Good day, ladies and gentlemen, my name is Katy and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International third quarter fiscal 2008 financial results conference call. All lines have been placed on a listen-only mode to prevent any background noise. As a reminder today's call May 7, 2008, will be recorded. After the Kimball speakers' opening remarks, there will be a question-and-answer period, where Kimball will respond to questions from analysts. (Operator Instructions) As with prior conference calls please be aware that today's call 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 Kimball's 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, Chief Financial Officer of Kimball International; Dan Miller, President, Furniture; and Don Charron, President, Kimball Electronics Group. I would like to now turn the call over to Mr. Jim Thyen. Sir, you may proceed.

Thank you, Katy, and welcome everyone to our third quarter conference call. We hope you had an opportunity to review our earnings release issued this morning on the results of our third quarter ended March 31, 2008. As in our last conference call, our format today will start with my overview comments on the quarter, followed by Bob's financial review. We will then open the call to your questions. As in prior calls, I have asked Don Charron, President of our Electronics Group, and Dan Miller, President of our Furniture companies to join us in support of disclosure, understanding our results, and providing you with appropriate information. In today's release, we noted how our net sales for the quarter ended March 31, were 7% higher than a year ago, with higher sales in each segment. Sales in our electronics segment were up 10%, while furniture segment sales increased 3%. I'm very proud of the work done by our teams to achieve these sales increases in this difficult economic period. Earnings, though, declined due to a reduction in gross profit margins in both segments. I am not proud of these results. We do have a firm resolve to bring improved results in the near future, and a roadmap to accomplish the improvement. We, as others, are experiencing rapidly changing conditions and market pricing pressures in each of our segments. This, coupled with higher commodity costs, and increased fuel base costs, together are squeezing margins. During the third quarter, we took actions to reduce our operating cost structure, starting with the announcement of a 150 employee reduction, mostly in our administrative areas. We are aggressively reviewing our processes and our entire cost structure to eliminate complexity, redundancy and inefficiencies in order to improve profitability. We expect to remove on an annualized basis,…

Thanks Jim. I'd like to drill deeper on a few areas of our P&L and balance sheet that may not be totally clear. I'll start with the consolidated P&L overview that we provided you in today's earnings release. Jim mentioned the 7% increase in consolidated sales, and the relative sales increases in each segment. Sales in the electronics segment increased 10%, while the furniture segment increased 3%. Due to the significantly higher material cost within the electronic segment, their gross profit margin is much lower than furniture. Consequently, when electronics sales increase faster than furniture, it has the effect of lowering the overall consolidated gross profit margin. But that explains only a small portion of the gross profit percentage decline. The larger reason is decreases in each segment caused by customer pricing pressures, higher commodity costs, and mix shifts to lower margin products during the quarter. We had a 19.4% gross profit in last year's third quarter that declined to 16.9% in the third quarter of this fiscal year. This is the primary driver of our lower earnings. To illustrate the effect, had our gross profit percentage remained flat with last year, our income from operations would have been approximately $4 million, or $0.11 of earnings per share higher. We are addressing these gross margin pressures through our restructuring actions, particularly with the reduction of excess capacity related to the electronics European consolidation and the exit of the two US facilities within the EMS segment. In the furniture segment, we recently increased pricing on select furniture products to help mitigate higher commodity costs. Also, as Jim mentioned earlier, we are continuing to invest prudently in the areas we feel will improve our long-term sales growth. Also, as Jim noted, we took quick action during the quarter to begin rightsizing our…

Yes. Your first question comes from the line of Chris Agnew from Goldman Sachs. Please proceed.

Hi, thank you. Good morning. I really want to focus on the gross margin and try and get my head around, I guess, the timing of the changes you're making and maybe a little more color on some of the impacts. You mentioned that the decreases in each segment due to price pressure, commodity costs and mix shift. I guess going one by one, in the pricing pressure are you seeing that, is that fairly broad-based? If I take the Electronics/EMS segment, you have four markets, and you were seeing growth in three of them. Are you seeing pricing pressure across three of those, or is the growth mainly coming from volume? On the commodity costs, how much ability do you have to defray that through locking in long-term agreements or to push back on suppliers? And then, finally, the mix shift, can you give me a little bit more color on helping to think about how that plays out through the year? Was there a particular factor that was one-time or will that mix shift continue through the rest of this year. I'm sorry if that was a bit long. Thank you.

Okay, Chris. We'll try to take them in the order of questions that you posed, and if we miss one, please bring us back on track. In terms of the commodity cost increases, they are fairly broad. The basic change in food and fuel prices and commodity costs, we're seeing them across the entire spectrum. Now the electronics portion did not emerge as quickly as the commodity areas in our furniture segment. But they are emerging. There are a number of factors there in global supply chain, particularly in Asia, that are changing the cost structure of our Asian suppliers, some of them regulation-based, some of them quality of life-based in China, what have you. And it's generally emergent. We think it's a global demand base. It's not something that's going to subside in the near term. And I think that we would all agree that that seems to be consistent in all the things that we read. In terms of competitive pressures, the competitive market pressures on pricing are pretty strong on all areas, electronics, as well as furniture. And it varies by project, by program and by vertical market depending on what the drivers are that those various vertical markets are experiencing at this time. I'll let Don elaborate a little bit on the electronics area, and then I'll let Dan elaborate a little bit on the furniture competitive pressures. Don?

Thanks, Jim. And Chris, I don't want to be redundant to Jim's remarks, so I'll just maybe touch on an area to one of the questions that you asked in terms of these commodity price increases, some of the rising costs we're experiencing there and our ability to overcome those or possibly even pass those on to our customers. You know, generally speaking in the EMS industry, I would say that the expectation, and again across all four of our end market verticals, is that we try our best to offset any of these increases with other productivity improvements we might have within our operations or elsewhere in the supply chain. I think that with where we are in this market, we can see that it's going to be very difficult to overcome all of these increases with productivity improvement. And so we will be and have been sitting down with our customers, explaining to them where we're seeing these increases, how much it we think we can offset with productivity improvements, and working in a collaborative way with them to try to get their help in the way of accepting potentially price increases or other things that they can do to help us keep our margins despite some of these rising commodity prices and their impacts on our cost of services. But again, that's customer by customer, and the last thing we want to do in this market is, as Jim mentioned send our customers shopping to our competitors. When we get to that point, it's a last resort by the time we sit down with our customers and look to pass through some of these items.

Dan, would you elaborate a little bit more on the furniture?

Sure. On the commodity or material cost increases, as you've heard today, they're broad-based. It seems that many elements, many commodities are influenced one way or another by energy, so those flow-through to just about every commodity that we have. We're trying to address that in a variety of ways. We're working with suppliers who change where we're buying our material moving to lower cost regions; we're having some success with that. We are also having success around material substitution, finding less expensive materials that are very adequate to meeting the specifications that we have on our different products. But we're seeing the pressure, no question. I think our supply chain folks have been doing a good job of delaying those, reducing the amount of increases, but we have not been able to be 100% successful with that, and we see continued growing pressure in that area that we'll continue to try to offset but we are likely going to experience some of those increases going forward. In terms of pricing, we have announced and are having what I would describe as reasonably historically good success at realization as price increases in some areas, and we have other price increases that we are considering. I think office furniture and hospitality, the industries have a certain rational approach to pricing in that they are well thought out, explained, and I think that our customers understand our reasoning and rationale for trying to pass through some of the increases in commodity costs and other operating costs in the form of higher prices. And we've had a reasonable amount of success in passing those through, and we'll continue to look for opportunities to continue to do that.

I think the last area, Chris, I think if I remember correctly your question, went to the mix and what might be expected as the mix between the two segments changes.

Yes, that's correct. And was there any mix shift within the segments? Thanks.

Bob, would you build on that?

Yes. Chris, there are two different types of mix movements that impact the quarter. The one aspect, the greater amount of electronics sales relative to furniture, that mix shift was about 3 basis points off of our gross profit decline. Said another way, we declined 2.5 percentage points, and about 0.3 of that was driven by just the mix between the segments. And so without that mix, the decline would have been 2.2 percentage points, so it added 0.3 to it. As we look to the future, and you look at the BIFMA predictions and what the furniture industry may do in the coming year, actually predicting a decline in the coming year relative to electronics, which based on contracts that we have to date and have some pretty good visibility on, we are expecting over the coming year that our electronics sales will grow at a faster rate than the furniture, as has occurred in this quarter and so consequently we will continue to see some of this gross profit pressure driven just by the mix between the two business units. The second part of your question in terms of the mix within the business units, the primary driver there we were referring to within the press release is within electronics and the decline that we noted relating to automotive being down. And those typically, for the most part, are more mature contracts where we've had more of an opportunity to have productivity improvements, etcetera to help the margin. And we've had a lot of new customer adds over the last few years, and those new adds outside of the automotive area often haven't had the opportunity to have the productivity improvement and consequently we saw that mix in the quarter when we saw the automotive go down.

Okay, great. Thank you. And then, finally just on, you said there were three things you were hoping to offset these pressures; one, reduction of excess capacity; two, exit of two US facilities. I just want to confirm that you were saying it would be done by June. And third, increase the price on select products. How should we think about the timing on all three of those and how they feed through to try and help the gross margin? Thanks?

We're focused on all three of them right now, with pretty strong urgency. And the latter part of that is improving our operational excellence as well. We think that will assist us in taking advantage, consuming some of that excess capacity. And you are correct, the totals of products in electronics is ongoing right now and should be completed in the near term. Gaylord has already been completed, that's done. Hibbing is well underway, it's going well and should be completed, would down by July.

June 30 is the date we expect to be totally out of the Hibbing operation.

The movement of product out of Ireland into Poland is proceeding quite well. The majority of that product has already been moved, and has been moved very effectively. The Wales consolidation is a longer-term strategic move that was part of the agreement with our customer when Wales was acquired, and will take a couple years but that will not be a deterrent to our operating effectiveness and our margin improvement. Does that help you?

Perfect. Thank you very much.

(Operator Instructions) Your next question comes from the line of Matt McCall from BB&T Capital Markets. Please proceed. Sean Connor - BB&T Capital Markets: Hi, good morning. This is actually Sean Connor for Matt.

Hi, Sean. Sean Connor - BB&T Capital Markets: A question on the make-up of the EMS segment, you commented about the automotive continues to decline. Any comment on the pace of decline? Are we starting to see it bottom out? Is the decline still accelerating or is it steady? Any detail there maybe on the breakdown of the international versus domestic automotive market exposure?

Sure. I guess let me say the positioning was to remind you that this was a direction and a strategy that we deliberately imparted upon a couple of years back. We knew our concentration in the automotive vertical market for EMS was too heavy. We also knew that our concentration in various programs and projects was too heavy, and we have made significant progress in the diversification of our projects and programs as well as the diversification of the customers that we serve worldwide. And so the change in the portfolio mix with EMS was a conscious strategy and we have pretty well achieved what we set out to do in the last two years and particularly in the last year with the acquisition of Reptron and our portfolio is pretty balanced right now. We also remain committed; we have never wavered from being a leading provider in the EMS and the vertical market of automotive. We are well-thought-of in our quality and our reliability and our whole package of value. So that's going to remain a very important vertical market to us, even though we have consciously diversified and balanced our portfolio into medical and industrial controls and public safety. And it's pretty well balanced at this time. Don, do you want to elaborate a little bit on the mix geographically and where we're going?

I will. And maybe, Jim, just to build on the first part of your response to Sean, in terms of what we're seeing right now in the market, our book of business in automotive is stabilizing and were it not for the strike that Jim mentioned that affected a number of General Motors plants here in the US, our automotive sales would start to track pretty close to where we were in the previous quarter. And so we do see sort of a bottoming out of where our current book of business is, and we have been successful landing new business. And I would just ask to expect new business with the comment that Jim made earlier, too, in terms of our selectivity. We've been very selective with our new business development activities in automotive. We're with customers that truly appreciated our package of value, and quite frankly are willing to pay for it. We have the margins we need to be successful in our business there. If you go back several years, maybe three or four or five years, you would have found that the majority of the automotive business that we supported in our EMS segment was built in plants in the US, namely right here in Jasper. And part of what's happened, and part of what we have done with our overall strategy is to recognize that a lot of that type of manufacturing is transitioning to low-cost geographies. So what's happened over the last three or four years is that the majority of our work now that we do for the automotive end market vertical is actually done from our facilities outside the US. And so Today, and in the future, the majority of that work would be supported, for example, in our China facility, in…

Sean, in prior calls, we had estimated that we would continue to see pressure on earnings from China for several quarters; we hadn't predicted how long it would take in terms of filling that facility and getting past the break-even capacity level. In the third quarter, we did have a loss, but it was less than we had experienced in all of the prior quarters and so we were pleased to see that in terms of reduced pressure on our earnings out of our China operation.

We're pleased with the way the startup is going; the operational excellence that we're achieving on the shop floor, and the perceived attractiveness that our customers are telling us about the operation.

Sean, in the past we've had $0.02 to $0.03 of earnings per share pressure, and in the third quarter it was less than $0.01. Sean Connor - BB&T Capital Markets: Okay. So definitely you're in the right direction there.

Yeah. Sean Connor - BB&T Capital Markets: I think maybe to get some detail on the upcoming consolidation in Europe, or I guess, the ongoing, since you're shifting product from Ireland already. Is there any detail on what type of cost savings or margin improvements that is going to provide when it's all said and done, or maybe to ask it in a different way, can you quantify the excess capacity pressure that you experienced this quarter that will be addressed by those actions?

Let me just talk about the European consolidation plan in general and then just reiterate that, all of these plans that we've been working on to get at our high cost of underutilization are all aimed at getting to the goals that Jim mentioned earlier. We believe these actions are the actions that we needed to take to achieve those goals, and the timing that Jim mentioned, so just more specifically on the European consolidation plan; we have already started to move production out of our Longford, Ireland operation. That activity is underway and we expect that that activity would be completed in the November/December timeframe of this calendar year. And so that is on a faster timeline and as I said, that work has already begun, and it's moving into the existing structure that we have in place in Poland. We're happy with the progress we're making there. Our team in Europe is a very strong team, especially the team that we've got based in Poland. They've been through this before; they've been through these types of transitions of work before, so we fully expect that they'll execute to that timeline and we'll have the benefit of that consolidation starting to occur after it's completed in the November/December timeframe. And as Jim mentioned, the Wales operation, those products there, all of those products are medical products, and you know with some of the work that has to go on in terms of registration and re-registration, some of the regulatory compliance work that has to be done upfront, some of the other parts of our plan there, that's going to take us longer. That plan is going to take place over a 2 year to 2.5 year period. But as Jim mentioned, we don't see that being a big drain while we're in the transition planning and execution mode. It's a longer timeline, so we don't expect that to be a drain to what we've got planned in the way of improvements from the overall consolidation effort.

I think it's important to remember that the Wales transition is part of a five year strategic strategy in close collaboration and cooperation with our customer, and it was also the company that we acquired the operation from. So it's a very carefully planned change, and we are right on schedule. The Ireland change has been accelerated, and it's fortunate that we have a high-performance team that can accelerate this change. The primary driver of the change in Ireland really goes to the macroeconomics of the European Union and the euro and what that has done to the competitive cost structure of the country of Ireland. And so they're both driven by economics; one is planned, and it's a nice, disciplined roadmap; and the other is a little bit of a change from what we envisioned over a year go, but it's based in the macro changes in the European Community, particularly tied to the euro and the competitiveness of the country of Ireland. And we're going to see the payoff of having a high-performance team established and well grounded in Poland. Sean Connor - BB&T Capital Markets: You guys have not quantified the overall savings that you'd expect? I know you gave the 4% goal in two years, but this overall transition won't be completed for 3.5 years. Can we get an idea of which is Ireland the most costly, as most of the savings is going to come from Ireland, you have less in Wales and then less in the Poland move?

They are both important to us achieving our operating income goal of 4% in the next 24 months.

And Sean, when you think of timing, as Don mentioned, the Ireland operation, that excess capacity will be taken offline in that roughly November timeframe and so that burden to our cost structure will not be there post that period of time. The Wales transfer will take longer, and so over the next 24 months, we would see the benefit from the Wales transaction happening towards the latter part of that 24 month period. But you were right; we have not quantified the benefit of the European consolidation due to competitive reasons. We're trying to give you a little bit of flavor in terms of timing, though. Sean Connor - BB&T Capital Markets: Sure, that's appreciated. Looking at the other part of the business, the furniture business, how did the quarter progress from an order or demand point of view? I think, if I'm not mistaken, open orders at the end of last quarter was 10%; growth in the quarter was mid single-digits. Did the pace decelerate through the quarter? And how has April and May looked?

We're pretty pleased with what our order pace evolved compared to a year ago. Third quarter to third quarter, we are up; our open orders are up. We also definitely saw a sort of a decline compared to the second quarter. And it certainly is reflective to the white water that we're seeing going in the economy and the credit crisis spread to a pretty broad brush across the economy, and what it's doing to discretionary spending. Dan, would you elaborate a little bit more?

We did see what Jim described, and more specifically in April and May. We're in a bit of a seasonal turn. The first calendar quarter of the year is traditionally a soft quarter in terms of demand generally, and especially in office furniture. And we saw a slowdown, and actually we've seen a little bit of an improvement in parts of our demand relative to the same quarter last year, and relative to the last couple of the months. It's not dramatic; I wouldn't describe it as that, but it is what we would generally feel more of a seasonal improvement rather than a general economic improvement. Sean Connor - BB&T Capital Markets: Okay. You mentioned in the release the supply chain issues in the hospitality market. We've seen that before; I just wanted to try to get some detail on what the impact was from a margin perspective? I know Bob gave some good information on the 30 basis points from the mix shift. I wonder, if that's been quantified as well, or if you could quantify that and if that was worse, better, improving versus the last quarter? You gave us some good information on the cost saving on the SG&A line, but I just wanted to try to figure out what's being done to remedy those issues as well?

This is Dan. What we're doing is both working with our established base of suppliers and particularly in hospitality. Jim mentioned earlier the pressures that are enormous in China around both mandated by government regulation changes; we've seen material cost impacts that oil have on any part of the world. We're seeing them over there. So we've been working on material substitutions to a significant extent. And that's having some real benefit for us. We're also moving country of origin where we're actually sourcing some of those products; as China increases, other countries aren't increasing quite so fast. And we have relationships with companies, suppliers there, who have manufacturing locations in more than one country. So I think the establishment of our supply base has put us in a good position of being able to move around a bit with companies and suppliers that know us, know our needs and know our quality and delivery expectations. And we have been able to offset a portion of that demand for increase in cost, but not offset them completely. And in terms of exact percentages, we probably would prefer not to get into that for competitive reasons. Sean Connor - BB&T Capital Markets: But do you expect a little bit of pressure going forward in the next quarter and maybe into the first part of next year until you get everything worked through?

I think we expect those, the pressure to be there, and that's why we've got to have initiatives underway, which we do, to try to offset a fair amount of those increases. But I don't believe we're going to be able to offset all of them in terms of being able to turn back or replace materials. So we're going to have that kind of pressure, and then we have to make decisions about how we will deal with that on the pricing side. Some we'll be able to pass along, and some we frankly won't be able to. Sean Connor - BB&T Capital Markets: And then, finally, we appreciate, I guess the goals put out for the margins in both segments. What assumption is put on the top-line to help do that? We've got the cost saving initiatives given; we've got the $12 million to $13 million savings; we've got the consolidation in Europe. What happens on the top-line to help drive those numbers? I guess that's the question, what are you assuming on the top-line to get those goals?

Sean, we don't provide that type of earnings guidance, but I will tell you we are very sensitive to what's going on in our markets in terms of the industry, the economic impacts, what we see out of BIFMA as it relates to office furniture. And we comprehend that within our forecasting and our roadmap plans on activities we have to do to achieve those goals. But that level of detail, for competitive reasons, we have not provided. Sean Connor - BB&T Capital Markets: Okay. Thank you very much.

Dan, we've got a trade show coming up, Neocon, it's a pretty important furniture show. Maybe you could talk a little bit about our plans there.

We are really enthused about the show this year because it's a traditional time of telling our story more fully, and in this year it will be both product introduction, which are very important, but also our story in both of our office furniture brands around sustainability. And those of you who might be visiting that show will see that very much in evidence there. We've been investing heavily and effectively in our product development efforts for a while now, and we have been introducing these products fairly consistently in both brands. And we're particularly enthused this year about some new product introductions that we believe are going to be very well received in the market based on some kind of pre-discussions with some significant customers. So when we add that to our sustainability clarification of our strategy and our story, we believe we're really going to be well-positioned in the trade show to encourage our dealer partners, our distribution partners, to make sure they stay partnered with us, and end users to view us as the great supplier we've been in the past, but look at us a little bit differently because of new solutions we're going to be offering. Sean Connor - BB&T Capital Markets: Great. Thank you.

At this time, I show you have no further questions. I would like to now turn the call back over to Mr. Jim Thyen. Sir, you may proceed.

Okay, that brings us to the end of today's call. We appreciate your interest in Kimball. We look forward to speaking with you on our next call. Thank you and have a good day.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the call and you may now disconnect. Have a wonderful day.