar third quarter order trends of the industry. And BIFMA is forecasting 7.4% growth for calendar year 2016 so our market outlook remains healthy. Orders for the hospitality industry declined 15%. We had a couple of midsize orders that hit last year in the first quarter which made the comparison the last year more difficult. It is important to remember which hospitality that it is project-based and so orders can be very choppy from quarter-to-quarter which is just a normal part of this market. The hospitality industry remains very strong and is expected to trend perhaps two more years before moderating according to a recent lodging econometrics report. Customer visits within all three of our brands continued throughout the quarter with nice strength and no noticeable signs of slowing down. We're confident in our people and our strategies and remain optimistic but will continue to monitor the general economy. Now I will it turn over Michelle for a brief overview of the financial results, before we open the call to your questions. Michelle?

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 its excludes all restructuring costs and it also excludes the impact of the revaluation of the liability related to our supplement employee retirement plan to get operating results that reflect the economics of our post-spin furniture company. And operating income reconciliation is included on Page 31 of our slide deck that was posted to our website. We were very pleased with the 8% increase in net sales for the first quarter compared to last year which was led by the strength of our hospitality vertical. This is now the ninth consecutive quarter we've had an increase in our quarterly sales over the prior year and the increase was really broad-based it was encouraging to see that sales in five of the six vertical markets increased over the last year and the six vertical was flat. The largest increase was in the hospitality vertical with growth of $8.6 million which was a 34% increase. We are seeing growth right now with both new construction as well as renovations in the hospitality market. As Bob mentioned the hospitality market remains strong in the team is working diligently to feed upon that opportunity. Sales in the healthcare and education verticals each increased 6% over the prior year, healthcare activity in general is robust. We really have focused our efforts on both of these verticals with new product introductions specifically for these verticals. Both the government and finance verticals experienced a 4% increase in sales in the first quarter compared to last year the increasing government fails was concentrated in the state and local government. Our recent product introductions have been well received and recognized in the market sales for the new Office Furniture products introduced in the last three years increased 33% compared to the first quarter of last year. Our new products are gaining nice traction. Sales of new products approximated 23% of our total Office Furniture sales compare to 18% in the first quarter of last year. As Bob mentioned our orders in the first quarter were up 2% compared to last year as a decline in orders from the government and the hospitality verticals were more than offset by increased orders in our four of the verticals. Both the government and hospitality business is very project based and so we tend to see fluctuations in orders from quarter-to-quarter. Our open order backlog at the end of September $123 million which was a 9% higher than September of last year first quarter. First quarter non-GAAP adjusted pro forma operating income as shown on Page 31 of our investor slide deck was 6.6% and you will note that out GAAP financial show operating income of 7%. The 6.6% adjust for the income recognize for the adjustment of the liability for the supplemental employee retirement plan. The 6.6% is a very healthy improvement from the 4.6% in the first quarter of last year which again is adjusted for spin-off related, and the supplemental employee retirement plan. We continue to benefit from the leverage of the higher sales volume. In addition recent price increases in operational improvements also contributed to the improved results. Sales mix shift to lower marginal project partially offset the improvement. Our effective tax rate for the first quarter was 38.2% there were no unusual tax adjustments in the first quarter and we expect our combined effective tax rate on average to normally be in this range. Our adjusted pro forma income from continuing operations after excluding restructuring costs was $6.3 million in the first quarter of this year, which compares to prior year adjusted pro forma income of $4 million again which is adjusted for the spin-off costs and the pro forma retirement related adjustment. Pretax restructuring costs related to the exit of the Post Falls, Idaho facility were $1.2 million in the first quarter and as Bob mentioned we are pulling our completion timeline forward by one quarter and now expect it’s restructuring to be complete by June 30. We still expect total restructuring costs to be around $8.9 million of which $5.4 million in total has been recognized today since we announced the restructuring a year ago. Moving to the balance sheet as of September 30 our cash and cash equivalents was $22.4 million which is down from the $34.7 million at June 30. The decline was primarily related to our share repurchase during the first quarter which was a cash outlay of $9.6 million. We have a little less than 300,000 shares left under our 2007 authorization plan and in August our Board approved an authorization to purchase up to an additional 2 million shares. We continue to review and discuss with our Board of Directors options around our capital structure including repurchasing additional shares. Our capital expenditures totaled $5.9 million for the quarter which included among other things building renovation costs that resulted from the spin-off and machinery and equipment related to the Idaho facility exit. Our operating cash flow in the first quarter was $6.3 million we paid $1.9 million in quarterly dividends in the first quarter and with continued positive operating cash flow we increased our quarterly dividend 10% from $0.05 per share to $5.05 per share affected with the dividend that was paid in September. Our days sales outstanding which is our measure of Accounts Receivable performance was approximately 29 days for the first quarter of this year compared to 30 days for the first quarter of last year. In our inventory metric or production day supply on hand for the first quarter of this year increased to approximately 53 days from 43 days from the first quarter of last year. And that was driven by increased inventory levels to support growth and customer lead time requirements and our manufacturing consolidation plan. We continue to have almost no long-term debt which should that 248,000 at September 30 we also have a $30 million credit facility for Kimball International so our balance sheet remains very strong. In closing, I do want to reiterate that we are pulling our operating income guidance up with the completion of the restructuring activity by June 30 we now expect at the low end of our 7% to 8% operating income guidance by the first quarter of fiscal year 2017 which of the quarter ending September 30 2016 and as one quarter sooner than originally planned. With that, I'd like to open up today's call to questions. Tony, do we have anyone with questions?

[Operator Instructions] Your first question comes from the line of [indiscernible]. Please proceed.

Hi.

Good morning Mark.

Yes, hi good morning. I’ve been having a little trouble with my headset. So let me know if you can’t hear me well enough and if so, I will just pickup the handset. So just some quick kind of housekeeping questions, you had a bit drop in the share count, I am just wondering how that happened versus last year I think it was about 1 million shares less.

What transpired is two things we had at the end of the year, normal stock issuance from incentive plans and going the other direction was the stock buyback that we started in around February or March or so of last year and had purchases going up through the end of the first quarter.

Okay, all right. And then the – do you have a share count that you’re modeling for the rest of this year?

Mark, in terms of our capital structure our Board decides in terms of what we are going to do in terms of buybacks. We just bought back almost million seven in terms of shares about $20 million worth and our Board authorized a new buyback amount of 2 million shares that is available. But in terms of what our capital structure will look like, our shares outstanding will look like, I really can't comment on as our Board makes that decision that is really frankly driven by buybacks netting against the normal annual incentive compensation that we pay out in stock that would go to the opposite of the buyback.

Okay. And then what are you expecting on a full-year tax rate?

Michelle you had 38, roughly.

Right, it’s probably mid to high 30s, 36% to 38%.

And generally speaking Mark, our tax rate should not fluctuate a whole lot since the spin we had issues in complicating things with foreign currency issues as taxability of spin cost. But as we are getting that behind us, we’re looking for a more stable effective tax rate in that mid to high 30s area.

Okay, all right. And then the $1.25 million that you are going to save per quarter closing the Idaho plant who is that divided between gross margin and SG&A?

Very good question. Michelle, top of your head..

I don’t have the exact numbers for the majority of it is in the growth profit line.

Mark, a fair amount of the benefit is driven by the logistics with that plant presently located in Idaho and so much of our business being shipped to the Midwest and East Coast, logistic savings is a very, very big part of this, which is going to hit the gross profit, we of course will be saving on the depreciation and then facility cost but as Michelle says most of it is coming from the operating results of gross profit.

Okay. And then commercial sales were flat, can you explain why they would've been flat, is there some sort of lumpiness previously?

We've been looking at that very closely, not completely sure. As we look at the orders throughout the quarter we saw a little bit of softening towards the latter part of the quarter in September. But it’s hard to put our finger on, we don’t know to what extent what's happening in China and just got caution and concern might be driving deferral of some orders. So it’s very, very hard to say and not totally clear. I do know several of our competitors actually had a reduction in shipments in the quarter. We were fortunate that we actually had an increase in sales but would have of a course like to see it much higher.

And I would point out that while the commercial sales were flat in the quarter, our bookings on the commercial vertical were up 7%, so…

Yes, it’s a good point.

Okay, and then what exactly comprises commercial, I think you have it in your 10-K, but I don’t recall.

Well, Mark, what we do is we have various verticals that we list in our press release and also in the slide deck. Those are verticals that we target market activities and special discount activities and so we track those very, very closely. Everything else is commercialized. And so it's really what's left after the areas where we have very, very focused marketing activities.

Okay. And then what percentage of your sales are international versus domestic?

It’s very, very small, less than 5% or so that’s really at the high-end and Mark as we do some business, in Canada we do a little bit, in the Middle East our hospitality business often is doing some international work, but most of our focus is in the U.S. and frankly our market share is so low in the U.S., we got huge opportunity in growing this market before we get very, very significant efforts outside of the U.S.

Okay. So recently you hired a new head focusing on healthcare, is he focused on any other product divisions or is it strictly healthcare and I think that as far as some new product launch came this past summer and with that – that entail any mark down discounting of old inventory to make room for the new stuff and how much of it perhaps margin impact would that have been if there was any discounting?

Yes, let me give you a little bit of background on our healthcare efforts. We have been in the healthcare market for many, many years focused on primarily a product that is lounge furniture and other types of office products that do not end up specifically in an acute care room in a hospital so to speak. And so that’s been the extent of our healthcare focus for really quite a few years with a lot of really good success in that vertical and about a year and a half or so ago we made a very focused effort with a align and brand that we are calling Kimball health and that's the individual that you are referring to. And frankly we hired several individuals that are very experienced and dedicated to that market vertical and that product line is very much focused for what you would find actually in the hospital room and we developed many products. I don't know the exact number on top of my head, but I’m sure its 15 or more that are focused in that way. So it’s really ramping up what we are doing in terms of healthcare vertical and so it's not such that we would have old products that would become obsolete that we would have to write-down an impact on margin. It sense like a new effort into the healthcare that we are really, really focused on because as you look to the future I'm sure as you see in others the healthcare opportunity in this country is huge over the next five to 10 years.

Okay. You had earlier referred to your market shares very small which clearly it is, can you tell me what’s your overall market share is and I’m sure it probably varies by category overall?

Both of our office brands are around 2.5% to 2.7% of the overall office furniture market in the U.S., hospitality that market there really is no published market for us to get to assess our position, but from just general in terms of the market we believe we are the biggest in the hospitality industry that’s focused on in room, case goods, and seeding by what we believe to be a wide margin over number two and as you get to number two to number five it’s quite fragmented. So there's nothing official in terms of publications we can look at, but we are very confident and we are the largest and frankly this past year coming off record sales in terms of our hospitality vertical.

Okay. And you said in room, case goods and what was the other one?

Seeding.

Seeding, okay. So if you are focused on in room what about the main lobby area, are there other just as you expand in healthcare are there niches within hospitality that you could expand and do?

Yes, we do that today, but we don't do enough of it Mark and I don't mean when I say we focus on the in room that were not looking at other areas of the hotel and these various flags, we are very much pushing to drive more of that business and frankly support important because more, more of the brands, the way they are designing hotel rooms is frankly getting sometimes – in terms of product it goes into the room which means of course less content for us and their desire is to get people into the lobby area and the bar area, the restaurant area to spend a little more money and so strategically we’re focused very much on trying to build that and grow that in the future. And we do some of it now but we don't do enough of it.

Okay. All right and last question just dealing with the EBIT margins you know given us some good guidance with the scenarios surrounding the Idaho plant and moving up margins by the quarter. So is jus fair to say that for fiscal 2017 it sounds like EBIT start out in that first quarter at close to 7.0%. Greater than assume that in by fourth quarter it could be ramped the 8.0% but then of course in the third quarter usually have that seasonal. That a fairway to look at it and then not until 18 can we reasonably think you have a shot at it 8.0%?

Let me say at this way Mark you know we had a lot of questions from investors really right after the spin in terms of your working on turnaround and you got this restructuring and you say that eventually you’re going to get to this operating income goal and how long is it going to take. And we had some investors actually put forth three years are longer and consequently we didn’t put out the guidance because in the April webcast where we made very clear it’s not going take a long and in the guidance that we talked about in our introductory comments. And the primary driver we had to get volume and we had to get the restructuring completed. And what our point was that when we get to that point which we now view as the first quarter of next fiscal year but the quarter ending in September of 2016. At that point we feel we will be able to sustain the profitability and at 7% to 8% range and as you rightly point out though going to Q3 typically very, very confidently the op income will be challenged as always is in Q3 because the lower volumes, but for the whole year we will be confidently in that 7% to 8% range and I will tell you and for our employees this we have historically been sold for a way from just that average of 8% op income that our markets over time generates. That we made our introductory are interim goal to get that 8% op income and we are very, very much into a lot of our competitors are doing more than 8% or less but we have this market is to able to generate more than 8% op income. So I am not prepared right now to say what our goal is going to be after we get to that 8% and but we were not going to be focused at hearing that the level and still looking our market and thing so many doing better than that and being complacent with that 7% to 8% range.

Okay. Yes that’s fantastic, I appreciate all the help and but looks good I mean the manufacturing plant was awesome that new headquarters in the showroom was great. So certainly sounds like you guys are off to the right track.

Thank you Mark and it’s a lot of work from a lot of employees and its really cook to feel the traction.

Yes.

Thank you.

Thank you for you question. [Operator Instructions] Your next question comes from the line of [indiscernible]. Please proceed.

Hi, guys how are you?

Hi, Paul good. How are you doing?

Good morning, Paul.

Good morning. So I think you guys done a tremendous job. So I don't want my questions to see him on unappreciative of that, but I guess following on the last question that was asked. I guess is there in terms of your competitors having higher operating margins. Is there anything that structurally different about your business that would prevent you from getting your margins up to their levels?

Good question Paul and I don’t think structurally we have anything of that nature and I think if you just look at the contribution margin and the change in profitability with the sales in the last year. We throw off a lot profit its so much volume driven and that is why I'm so thankful in terms of all the work its already been done in terms of getting new products introduced, getting marketing programs implemented starting to see the traction and I am anxious and hopeful as we get past that 8% percent level like we had past this year and have our sales at that level and continue the new product success that we’re having. I don’t think there is anything structural holding us back, I think when you look at an overall cost structure of Kimball, a capital structure frankly I think we look really, really good and perhaps even best in the office monitor industry in terms of capital to sales ratio and that bodes well in terms of CapEx that gets depreciated et cetera against our operating earnings as you go forward, so…

Are the increases in margins, is that coming more from the incremental products or higher margin products or is it that you know through the process of like continuous process improvement and I hate buzzwords but or is it kind of a combination of both and that the fact that as you increase your sales you get more operating leverage. I guess it all three.

Yes, we have a very, very disciplined process on new product introductions to past various milestones and tollgates I should say before that product ever gets introduced to give us a comfort level that it's got good margins and the products that we have been introducing generally have very good margins they are - obviously there is a range and some not as good. But very much so equal to and often cases better than the margins [indiscernible] today, so that’s a part of it, just again goes back to volume and the contribution margin frankly our business has always grown off with higher volume, so even on the existing products, we get a lot of mileage out of even existing products increasing the volume. And I will tell you in terms of continuous improvement like what we call that our company it’s our 8% plan and of one company in particular that is not as healthy as some of the others, very much focused on that 8% plan in terms of looking at everything in the business to reengineer, redesign, take cost out and they’re working to actually they have been working out for about nine months or so, seeing some nice improvement and I expect much, much more improved as we go forward.

Well I guess we’ll look forward to you introducing your 10% plan.

Someday, hopefully that is exactly what we end up doing.

The other question that I wanted to ask is it, how is pricing been in the market, I mean and in terms of the competition from overseas, you are seeing more of that or less of the and like are you is it a good pricing environment and kind of how does that look going forward.

In general and this really applies to all the verticals, our hospitality along with the verticals in office. I don't think there's a real discernible difference between now and say a year ago. It has been intensely competitive overall these quarters and I think you look at a lot more of competitors and Kimball also with excess capacity as this market is slowly rebounding after the 2009 bottom. And everybody is very willing unfortunately to compete on price a lot of times and discount and so I don't see a change Paul, but it’s very intense and hospitality also on office and it's been like that for quite a while.

To ask and answer a question like I guess what do you think capacity utilization is in the industry and I guess what would it be at Kimball, unlike what is the theoretical mix I guess the theoretical mix would probably be about 90?

It’s so hard to answer that Paul, because….

I said it was ask for a question.

Well, yes, it goes to number of ships that you are working. On our existing platform and the existing number of shifts that we are in. And I don’t know exactly but I am going by memory of roughly a year or so ago I know we are in New York and some of the work we did with and discussion with analysts I think around 60% or so presently. But Paul there is outside because of the ability to put on second shift in certain of our facilities other areas because of just the employment situation gets very, very difficult to do that. I don't know where the industry is overall, but we also Paul have the issue of Post Falls because we are basically taking a 460,000 square foot facility and moving that into existing facilities in Indiana that’s going to greatly help our capacity utilization once Post Falls is shutdown here in the next roughly a year.

And then what is your competition doing like or you seeing any capacity coming offline like you're doing?

Not in the last year or two…

60% capacity utilization I mean you would expect, because the economy is in shapes.

I would suspect, Paul I’d suspect some of our competition is more than 60%, we have the extra capacity with Post Falls that it is hindering our number.

In Post Falls that you gave to like 70 or something or…

It’s going off on top of my head, but it certainly it’s going to improve nicely with that much square footage that’s going to come offline.

Okay. And I guess are there any particular areas that your like really excited about like what you just see like blue skies like if you could spend all of your time I mean that you, but figuratively if you could just spend all your time like what area is the most exciting at this point?

There is a bunch of areas. I think the…

Yes, don’t give me one of those they are all good.

Well, I’m going to give you some specifics. The focus that we are putting on really driving to what designers, what architects are really looking forward in terms of new products and getting much more aligned with the design elements, it’s already helping us tremendously in terms of our new product introductions and driving interest in our products. It’s an important aspect because our Kimball office brand if you go back two years in prior did not have that focus. So that’s a significant change, nationals always had that focus and done very well with it. I’m just very anxious as we are getting more, more attraction with the Kimball office brand as it relates to the design community that's got a lot of optimism for that and the impact on our products. Kimball health I touched on in the previous caller that I think there's huge opportunity in that vertical and it’s a vertical we looked at for while back potentially should we buy somebody to get it to gain that entrance and we decided no, we think we can build it and build it a lot more effectively and hire some really good talent which we have. I’m encouragement with that over the next five to 10 years to drive the huge growth. And also in the education market where historically we have not done a significant amount of work and had a significant product presence in the classroom, we had lounge furniture and other types of seating that went elsewhere in colleges, universities and high schools, but not actually in the classroom and so that's another area that I'm pretty excited about as we go forward.

Working with designers and architects is that something your competitors has been doing in the past and you're just playing catch-up or is that…

Yes, as I said national has been doing successfully for a long-time and we at Kimball office really put an emphasis on this about two years ago making really good, good inroads, but as you look at our competitor base that they’ve been doing this for a while.

Okay, I guess getting to make some more granular questions, I guess in terms of the buyback I notice that in the first quarter you issued 246,000 shares for a incentive comp. I guess do you have any kind of estimate as to what it would be over the full-year?

And Michelle you’ve to help my memory on this because I know while back you were talking about this, but what we did in terms of the incentive shares that were just issued. Some of those shares were shares related to a spin, successful spin bonus for employees, for some employees. Also the vast majority of those shares were incentive comp related and some of those had transition elements into it because of the various leadership changes in Kimball and transitioning various aspects of compensation it resulted in more shares that got issue. As we get into a normal year I think results around 150 or so is a normal amount of shares that we would be issuing for incentive comp. And again that getting beyond some of the transition amounts we did this past year.

150 per quarter or per year?

Per year. You can generally Paul you will see that we issuing shares in the first quarter of a fiscal year generally because there driven by what the prior year and then we pay it out in the first quarter of the next year and then if not see won't see so shares issued throughout the year but not very many.

Do you guys have 10b5-1 plan in place like would you able to buy any shares during October?

Why I can't comment Paul as we get past September 30 but up through September 30 at various times we had that plan and in and bought through that. But I can’t tell you what we’ve done October forward.

Okay and then I guess in terms of the dividend versus buyback you know in terms of like tax reasons and because like you get you know the compound and I'm always a big centers shares repurchases versus dividends because and I mean if you don’t have a dividend that would be an extra 8 million a year that you could spend on buyback stock I guess you know kind of what I mean I guess you're doing both but on I guess what are the thoughts there like do you see continuing to increase the dividends or?

The dividend strategy we have we look at the markets orient we look at roughly what the payout ratio is for competitors and its in that roughly 20% to 50% 30% to 50% give or take of net income that get paid out a dividends. And so we look at that very closely that's what our market is doing today and we as I indicated my introductory Michelle touched on raise the dividend 10% this quarter. So we look at what the payout ratio is of our competitors we look at what our earnings have been we look at our projections into future because Paul I mean obviously that no company wants to raise the dividend and then have to lower it. So we look at what our forecast is and will have to play out this coming year and year after and now profitability is to assess whether or not we change that dividend going forward. We do believe that the dividends are an important aspect of Kimball International and again common in our market. We evaluated as we look to our capital structure should we do a special divided and we felt no should not and that’s where we landed on the buyback in part because we do modeling just like you do all of our investors analyst do and we model based on what EBITDA multiples et cetera for competitors and we make judgment calls as to what we think the price might be in the future and as that drive some of the leverage aspects will speak of doing buyback and having that pay off a lot more than doing a special dividend. So all that comes in the play.

And then my last question are you seeing any consolidation in the industry and is likely, kind of what’s level of M&A activity and then are you guys know you guys on the hunt?

We are not almost I think almost I can’t recall the last significant nature any kind of consolidation in the industry and we are looking very, very closely in terms of organically growing Kimball International for example in the Kimball health area. Investments were making in hospitality to better attack shortly time type product which drive some capital needs for inventory. We are looking at all of that and focused on getting to the market level of profitability and does not to say Paul that as we look at any kind of an acquisition that might make sense to us that we wouldn't address it, but I would just tell your our primary focus right now is gets fully getting healthy growing our sales with new products and attacking the areas I just mentioned in terms of education and healthcare and being very selective in terms of whether or not it makes make sense to do acquisition. Our company its very, very focused on growth but were also very, very proud of the capital structure in the sense of return on capital as we get to that 8% op income we think will be among the best and perhaps even the best in our industry on rent on capital at 8% op income and I see that just because with acquisitions we would be very cautious that we don't do something that goes on a huge amount of goodwill on our company and ultimately reduces return on capital significantly without of course something like that having a huge growth outlook.

Gotcha. Thank you very much.

Thanks Paul.

Your next question comes from the line of Mr. [indiscernible]. Please proceed.

Hello Mark.

Yes, just wanted to follow up on something you guys said in the prepared remarks where I think you said that sales of products introduced the past three years up 25%. Since there some sort of sweet spot with this three year number just explain why you bring that up how quickly there is a new product ramp up?

Okay good question Mark. What I said in my comments was there were up 33% and so new products in the way tell how we measured first. We look at the new products introduced in the previous three-year period and we look at that the year ago in the first quarter we look at that again in terms of this quarter and the dollar amount of sales that we had that fit that criteria were up 33% and that goes the point of all the new product introduction focus that we've had.

And maybe Mark you are thinking I would mentioned that equals 23% of the total sales.

Yes so that’s a mix issue that that is what we were sold look at in terms of our internal measures and looking at roughly the sweet spot of that being in the mid-20% mix we think any company that if you have a new product sales that say are 10% of your total sales you're really you’re struggling you got a real problem. And for us we think the sweet spot is around the mid-20s.

Okay but why that three years is that how long it takes for know if you introduce the product? How long its take.

Yes, good question – yes with the ramp of new products it takes time to get that new product on dealer showrooms it takes time to get all the marketing material out get in our field sales people trained on the new product and also Mark what we will be to helps in terms of that timeline that also I believe just about everybody else in the industry or at least most of them look at that same way as a three-year back and so that’s why we use that. But I think there is logic to it because of the length of time it takes to ramp new products.

Okay and then in the local showrooms with the showrooms carry the full range product or they solely focus on say healthcare versus…

That they have a broad sampling of all products and I say all products is our San Francisco showroom and I know something like healthcare is not is fully rolled out yet to all the showrooms but it’s generally broad-based but some showrooms will have a more particular product and then maybe less than another we have no showrooms that are focused entirely on let's say education are on healthcare. It is really a sampling of all products.

Okay. And then just lastly regarding buybacks again, is your philosophy to just buy steadily every day or do you perhaps jam on the gas pedal a little bit depending on whatever variables you're looking at?

I will tell you when in late February when we started buying we hit the gas pedal to and of course there are limits as to how much you can buy of the daily volume. I can't comment as we go forward Mark in terms of the buyback strategy and approach because that that is an issue that is decided by our Board and we reported, one quarters over as to how much we have done. But I will tell you we look very, very closely at what we think the intrinsic value of the stock is, what do we think with our forecasted projections into the future, what do we think based on comparables, what our stock price might be in the future and all of that comes into play coupled with the free cash flow we have and expectations of we don't – we recognize today, we have got a lot of capital and we were greatly over capitalized before we started the buyback and that’s an element also we look at with our Board to make the decision of just how we go about it.

Okay, all right. That was everything I had. Thank you.

Okay, thanks, Mark. End of Q&A

Thank you for your question. There are no further questions in the queue. We would now like to hear from Mr. Bob Schneider for closing remarks.

Okay, Tony, thank you. And thank you everyone. In closing we had a very good start to our fiscal year 2016 with 8% sales growth and significantly improved operating income over the prior year. I want to touch on again just a key point that I mentioned at the beginning of my prepared comments. The first one was the new product introductions, again I really want to emphasize because we are so pleased to see this come to fruition. The new products getting traction and those products sales being up 33% over a year ago, which is fantastic, the office orders being up 8% in the quarter and our market was up 2% which again very, very bullish open orders at the end of September up 9% over a year ago. We touched on the operating income being at 6.6% as percent sales and I really would ask everyone to take a look at page 26 on the slides that were accompanying this webcast on our internet site. It really shows the trend and there are various other slides there I think very, very important to show the trending what's happening. We also talked about the accelerating what's happening in Idaho and that facility moving to our Indiana locations, helping on excess capacity and getting us one quarter quicker to our earnings guidance and increasing the dividends. So a lot of good things happened in the quarter, we are excited and we very much appreciate your support and focus on Kimball International and we look forward to speaking with you on our next call. Thank you very much and have a great day everyone.

At this time listeners may simply hang up to disconnect from the call. Thank you and have a nice day.