Organon & Co. Q3 2023 Earnings Call Transcript

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April 26, 2023

There are 5 speakers on the call.

Operator

Afternoon, and welcome to the Ethan Allen Fiscal 2023 Third Quarter Analyst Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. It is now my pleasure to introduce your host, Mac McNulty, Senior Vice President, Chief Financial Officer and Treasurer.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good afternoon, and thank you for joining us today To discuss Ethan Allen's fiscal 2023 3rd quarter results. With me today is Farooq Kefwari, our Chairman, President and CEO. Mr. Caffuri will open and close our prepared remarks, while I will speak to our financial performance midway through.

Speaker 1

After our prepared remarks, we will then open the call for your questions. Before we begin, I'd like to remind the audience that this call is being recorded and webcast live under the News and Events tab on the Investor Relations page of our ethanallen.com website. There you will also find a copy of our press release, which contains reconciliations of non GAAP financial measures referred to in the release A replay of today's call will also be made available via phone and on our website. Our comments today may 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.

Speaker 1

The company assumes no obligation to update or revise Any forward looking matters discussed during the call. With that, I am pleased to now turn the call over to Mr. Kefwari.

Speaker 2

Thank you, Matt. We are pleased with our strong financial performance for the quarter ended March 31, 2023, especially compared to strong results for the previous period. Matt will View in detail our financials for quarter ended March 31. We had sales of 186,300,000 Strong gross and operating margins of 59.9% and 15.5%, respectively Our diluted earnings of $0.86 remained strong. And importantly, we ended the quarter with cash of 100 and $6,200,000 and no debt.

Speaker 2

Also pleased, yesterday we announced that our Regular dividend, cash dividend has been increased by 13% to 0 point 3 $6 Last week, we had an in person convention with 300 of our leaders from retail, Manufacturing, logistics and our corporate teams. We launched with a grand opening of our interior design Destination initiative at our flagship Danbury Design Center. We discussed many initiatives After Matt provides a detailed financial overview, I will review our initiatives to maintain a strong operational and financial

Speaker 1

Thank you, Mr. Kefwar. As a reminder, we present our financial results on both a GAAP and non GAAP basis. Non GAAP results include restructuring initiatives, impairments and other corporate actions and are further detailed in our press release. We believe the non GAAP presentation better reflects underlying operating trends and performance of the business.

Speaker 1

Our financial results in the just completed third quarter That were highlighted by strong growth and operating margins, shorter lead times from decreasing backlog, disciplined cost and expense controls and a robust balance sheet, including $156,200,000 in cash and investments and lower inventories. As we began to revert back to pre pandemic conditions, Our operations produced strong financial results, which I will now discuss. Our consolidated net sales totaled $186,300,000 and were helped by high backlogs, pricing actions taken and the positive effects of product mix, partially offset by lower delivered unit volume. Sales in fiscal 2022 set a near record pace, leading to a difficult comparison. Compared to the Q3 of fiscal 2019, Which is pre pandemic and more reflective of historical norms, our consolidated net sales were up 4.8%.

Speaker 1

Wholesale segment written orders decreased 9.3% compared with last year and were down 5.9% to the pre pandemic Q3 of 2019. Our retail written orders declined 12.3% due to a strong prior year comparable. However, when compared to the Q3 of 2019, Our retail orders were up 3.6%. We ended the quarter with wholesale backlog of $73,300,000 down 42.2% from a year ago, As we were able to reduce the number of weeks of backlog by over 30%, bringing it more current. However, our wholesale backlog remains 30% higher than pre pandemic levels.

Speaker 1

Consolidated gross margin was 59.9%, which marked our 8th consecutive quarter that our Consolidated gross margin exceeded 58%, a metric previously not seen before the onset of the COVID-nineteen pandemic. When compared to last year, our consolidated gross margin was down 50 basis points due to a change in the sales mix, partially offset by lower input costs such as inbound freight and raw materials. We had expected the percentage of retail sales to consolidated sales to moderate towards normalized levels and this materialized in Q3. Retail sales were 81% of consolidated sales, down from 84.4% last year As we delivered out more of our wholesale backlog, including a greater percentage of contract business backlog. Adjusted operating margin was 15.2%, down from 15.8% last year due to lower consolidated net sales, a gross margin reduction And higher retail delivery costs, partially offset by our ability to maintain a disciplined approach to cost savings and expense controls.

Speaker 1

Our SG and A expenses decreased 5.7% and equaled 44.7% of net sales, the same as last year, as we carefully manage expenses in a declining net sales environment. Adjusted diluted EPS was $0.86 per share compared to $0.93 last Our effective tax rate for the quarter was 25.1%, up from 24.2% last year. Now turning to our liquidity and capital resources. As of March 31, 2023, we had cash and investments $156,200,000 with no outstanding debt. We generated $33,400,000 in cash from operating activities during the quarter, Bringing our total year to date amount up to $74,400,000 in fiscal 2023, an 85.9% increase over last year Due to higher net income and an improvement in working capital, our inventory levels decreased $24,800,000 since the start of the fiscal year As we restore operating inventory levels to more historical norms as backlog decreases, while also ensuring appropriate amounts of inventory are on hand to service our customers.

Speaker 1

Capital expenditures were $2,200,000 for the quarter and included investments in various areas within manufacturing, technology and retail. We continued our practice of returning capital to shareholders as our Board declared a regular quarterly cash dividend of $0.32 per share in January, which was subsequently paid in February. Our total year to date dividends paid were $37,200,000 Also, as just announced in our earnings release, Our Board increased the regular quarterly cash dividend by 13% to $0.36 per share, which will be paid in May. We have paid a cash dividend every year since 1996 and have now increased our regular quarterly cash dividend in each of the past 5 years. In summary, we produced strong growth in operating margins while managing our expenses in a challenging environment.

Speaker 1

As we move through 2023, We are carefully managing our expense structure while investing in growth initiatives that we believe will further our business. With that, I will now turn the call back over to Mr. Kefouari.

Speaker 2

Thank you, Matt. As I mentioned, last week, we had in person convention At our Danbury, Connecticut headquarters with about 300 of our leadership from retail, Manufacturing, logistics and corporate. We reviewed many areas of our enterprise, including the following: Introduction of the interior design destination initiative. The Danbury, Connecticut Design Center reflected our Strengthened offerings and projection of classic designs with a modern perspective. The projection and our new offerings were extremely well received And our plan is to have this projection reflected in over 172 design centers across North America During the next 9 months, this is extremely important initiative for several reasons, Our design centers across North America will project the perspective, creating excitement With our interior design teams and also our clients, Weebly will help us in driving traffic To our design centers during the time of softening economy.

Speaker 2

Our manufacturing is in great position to service our clients. During the last few years, had to manage very strong backlogs of orders. As you know, About 75% of our products are made on receipt of orders in our North American workshops. While we had developed new products, we decided to hold introductions until most of the backlog was delivered and we were In a better position to service our clients, we started to introduce Some new products during the last year or 2, but now we have continued to invest in strong product introductions. We also continued to improve and invest in our manufacturing.

Speaker 2

Keep in mind, 20 years back, we operated about 30 Manufacturing Plants in United States. Today, we operate 10 very strong plants in North America, making, as I said, About 75% of our products. We have strengthened our logistics, Both at the national level and at the retail level, we deliver our products at one Cost nationally. During COVID, we had to absorb very high freight costs. Currently, we see the Freight rates coming down.

Speaker 2

Now very importantly, we have also continued to invest in technology In all areas of our enterprise, combination of strategic locations of our manufacturing, Talented, motivated associates and technology has resulted With our many initiatives, especially some from fiscal 'twenty nine, we have made Major efficiencies in getting stronger talent, reducing overall headcount, while major increases in sales. For example, since fiscal 2019, We have reduced our headcounts, both in retail and network And our manufacturing logistics by 12%, while increasing sales substantially. We've also reduced our overall inventory. As Matt mentioned, we have worked hard to service our clients and while our backlog is down substantially from fiscal 29, it still remains at healthy levels. With that, I'm very happy to open it up for any questions or comments that you might have.

Operator

And at this time, we will be conducting a question and answer session. A confirmation tone will indicate a line is in the question It may be necessary to pick up your handset before pressing the star keys. Our first question comes From the line of Cristina Fernandez with Telsey Advisory Group, please proceed with your question.

Speaker 2

Yes. Hello, Cristina.

Speaker 3

Hello, Farooq and Matt. Good result on the operating side. I wanted to Start with the SG and A expenses are being very well controlled. Where are those reductions coming from? And do you think you can manage this from quarter to Quarter or as we look at an environment of softening sales, there needs to be more structural changes to your expense Yes.

Speaker 2

Christina, the our it's interesting since when you look From 2019, that is pre COVID, we have reduced our inventories. We have reduced our operating expenses While our sales have gone up, a lot of it is due to the fact there are a number of factors. First is on the retail side, Technology and stronger interior designers have played a very important role. We have today less People in our retail bring more business. Today, our designers are able to work virtually with Clients, of course, with the COVID that was tremendously important.

Speaker 2

That resulted in reduction of people, But more stronger interior designers and I think that will continue. Our designers are doing well. Similarly in manufacturing, If you take a look at our manufacturing and our logistics, we have less people today than we had 2019 with higher sales. And as we go forward, that will continue and will give us benefit and will continue to become more efficient. So this question of making sure that our operation is more efficient has been a very important part of our initiatives And I think that will continue.

Speaker 3

Thank you. And I also wanted to ask about Demand, the down 9% in wholesale for the quarter, 12% in retail. How did demand progress during the quarter? Is it even or are you seeing a lot of volatility? Any color by regions that you can share?

Speaker 3

Are there any No major differences. And how is Cement trending so far in April? Any color there would be helpful.

Speaker 2

Well, we are of course comparing to high, very high numbers in the previous years. So obviously, We are looking at when we take a look at our business even compared to 2019, Our backlogs are still higher, as Matt just mentioned, compared to even 2019. But we do know that we were operating at very high demands. That is softening. And we saw that most of it really during the quarter and in April also, I think that People are more cautious.

Speaker 2

And obviously, it's still early. As you know, we look at the whole quarter before we make any determination. But we are prepared to we need to understand that people are more cautious and that we have to be more Active, efficient, both in marketing and in terms of our operating expenses, and we are looking at both very carefully.

Speaker 3

And as a follow-up to the backlog comment, you mentioned backlog is up about 30% versus pre pandemic And orders for the quarter, I think are down like 3%. So do you expect that backlog To normalize versus the pre pandemic level or anything has changed where that backlog should stay higher?

Speaker 2

So, well, if you keep in mind, just our backlogs, just to take a look at it, just from prior year, They are down almost 40%. They are still high compared to the pre pandemic levels. No, as we continue to go forward, Our backlogs are going to continue to come down because we are able to make the products. We had just tremendously high Business in the 1st 2 years of the COVID, we have caught up and we've caught up very, very well. And I think by this quarter, we'll have completely caught up, And which is good news that we will have even faster deliveries.

Speaker 3

And one last question I had was on the dividend increase. As you thought about increasing the dividend, is there a payout Target your working stores that you wanted to hit with the level of where you took the dividend?

Speaker 2

Well, as you know, we have been giving over the last as Matt just mentioned, we have continuously have had regular dividend and we I've also had special dividends. And when I take a look at it, just before we increase this dividend now, I think our Yield on the regular dividend was close to I think 4.7%, 4.8%, right, my Matt? That is correct. The dividend will now go over 5%. But then if you include, which I don't know, the financial markets don't include our special dividends, that would also that makes Close that to 5.5% to 6%.

Speaker 2

So I think having a dividend between 5% 6% yield is pretty good and that's our intention.

Speaker 3

Thank you.

Speaker 2

All right, Christina. Thanks very much.

Operator

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets Inc. Please proceed with your question.

Speaker 2

All right. Now, this is not Brad, is it?

Speaker 4

This is Zach Donnelly on for Brad. How are you, Farooq?

Speaker 2

Very good. Good to hear your voice. Go ahead please.

Speaker 4

Sure. So I want to touch on the backlog as well. I know you had mentioned that you were working down the On transact portion of the backlog specifically for this quarter, so I was wondering if you could provide us With details on what portion is contract versus not contract and maybe some of the different margin puts and takes associated with the contract Versus non contract portion of the backlog?

Speaker 2

By contract, you mean our business with the government? Exactly. Yes, Yaron. As you know, most of our business comes from our own retail network. Retail network, which Operator by our own retail division and then our independents.

Speaker 2

So we have what we call retail backlog and wholesale You compare it, for instance, to, let us say, the pre let's say, even sixthirtytwenty twenty, going back to 3 years, Our backlog is still approximately at the retail level. It's Still higher by about close to 30% to 40%, right?

Speaker 1

That is correct. It is up 41%.

Speaker 2

Okay, 41%. And our wholesale backlog is up even with all the business we've done, we've delivered, It's approximately at about 12% to 15%.

Speaker 1

Correct, Matt? The wholesale backlog is up 30%. All between And retail is up about 40%.

Speaker 2

I see. From sixthirtytwentytwenty to now. Yes.

Speaker 1

From pre pandemic levels actually I was looking at.

Speaker 2

Yes. $10,000,000 over $63,000,000 is what, yes, and that's Okay.

Speaker 1

From June 30, yes, you are correct. It's down about 15%.

Speaker 2

All right. Yes. So our backlogs are still high, but again both at the contract level, which is our government contract and at the retail, but retail is higher.

Speaker 4

Understood. Thank you. And then I also want Touch on unit volume trends. So I know that the negative unit volume trends you've been kind of seeing Has been negatively impacting gross margins. We've been hearing from different industry participants That unit volume trends might be down somewhere in the mid single digit to high single digit range for this quarter.

Speaker 4

But I was wondering if you could Provide any additional detail on that and then maybe touch on whether or not you think Ethan needs to become perhaps more promotional in order to drive unit volumes in the next couple of quarters.

Speaker 2

No, I understand. As we just Our gross margin for this quarter, this ending was about almost 60% and 59.9%. And if you take a look at Going back to our pre pandemic level, it was about 56%. So we have maintained a high gross margin. And now as we go forward, obviously, we have to take a look at the economy.

Speaker 2

We've got to take a look at whether we have to We'll be more aggressive in our marketing, but we have these gross margins. They are a result of a number of factors. First is The fact that volumes are a very important factor in terms of having an impact of gross margins, especially at a manufacturing Because our manufacturing is impacted by volumes that have a tremendous impact on our gross margins. So I think at this stage, we operated at a very high level of 59.9% and pre pandemic level was 55%. So So I think within $55,000,000 $60,000,000 that is something in between the 2, I think we'll continue to have that we expect that to be our gross margins.

Speaker 4

Understood. Sounds good. And just one last question for me. I think the last time we spoke, You had reminded me and our team that the last set of pricing actions you had taken were passed maybe In January to March of the previous year, can you just remind us if that's correct or if you've passed along any pricing actions since then? And then if not, how do you expect the fact that we are now lapping those pricing actions to impact revenue and margins moving forward.

Speaker 2

Maybe Matt can give perhaps give you somewhat more details, but our objective has not We have not taken price increase across the board. Our focus has been in the last few years to be We are very selective in our price increases depending upon where the product is coming from. And in fact, some of the price Increases that we took in the last two years also reflected extremely high freight costs. 25 Our product for instance is coming from offshore in East Asia. The cost of a container went from $3,000 to $30,000 Now it's coming back to close to $3,000 Similarly, our for instance, our forwarding a container from East Coast to the West Coast also increased by almost doubled and now it's come down.

Speaker 2

So our price increases reflected to a great degree the impact of freight and that's why we have not taken many price increases Because the freight is coming down.

Speaker 1

And just to clarify, The last price increases were done in January, February of last year of 2022. But do remember though, due to the backlog and the nature of our business, those Price increases do not impact our P and L until it actually gets delivered. So there is a lag of anywhere between 2 to 4 months on that. Yes.

Speaker 2

And that's important, but also as I said, the freight factor was a very important factor. It's still not completely down, but major factor. Look at this, as I said, from East Asia from 3,000 to 3,000, now it's down to 3,000 or 4,000. So we did take price increases. Other price increase that came in have been absorbed because by the reduction of freight, the national and domestic.

Speaker 4

Got it. Got it. Yes, that's really helpful. And just to kind of clarify as a last point with the kind of lagged impact Of those pricing actions, I guess it sounds like we won't really or truly kind of lap those pricing actions until maybe the end of next quarter. Is that kind of generally correct in that thinking?

Speaker 2

At this stage, we don't have any plans of increasing prices

Speaker 4

Got it. Thank you. That's it for me.

Speaker 2

All right. Thanks very much. And any other questions?

Operator

We've reached the end of the question and answer session. So therefore, I'll hand it back over to you for closing remarks.

Speaker 2

Thanks very much. Well, as I said, we are pleased with the performance. We are also, of course, cautious We are optimistic as I said in our press release that we have to watch what is taking place in the economy. We got to take a look at the ManTechs, so far we are positioned extremely well. Keep in mind, as I said, our operating expenses are lower, our inventories are lower, we have managed our costs quite well and we have strengthened our teams.

Speaker 2

And this launch of the interior design destination is a very important initiative. We were going to do that too, but it just so happens the softening of the economy Gives us an opportunity of having a strong marketing to get a message across. Thanks for everybody for joining and look forward to continuing our progress and talking in next quarter.

Operator

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Organon & Co. Q3 2023
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