AGM 2018

Nov 14, 2018

Slides

Good morning, everybody, and welcome to our 2018 shareholders meeting. We're also today very pleased to have our members of our board here with us today. We have Domnick Asposito. We have Tara Stachem. We have John Duna. We have Jim Smader. We have Jim Carlson. That's our full board and and Mary Garrett, where are you, Mary? So we've got all the board members here. So what I would like to do is today I would like to give a very brief overview about our business and then we will go and discuss our various elements of our shareholders meeting. For fiscal 2018, we had sales of about $767,000,000, a little bit higher than fiscal 2018. We had an operating margin of 6.5%. It was lower than last year due to many factors. Especially in terms of which I will talk about later and getting a fairly major investment in government contracts. Our EPS $1.35 was pretty close to what we had last year. We did benefit from the reduction in the taxes. We will continue to generate good cash. We pay we continue to pay strong dividends. In fact, our dividends last year increased by 47% We also purchased $22,000,000 of our shares and we can maintain capital expenditures at about 18,000,000, about what we have spending in the past year and also basically we had no debt. We are positioned for growth. In fact, last week, we had our annual convention with about 550 of our team members here and we discussed many of our growth strategy of opportunities. We have in the last few years continued to make good progress are products are more relevant, 70 about 70% have changed in the last 3 years. We are the world's leading interior design destination. We are leveraging our vertical integration via vertically integrated enterprise. We have focused on increasing marketing, we're enhancing technology. And we are in addition to our retail network, we are also expanding in international government and contract business. And we have and we continue to have a strong focus on social responsibility. As I said, 70% of our products have been refreshed in the past 3 years. They're relevant. They're fashionable. They're spanning multiple style that in fact, as you know, we are known for classics, but today, classics have to have a modern attitude. And if you come to our design centers, You will see that attitude there and also in all our communications. We continue to leverage our vertical structure that is about 75% of our products are made in our own workshops in North America. We continue to improve our product offerings. And in fact, last week, we introduced new products throughout the Ethanol inflection, which will be launched in the spring of 2019. As you can see in the last 3 years, we are somewhat familiar with it, but we'll continue to add products that are under this umbrella, not being classic, but with a modern attitude, today also lifestyles such that even So the so called formal has to be livable and that's what we have been doing in terms of the products that we've been introducing. We've continued in 2017 with products, again, following this whole attitude of being classic and livable. In 2018, we had very strong product introductions. Now all of this also had implications in our manufacturing and our tooling in our selling of the products from the floors which were the positives that we have a strong product program, but the impact was that it did have some impact on our margins because of the fact of selling off as much of products from the flows that we had to do in the last 2 years. The good news is we are almost towards the end of that. And we just introduced product programs that are going to be in the spring. 2019 will be marketing them very well received by network last week. As I mentioned, we are the world's leading interior design destination. We have our 200 design centers in North America, We have 1500 interior designers in North America in 2000 network wide that is internationally the rest of them. In addition to these 1500 who worked directly for our network, We have about 8000 interior designers who are affiliated with us who come and utilize our products and work closely with our in house interior designers. And today, we are combining personal service and technology, very critical. Over the years, We have been we've continued to reposition our design centers. We are reducing the size from an average of 16,000 square feet to about 10,000 square feet and the new locations are leased in high traffic time centers and lifestyle centers. Lifestyle center is about 8000 square feet classic design centers. This is what we had previously. This opened in the 60,017, average is 15,000 square feet. And then before the Great Recession, we also opened up design centers in 18000 to 25000 Square Feet. As you can see, 68% of our design centers in North America and they were relocated in the past 15 years. This has been a major focus and very extremely important in our repositioning. Right now, for instance, recently, we opened a number of them, but this is in Buckhead Georgia, we opened in Chicago, we opened also Calgary, Canada, right now under construction is Albany, New York. And these are all independent retailers who in some of them retired, in this case, like an Albany Stanley was there for of almost 60 years. So we are now relocating. It's under construction. So we have just now, it should be opening next week. This is something that we build from ground up in Denver and is opening up next week for consumers, again, the relocation. Toronto Miraj in California. We purchased this building and again, it's a relocation and again, it would be opening up in the January of 2019. Under construction is also a design center we're moving from Cedar Rapids to Carl saliva under construction. And April 2019 is the date. Our manufacturing, as I said, 75% products are made in our North American manufacturing. It enables product customization. It also manages our inventories. Our custom quick share proposed phase delivered in home within 30 days anywhere in the United States. We have a sharp replenishment lead time for stocked wood products. We're also now supporting the GSA that is our state department and the government contracts. We have 7 plans in United States and 1 complex in Mexico and in Honduras. We have invested and we continue to invest in technology. Keep in mind, 25 years back with 30 manufacturing plants in North America. Today, these 9 plants has the capacity of producing more than the 30 plants that we had 25, 30 years back. Our logistics is tremendously important because we deliver our products at one cost nationally, as you know, in our business logistics is tremendously important. Managing returns, managing services critical. So we do have a world class logistics structure. We have a strong network, in terms of from trucking to parcel shipping. We are CT pad certified. We have also about 10.25 percent of our products action accessories are coming overseas. We also have international retailers, especially with our 85 locations in China, and most of that product is shipped from North America to China. Talent is critical. We are blessed with people. As you know, we started in Northeast, Vermont and we've got lots of craftspeople in Vermont. In the Blue Ridge Mountains of North Carolina. That's where a lot of our manufacturing is, talented people, a long tenure, This is our team in Silao, Mexico, when they're 10 years back and started with a 40,000 square foot. Now we have 600,000 square feet. We've been expanding it. About a 1000 people went from 90 to 1000 good people and we've been trading them. In terms of in the upholstery area, especially cutting and sowing. In addition to Mexico, we also have one in Honduras, which we also operated 7 7 years back and that also is helping maintain our presence in North America. Now in marketing, our focus has been to get to be known and desired. We are a known brand, 86 years known. We need to make sure that we reach. We expand the demographic base We utilize and increase our broadcasting print, expand digital marketing, and we utilize technology to expand reach. The media mix is important and it's just changing based on what we did 10, 15, 20 years back. Today, we are using directional We're using magazine and new movers. This is new movers who are moving into the markets. We have a very strong entrepreneurial marketing Each one of our 1200 interior designers is an entrepreneur. They have grassroots marketing is critical. So our national print is important. So all the various elements from social media to local digital to email to search and SEO that is all part of our media mix. Our message in our website is important. It gets a message across of our complementary design service. That is a great differentiation. Oncology and craftsmanship. And then very importantly, our environmental and social responsibility, we want to get that. We have done it, not because this is the fashion of the day. We've been doing it for the last, I would say 86 years since the company got started. We did it because the right thing to do. We also are launching some initiatives to get newer people started with each channel. In fact, we just launched this in November that says get started with the best. We've taken a number of our items to let people know a great, great, great off great savings because we want them to know that Ethan Allen's quality should there's great some great value and we want them to get started with it. Our direct mail is important. We last year's mails are close to 18,000,000 Copies of our direct mail is targeted. It's a proven revenue generator and its prospects or conversions have higher average order value. It gets some message across. Our email blasts are important in getting, again, the messages about our interior design service, about our products, about our services, about our values, And today, digital mediums are important. So display ads, banners, all of those are where we have been investing as we move forward. Paid social in addition to the social that our grassroots folks do, we also invest in social mediums. I mentioned the new move up program. It's important that these are folks who have just moved to the new homes. We've reached them through different mediums, including direct mail, Shelter magazines. We also are in these magazines. And you will see our advertising in some of the major magazines, shelter magazines around the country. We also participate in what you call designer showroom. Many parts of the country. So our message gets across in the fact of what Ethan Allen can do today. And a lot of this is done by our interior designers in the field. And they then send the work that they have done. We really literally get 100, if not thousands of work that they do They shared it. And in fact, last week, when they were all here, they even get some recognitions for the work that they do. Technology is critical today combining personal service and technology, tremendous focus in all areas, whether it's in manufacturing. Our manufacturing today uses technology, to make to make us not only produce great products, but to make more efficiently. Our retail from an augmented reality to 3 d room planning to retail systems. All of that is critically important because we are play integrated company from a concert of an idea to engineering to design, to marketing, to retail and logistics. And that may, may I mention this is sort of our website. The message is getting across who we are, what we do Now augmented reality is important and we have been spending a great deal and in fact, a lot of our products are now available so that designers can work in the design centers. And in fact, 600 of them are chatting online so they can help, just to give you a little perspective, listen a brief video. An important differentiation about our augmented reality is done to scale. So that people can see it in scale because a lot of that is not on scale, what's available outside. Now three d room planner, We have 2 d, 3 d, we've got whole teams working on it. We have about maybe 70% complete. And in the next few months, we are almost 100% complete. So all of that can be utilized by our designers. Just give a little bit of a brief video to show how this works. Alright. Thanks Corey. Now, as I said, including technology and personal service is our great competitive advantage and you're going to see more and more of us utilizing it. Our design is using it. In fact, last week when we had our convention, Here, we had a great focus on this in sharing ideas of where we are and what we need to do. Now in addition to our North America where of course most of our business is done. We have over 100 locations. This is all operated by licensees while in the North America most of 70% are operated by the company. Of course China has been the most important and in fact almost 70, 80% of the products is shipped by North America to China. In internationally. They project our brand very, very well and whether it is in Doha, Qatar, Kuwait or Philippines, In fact, we are today in the process of Opening 1 in Cambodia. Also last, a year. We were awarded a contract by the U. S. State Department, which is a very, very important one. We just got started and this has an opportunity. And contract enables all American diplomats to utilize Ethan Allen furnishings. So this year, we expect this to continue to grow We're also working with the U. S. Military Department of Defense. And in fact, we just received a contract to furnish one of the fairly large complex that the military is building in South Korea. So we're in the process of finishing all that big complex. We're also looking at other opportunities. Last year we made an agreement with Margreitaville and their first major project was in Orlando. Is about 1000 vacation homes in a hotel and we are in the process. We are finishing the hotel and also finishing most of the vacation homes as they are being built. And with this company, we are discussing other markets around the country. I mentioned briefly about environmental and social policies. As I've said, we've done it because the right thing to do. And if you also go to our website, you'll get information about the work that we have done for the last 86 years in, you know, we are in manufacturing in the Northeast. Of Northeast Vermont, we run a sawmill. We go to the forest. So all those from there to our design centers is important. If you go to it and you can see that all the work we have done for instance, we have reduced recently in just the 34 percent carbon footprint has reduced. Electrical usage has been reduced. Recycling has been increased. Water usage is reduced. All important aspects, whether it's landfill or greenhouse gases. We also take this across the world We have a compliance department that we work, for instance, with all of the world. Every company that has to deal with us has to meet certain standard, safety standards, environmental safe, there's no child labor. So that's tremendously important. And all of that has impacted our business, our culture and the way that where we do business. So, say processes are important. Because, you know, we are in manufacturing. We are in retail. We are in logistics and we've got over 5000 people working in these areas. So keeping them safe is critical. I mentioned about environmental initiatives, many, many initiatives for instance we used to burn thousands of gallons of oil in Vermont, number 0. We We use sawdust, we make, we use it for heat, we even create electricity, we have steam engines, and All of that gets across. The recycling is important at every element of our business. We do, as I said, we do it. It is also helpful to our business, but also the right thing to do. Given that, we're also aware it makes sense. We do. Habitat is something important that we've been associated with for some time, and we have so far given about $19,000,000 to habitat with one of their larger supporters in the country. In corporate governance, as you know, we fortunately have, 1st of all, a great board. We also have, take a look at all the things that we need to do because we don't want to do things that we're trying to shield anything. So as as new ideas come up, we incorporate them because we believe that's the right thing to do. We also just introduced, we have also continued to look at stockholder returns since we took the company private. We have continued to pay dividends. Total dividends, we have paid is over $400,000,000. So it's a constant last year Also, we paid strong dividends as we paid, special dividends, regular dividends. We believe it's good to take care of our stockholders from that perspective because if you generate cash, that's a good and good way of using cash. But all that result, we'll have to sure that we also look at other things. Look, we have purchased almost 43% of our company back. We've invested $600,000,000 in buying our shares. We have also capital expenditures are equal. These are actually more critical than paying dividends and buying shares. These are the more important things. We invested $800,000,000 in capital expenditures continuously. As I mentioned, we had to invest in manufacturing and logistics, in our retail network and technology, so we feel pretty fortunate that we are in good shape in those areas. Again, as I mentioned, this is about dividends. We increased 47, we continuously look at it, what's the best way of returning share to our stockholders. But I don't want to we don't want to create this stuff. It got to make sense, it's got to be prudent. Now you folks have also looked at and just and we have reviewed over the years some opportunities We do have an opportunity. And just keep in mind, before the great recession, we did over a $1,100,000,000 in sales. We had an operating income of our call was close to 14% different times. But now we have $900,000,000 or $800,000,000. Just think of the operating leverage we have at $900,000,000, we believe that we can take our operating income to 10.9%, close to 11%. From 1,000,000,000 to 12%, the operating leverage of our manufacturing of our retail is great On the other hand, if the business is slow, it has a negative impact across the board. So we are very much aware of the fact that we have positioned ourselves well And I believe that we have an opportunity of having operating income between 10% 12% because of the operating leverage that we have. It also reflects the fact that, of course, from even from 2000 6 before the Greater session, we also reduced, we had about 34,000,000 shares outstanding, now it is less than 27,000,000 that is also affected, but we have to be careful that we don't reduce it too much, but we have a good, good base right now and that we intend to keep it at that level. So with that, again, very briefly, we do, we are positioned well. We have made a lot of work, especially in the last year. To expand our offerings, to get the message across. In fact, as I said, we are the world's leading interior design, that message is going to get even more stronger and more clear. As we go go forward. And we're leveraging our vertical integration in terms of managing great quality, managing inventories and also differentiating ourselves. We're going to increase our marketing as we have been doing and even more so, but especially today of course, the new mediums of marketing have to be utilized. And technology with personal services are a great focus. And we'll continue to expand in other areas and continue with our social responsibility. And With that, I would like to now invite Eric and in fact what we'll do after Erica done at Eric Costa is our General Counsel Secretary after his given an overview. Later on, I'll come back. Any questions or comments, I'd be happy to address them. Eric. Hello, everyone. Welcome to our 2018 annual meeting of shareholders. Please refer to the Rule conduct that were distributed when you arrived. Your cooperation in observing these rules is very important. We'll be greatly appreciated. It'll provide an opportunity for everyone to participate. And to highlight a few of the rules as we get going, All questions and comments should be directed to the Chairman. No stockholder may address the meeting until he or she has been recognized by the Chairman. If you wish and the fact that you are a stockholder. If you are acting as a proxy on behalf of the stockholder, please so state and name the stockholder you are representing. Only stockholders of record as of the close of business on our record date, which was September 17, 2018, or their duly appointed proxies are entitled to address the meeting and to vote. Beat as brief as possible with your questions and comments, questions and comments must be within a time limit of 2 minutes. Now, today's procedure, the order of business is First of all, if there is anyone here who has not yet submitted his proxy and wishes to do so, Please give it to the 2 inspectors of Election who are seated at the inspectors table to my left. We will proceed with the initial formal business of the meeting, after which Mr. Kathwari has explained, there will be an opportunity for you to ask questions and make comments. Now, as secretary of the meeting, I can report that the notice of this meeting was duly given on or about October to 2018. The list of stockholders entitled to vote at the meeting has been available for examination by any stockholder at the company's offices in Danbury for the past 10 days and will remain open for inspection during the meeting. Pending confirmation upon tabulation of the ballots after the voting, we are operating on the assumption that a quorum is present. In fact, as of this morning's tabulation of proxies that have been received, we have more than the 13,264 648 shares present. That's our number for the quorum. The inspectors of election for this meeting are Peter W Descovich of I OE Services, Inc. And Christopher M Hayden of Georgetown LLC, both of whom have signed the judges oath, which will be filed with the records of this meeting. Once the final votes are tallied, The Inspector of Election will certify the final results of the meeting, and that final result will be filed with the records of the meeting as well as with the SEC suent to the rules of that commission. Before we begin the consideration of the 3 proposals, to be submitted to a vote of this meeting, I would like to note opportunity to comment on each before the polls are closed. During the formal business of the meeting, we ask that you limit your questions and comments to the business at hand. After the formal business, there The 3 proposals to be voted at this meeting are as follows: 1, the election of 7 directors of the company. The Board of Directors has nominated M Farooq Kathwari, James B. Carlson John J. Dooner, Jr. Dominic J. Espazino, Mary Garrett, James W. Schmater and Tara I Stachem for election to the Board of Directors. There have been no other additional timely nominations to the foregoing 7 nominees, and therefore, they are the only individuals to be considered for election at this meeting. The second proposal is to on the executive compensation for is to ratify accounting firm for the 2019 fiscal year. Okay. We are not aware of any other business to be conducted at this meeting. Before we proceed to vote for the above 7 both proposals, I'm sorry, I would like to ask if any stockholder is aware of any other formal business to come before this meeting. Now that all proposals have been submitted for consideration, I would like to ask if any stockholder has any questions they would like to ask or comment that they would like to make with regard to the proposal If so, please raise your hand and the microphone will be given to you. I note there are no questions. Okay. It is now 10:32 am. As the designee of the Chairman of the company, I declare that the polls are open and we will proceed to vote. Persons who have sent in their proxies do not need to vote by ballot, unless they wish to change their vote at this time, If anybody would like to change his vote, please raise your hand and we will furnish you with the necessary ballot. And that will be substituted for the proxy that you submitted previously. After you vote, please return your ballots to the judges at the table. Okay. Does anybody wish a paper ballot? Thank you. Okay. Okay. I ask, have the judges been able to tabulate the votes based upon the proxies received as of this morning. Okay. All persons desiring to vote have done so, I declare the polls to be closed at 10:34 am. The judges have reported that $24 sorry, $26,529,000 294 shares of common stock are entitled to vote at this meeting. The holders of 24,000,000 $972,000,000 or since 10.97 shares are present in person or by proxy. And that constitutes 94.13 percent of the shares. Based on that report, I declare that M Farooq Kathwari, James B. Carlson, John J. Dooner, Jr, Dominic Esposito, Mary Garrett, James W. Schmater, and Tara I Stachem, has been elected as directors of the company the executive compensation of the company's named executive officers KPMG LLP as our independent public accounting firm for the 2019 fiscal year has been approved. The report of the inspectors of Election will be filed with the minutes of this meeting. And that concludes the formal business to come before the meeting, I would like to turn Thank you, Eric, and congratulations to our board for being elected. And Eric, I'm going to send you to Florida to conduct voting there. We're well, we're always very pleased. We have been now here having these meetings for the last 25 years and great to have the opportunity of having a very strong support, extremely strong support from our shareholders for the election of our directors and the other proposals that we have. With this, any comments or questions? Yes. And you are pleased to identify yourself and we're getting a microphone. Good morning, Mr. Catroy. My name is Jim White, a shareholder. Congratulations to, you and the team and Eric and Corey. I think on a qualitative basis, you've positioned our company extremely well with the Wow experience as well as the one place delivery method, which I think is tremendous in the white glove treatment So that I think is going to be excellent quality moving us forward. And, I think from the standpoint of the way that you have positioned your stores, knowing that, you've repositioned and relocated about 68% of them over the last 15 years. You're also taking that smaller, more lifestyle, less than 10,000 square foot store approach, which I think is going to be much more nimble much more welcoming and, I think, much more effective in the marketplace. And on the quantitative side, I think, as I mentioned to you earlier, for your reduction in debt over the last 3 years. It's been a busy 3 years, and you've done great work to bring debt down from, 41,000,000 to 1,600,000 and to bring dividends up for We shareholders, from 16,000,000 to 29,000,000 thank you very much for great results and God bless you. Keep up the good work. Thank you. Thank you very much. Very kind of you and I And I'm sure that all the comments you made, you are also a customer of Ethan Allen, your visited Advanced Centers, which is good. Now as we mentioned, any other questions or comments? If not, we are well positioned. We have work extremely hard to position ourselves in a fast changing environment. The world is changing from manufacturing to retailing to technology So we have to make sure that we are relevant that we one of the biggest assets we have is we have a very dedicated team of people. Who take a lot of pride in what they do. And it was actually also just to mention it that we benefited from this techs reduction. And we decided that we'll use part of that to help reduce the medical costs of our employees. Because I think it's important for us to make sure that we balance it, because they're all stakeholders. So on one hand, we have been we have strong program in dividends. And we also want to make sure that whenever as it makes sense, we take care of our associates. That's why for instance, in many places, we have medical facilities, like in a place like Mexico. When we went there, we said we are going to follow similar environmental and safety and Honduras to as we are in the United States not required was the right thing to do. And today, the benefit is that after 12 years. We've got people with low turnover, dedicated people, and that I can say is across the board. So we are well positioned that I want to again thank all of our team members at Ethan Allen for the positioning that we have done. And I believe very strongly that we have an opportunity to continue to grow our sales profits and also do it the right way. So again, thanks to our Board of Directors who are very knowledgeable, strong parts of the system, and together with our team of very, very strong leaders. So thank you very much. Okay. The business of the meeting having been concluded, I call for a motion to adjourn the meeting. Seconded in favor? Good. Thank you. I declare the meeting to be adjourned at 10:40 am. Thank you all.