AGM 2017

Nov 15, 2017

Slides

Well, good morning, and welcome to our 2017 shareholders meeting. And also a year when we are celebrating our 85th year. We are pleased to have also all of our directors are present here we have with us Jim Shmutter, we have Mary Garrett, we have with us John Dooner, Dominic Esposito, Tara Statham. He also with us a number of our offices are here today. So what I would like to do is give a brief overview of our business, the progress that we are making. And then after we have done with the presentation my presentations and also Eric Costa, our secretary, general counsel secretary is going to conduct the formal part of the meeting. We're very happy to answer any questions or comments that you might have. So as I said, we are celebrating our 8050 as a whole year. And in fact, Last month, we had about 5.50 of our associates here from all of the country and many other countries as well celebrating this event with us. Well, this is our annual convention. Briefly, Ethan Allen got its start in 1932 when 2 young New York City entrepreneurs, Ted Bohm return at Ensell went to Vermont and established the Ethan Island brand by focusing on the most relevant style of the time. That is early American colonial. And in the 30 in the 40s pioneered what was called the gallery concept that is establishing Ethan Allen Galleries in large stores. And then Then in the 1950s and especially in the 1960s, they pioneered again by establishing freestanding Ethan Allen Galleries by having many entrepreneurs convert their stores from Ethan Allen gallery all over the country. And by 1970s, about 250 of these galleries had been established And around this time, Ethan Allen had also established close to 30 manufacturing plants all over the United States mostly in the Northeast but had even gone to Oklahoma and to California. In the 1980s, the company went from being public to be part of a company called Interco. And in the late '80s, we had an opportunity of to having a management buyout of the company and we took the company private. And in the 1990s, we had to reposition the company again. We had to make changes, change forty change almost 50% of our product lines and a year and a half's time change the the design of our of our galleries at that time and finished all our dealers to do it and then also started speaking with one voice. And that happened because we took in the late '80s, we took a major step of delivering our product at one cost nationally. Hardly anybody did it at that time even today. It is not that much prevalent. It established an Ethan Allen as a national our national network. And in 2000s, we also had to make sure that we were confronted with globalization and commoditization in 2000s around that time before 2000 about over 75% of the furniture made in the United States, 15 years later 75% went offshore and a big issue of deflation which has lasted in the last 15, 20 years. Every year because of this globalization and commoditization, the prices of our products as has happened in other products as well, the prices have gone down. So to stay ahead every year, you really have we go down 5% to 7% before you are even at the base level and that has happened in the last 15 years. So we have been hard to confront with that. Now today, we are a desire in the known brand. 75% of our products are made in our workshops We are in an interior design business with 1500 entrepreneurial interior designers which we are strengthening every year and now importantly I'll talk about it close to 600 of them up also participating in live chat. So today personal service and technology is important. We have 303 Design Centers Worldwide 200 in North America And we have almost 70% of them have been relocated, refreshed. And then we also have a very strong logistics, and I'll talk more about it. In the last few years, we've had to again reposition our offerings to make them stylish, livable, quality value, Our vertical integration helps because we make over 75% of the products. Personal service is a new luxury. And now today combined with technology. These are some of the initiatives I will discuss in greater detail. Our retail network has gone from a store In fact, is in the process of going from a store to a regular design center. Marketing today is a new paradigm. Today, 70% first shop or we was online before they come to our design center. These are major implications. It has also meant for instance in our designers. We have 1000 less designers today than we had 15 years back because people use them to do their window shopping in our stores. Now they do it online. It's positive. It also has challenges. We also in the last 2 years did 2 collaborations with Disney and with Amazon. As I said in the last 3 years, we have changed almost 70 or 70% of our product line. We introduced Buckhead We introduced Santa Monica. All of these are, of course, in our design centers. You can even get a greater perspective of it from, on our website. Brooklyn, somewhat on urban, projection, Sonoma, So you might say more of a European, Italian, French projection, Georgetown, part of what we are under the umbrella of uptown, which I'll talk more about. Then we introduced the Ethan Allen Disney last year and in fact it was introduced about this this time because I think November 18th is Mickey Mouse birthday and we introduced that that year. So we have an anniversary although of course we started selling a few months later. We have now our newest product line was being introduced to the consumer this month. It's in our design centers. It's called Passport. It is somewhat of a global traveled look, getting inspirations from many parts of the world, well received, And the next one that we just introduced to our network last month and we introduced to the to the drug consumers next year in around April, May. It continues with somewhat more of a formal but a livable formal. Now our focus has always been to strengthen our vertically integrated structure. We own and operate 9 manufacturing facilities 7 in the United States, 1 in Mexico and 1 in Honduras. As I said earlier, we manufacture assembly about 75% of our furniture in our North American plants. Our focus on environmental and social responsibility and uniform manufacturing standards is tremendously important to us. We have full control of product from manufacturing, I would say from a design, from engineering, from design, engineering to manufacturing, And then we deliver it through our 3 National Distribution Centers, 29 Retail Division Service Centers and 37 Independent Retailer Service Centers. So manufacturing, we have a tremendous focus. As I said, we have a great, great group of people who working in our manufacturing, the craftspeople with long history and much of the furniture is built one piece at a time most frames are hand assembled and stitching is guided by hand. We have, our wood products are made with premium lumber in veneers, So we have really best in class technique construction techniques and a lot of technologies now in our manufacturing. Our first plant beach of all is remote. We have also a major sawmill. We have in a major North Carolina 3 upholstery plants And in Old Fort, North Carolina near Asheville, we have a wood plant in Pasek, New Jersey. We do all of our wall decor And also this facility also is partly used as distribution. All liens were mounted. We have a major wood plant. And then as I mentioned about 10 years back, we purchased a small plant about 40,000 square foot in Sila, Mexico is a great central Mexico, great, great people, great operation. And today it's almost 600,000 square feet. This plant does most of our cutting and sowing because cutting and sowing in the United States is difficult. And from there, they send these bundles to North Carolina and our 3 plants do most of the poultry. Honduras, we purchased a plant that an empty plant was made for wood plant and we started as a chair plant and now today it is a full fledged plant producing a lot of products and made a lot of progress all in the last 5 or 6 years. Our distribution logistics in the business in our enterprise is very important. Dublin, Virginia is our main distribution center over 600,000 square feet and this is where we most of our Our furniture is received and then shipped to our service centers and from the service centers delivered to the to our clients. In the Tokyo, Oklahoma, we have approximately a 250,000 square foot distribution center Most of this product is UPS product shipped from there. So it's important for us to make sure we ship the products in 1 day or 2 days and all of that is shipped within that time period. Pasek New Jersey is also partly used as a 300,000 square foot facility partly used as a distribution center. Our logistic retail network in in our enterprise logistics is tremendously important. So these the network is operated by our retail, by independent retailers or by the company retail division. And they receive the product, they prep the product, and then they deliver because providing great service and making sure that customers are satisfied and we don't get the returns, it's important for us to have this kind of a network to provide this service. The company in addition to having service centers all over the country has 5 major locations One of them is rideshare in Newtown, Connecticut, which delivers to the client to customers from Maine to Manhattan. We have 1 in Pomona, California which can take care of all of Southern California. We have one in Margate, Florida which takes care of, most of Florida, especially the southern part of Florida. Jester Springs in Pennsylvania takes care of from New Jersey to Maryland to Washington, Philadelphia and all that general mid Atlantic States. And Detroit, Michigan takes care of from Detroit to Milwaukee, Chicago and the Midwest. And our so from that point of view, it's extremely important that with our independent retailers and with our Let me just see. All right. It's going backwards. Premium Home Delivery is critical. In this case, we, as I said, We deliver the product at one cost nationally to the consumer's home and it is wide glove service. That's what differentiates us. The next important thing is what we say quick ship is a new reality. People today want things faster. So we started this program with custom quick ship upholstery. Now 85 percent of our wood products are available as quick ship. All our actions, accessory products are available to be shipped most of them by UPS. So this and then we of course have also custom. So we're combining in stock and custom. The retail network is an important part of our business. Today, we have, as I said, 2000 interior designers with 303 design centers. We also have 6700 what we call IDA or interior design affiliates. These are designers who do not work full time for us, the other 2002, and they when they come in, they are work with our in house designers and take care of clients. So we have continued to reposition our design centers today as you will note 72% of our design centers have been relocated within the past 15 years. It's been a major undertaking. Just to give you a perspective that today we have more or less 3 free design attitudes out there. First one, which is a classic design. This is the one that we converted from the colonial to what you see today is right here in Danbury, Connecticut. Average is 15,000 square feet. Then we have prior to the Greater we've built larger design centers called neoplastic design centers and averaging 18,000 square feet. And now in the last 10 years, we are relocating to what you call lifestyle centers averaging about 8000 square feet. Just to give a little perspective in the last year, we opened up our second location in downtown Manhattan in the flat iron area. And also what we are doing now is we are repositioning it from a store to an interior design center with designers and with technology, all right in the front Sooker people know what our business is about. We also relocated from a 25,000 square foot building in Virginia Beach to about a 10,000 square foot building. Again with the interior design projection. Also we relook repositioned expanded in Corte Madera San Francisco. Just opened recently in Indianapolis again from a freestanding to a lifestyle center with an interior design projection. We also recently opened a new one in downtown Atlanta in the Buckhead area. We also opened, in September in downtown sort of the more of the downtown area of Chicago, more of the urban areas of Chicago. And right now under construction, is a new design center in the superior area of Denver, Colorado. Scheduled to open the summer of 2018. We also in the process just right now of relocating in Calgary in Canada. In Cedar Rapids, Iowa, these are all under development. Internationally, we'll continue to focus on with our licensees We have many of them were here in our convention. We have a strong presence in China with over 83 locations And China has been good. They have grown in the last year. We have three locations in Korea. They're also doing well. We have also in the Middle East, in Doha, in Jeddah, in Dubai, in Kuwait, in Jordan. Also in Philippines, we just also in the process of opening a design center in Taiwan and also in Indonesia. The next one of which is a very important element, the environmental service and sustainability is critical. We've always been very focused on this. So sustainable operations is tremendously important and we take pride in the fact that we did this in the last 30, 40 years not now. And because of that, we are, I would say, our leader in terms of our environmental, in terms of using electrical usage, reducing carbon footprints, water usage, landfill, greenhouse gases, recycling, instance, when one example in Vermont, we used to burn 100 of 1000 gallons of oil. Now we burned 0 because we use wood chips and we also produce electricity. In fact, that is a steam engine that produces electricity in Vermont. Our social responsibility is not only now in our own manufacturing, we are now conducting it all across the world. Every company that we deal with has to meet our social stability standards. So we have we have invested in our talent and we are now working with every organization that we work with all of the on safety because we are in manufacturing, we are in retailing, we are in logistics. So that and we have made a lot of progress in now briefly on our marketing. Marketing, as we all know today, that customer experience is critical. Good customer experiences what defines brands In fact, even today, if you don't have a good customer experience, having, giving big discounts does not work. So even brands are important, but experiences important so that our focus is on that. So our marketing really focuses on creating desire call to action and this experience I talked about. Our internal marketing our marketing for us is external and in internal marketing, acquisition of talent, learning and training, technology, live chat, grassroots marketing, social and digital marketing, acquisition of talent is critical. Our interior designers are entrepreneurs. And every year, this last month, we had 200 and 40 of them being recognized here, we do it every year. So learning and training is a critical part of our enterprise and today of course with technology, A lot of that learning is done via technology. We have and will continue to make sure that we have updated and mobile friendly technology, especially including our website. If you go to our website today, you'll see the dynamic nature of our website. Combining technology with personal services critical. And as I mentioned, live chat just started a year back and today or close to 600 of our designers are participating in this live chat. Grassroots having 1500 designers and over 250 management and independent retailers, all of them as I said are ambassadors that deeply involved with the grassroots marketing. Social media is important. And we are also in the process of even accelerating all of these. Then external marketing is the main elements have been direct mail, digital email, print, television and again technology and personal service. We just introduced as I mentioned our passport and we introduced it by sending out 3,000,000 copies of our direct mail which has just actually been received by clients this last week or so being well received, and that's me going on a mountain because we're traveling this passport. You only get a passport you travel. So it's a it is this is a part of a direct mail and I think those of you are here you can also get that direct mail here. Digital Marketing, you're going to see a lot more focus on it as we move forward. And we have this is our Black Friday initiative going on right now and in here again as you can see we are initiative is expanding our Ethanol and QuickShip. Especially when you custom and quick ship, our products that are in stock and delivering it and delivering in good shape is a great competitive advantage And this is right now banner ads. Our emails are also reflecting the quick ship and all our other initiatives. Print. TV video is very, very important. This is a lot of the videos are being used on social media. And as I mentioned, we continue to invest in technology. We are in the process of converting everything to 3d 3d and we're going to see more of that being used by our designers and even by our clients. We are also in the process of expanding our marketing from in addition to our Ethan Allen network. We just recently in the last quarter actually received our orders from the U. S. State Department in which we are now finishing is in all the all the diplomats all of the world have access ethanolin programs and was well received, created a little bottlenecks because all of a sudden in September, we received a fair amount of orders which had the unintended consequences of putting some challenges in our manufacturing, but we are more or less out of it. We have just completed that And we are looking forward to really developing a strong program with the stage of 5 year contract. We're also looking at other opportunities. We have now entered into an association with Margaret Will. This brand is involved with developing housing, hotels. So we're right now in the process of furnishing 1100 Homes and a hotel in Orlando and in the process of finishing another hotel in California and a few others. So we're in the process It's a good, good program. It combines the 2 brands quite well where we are doing all the furnishings and this co branding is really is working well and we expect these kinds of initiatives. The next one is Amazon, just this summer after 6 or 8 months of work. We introduced Ethan Allen Design Studio on Amazon. It's a it was somewhat unique for them and also certainly for us whereby so just selling products, they're selling our services and having live chat with our designers. So the process just started and it gives us an opportunity for a fairly large customer base to look at Ethan Allen and then be aware of what we are doing. So we have just launched it in fact this holiday season. They've taken a few of our items and put it into their what they call their holiday event. So we look forward to continuing development with Amazon. And finally, I've always said this, EnSantis doing the same thing over and over again, but expecting different results. So we continuously look at how we're going to continue to reinvent because for 85 years, the only reason we have stayed and been profitable for 85 years is because of continuous reinvention. So with that, I'd like to introduce Eric Costa our but before that let me go a little financial information of course you're all very familiar with it, but I will give a little some motion overview. This is a historical perspective that is since we took the company public, we have been able to generate a lot of free cash and we have invested in the company about almost $780,000,000 in capital acquisitions We've also continued to pay dividends regular and from time to time special dividends, $385,000,000 we have also been purchasing a lot of this was purchased before the great recession shares we purchased almost 40% of our company back with $179,000,000. We have as you can see after the great recession, our sales we had a 40% decline in 2 years. We really were it was being like hit with the tsunami. So we have been getting back up And in 2017, our sales was a little bit lower than 2016. And it also reflects what you call our written orders. Our written orders are important. This is what we receive from the retail network and then translates into delivered sales. So it reflects a 3 year 0.6% decline in actually in past year. Our gross margins are healthy and remained healthy. And despite last year being somewhat lower, we have maintained strong gross margins of over 55 percent, which reflects our vertical integration from manufacturing and retailing. That's what makes it possible. This is sort of in their industry high margins but the result of our vertical integration Our EPS last year was $1.45 lower than 2016 dividends, as I said, we have continued to generate cash. We make sure that we watch our inventories, our expenses our yield has been about 2.5% and right after the great recession we even continued with some dividends even with the great recession our TSR performance, if you take a look at 5 years, 12.5% lower than S and P 500 or Russell higher than Spire, but 3 year we are somewhat higher than the other 2 S and P 500 Russell 3000 11.6 percent versus 9.6 percent S and P 500 in Russell, 309.1 percent. You we have discussed our opportunity scenarios with the investment community, with our shareholder community that are peak before the great recession, we had gone to about a $1,100,000,000 in sales, reducing of $147,000,000 of operating income And then 2 years in 2010 with the we were affected by the great recession. We'd went down 40% We went from $147,000,000 of operating income to 1,000,000 in just a 2 year time. So we had to take major, major steps Now we are back. We are close to about this $800,000,000 level. We are producing a part close to $86,000,000 of operating income with about 10% operating margin, our objectives opportunities to continue and to go back to the previous peak. With that, I'll also like to talk briefly about some of our corporate governance initiatives. Our we have a continuous focus on best practices and governance we have implemented the annual non binding vote and executive compensation in 2011. We eliminated shareholder rights plan that is a poison pill in 2012 at the 2013 annual stockholder meeting implemented a number of significant changes including appointing a lead director, eliminated classified board terms, approved the recoupment clawback of executive compensation in certain circumstances imposed requirements for in stock ownership and implemented no hedging, pledging policy. We eliminated requirement that business combination we proved by majority of the continuing directors. That's what we had previously. That we did that in 2015 into the 2016 annual stockholders meeting implemented a number of significant changes including proxy access, majority voting in uncontested elections, provision for stockholder removal of directors with or without cause. Overall updates to our governance documents to implement the 2016 proposals, remove obsolete provision and conform them to customer standards. We have done this more or less on our own when we have received suggestions and as they make sense, we do implement them. We have an independent and engaged vote. They're all here and good and as our board has done for as many years as I remember they always have 100% attendance in our board meetings. So average tenure is 4 years. Gender diversity is 33%. Average age is pretty young at 65 years. So with that, I think Eric Costa, our General Counsel And Secretary, how about coming up. Good morning everyone. At this time, we're going to proceed with the order of business. We welcome you to our 2017 annual meeting of stockholders. Please refer to the observance of the rules will provide equal opportunity for all stockholders to participate to highlight a few of the rules of conduct. All questions and comments should be directed to the chairman. No stockholder may address the meeting until he or she is recognized by the chairman. If you wish to ask a question or make a comment, please raise your hand and a microphone will be brought to you. When recognized Please stand, state your name and the fact that you are a shareholder. If you are acting as a proxy, please so state and name the stockholder you are representing. Only stockholders of record as of the close of business on September 18, 2017, or their duly appointed proxies are entitled to address the meeting and to vote. And of course, be as brief as possible with your questions and comments. And, although it's probably not necessary today, We ask that every question or comment be limited to 2 minutes. Now with the order of business today, if there is anyone who is here, who has not yet submitted his or her proxy and wishes to do so, would you please give it to the inspectors of election who receded at the inspectors table to my left? Okay. We will proceed with the initial formal business of this meeting, after which, as Mr. Cafari has explained, There will be an opportunity for you to ask questions of him. Now as secretary of the meeting, I can report that notice of this meeting was duly given on or about October 2, 2017. The list of stockholders entitled to vote this meeting has been available for examination by any stockholder in the company's offices in Danbury for the past 10 days and will remain open for inspection during this meeting. Pending confirmation upon tabulation of the ballots and the proxies, we are operating under the assumption that a quorum is present. The inspectors of Election for this meeting are Peter Deskovich of I OE Services, Inc. And Christopher Hayden of Georgeison LLC, both of whom have already signed the judges oath, and that will be filed with the records of this meeting. Once the final votes are tallied, the inspectors of election will certify the final votes of the meeting. Now before we begin consideration of the for 4 proposals to be submitted to a vote at the meeting, I would like to note that ballots will not be distributed to anybody who has not yet voted until after the presentation of all proposals and the stockholders have had an opportunity to comment on each proposal 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 will be an opportunity for you to ask questions of a more general nature. There are 4 proposals to be voted on this year. And they are as follows. The first are the election of directors. There have been 4 there have been 7 nominees for directors. Mr. Kathworry, James Carlson, John Dooner, Dominic Esposito, Mary Garrett, James Smatter, and Tara Stachem. There have been no other additional timely nominations Because of that, the foregoing 7 nominees are the only individuals who are to be considered for election at this meeting Now with regard to that, are there any questions with regard to the 7 nominees? Any comments with regard to the 7 nominees? The second proposal is to the executive compensation And are there any comments or questions with regard to the second proposal? The 3rd proposal is to approve by a non binding advisory vote, the frequency of future advisory votes to approve the named executive officer compensation. And the method of voting on this proposal is to select among 4 options. 1 year, 2 year, 3 year, or abstain. With regard to the 3rd proposal, if there are any questions or comments? The fourth proposal is to ratify the appointment of KPMG LLC as our independent public accounting firm for the 2018 fiscal year. Are there any questions or comments with regard to this proposal? Thank you. Okay. Now I am not aware of any other business to be conducted at this meeting. Before we proceed to the vote on the above proposals, I would like to ask if any stockholder is aware of any formal business to come before the meeting. Now that all the proposals have been submitted for consideration, would like to ask if any stockholder has any question that they would like to ask or comment that they would like to make with regard to the 4 proposals. If so, please raise Okay. It is now 10.37 by my watch. As the designee of the Chairman of the company, I declare that the polls are now open, and we will proceed to vote. Persons who have sent in their proxies do not need to vote by ballot unless you wish to change your vote at this time. If anyone would like to vote by ballot, please raise your hand, and we will furnish you with the necessary ballot. After voting, please return your ballot to the judges sitting to my left. Does anyone wish a ballot at this Okay. Gentlemen, have you, tabulated the vote at this point? The inspectors of Election have just handed me the vote. And based upon their report, I declare that M Farooq Kethwari, James B Carlson, John J. Dooner, Jr, Dominic J Esposito, Mary Garrett, James W. Schmater, and Tara Eistacom, have been elected as directors of the company for a term of 1 year. I further declare that the proposal to approve by a non binding advisory vote, the executive compensation of the company's named executive officers, has been approved. And the proposal to approve by a non binding advisory vote to frequency of future advisory votes to approve named executive officer compensation has been determined for a frequency of 1 year, And lastly, on the 4th proposal, to ratify the appointment of KPMG, that has passed as well. They will act as the firm's independent registered public accountant the 2018 fiscal year. The report of the Inspector of Election will be filed with the minutes of this meeting. And that concludes the formal business to come before the meeting today. I would now like to turn the meeting back to Mr. Kathleen. Well, thank you, Eric, and congratulations to all our board members for being elected. And, also, thank to all our shareholders for I had an opportunity this morning of looking at the results that had come this morning of having extremely, extremely overwhelming support by our shareholders. So I want to thank them for that. And I would also at this stage if any any other comments or question anybody has about the presentations. If not, then I do I have a motion to adjourn the meeting for one of the stockholders seconded, seconded. And again, thanks very much and thank you for participating in our 2017 shareholder meeting.