Natuzzi S P A Q1 FY2021 Earnings Call

Thank you, Kevin. Good morning to our listeners in the United States and Americas, and good afternoon to those of you connected from other countries. Welcome to Natuzzi's first quarter 2021 conference call. After a brief introduction, we will give room for a Q&A session. Before proceeding, we would like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States securities laws. Obviously, actual results might differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial condition. Please refer to our most recent 20-F filed with the SEC for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. And now, I would like to turn the call over to the Company's Chairman. Please, Mr. Natuzzi.

Okay. Good afternoon and good morning to everyone. I hope that you have noticed the different setting of the press release this time. To be honest, Antonio, our new CEO, helped us really to design it in order to make clear the nature of our business. I would highlight the most important goals that we have reached; 87% of the sales are branded with a better margin. Now, what branded means? As you should know, we have Natuzzi Italia, Natuzzi Editions, Divani&Divani, and DOS, franchising, and galleries; all together these brands and channels represent 87% of the total sales, which is an improvement from the previous 76%. I would also like to emphasize the operations side. Last year, we downsized the factory in China from 88,000 square meters to 38,000 square meters due to the trade war between China and America. We were manufacturing and exporting almost 80% of our total production from China to the United States, and the raised duties impacted our P&L. Therefore, we decided to reduce the factory size based on our needs and the growth of the Chinese market, which is performing very well. We are opening a store in China month after month, and we expect that within the next two to three years, the Chinese production will be entirely absorbed by the Chinese factory and the growth in the rest of Asia. We have also started outsourcing to Vietnam, servicing major customers in the USA and Canada, to avoid duties and improve margins. We believe we will start production in Mexico within the next 60 to 90 days to further enhance margins and service levels for our American customers. The most important novelty is that we have welcomed Antonio Achille, our new CEO, who will officially start on June 1. Antonio recently celebrated his 50th birthday; he is a young fellow with a lot of energy and 25 years of experience with the best consulting firms in the world, notably McKinsey as a Senior Partner. Antonio has been a consultant for us for a long time and understands the significant potential that Natuzzi has at a global level. I ask you to welcome Antonio, who will continue the transformation of our manufacturer company into lifestyle brands managed by the retailer division. As Chairman, I will serve as Executive Chairman to manage the transition and focus on a long-term strategy to build more retail, increase DOS, improve margins, and meet shareholder expectations. Thank you for listening, and I'm available along with Vittorio and Jason, our President of Natuzzi Americas, to answer any questions you may have. Thank you.

Thank you. You may submit questions via the web meeting at any time. Click the Q&A button on the left side of your screen, type your question in the white box, then click submit. If you'd like to verbally ask a question, please make sure the 'request to talk' switch is enabled prior to clicking the 'submit request' button. Our first question today is coming from David Kanen. Your line is now live. Please proceed with your question.

Okay. My first question relates to the transformation of the company. In the future over the next few years as a lower percentage of our overall revenue comes from private label and more from Natuzzi Italia, Natuzzi Editions, and DOS; what do you see as the longer-term gross margin profile of our business? When I look at some of your competitors, like La-Z-Boy, Ethan Allen, Bassett, they all have gross margins over 40%, some even in the 50s. Where do you think we will be long-term as that mix shifts? Thank you.

Okay. No improvement, no question about it.

And then, when I look at your liquidity, I'm struck by the strength of the company given that you've got over $50 million in cash and probably over $40 million in real estate; my estimation is Kuka is worth over $65 million at this point. There was an article that was written last Thursday by someone who theorized that the company is going to do something highly dilutive; sell shares here, which to me sounds absolutely insane given the low valuation; could you comment on that? Would you be willing to sell shares here or is this person speculating?

Hi David, can you hear me? It's Vittorio. Sorry for the technical problems. We received this question in recent days. Let me answer you and those investors about the company’s plans to issue equity. In February 2020, due to the pandemic, Natuzzi was close to being delisted by ICE, and the Board of Directors was also forced to seek financial support from the main shareholder to handle an immediate stop of the business and cash flow. The visibility at that time on the business was really poor. The main shareholder immediately granted the requested financial support up to €15 million. The way to grant was at zero interest credit line, refundable with a future share issuance. This option will last until December 2021 for the approval of the shareholders meeting and if necessary, by March 22, for the execution of the share issuance. That is where we are currently. Now, thanks to the efforts of the management team, today, Natuzzi does not need to hold that money. In fact, after the €2.5 million we received in February last year, the company has not asked for the remaining €12.5 million. If the Board option is not exercised, the company will reimburse the €2.5 million loan to the shareholders. In the meantime, the company is continuing to dispose of non-core assets to find alternative sources. The Board of Directors is the body that will make the ultimate decision. They will consider the business environment, the financial situation, and the interests of all shareholders. I need to be clear that the company is focused on maintaining an efficient capital structure. We are facing a very different situation from when the initial credit line was granted. Should the equity option be confirmed, it would be because our team has found exciting new opportunities for growth that require additional investment, aimed at creating substantial value for our investors. But again, we are not at that point yet based on our actual cash position and projections. Hope this clarifies this topic.

Okay, thank you. Appreciate that.

Now, I would like to pass the floor to Jason, who will comment on the business momentum in America, our key market, notwithstanding the short-term visibility challenges. Jason, it's your turn.

Sure. Listen, good morning, and good afternoon to everyone. I'll be brief this morning. We feel continued momentum in North America; when we look at our branded wholesale business, the orders compared to 2019 are growing at a pace of about 44% year-to-date, and in the retail channel, we're growing at just over 50% compared to 2019 levels. We're very pleased with our current momentum and are working hard to maintain and accelerate that pace. From my perspective, those are the key headlines for us at the moment, and I'm happy to take any questions if there are any.

Thank you. As a reminder, you may submit questions via the web meeting at any time. Click the Q&A button on the left side of your screen and type your question in the box. Our next question today is coming from Charles. Your line is now live.

Good morning, Charles. We can't hear you.

Charles, you are muted. Please confirm. I can read the question to proceed if that's okay? A key focus for Antonio is operating margins. Could you help us understand the opportunity that Natuzzi has with improving operating margins with Poltrona sofa and Poltrona Frau operating margins in the teens?

Excuse me, this is Pasquale. Who is asking this question?

This is the operator reading the question from Charles. He says a key focus for Antonio is operating margins. Could you help us understand the opportunity with Poltrona sofa and Poltrona Frau operating margins in the teens?

Okay, this is Pasquale Natuzzi. Antonio, our CEO, will officially start operating June 1, and today he is not here; we apologize for that. I don't have the numbers regarding the operating margin of Poltrona Sofa or Poltrona Frau. But let’s understand, Poltrona Sofa is a completely different company. Their best-selling product promotes sofas for $99 up to $699; they outsource without respecting human rights. Poltrona Sofa has nothing to do with Natuzzi. Regarding Poltrona Frau, we are a tailor-made lifestyle brand with a presence worldwide; we manufacture products in Italy, Romania, China, and Brazil. We do not consider Poltrona Frau as our peer, nor Poltrona Sofa. It’s a completely different market.

Thanks.

Okay, thank you. Our next question is from the line of Greg Cowen. Your line is now live. Please proceed with your question.

Good morning, Greg.

Hello, Greg. Your line is now live. Please proceed with your question. Can you confirm hearing me?

Can you guys hear me?

Yes, please.

Okay, thank you. Hi, question for Jason Camp. How many stores do you think we could open in the U.S. in the next two to three years? And how would you describe the current trading environment relative to prior periods in your career, including at RAH?

So, thanks, Greg. Let me start with the current trading environment in the U.S. It feels unprecedented; I've been in retailing home furnishings for 25 years, and I've never seen growth like this at a macro level. We observe growth rates generally at 20% to 40%. We're pleased to be in the 40% to 50% range, ahead of the general market. We see continued opportunities to build a strong foundation for this business and accelerate it further. We believe we can comfortably open around 10 stores per year and potentially accelerate that as we learn more about our model and the opportunities ahead.

Thank you. Our next question today is coming from David Kanen. Your line is now live.

Coincidentally, the previous caller actually asked the question that was on my mind, but I'm going to spin it a little differently. The 50% growth from retail that you saw in Q1, was that all organic or were there stores added to that number?

Thanks, Dave. That is purely an organic number, and it's a January through April number; so it's quite current.

Okay. And then, is this a question for you, Jason? Given that North America’s growth is impressive and Europe has just reopened, do you think we'll see numbers comparable to 25% to 35% up versus 2019 in the UK, Italy, etc.? Or is the initial reopening in April below that?

I think that's more of a question for Vittorio, but clearly, we reported in our release that as Europe reopened, we saw a substantial increase in our incoming order rate of about 16% on a global level. You can feel the impact of their reopening.

Yes, you're right. The percentage after 18 weeks shows a global increase of written orders by 15.7% versus the same quarter in 2019. Consider that the UK and Italy, for example, were almost entirely closed during that period, and the pace for order flow was better than Q1.

So, Vittorio, 16% up overall is inclusive of Europe being very weak for January-February. Could you speak to specifically April and the first few weeks of May in Europe? What kind of increase are you seeing in written orders?

We divide Europe into Southwest Europe and emerging markets. Southwest Europe includes Italy, Switzerland, Austria, Germany, The Netherlands, Belgium, France, Spain, Portugal, and England. Until a month ago, we were about 25% with the budget in this region. Right now, we are at minus 15%, which shows a recovery of 10 percentage points in four weeks. We're very confident that business will pick up in Southwest Europe. Emerging markets are seeing unbelievable growth for us, even Natuzzi America and South America are performing well. We still want to see improvements in margins, but overall, the business is performing satisfactorily.

Let me underline that branded orders grew 15.7% while unbranded is down. Overall, we are up only single-digit against 2019. Branded orders are up double-digits, and unbranded is down double digits.

So, what I'm trying to understand is if the numbers are diluted when you include January, February, and March. Could you give us a sense of the written orders in April?

April's pace is up 16% versus Q1 2021, thanks to contributions from Western and Southern Europe that have just reopened.

And is May consistent with what you're seeing in April?

Yes. The year-to-date order flow is consistent.

Okay. Thank you.

Thank you. Our next question is a follow-up from Greg Cowan. Your line is now live.

Greg, your line is now live, please proceed.

Greg, we can see you.

Greg, you need to unmute on the platform; we cannot hear you. If you can hear us, please.

Sorry, we cannot hear you. If you can hear me, we cannot hear you, Greg. I apologize for any technical issues; you may need to unmute yourself.

Ladies and gentlemen, to ask a question, click the Q&A button on your screen, type your question, then click 'submit request'. One moment, please, while we pull for further questions. If there are no further questions, I will turn the floor back over management. Management, can you hear me?

Yes, we do.

I believe that concludes our Q&A session. Would you like to make any closing remarks?

Yes, Mr. Natuzzi, would you like to close the meeting?

Certainly, I would like to thank all attendees; I see we have 33 listeners. I hope that next time, or any time you need to ask questions about our company, we will be pleased to answer all of you. Again, thank you for your confidence, and I wish you all the best. I wish you to stay safe. It seems the pandemic is reducing in Italy and Europe; I am looking forward to traveling again and meeting people worldwide. Thank you very much, again. All the best to everyone.

Thank you.

Thank you. That concludes today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.