Investor Meeting

Apr 10, 2018

Slides

Well, good morning, everybody. I'm Cory Whiteley, Executive Vice President Administration And Chief Financial Officer, and I'd like to welcome everybody this morning to our Ethan Allen Investor Meeting on this nice spring morning. This is raining and at snowing. I want to remind everybody that our discussions and contains forward looking statements that involve uncertainties and risks is detailed in our regular filings with the SEC. Our actual results may differ materially due to wide range of factors. We undertake no obligation to update any forward looking statements. And at the end of the slide presentation is a reconciliation of any non GAAP measures set forth in the presentation. We do have a detailed presentation lined up this morning and then it'll be followed by a Q And A. Now the meeting is being webcast on Ethanallen.com. So we're during the Q And A, we will ask that you say your name and the firm you represent so that people listening online can know who's speaking. We'll also be posting a copy of the presentation on the Investors section of Ethanolin.com later today. So it is now my pleasure to introduce our Chairman and CEO, Froud Kapuari. Good morning, everybody. Good to have you all here in our latest and the newest auditorium. 2 weeks back, this was full of furniture. And we felt that two floors is enough And we decided that we'll make this into a small auditorium and then Jimmy Bernardo is in charge of this. He was going to rent tables. I said, what do you mean renting? We're going to make them So these are made in our U. S. Plant. Jail are also made because we thought it was appropriate that we do it and it was done very fast. Now today, we are We are going to we're also pleased that a number of my associates are here. We are joined by 3 of our independent directors. We are joined here by almost the 4 of these are 3 of the 4 of our vice presidents in the retail division. We are joined here by Tracy Passion who is the head of our merchandising and shows she lives in as many of you met her with the tools. Dan Grows, ahead of our business development. Corey Whitey, of course, both We've also been joined by a couple of new associates in the last 6 months. We have Bridget O'Brien who joined in and then also Kemper Johnson sitting back there who also joined us as a creative director in advertising in addition to a lot of other folks that are here. So I'm pleased to have all of you here. Now today, we are going to focus on the fact that you have to differentiate. In this age of challenges faced by brick and mortar, you have to you have to make sure that you have a differentiation. And for us, that means becoming more and more so an interior design destination So today, we just cannot afford to be a little bit in anything. So you'll see us that more and more in every element creating an interior design destination, we're expanding to solve some of our fashionable relevant product offerings. We've got a glimpse of some of our newest products. We are going to leverage our vertically integrated manufacturing and logistics. We are increasing marketing. We are reinforcing our design service, expanding offerings and client service, again, this message through our marketing will get across. We're also expanding our international e commerce, governments and contract business. And again, we could we continue to engage in and enhance our governance. So, me, talent is a critical factor. We are blessed with great talent. We are a vertically integrated company. From design from idea to design to engineering, to manufacturing. We run a major sawmill in Vermont, wood manufacturing, upholstery manufacturing, logistics, distribution, and without talent that does not work. So In our retail network, we have about 2000 interior designers, about 1500 of them in North America. We have also about 6700 interior design affiliates. These folks don't work for us, but they work with our interior in house interior designers. Combining personal service and technology is critical, and I'll talk we're talking more about that in every element of our business. One of the one of the major elements, as I said, in the North America is these 1500 interior designers. They're long tenure. In fact, with 200 management associates in our retail division have come to the ranks of our interior designers. In Freddie, all of our vice presidents have come. Now it has taken us 15, 20 years to develop that kind of a talent, but this talent right from the ground up is one of our greatest assets. The next important element has been transitioning of our interior design network. 2025 years back, some of you folks here who knew that about 80, 90 percent of our retail network was operated by independent retailers as they go as they retired we had to take over their retail. And then on a plan basis, we have been transitioning them. And right now, you can see 69% We have relocated in the past 15 years. Most of these were legacy locations that we purchased, are rented from our independents, 13% new auto located in the past 3 years, 20% in the past 5 years and 42% in the 10 years. This is This continues. And I'll talk more about where we are. And the good news is it's I would say we're almost towards the end. It never ends, but the major work of having 70% or so relocated has been a major major focus. When we our Ethanol And Design centers, 25, 30 years back or even 40 years back, we used to be a 15 1000 square foot freestanding, whether it was in Birmingham, Alabama or in New York. Now after the greatest session, Now before the Great Recession and before the advent of commoditization, technology, everything else, we also added about 18,000 to 20,000 square footage Center, beautiful locations around the country. But now in the last few years, we are now making them between 810,000 square feet, but in the right location. That's critical. We just opened last year in Flatiron, in Broadwind and 21st. Great location. However, it also has meant a tremendous amount of cost in the last year gearing up these new ones, especially in the downtown areas, is not it takes a couple of years, just the rent alone is major. So we've been absorbing major costs, or $1,000,000 in each one of these design centers in the last year or so. Until we get them going. Same thing in Corte Madera in San Francisco. We opened it up and we had again a fair amount of costs in getting this going in this past year. Then also on the other hand, we've also been relocating some of our legacy locations. This is in Indianapolis. It used to be 15,000 square feet and we opened it. It's about close to 10000 square feet in Indianapolis. And also you would note, as you noted here, when you walked in this design center, our designers used to be somewhere in the back. I'm in the 2nd Floor, 3rd Floor. Now they're in the front because we are an interior design company. We want our associates with the technology right in front of the customers. And that you're going to see in all our new design centers and on a plan basis, we are implementing that throughout the country. Chicago also reopened in downtown. I was there last week, great, great location, but again, about $1,000,000 cost last year in getting it going in occupancy cost, beginning cost, all of those single expense. Now In addition to what I just said, we have vowed at this time, close to 8 to 10 relocations taking place. In fact, next week we are opening 1 in Calgary Canada. We are in the process of moving our legacy Cedar Rapids, Iowa Design Center. We are looking at about 8 or 10 again on a plan basis of relocating them, again, more 2 lifestyle centers. Internationally, also, we're making progress. We've got 116 and design centers all operated by our partners and licensees. We go from Taiwan to Dubai to Philippines. And also actually starting tomorrow, we have a retail conference here. A lot of our folks are coming in today. For the next 2 days, we are going to have all our independent retailers from North America and also from many, many countries including from China to Korea, to Jordan, and other countries will be all here in the next 2 days. Most of these are operated by families or dedicated to each in Ireland. But of course, our biggest one is in China 2 weeks back, I was in China participating in the opening of the 86 by our licensee there. And it's in Chengdu, China, which is the capital of Sichuan Province, a great, great location and great presence. And in fact, I had met the American Ambassador, our investors were China a few weeks back. I contacted him and he sent one of his diplomats the gentleman on the next to me left of me is he also participated in the in the opening ceremony along with Richard Fine, the Chairman of Mark Hall. And they also have a way they call it a goodwill ambassador, a very, very well known personality, a television film personality is their new brand ambassador. So he was there too. Now, on our offerings, our objective is to continue to expand our reach. You had an opportunity this morning looking at some of the offerings in the design center. We have 70% of our flow has been refreshed in the past 3 years. We have relevant and fashionable offerings spanning multiple lifestyles and targeting multiple demographics. Our offering 70% of our furniture is made in our own workshops. It's a great opportunity, but again, the challenge is when you make so many changes as fast as we have done, but we leverage our vertical structure. And spring and fall product introductions further expand our reach to more people. For instance, in the last 3 years, we have invited us to give you a little of our overview of our product programs We introduced a product program under the Brooklyn projection. This is inspired by the city, functionality, scale and clean style are key to this effortless. Living. We introduced a Buckhead projection. It's again infused with European inspiration. Our Buckhead projection blends eclectic looks to create something refreshing timeless and livable. Georgetown, again, we have to balance it. And I've more and more of our teams were having a great discussion yesterday in Danbury. We want to make and make sure that we are known as classic American brand. Our products and ideas are coming from all over the world. We then take them and like the English language, we silently modify them to make it American. And then we take it the rest of the world. But we want to make sure it works together so that we can we don't it's not just a product is a total offerings that lives together, that works together and that has implications as we go forward in the way we will project all of it. But this is a georgetown, it's a marriage of traditional contemporary style with a deep rooted his rooted sense of history. Santa Monica, the game's objective is to go from somewhat more the casual to the some modern and somewhat of the classic traditional with the modernity all about relaxed living, soothing, pallets, mix with painted and wash finishes, elements of traditional design combined with vintage fluids. Passcode was introduced to last last year late last year, vast array of curated materials, focused on statement pieces with that mix well with our current offering. And Uptown, this you might have seen it down stairs. This has just come in the last week to our design centers, and we're going to start marketing it this month. This And of course, last next month is really where we'll even expand our marketing of this. And I'd like your perspective for marketing of this program. Is modern elegance with a twist. Again, it's classic, but with a modern attitude. I rooted in classic alloy with a knot, the modern glamour, as I said, the style bridges, traditional and contemporary design. And then this is our newest program that normally we will be showing it as early as we did we felt this was a good opportunity and also we wanted to show it in this urban environment. So we took this location we're showing it. We in fact had in the last week, we had a press preview. We have this evening, independent, these IDAs or the interior designer affiliates, they have a fairly large contingent coming in this evening to preview them. So we want to make sure that this gets a lot of attention. And then it will be marketed later this year in our design centers. The next one I want to briefly talk about is our vertical integration. Our vertical integration today we have to be smart in what we do, just the fact that we've got manufacturing is not enough, the fact that we are in logistics. The question is smart. Time opportunity of visiting a number of operations in China. And today, they're using a tremendous amount of technology. So we have to make sure that personal service and technology is combined in what we do. Now again, talent is critical. We are blessed with people that have been working for Ethan Allen craftspeople for 2030, 40 years. And, in the northeast of Vermont, in the Blooridge Mountains of of North Carolina, even a plant right here in New Jersey, then also our operations, the new operations in Silao, Mexico and Honduras. Great, talented people. We want to make sure we retain them, which we've got to treat them well. And my focus is you've got to treat people with dignity. It doesn't matter where they are, whether they are in Indonesia or China or India or here in Mexico. We do that. You get great quality. And long term it benefits. And we have implemented many, many programs, which I will talk about our social responsibility. I went a few weeks back in our Silao operation. We started from scratch and now we have nine hundred people there. This is a management team, young, Of course, there are 900, these selfies that they were taking. Amazing the world, everywhere you go. This is our people, this person, the lady who is in North Carolina and when I was there, she showed a photograph that she had of me and her 30 years back. So we have not much change, right? And I think of and we are about 30 years back, I did something crazy. Invited 5000 for factory workers to come to Danbury in batches of 300. And that's created revolution. And in fact, this lady had come there to Danbury. And we also have health clinics in many of our operations Now North American Manufacturing, it supports a low inventory model, but it also creates issues when we have surge in and I'll talk about it. That's what happened in the last 6 months. We do not buy a lot of inventory and then say quick ship because we have it, we're going to ship it. So our balance is we make most of the products close to either it's completely custom or close to when we get an order. So that's our North American manufacturing support that. It also means we manage our inventories better. It enables custom product customization We have introduced custom quick ship. Also great, we are delivering our products fast, but when there's a surge or leg of orders, it also has its own implications in keeping our people busy. We are now also supporting our government business. I'll talk more about So we have, as I said, we've got 7 manufacturing plants in North America, making about 70% of our furniture products. Now using technology, as I mentioned, is critical. We have invested in equipment and we continue to. Unfortunately, I'll go a little bit later, talk about the fact of how tech 12 years back, we made tremendous investments, which has helped us to be where we are today. In terms of our even though today, we are spending about overall $20,000,000 to $21,000,000, but we in the last 3 years, we spent about $21,000,000 mostly on new equipment for our plants. That will not have been enough if we had not spent $300,000,000 10 years back. And I'll talk about that. Next is logistics strategy. We also did something revolutionary, a little crazy also in late '80s, we decided that we will deliver our products at 1 nationally. We took over the logistics. Something that was not done. And even today, I don't think a product like furniture is being done. It has helped us create a world class logistics structure. As I said, we we deliver at one cost. We have a strong network of direct LTL International partial shipping. We are CTPAD certified and we have to operate import export operations. In addition to our national distribution centers, in fact, we have 3 national distribution centers in 1 in Dublin, Virginia, 1 in Oklahoma, Oklahoma and 1 in New Jersey. They are supported by retail service centers because we take the products from a manufacturing to our national distribution centers to our retail service centers. Our products are prepped and delivered to the consumer. Very important. We have today operating 28 retail division home delivery centers plus 38 operated by our retailers. Again, in the company retail division, we had because of the consolidation we could have in We have 1 major distribution center, a service center in Connecticut that is that delivers from Manhattan to Maine. It replaced about I think close to 15 local service centers by dealers. Same thing all around the country. We have been able to do this. And it gives us an opportunity of a good level of service and it also makes sure that we differentiate by this white cloud delivery. We don't just drop it on the front of their homes. And this is our game is costly, but this is part of our service. The next one I'll talk about is our marketing. And you've noticed that every detail matters because that is the differentiation every element of our business. We are a known and desired brand. Actually, we are more known and we need to make sure we get even more desired. That's where our focus is. We've got to expand the demographic base. We've got to utilize and increase the broadcast and print. We are expanding our digital marketing and utilizing technology to expand reach and Bridget for Brian who came in, she comes to a very, very digital marketing background and I'll talk a little bit more about that with what our focus is. Our focus really is to expand the demographic base. If you can take a look at this so called power elite, this is what our basic customer base has been and is. And with all the work that we are doing, we've got to expand it to the other demographics. And I will talk briefly about it. Now when we felt comfortable that we said now is the time for us to expand our marketing, both somewhat in the traditional media as well as in the digital media. So our national broadcast started in March We have invested a great deal in March, and we're going to invest more in April May to get a message across. And the objective is to create a buzz, to create traffic. And it is making an impact and you can see these are all the various mediums that we are utilizing for our national broadcast. Now, national television, we launched it last month. And in fact, this television commercial, I've got to press something. Nope. 0. I see. Thanks. Bye. It. Good condition. Putting together. But you see the changes? I know you saw Ethan Allen being mentioned as Watermark and you also saw that we had a discussion I was in Orlando but it's a smart fellow, okay. I mean, I told you we're already thinking about it, but it was good that we were all thinking in the same way. This relaunched and actually we had a commercial that this commercial has some products from the Uptown collection And again, that just has come into our design centers. So this is being run right now and we run this commercial for the next for this month and next month. Grid. And then as you know, last month, we had the same content, but with the different products. Our direct mail is still important. We're going to continue it, but for how but not as much as we did previously because we're now using digital mediums. We're using national broadcast, but it's more targeted, targeted and tech It has been a proven revenue generator, especially with our customer base and folks who are pretty close to our base. We want and we will continue to mail it and we will take a look at in terms of what the right number. But in this last this last quarter, we mailed 5,000,000 magazines out. Digital Marketing is important. Today, up almost 60, 70 percent of folks who come to our design centers have first gone to our digital mediums, whether on mobile, that our website. So we've got to make sure that is critical. If that is not right, you're not going to come to our design centers. So that so we are working in terms of to reach people, to educate, to inspire and convert new customers to Ethan Allen brand experience. So we have a number of number of number of initiatives, including some of the newer ones that we have just last year, used to some degree, whether it's Amazon or Shop Disney, or shop style or even with the army shop exchange.com in addition to our own efforts of getting the message across. Now we have if you've noticed it, we have launched a new top level navigation of our easenallen.com. Higher click through rates. Email revenue growth is up, and acquisition growth for new subscribers is up 40% quarter over quarter. Facebook continues to be strong traffic driver, representing 67% of social sessions overall, and I hope they do well. User generated context, drives high click rates, reputation management is important. And we are managing ratings and reviews very proactively. And again, while overall our digital revenue has increased, but of course, that's a very small portion of we've increased 50% of our web sales, but that again is a very small portion. We want them to come to our design centers. Interact with our designers. Chat Online is critical. This is combining technology and personal service. Last year, we launched it and now about 6 100 of our designers are certified for live chat. It connects online client activity with brick and mortar design services. Is a personalized service a little or as much. And now they are chatting at 6 in the morning in the middle of the night in the morning, and they are also cathode. Right now more and more designers are closer to where people live. So that also is taking place. We're also seeing higher average orders as it gets in and also fortunately lower return still. When you do something like that, you've got to worry about returns. So our technology strategy is to utilize technology to find next generation of shoppers and convert them to buyers. The deploy technology and power and differentiate designers with Vowel moments, extremely important. Leverage technology, do a personalized and relevant experiences and through automation, while improving quality reduce costs. So you're going to see us maximize the use of data across a vertical enterprise. Then we have also been working in the last year and now we are launching these. We are an Ethan Allen in home augmentation, the reality app. We utilize the leverage of our 10,000 3 d digital asset and to continue to grow. It's compatible with Android and iOS mobile devices. It optimized for Google AR core and Apple AR kits enabled devices. We visualize furniture, accidents, rugs, artwork, and decor in your home. They are app is free for designers consumers and we're going to be launching it in keeping on this augmented reality app, products shown as a 3d virtual ranging all to scale and showing how ethylene products complement and fit. This customizes products with most popular finishes and fabrics. It configures multi piece items such as sectionals and media of all disease. It shares design ideas with friends and local designer via email or social media. Affecting both empty spaces and furnished rooms. Now Ethan Allen in home air app demo, I'd like to show this to you. And I think that, Corey, I'm on my technology person here. I tried to do that. Okay. Got it. First, have the add furniture button to add furniture to the interior. Next, select furniture from the list of the available products, then tap the place button to place chosen furniture in your interior. Now drag the object to the desired space. You can add as many products to your interior as you need by repeating the previous step. Alright. 3groom planner. This has also been a major work of our teams to enable the designers to enhance experience from 2 d to 3 d rendering in HD. Designer can work with a client in the design center or work remotely with an online Again, chat is extremely important. Now we also last year, as you know, Wealth associations with a number of marketplaces, Amazon, shopmicsage.com, shopdisney.com, I mean, this has been the main thing it is that is driving people to our website. We're doing some business, and we have not done what is needed to even do a lot of business that is to advertise on those. So we have decided that we will do very minimal. We will use advertising money to bring people directly to our own site. But this is an incremental business that we are doing. Now, government and GSA Department of State contract, we is another channel. Another channel is hospitality, real estate. So we are looking to expand in all these areas. The government contract, it was sort of great. It also created a lot of issues. We did receive in the last 3 months about $20,000,000 of orders. It all came in at one time and had to be delivered in 60 days and at a not a good time when we had to produce products for our a holiday sold audit. So we had to juggle a lot of things. We had to work a lot over time. We had to ship products on trucks rather than rail. And still, we had we created issues of approximately and I'll talk more about it it had it created an issue of not delivering about $15,000,000 of sold products at our retail division. That had an impact on our profitability in the third quarter. However, the good news is, this product line is now being made, and all of it is being made in our plants, mostly in United That's why we have had to hire people in Vermont and North Carolina. And a lot of the product was new product, a product that had to be modified. So our people have to learn it. And every time it takes us for 6, 7 months for new products to get it through the factories. Our objective is I mean, we think that we have a 30,000,000 plus opportunity in this contract. Next one we are looking at again is we've got to make sure it our sales match our production capacities. We don't buy a lot of products and get an inventory and then sell it. Our model is manage a manageable contract, manageable custom. So we got into, for instance, we had developed the association with the Margreter Will Group, The first one we are about completing through I mean, Kurt, about starting is a 1000 vacation homes in Orlando where we will be They're selling these homes completely furnished with Eastern Allen Furniture about $17,000 home, about a $17,000,000 opportunity in the 3 years. Similarly, we are in the process of we are now working on 3 thousand homes in Daytona. In this case, the customers don't buy the home completely furnished. They have a choice of buying from us or from others, but we have a good opportunity. And we are in the process of working in other areas as well. Going back to this, we also of course had a number of other contract opportunities. We are furnished couple of major Disney Hotels. We have also their preferred source for all the sleeper programs, which is which is a good is a good contract business for us. Now, briefed on social responsibility. As I said, creating people with dignity, making sure that our environmental work is done is tremendously important. And something like this, we have done all for the last this company was founded 80 60 years back. If you start doing it now, not easy. So I'm glad that we have received lots of awards recognitions from the work that our folks do. We have certain sustainability is tremendously important. In 20 we implemented American Home Furniture Alliance Environmental Management Systems. If you take a look at it, we have we have carbon footprint. We watch it very carefully, whether it's a carbon footprint, electricity usage, water usage, landfill waste, greenhouse gases, biomass. Keep in mind, we make, we are manufacturing, especially in states like remote, not easy. But in Vermont a few years back, we used to burn 1000 of gallons of oil to date 0. We produced electricity. We produced steam. We used our wood chips. All of those things are important. Code of conduct is important. We have a very strong social responsibility Tracy, Bastione and our folks, we have a compliance officer. We inspect every company that we do business with. If they don't meet our social responsibility, I don't want to do business. With your child labor, we're not going to do business. We're going to be very selective. I don't want to do business just for the sake of business. We want to make sure it is done right. We follow great environmental and social responsibility in Mexico and Honduras. People are amazed because people go there because they can get away with these things. We said no. Because of that, we've got high caliber people. So social responsibility is good for profitability, but you've got to be consistent and not due to the gimmick. And that's what we do. Safe processes in manufacturing not easy. One accident can be can be $1,000,000. You've had once in a while something like that. But so safe processes really are in manufacturing is critically important. I mentioned about the fact that we established medical facilities in Mexico and Honduras and also medical facilities in our U. S. Workshops. And with ads cost, but also is important, we've also made sure that comprehensive non harassment and non discrimination policies are practiced. We've made sure that we geared to the laws and regulations of wherever we operate. So these are very, very important factors that one has to today, operate in. In terms of continuing with our corporate governance, I basically also would like to talk briefly about the fact and I'll of course talk about currently that we have made sure that we continue to return value to our stockholders. We have reduced about since we went public $385,000,000, but of course, everybody is interested in what we have done lately. So we'll talk about that too. Red bud, you know. And so this is what is good to know that those of us for long term shareholders we all benefited from this. For instance, uh-uh, we have just we have, you know, I'll talk with one of our other slides. Share repurchases. I know it's always a question about should we be purchasing more shares Yes. We've already purchased 41 percent of our company. I want to do it at the right time. Makes sense. We have purchased And I'll talk a lot and discuss later the impact of it. And we're going to consider again buying shares because you said the timing has to be right. We also got to make sure we don't jeopardize the welfare of this company today much less. And I bought all these shares. Keep in mind, I've taken the private and the management buyout with 90% debt at 18%. We had to pay that back first. Then we had to purchase $600,000,000 approximately of our stock back, which we did, we had to pay $400,000,000 or $500,000,000 of dividends and capital expenses are important. Now this is important we if you take a look at it, our capital expenditures, we when when we when we take a look at From the critical years, from 2000 to 2008, we spent close to $400,000,000 in most of it, a lot of it in improving our manufacturing and logistics. That's why today, while we have to spend money, We've got a great base because we have invested in our manufacturing, in our logistics and in our real estate. And we'll continue to do this. Now we're spending close to $20,000,000 annually that if it makes sense, we'll spend more. Dude, now what you this is what we've done recently. We have this fiscal year so far We have increased our dividend by 65%. We just had a special dividend that we just faced this quarter. $4,300,000 right up to March 31st. So we have we want to make sure that we take care of our shareholders but also we do it sensibly. Now, capital strategy, Today, good news is we paid all our debt back. So we got we are in a position that while we're going to be spending about 20,000,000 dollars, $20,000,000 in capital expenditures. We have spent $37,000,000 last given back to our stockholders, we've increased our marketing to $43,000,000 this year. That's approximately what is estimated for the whole fiscal year. So we're going to take a look at where else should we be spending money? And we will do that whether it is our capital expenditures, whether it is share repurchases, dividends, rebalance it. We also continue to improve our corporate governance. We are keeping up with all the new things that are coming in. We want to do what's right. I'm not interested in trying to avert anything. We've eliminated requirement for business combination to be approved by a majority of the continuing directors. We implemented a number of significant changes proxy access, majority voting provision for stockholder removal of directors with or without calls. I mean, a lot of things we did in the 90s were different rules, but today, we want to be current. And overall, we've updated our governance documents. And also, we want to take a look at do we, give incentive compensation, including myself? So, Jim Carlson, where are you, Jim? Okay. He was here. So there is a look at products. Now, come on, Jim. I'm trying to join his of our directors is also Chair of our Compensation Committee. And we said we've got to make sure we are current. So our metrics is going to be sales growth. Operating income growth, return on equities, shareholder return, all those things are important. And I have, if it makes sense, I've given back things that were by contract given to me if I thought it was something that I should give back a few years back I gave. I don't know quite about $23,000,000. And we were discussing it yesterday. And this year, I'm going to give back $500,000 more or more than that because I want to make sure that I'm entitled to it. It's my contract, but I've got to make sure that it's consistent with what everybody else in the company gets. We've got to focus on those things. Now let me talk about something very important. Corey and I sat down and we said, let's update this opportunity scenario. We had done that number of years back right off the great recession. I said, Corey, so this weekend, we sat down And we said, okay, let's take a look at fiscal 2006. That was, the peak. That's before the great recession. We did a billion We made $147,000,000 of operating income with a gross margin that gained 50.7% and operating income was 14% then comes the greater session. In 2 years' time, our sales were down 40% and operating income went to 0. So now all of a sudden, we got to get back on our feet. And we're still making progress. But last year, in fiscal 2017, our sales of 763 Gross margin was 55.8 percent, but keep in mind, gross margin is also impacted by the relative retail to total sales. In 2006, relative retail sales I mean, I don't have the numbers Corin later on we can share was most probably 40, 40, 40, 40, 50%. Now it is 70%. So that's the difference that's one of the differences. Operating income also operating expenses also reflect that because the retail operating expenses are higher. Now then we said, okay, what are the growth opportunities? What could happen? And our objective really is no reason why we shouldn't go back at least 1,000,000,000 to my objective is 1,500,000,000. But if you take a look at even $900,000,000, Our gross margin, we have set about close to 55% operating in expense of 44% and operating income of 10.9%. Other factor that you can see is now take a look at the operating income. The operating income from 2017 operating A is goes up 50% and our diluted EPS goes to 80%. And again, that's a force to reflect you of the lower tax rate. Our tax rate as we go forward is 25 percent. This year it's going to be 30% previously it was 38%. Now take a look at $1,000,000,000. And again, we've looked at our operating expenses, again, we have a leverage. And again, I'm trying to be reasonable conservative, not trying to sell anybody on this. We carry an opportunity of doing at least 12% in operating income. And This again has an opportunity of having diluted EPS of $3.26 much look at much, much higher than the $2059,000,000,001 in 2006. The 86% increase in operating income diluted EPS And keep in mind, in 2006, 2017, our average shares went down by about almost 20%. From 34.1000000to27.9percentto27.9000000. And we are at for this scenarios we have retained we have kept the average share of what it is current. Now as I said, we take a look at whether we reduce the share count. We do that. Then we have even a greater opportunity of leveraging the operating income and a diluted EPS So this is something that's what we're working on. We have worked very, very hard and I think this opportunity is there. We've got to make sure we do it sensibly. And I think we have that opportunity. Our directors, they are independent. Average tenure is 5 years. Gender diverse is 33%. Average age is sixty year. We got Tara Stakeham and Mary Garrett, they're both here today. I'm glad to see you and Jim Carlson is looking at products. Very Jim. Okay. And, so with that, I want to also briefly before I talk about growth, I'll just comment on our third quarter. We did send a press release. Our third quarter and I know you folks have questions on that, but let me upfront give you some information. Our sales were 181,300,000 compared to 180,500,000 previously a small increase. We mentioned that our region sales in the retail division were $155,200,000, up 2.6% for the quarter and over 6% in the month of March. Our wholesale orders were $126,300,000. We increased 14.2%. It's all in our press release. Now due to the bottleneck mostly caused by startup of this, the U. S. Government contract, our delivery suffered. And our deliveries in the retail division were down 3.6%. That's a big difference because that difference is what we're going to make money or not make money. And we didn't make money in the regional division in the third quarter. And our backlog had increased by 15,500,000, which we took that product had to make it for the state department. So the U. S. Government owes us something here. The backlog increased by $15,500,000 in retail You know, the shipment of this, our 5th, that would have added about close to $0.10 to our EPS if we had shipped that product that is the incremental that we need to make things happen. But anyway, that's an opportunity we have in 4th quarter. I also mentioned in addition, our third quarter advertising increased by 20%. And impacting our operating expenses that's impacting our EPS. The other factors impacting our gross margin, some of you folks are getting very much focused on gross margin. I do like gross margins, but I like operating margins better. Our gross margins were impacted by higher wholesale sales to total sales. That is an impact. Our gross margin were impacted by manufacturing inefficiencies, especially in our U. S. Wood plants. Because we are gearing them up, they're hiring people, which is good news in Vermont and North Carolina. We also had incurred higher logistics costs because what we did was this, we had to determine, deliver our products from Mexico to U. S. From East Coast to West Coast by trucks rather than by rail because people needed their products. So it cost us Coric and later on give the impact of over $1,000,000 $1,500,000 just by changing from rail to truck in this quarter. But we want to make sure that product is there. We also which our industry has also talked about is the increases in especially in upholstery, raw material costs And we have taken a price increase of April 1st, but also of course as you know, we also have to rebalance our prices with with some sort of savings and sales and discounts that we give. With that, I'd just like to open it up for any questions or comments that you might have. You did. We had a microphone, like, you know, but this is all webcast. So if you kindly give your name, Thank you. Evan Stein, Gagnon Securities. Could you just highlight some of the key areas in regards to that last financial slide that, you see to get you from where your current run rate of sales are today to some of those goals that you laid out in the chart. All right. That's what you mean, right? We have to make sure that we balance between what we sell and what we deliver. We are 70% of our product is made either custom or closed for when we get an order. Now that's great positive for inventory management and all those things, but when you it creates issues. It creates issues. If you get lots of orders at one time or it creates issues when we don't have enough orders, we've got to keep our manufacturing So that we got to keep in mind. I think right now we have invested in manufacturing and we're going to invest more to create capacities, both in North America and outside North America so that I because I don't want to invest upgraded in marketing and not be able to deliver it towards our level of quality. Or to develop a tremendous amount of inventory and then sell it, on giveaway prices. That's many, many folks in our industry do that. But I think that today we are in a better position. We are increasing our marketing by 20%. We are investing in raw materials. We're investing inventories that we're going to be able to deliver it as well. Jeremy Hamblin from Dougherty And Company. Just want to follow-up on some of the points that you made on the Q3 update. Did you indicate that the government contract you had $20,000,000 of orders that were received over a 3 month period? For what was the time frame on that? Most of it was received in this garment's new fiscal year, we start in October. Okay. And in terms of, you mentioned that that really impacted delivery timeframes, the $15,000,000 of impact to your delivered sales that is for the January to March timeframe for your 3rd quarter? That's right, yes. Okay. And then associated with that you have about $1,000,000 to $1,500,000 of shipping impact, because you chose to deliver faster by truck rather than rail, I think. Are there still some delays from the hurricane or what was the choice there on that? We had some impact of hurricanes also. You know, we Cynthia Barrow, she runs the West Coast and she's somewhat happy because all of her and now she's getting her products from Virginia distribution centers, what about 6 days faster. Now interestingly, a lot of this product they did get in the third quarter, but in the last week So they can't deliver to the customers, they'll deliver it in April. It is an impact. Now the fact is that they've gotten used to faster deliveries, so they us to continue to ship by truck, so we'll balance it. We'll do we've shipped a lot of raw materials from Mexico to the U. S. It will continue because faster deliveries are important. And but we will not be spending as much as we spend, I think, in the third quarter. Hi, Christina Fernandez from Telsey Abayashi Group. I wanted to ask about marketing, how are you thinking about the spending here in fiscal year 'nineteen and also in the back half? Because you said, spend 20% more in this 3rd quarter. I thought before you had said maybe 33% and then 15% in the 4th quarter. So how should we think about that total spending? And also if you could help us understand sort of maybe a high level, the breakdown between print, digital TV, how's that shifting going forward versus what it has been in the past. Okay. Well, I am obviously, I want to spend as less than possible. When we look at it and get all when we get all kinds of information, I don't want to spend just for the sake of it. So we thought that 20% was a big increase. Now last year fourth quarter, we had a substantial increase in advertising from the fourth quarter of the previous year. We also had national broadcast last year fourth quarter. So we're going to increase by 10% from that higher increase that we had in the previous year. And I think that that will be approximately 10% will still give us an opportunity of maintaining a strong presence in broadcast, which we're going to do in April and May, direct mail. And then this question of digital, This is something that we are looking at. I want to make sure it makes sense. I don't completely understand it. So I'll need to understand before I prove things. So Bridget and her team really has spent a lot of time letting me know why we should spend this money. I do understand As I said, the 7 60, 70 percent of our customers who come to our design centers first go through our digital mediums. If you don't get them there, the chance that they're not going to cut customers. So all digital mediums, as I mentioned, are going is under review we go to expand and it's possible that we will reduce some of the print and the direct mail that we've done in the past. And then I have a second question. On the new stores that you've opened in the higher traffic locations, so in New York, Flat Island, Chicago, understand it's been higher cost, but are you getting more traffic and higher volumes and how do you think about the ramp up of those stores to be profitable? Well, I think that, you know, we look at profitability fortunately a little bit differently. The retail division looks at the retail store profitability, very, very important. They got to make profits. I look at the fact what does this contribute to our overall business? Which is because we are in the wholesale business, we are in the manufacturing business. So at this stage, we have a net negative in all these major markets that are not contributing overall because they're not making enough sales to be able to have on the wholesale side the margins we get on the wholesale side. I think if we have another year, they're making progress. We opened up in Buckhead, for instance, on the location and Kathy is responsible for that. And we are actually a task force, which I'm deeply involved with which is focused on Manhattan, Chicago, San Francisco, and Atlanta, and Atlanta, I think that we're going to most probably we're going to reduce most probably by 50% to 70% the losses that we had in fiscal next fiscal compared to this year, but still, it's still gearing up. Yeah, Budd. Budd Bugatch with Raymond James. Trying to understand a little bit about what was in the the release. You talked about the wholesale backlog, I think being up 70%. How much of that backlog represented the governmental orders? What percentage of that group? And can you put some numbers or dollar numbers to that? Yes. I'm in I've used on broad numbers Corim will have the details. I would say that 70% of the increase in that backlog represented our government contract and international business. And 30% or so represented the business that came from the retail that was not delivered. Cory? Yes, that's fairly close. About 10% of it was the State Department. So that was a big piece of it. And then the rest was our retail and the international business Yes. 10% of the increase or 10%? No, overall. Overall. 10% of the And that will be delivered in the fourth quarter, most of it. Okay. And as you get, as you look at the wholesale business then was the wholesale backlog or the wholesale business of the independent dealers up as well. And that wholesale backlog was higher for them. And that was because of the 15,000,000 of undelivered orders. But keep in mind, our total retail business increased 2.3%. So it is not that a tremendous amount of increase came from our retail. The wholesale increase because we didn't deliver the products that we had received same thing happened with the dealers too. And these are ready for delivery now? That's right. By the end of this, we've caught up. Which is good news. Didn't catch up enough to be able to make regional deliveries but caught up enough to make it to the whole sense. So now we are much much better So I'm trying to understand something because this is the second time we've had that issue with the deliveries. Is that over or is that something that should continue? What was the issue that caused the Well, but we do not know in September how much of orders we're going to get from the state department. It's uncertain. Dan Grove. His lessons, he sleeps on this. He works on it. And all of a sudden, we got because it was the last the fiscal year of the government ends in September, we got it and by contract got delivered in 60 days. But they didn't take it in 60 days, even though we're obligated to do it. Now we also at the same time had to make this product in our factories. First, frankly, all of this product has been designed specifically for the state department with changes and finishes and changes in sizes, some new product. Now two things are there. One is that we've gone through most of the costs of making new product In fact, part of that product is now in warehouses ready to be delivered to be made more product than they took. Because we're obligated, but they didn't take it. So the government keeps makes an obligation, but then they don't fulfill their side. They're working hard to take it. The next thing is about now we also can somewhat estimate. Just keep in mind this contract is on a competitive bidding. This is not something that we automatically get. Every order, every day is bid in what's called a Fed bid. It's like a eBay. Every order. And so so far we have, I think, got a fair amount of it. And now we'll do some projections for the rest of the year. And we'll prepare if, let's say, the last fiscal the last month of the fiscal year, the government, they give us big huge orders Now we've got to plan ahead. Now we've got to see how much do we plan in inventories? How much do we plan in making the product? Which we can do all of that. But on the other hand, I don't want to build a lot of inventories and those orders won't come. So we're balancing it. We're in a much better position. But it's not something that is automatically they'll give us $40,000,000. It's bid every day. And also, I think you told us you had accommodated a lot of extra cost to open up New York and open up the Chicago store. I think a 1,000,000 each. If I heard you correct, And you have a mid single digit target for retail margin. What's the timeframe that we can hold you accountable for getting there? Well, I think our regional region vice presidents are there. I would hold them accountable. I think that but as I said, this question was asked earlier, I said that in the next year, certainly, we are going to break even between a consolidated margin between wholesale and retail, not on the retail itself. When the cost of man happening in this one, hard to make a profit share just by itself. But on a consolidated basis, we sort of break even make a little bit. I think in the next Under the 2 years, we should be in a position whereby we would be making not only consolidated margins, but some profits in the retail debt. Okay. And last for me, you've increased marketing and you and I had some serious conversation about that. You did have a good acceleration in March. Can you, can you pinpoint where that came from, what the effectiveness of the advertising was and in driving traffic and closing? Yes. We started in March with the National Broadcast. We spent closed to Corey about $9,000,000. We spent $9,000,000 in March between running the broadcast as well as we expense the total cost of producing it all in March. So $9,000,000 was spent in March. And we have received a fair amount of comments. People are happy that we are on national television We have had some increase in traffic. I would not say that people just getting up and coming because that is not something we expect we expect to make sure that people see the Ethan Allen brand as I started by saying, I want to make sure that while we are known, we're also desired today. So this is one element of creating that desire and 1 month is not going to do it. So far positive, but this is not something that And also as you know, you and I had a discussion. We didn't make it to say that this national television is that come and you've got 72 months of interest free, 30% off viewer had a lot of traffic. That was not it. So we had to balance should we be a very sales oriented or should it tell people that Ethan Allen today is the desired brand? So we've had favorable, but still we're going to see its impact in April May June. Yes, John. You haven't changed, John. I don't know what's going on. 30 years. Oh, no. I'm aging. Trust me. John Baugh with Stifel. Thank you. You slipped in the April 1st price increase and then we saw the 20% promotion off on April. So my question is not just really for the month of April, but how do we think about the price relief versus raw material versus discount, infecting your margin? That's my first question. John, it's an important question. And it's really something that the fact that we took a price increase don't automatically mean we're going to get higher margins. We're going to see how do we manage this whole issue of sales discounts. So we're looking at what do we do that is sensible that makes us get more traffic. Yet we do not create a precedent that next month we got to do at higher level. Take a look at our industry. Industry today. I mean, you are very familiar with it. Almost everybody is saying that you're going to get 72 months or 60 months of free interest. Going to get 30% to 40% off. That's what we are living across across the board. So how do you I'm not hardly anybody that is not doing it. Especially certainly the large retailers in our industry. So we're confronted with that. We're balancing it of how do we create so that our customers And especially the new customer understands the value that a 20% is a great value, not an easy job, but that's what we're working on. If because new customers were used to seeing 30, 40, 50% off, how do we convince that our products and our offerings. Now that's where our 1500 interior designers come in. These are 1500 folks out there who each one is our marketing agent. And more and more, we want each and every one of them to be which they are doing, establish their grassroots marketing, get the message across So all I can say is we this is a balancing act that we have to do every month that how to what's discounts to give on one hand, maintaining credibility, bringing traffic and also maintaining our margins. So it's something that we'll continue to say, John. And my second question is, you seem to have a bit of a growth problem. Your revenues are sort of stuck in the 750 $800,000,000 range for 3 straight years here. And if we backed out the government business this year, it might even be down, what would you attribute looking backwards over that 3 year period as to what those pressures are, maybe in order 1, 2, and 3. And then how you change that portfolio? I'm going to look at, John, this pressure is not new. We've been confronted with the impacts of globalization and commoditization. I talked about the fact that 25, 30 years back, a sofa was selling at $400 and now selling at maybe $4.50 or even lower. So deflation has been a major factor in our industry as it has been in many, many industries, whether it's apparel, whether it's electronics. So we have been faced with the fact of deflation. So while we And a lot of that started in my view in the last 12, 14 years. And that started with the globalization and the commoditization of products. Today, products coming let's look at cases for instance. Tremendous amount of product is coming at offshore in countries where they're making the product that was made over here, for instance, and even in China, they're making it 20, 30, 40 percent lower. So we have so when you take a look at our numbers, to stay even You ought to be, you've got 15, 20% ad to stay even. That's a big decision. So having said this, I think not completely. Not completely the deflation. It's somewhat, I think ebbing because cost of labor, let's say, countries like China. China, in fact, they are now outsourcing a lot of their products to other offshore countries. Vietnam has been a great beneficiary. Cost of labor in Vietnam is increasing up to now it was decreasing So this question of the fact that we haven't grown is the fact that to stay even you've got to grow 15% to 20% and stay even. Our prices haven't gone up. So that's one factor. The other is the change in the demographics. The change in the demographics in terms of people's attitudes of furniture, what they want, what styles they want. 3rd is technology. The fact of look at what's happening right now with people selling products on these online retailers. They are not making any money, but taking market share. Even some major retailers not making money, by taking market share when the when the Wall Street likes them because they show big huge sales and no money. I want to make profits. I don't want to just I don't want I could also increase our sales, but we have to have no profits. So it's the question of balancing it. Yes. Seth Rosen from the HRM Capital. You mentioned in the third quarter, the margins were impacted by the mix towards wholesale to lower margins. So can you give us some sense of for the wholesale only in the business that's not running through retail, how much lower are the margins? What's the mix now? And I guess for the opportunity that you laid out different scenarios, what type of mix do you envision to get to those? Thanks. It's a good question. Right now, Again, our gross margin is going to be impacted, as I said, number of factors for some mix between retail and wholesale. Second is the gross margins that we get at retail and the gross margins we get at wholesale. We are I'm right now looking at approximately $68.70 retail versus a higher retail a few years back. Core year. 78% to 75%. And if our wholesale increases, which is 8 news, which can go down to 75, which has an impact even at 77%, 78% the gross margin, assuming we have the similar gross margin that's wholesale and at retail, it will go from 55.5% to 54%. Right? So that is approximately, at this stage, about a 54% gross margin, assuming that ratio goes from 79 to 75 of regions to total, right? The mixes will be approximately I would say 7525. Yeah. And that's a good mix. Jeremy? Thanks, Jeremy Hamblin from Dougherty. Just a couple of follow-up questions here. The artist in collection that's going to launch I think in September timeframe. That has what I would characterize as significantly lower starting price points. It's definitely a simpler collection, very modern. What would the margin profile look like on the product line versus your typical collection? A lot of discussion debates. Tracy, you have no idea how much of time I spent with Tracy on that. It would be but keep in mind, first let me tell you, that all the product line is exactly the same specs of quality that we make. There are discussions. Should we make it so that it reaches a larger consumer base and we and we make it cheaper. I said, no. We're gonna kill our brand. But we said, let's be creative. Let's make sure that we design it. And then the next question was where to make it. That has an important application. A lot of this will be made in some in our U. S. Plants, but some in our other North American plants, and some also from great plants we have in Indonesia. So that has an opportunity of giving good pricing and about pretty close to the gross margins we get to the wholesale maybe one point or 2 point difference, not much. Right, Tracy? Okay. She'd been living and sleeping at on this. There are follow-up questions. Just in terms you've you've mentioned you've done nearly 70% of the locations have been relocated over the last 15 years. What's the maturity curve of a new store in a new trade area versus relocating a store, let's say, from Carrie Hill, New Jersey, to Marlton, New Jersey. Is it, what is the timeline to maturity on an average unit volume in those two Well, Jeremy, most other than other than major location like downtown Manhattan or Atlanta or Chicago, Most of these are relocations of existing stores. So while there is and in most cases, the opportunities to doing more business with relatively small impact on our profitability because these are existing businesses, with wholesale, with people, We have some sometimes what happens is like, let's take a look at Downtown Manhattan or Chicago, we have to expense occupancy costs or rent, sometimes 6 months, even before we open it, because according to the the counting rules, the rent has to be expensed. So that sort of adds up the cost when we have like for instance we're doing in Calgary right now. We're opening next week. Kathy is going to a great location, and we're moving it from an existing one. So, in this one, where our cost would be about 6 months of paying rent before in under terms of renovation construction before we move there. But other than that, it's the same staff, same people. And most of our real estate is relocations. So in terms of the timeline to get your average unit volume. There's no catch up time you're That's right. In the relocations. Okay. Another question, just to follow-up the transition of the company from, and I put on this gentleman's question, you've got percent of the options our company operates 70, 70 in the United States in North America, 70%. And so that has a, almost by definition, a negative impact on your operating margins. Is there any thought to potentially swinging the pendulum back to more independently operated in which you're simply, coming through with the designs, the marketing plans and letting the independent operators, the third parties, run the stores because you seem to execute really well in creating the collections and so forth and they're operating the retail design centers is a little bit more of a challenge. Yes, Jeremy, that's a good question. We have actually, as I said, starting tomorrow, we have all our independent retailers are coming here, both Domestic and International. This is subject We have to also keep in mind a number of factors. Some of our competitors almost everybody other than a few that are exclusively running their brands. They sell their products not only through their stores. They sell them also to large, retailers. Now we can we can do that. We have people coming in and they would take our products and put it in, but it's negative impact on brand. In managing it. I've for a short term, we could get lots of business in aligning ourselves with department stores. With large stores, but the credibility, the service person, the top line will go up. But I think that we believe that short term while we'll gain longer term, it will be negative to our to our brand. Yes. In the North America, our objective is to grow and we're going to look for entrepreneurs. In fact, you mentioned that our we our retail division model that we have been working on, and I've spent a lot of time on it, is to create an entrepreneurial business unit. When we started it, you know, we had just three or four people running the whole thing. Today, every month, we are creating what I call an entrepreneurial model, like a dealer would, right? Most of our independent dealers have 1 to 2 there are only 2 that have more than 2 stores. We have now created over 30 entrepreneurial units. And each of those are units, we are discussing with them a incentive program as if they're an entrepreneur. Now what you are talking about is, yes, we we would look for and encourage people to come in and run as entrepreneurial business, but as long as budgets, they've got to be the right people. They've got to be willing to make investment. Today, business environment is different. People are not the entrepreneurs of the 7 60s 70s 80s are no longer there. But it's we are looking at it and it's possible that we would sell some of our retail to entrepreneurs, but they've gotten the right people. Yes, Maggie. Maggie getting me down at the start. She interviewed Ethan Allen's CEO when we are public in the 60s. It's really good, Maggie. I was sitting there. Go ahead. Yes. Well, Maggie Gilliam and I would like to know what has been your experience with your operation with Amazon and also with Disney, please? Yes, good questions. As I said earlier, our experience I mean, I experienced the mixed. I thought that, foolishly, maybe, that there are 60, 70, 80,000,000 folks who are prime members and all of the time will rush to us. Then I found out you got to pay for them. That you got to advertise pay. So we're doing some, but I'm not interested in spending a lot of money to advertise. And I've told them that too. Similarly, Disney is better. I think in there, we are making progress. We are also doing actually some reasonably good business in China. We just went to Qatar and open up a Disney there. And it is growing and also we are aligned with them on the Disney store.com. So Amazon is okay, but we want to control it. I don't want to be in a business that they're controlling our business. So it's small. Yeah. Growing but small. It's growing, you know, it's obviously doubled in the last year, but for a very small base. All right. I think that this is I hope it's in production. And I'm glad that you all were here. And we I tell you this that I feel more comfortable the fact that we have the opportunity. And I think that there's all the changes we have made. Our objective is to increase the top line. That's really where it is at, whether we do it with our wholesale business or the retail business, the leverage we have is very, very good. And that is going to be our total focus in growing the in growing our top line, but doing it in a disciplined manner so that we are able to also leverage it to be profitable and we have that opportunity. So thank you very much for coming.