Q3 2022 Ethan Allen Interiors Inc Earnings Call

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Good afternoon, and welcome to the Ethan Allen fiscal 2022 third quarter Analyst Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please no.

This conference is being recorded it is now my pleasure to introduce your host Matt Mcnulty Senior Vice President CFO and Treasurer. Thank you you may begin.

Thank you Paul Good afternoon, and welcome to Ethan Allen's Analyst Conference call for our fiscal 'twenty 'twenty third quarter ended March 31st joining me today is Farooq FRE, our chairman President and CEO . Mr kept wire will open and close our prepared remarks, well I will speak to the financials midway through after our prepared remarks, we will then open the call for you.

Your questions before we begin I'd like to remind the audience that this call is being transcribed in reported lives on Ethan Allen Dot Com, where you will find a copy of our press release, which contains reconciliations of non-GAAP financial measures referred to it in the release and on this call. A replay of today's call will also be made available via phone and on.

Our website as a reminder, our comments today will include forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks the company assumes no obligation to update or revise any forward looking matters discussed during this call.

I'm pleased to now turn the call over to Mr kept for it.

Yes.

Thank you.

And thank you for just for all of them.

Now, let's go to the earnings call.

We continue to make good progress in many areas, resulting in strong financial results for the quarter ended March 31.

'twenty two.

Sales of 197.7 million increased 11, 7% from previous year quarter strong gross margins of 64% compared to 57, 3% in the previous SKU corporate.

And control over our operating expenses resulted in adjusted operating income of $31 3 million at 59, 9% increase over adjusted EPS of <unk> 93 cents increased 63% from the previous year quarter after Matt.

Mcdonald he provides a brief.

Hum.

Areas of focus.

And with that to match newspaper all those great. Thank you again consolidated net sales increased 11, 7% as a result of strong demand and increased levels of manufacturing production that led to higher deliveries combined with the prior year being negatively impacted by COVID-19. The increased production was partially offset by ongoing supply chain.

<unk>, which negatively impacted imports and raw material availability.

Third quarter progressed, we saw an increase in receipt of product from a higher volume of shipping container of seat.

Our retail orders were down 3% compared to a very strong prior year comparable however, retail orders were up 18, 2% compared to our pre pandemic fiscal 2019 third quarter wholesale segment orders were down 0.2% to last year, but were up 8.4 per cent compared to the third quarter of 2000.

19.

The higher level of product demand that we continue to experience has also led to an increase in our backlog. Despite the fact that our manufacturing production levels have returned to pre pandemic levels.

The delivery lead times remain higher than historical average as the first half of our third quarter was marked with higher COVID-19, absenteeism, among our employee base raw material constraints in supply chain disruptions. However March had strong production and related delivery that enabled us to decrease backlog during that month with that said our order backlogs.

Hi, and at March 31 were approximately 25% higher than a year ago.

Holidayed gross margin increased 310 basis points to 64%, primarily due to a change in sales mix higher manufacturing productivity previous product pricing actions that are beginning to work their way through our P&L and a favorable product mix, partially offset by higher important raw material cost.

The retail sales mix grew to 84% of consolidated sales compared with 79, 9% a year ago.

We are pleased with our consolidated gross margin of 64%, we expect our margin to return to approximately 58% in the near term due to the impact of.

Input costs in our system.

Our return on sales mix to more historical norms.

Our operating margin increased from 10, 7% last year to 16, 5% in the current year third quarter. Adjusted operating margin was 15, 8% of sales up from 11, 1% of sales last year due to fixed cost leverage on the higher sales volume strong retail gross margins and cost containment.

Sure, it's including lower marketing costs due to a change in marketing initiatives as will be discussed by Mr. Cat four shortly.

Now turning to our liquidity and capital resources, we ended the third quarter with a strong balance sheet, including cash and investments of $104 6 million and no debt, we generated $17 3 million of cash from operating activities in the quarter due to strong net income and increased customer deposits, partially offset by additional purchases of inventory.

To support increased production as well as to help protect against future supply chain disruptions and price increases.

Capital expenditures were $5 3 million and primarily related to the expansion of our upholstery manufacturing in North Carolina construction of two new retail design centers, depending on design center projection improvements manufacturing plant upgrades to further increase capacity and efficiency and investments in technology, reflecting the.

The strength of our balance sheet and strong history of returning capital to shareholders. Our board declared a regular quarterly cash dividend of 29 cents per share in January which was subsequently paid in February bringing the total year to date dividends paid to $40 1 million also as just announced this past Tuesday, our board increased our regular quarterly cash dividend by <unk> <unk>.

10% to 32 cents per share, which will be paid in may.

Lastly, as mentioned on our January earnings call, we amended our existing credit agreement to provide us a revolving credit line of $125 million and extend the maturity of the facility to January 20th 27. The amended agreement also provides us with the transition of sulfur improved product pricing on borrowings and enhanced future flexibility over the next five.

With that I will turn the call back over to Mr. Caf II.

All right, Matt and I would just like to tell everybody that you know I was actually coming from New York to Washington, playing got delayed and I got into this office that I'm talking from just at 459, So one minute before the skull things work out so I am actually speaking.

On my mobile phone and and and covering a lot of a lot of good areas to date.

Now I'll focus.

During the quarter continued on a key areas or key areas, which will help us to continue the progress.

Plus there is talent.

The development of strong talent continues to be an important area of focus and our vertically integrated enterprise.

We promoted a number of key associates, including within our retail division and business development.

Product development marketing manufacturing finance technology.

Operational and logistics, we are I'm very pleased that'd be able a strong team in place.

The second area of focus is service.

Proving our capabilities to increase production has been key to improving of our service and shipments.

About 75% of our products are made in our North American workshops, and almost all made custom when orders are received.

This requires effective management of inventories and bot to help manufacture in a timely manner.

We continue to greatly improve our delivery times.

Custom upholstery products made in our North American workshops ship in seven to nine weeks.

As compared to 15 to 17 weeks six months back.

We're also making good progress in improving shipping times in our wood products made in our North American workshops, now averaging about 10 to 12 weeks as compared to 14 to 16 weeks.

Continued investments in our workshop workforce and technology in our North American workshops have been key to increase production and efficiency.

We acquired a new 50000 square foot upholstery manufacturing operation in Florida, and North Carolina.

And continue to consolidate.

Technology operations in our recent 80000.

<unk> thousand square Foot addition to our maiden North Carolina upholstery operations.

We also continue to invest in technology, and all Vermont, Mexico, and Honduras manufacturing workshops. We are pleased that you know we have over the years invested a great deal in a lot of manufacturing logistics district give you a perspective.

K schools, we have close to one 3 million square foot Els.

Space in our manufacturing we own all the upholstery also close to a million three a square.

Square feet.

It's also a million two two.

Two square feet, there's a national logistics all of this has really given us a great opportunity to to improve all of our business model.

In our marketing our focus is continue to reach a larger consumer base utilizing many new modems of communication greatly increasing our reach while reducing costs.

We have greatly reduced the cost of producing all the advertising content, thereby further reducing expenses.

Now while we are overall reduced our cost we have been able to maintain most of our money has been spent in advertising in the various mediums not in producing.

During each month and now digital mediums have been key in our marketing efforts during each month, because we are now reaching about 20 million households through our.

336 page digital digital digital mediums.

During the quarter, we also ran national and regional television commercials.

We also selectively utilize other mediums such as printed direct mail.

Another important effort has been the grassroots effort of all of over 1000 retail designed associates and management, who are reaching clients via social media.

We have continued to add new products as we feel comfortable with our ability to service effectively.

We have a strong product program ready for launch and we and as we feel comfortable with all the service position, we will watch that.

Now another area that has been a major focus on technology investments and initiatives in technology, and marketing manufacturing and logistics continues to be key and improving our ability to service our clients increase our sales and profitability.

Combining personal service of our interior designers and technology continues to be a game changer.

We hadn't been Dane strong business during the last two years of Covid due to a number of factors such as offering.

Quality value.

75% made in our North American workshops, and importantly duty combining personal service of our interior designers with technology.

This continues as I said to be a game changer.

Continued repositioning of our retail design centers with smaller size excellent locations is tremendously important and the use of technology in a region. We recently opened two new design centers rejecting this concept one investable at Connecticut, and the second one to two weeks.

Back in Walnut Creek.

California averages, which is a which is in the San Francisco area.

In March 2018 in our retail Division, we had about 1900 retail associates and 900 designers.

Dave you have tell hundred retail associates and close to 600.

Designers.

So about a third less and the written.

He is up considerably and the quality of our teams is making this happen.

Finally, our social responsibility and safety is always a focus.

Man you got enterprise in a socially responsible manner has been bought for 90 years of innovation.

We have continued to receive many commendations and awards and conducting our business in a socially responsible manner. We believe that it is an essential part of our DNA.

With this brief overview I'm happy to open for any questions or comments.

Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your lineup in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the <unk> one moment. Please while we poll for questions.

Okay.

Thank you. Our first question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Hello, Brad how are you.

Hi, Good afternoon, Farooq, good afternoon, Matt and Farooq I hope the rest of your travels or a relatively uneventful.

Uh-huh, but.

A couple of questions a couple of questions. If I if I could you know first of all Farooq I was hoping you could talk a little bit more about the cadence of a business you know we've heard from some other retailers and manufacturers of home items in furniture, and mattresses that things have been a little bit softer over the last month or so here I was hoping you can.

Can just comment a little bit about about the pace of business and and and what you've been seeing as we've moved into April .

Yes, Brad.

It did.

The two factors in here, but what is the question of the relative to.

To the very very strong businesses that we have seen in the last six months.

We've continued that in March I think in April this month.

Of course, it's not finished but I think we can see that people are being cautious and it's I think it was to be expected. So I think that.

I'd seen that people are cautious but on the other hand. It also looking at much more clearly carefully on value.

Value in terms of quality in terms of pricing and in terms of service. The good news is that we are pretty much.

Well positioned in all of those areas. So while we do expect people to not to have the kind of a crazy thing that happened in the last year and a half that business will slow down but I think.

We will be able to continue to maintain our.

All of our momentum.

As you move forward.

Gotcha that's helpful.

And how how would you all characterize that.

The backlog today, I know, you're having success, reducing delivery times as you mentioned, but I think when we look at the customer deposit numbers. It's one of the highest numbers we've seen them in company history. So how.

How should we think of the size of the backlog.

And the opportunity for that from a revenue perspective.

Yeah, I think that if you take a look at our backlog for instance, compared to.

Retail and wholesale backlog is up between 20% to 23% compared to the previous year, even after a very strong.

Deliveries, so I think that certainly for the next few months, we will work to continue to reduce the backlog.

We have already reduced the timeframe as I mentioned in terms of our deliveries which is of course also positive because of the fact, we make it so I think that us right now.

Our backlogs are decent and we but our production has also increased so I think we will continue to improve our shipments and deliveries and and the backlog will most likely continue to go down. Although you do that do you know whether that's a decent levels right now.

Great and Matt I think I heard you make a comment about the gross margins being in the 58% range did I hear you right in and where you're focused on a particular quarter or annual level, what was the comment on gross margins.

So we ended this quarter Q3 at 64%, but we expected but with them.

Higher raw material and freight costs, continuing and uncertainty out there we expect it to come down a little bit when we provided the number of 58% and that's in the near term not specific to one particular quarter, but in the near term.

And again, you know that is bad it's just a it is they just they can sit in the assumptions on gross margins.

Right now, it's 64% is at a record high.

And if you take a look at it last yeah.

Coming into our fourth full quarter of our gross margins were at about close to I think 58.7 58.7, Greg to match.

Correct, correct, yeah, but yeah.

So we already was still quite high so I think that what Matt is saying is it most likely between 58 and 60% you know that that's most likely where we'll end up.

Great.

Thank you very much farooq and Matt.

Alright, Brad Thanks very much.

Thank you. Our next question comes from Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

Hello Cristina.

Hi, good afternoon, Farooq and Matt I had a couple of questions as well I wanted to start with.

If you can give more color on why you're seeing as far as cost inflation.

Versus you know the last time, we had the call and also the level of price increases I think last time, you said you have raised prices around 10%.

That's still the case or are you finding that you need to raise your you need to raise prices more to offset cost inflation.

Yes, I mean these are very important areas Christina are now.

Where hmm, Matt has as I have the numbers to what Matt to you and I were discussing the numbers in terms of you know we had a number of factors. One is fortunately that more 75% of our products are being made in our North America. These projects.

Had been less impacted than other imported products.

Important projects to match correct me, but we are talking of and we haven't seen an increase of anywhere from 20% to 25% that is correct.

And while all the domestic or North American you were talking about from that mix, I'm, and maybe 10 or 12%.

And so I think that and lot of this international has been also the impact of the freight costs.

Glean, we also of course as you know deliver our products at one cost nationally.

And that has also.

We have had some impact on the cost of transportation domestically, you like baby and I'm talking about domestic North America, I mean from Mexico, and Honduras, and all our facilities and then shipping it to all our retail network I think that that also has gone up 8% to 10%. So I think going forward.

Most likely yes.

I would think that we have seen the worst of the increases that suddenly in transportation and overseas. We have taken price increases I would say averages.

Between 10, and 15% and as we move forward. He was continue you will continue to look at our pricing to see what increases we may have to take but perhaps anywhere between five and 10% in the next six months.

Possibly them, that's what we're looking at Christina.

Okay. That's.

That's very helpful color and I guess as a follow up how are you reconciling the price increases that you know.

We need to take to offset cost inflation, but you know the consumer be you know a little bit more.

Cautious when it comes to you know.

Pricing and values Hum.

I guess did you in fact cause when we get we get asked a lot about promotions and promotions have been you know still low year over year I guess, how are you thinking about your promotional tool and as the year progresses.

Yeah. That's a good question, we have maintained approximately a 20% savings on all of our.

What we say everyday best price.

I think that one has to be careful and concerned about the effect of what kind of price increases.

The consumers will accept we have been very careful because again the effect over 75% being made in North America, where the prices really had been impacted to a great degree have been all the offshore product both in the cost of the product, but most importantly in the transportation as you know cost of a container is gone.

From 2012.

$30000, we have not fortunately seen debt domestically. So I think you're right. We are being very cautious in our price. While we have taken price increases. We also have been able to offer people a special savings and we'll continue to do that and we'll continue to make sure that we are competitive and we keep that into perspective that consumer.

There's not going to continue to keep on just being more from higher prices.

Yeah.

Absolutely and then I guess another topic I wanted to discuss with our marketing I mean, you commented about how have you been able to be more efficient with marketing last call.

There was.

Number talked about getting marketing back just to me the 4% is that still the target or you think you can come.

Below that just based on all the changes you've made.

Well you know this quarter.

We have no matter, what did we spend a 3% or less what did we spend on.

To my mind, 3%.

2.3% no.

The number of affected interestingly as I mentioned in my comments, while we reduced our expenditures will be even more effective.

Number of reasons first as we also reduced our <unk>.

And keep in mind, when we talk of 3% or 4%. It also includes it includes the <unk>.

All of the cost of producing a marketing that's our advertising costs a photo studio costs and then also the actually placing the advertising. So our marketing costs include all of that we have been able to through many factors reduce substantially all of the cost of production.

And then then we will also reduce the mediums that you're using for instance.

We spent a fair amount of money on direct mail print and direct mail.

Now in the last.

You had also two years, we have been increasingly using digital mediums for finished as we are now sending out as I mentioned three direct.

Three digital mediums.

Magazines two years back it was you know we'd be.

You wouldn't think of it so the mediums are changing plus also the cost of producing is changing so having said all of that but I think.

Keeping anywhere around three between three and 4% for budgeting purposes, I think it's a fair thing to keep in mind.

Okay. Thanks, and then I just had one last one and it's on the sort of like the new product introductions, you know I noticed that he introduced you know flooring Ob team, which is a new category for Ethan Allen and more on the home improvement side. So can you talk about you know why I decided to expand you know.

That category is that part of get manufacturing yourself and just how is your product introductions this year compared to last year.

Yes, I mean.

We have introduced products based upon also availability, but also obviously in all of our.

Our ability to sell their products. This Florida program is a very innovative concept.

It's a product that is being.

As shown by our designers and it is it can it can be used it can be applied without putting in all kinds of materials. It does it it it it works in a manner that.

It's it's it's put together joins together as a product rather than having be cemented though it seems like it's a much much easier way of using it now we do have.

I've always had a strong program in and carpeting and area rugs. So if we look up on this.

In addition to those programs and it's been very well received.

Okay. That's all I have thank you and good luck this quarter.

All right Christine and thanks very much.

And it looks like there are no further questions in the queue at this time I'd like to turn the floor back over to Farooq katamari for any closing comments.

Alright, well, thanks, very much and thanks, everybody for joining and I want to also thank our teams for doing a great job and we look forward to continuing our progress and growth. So thanks very much.

Thank you. This concludes today's conference you may do.

Disconnect your lines at this time, thank you for your participation.

Yeah.

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