Natuzzi S P A Q3 FY2022 Earnings Call

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter 2022 Financial Results Conference Call. As a reminder, interested people can join the call live by dialing in: (+1) 412-717-9633, then passcode 39252103#. Once again, if you would like to join the call live on the phone, please dial (+1) 412-717-9633, then passcode 39252103# in addition to the link already provided to join via video. At this time, all participants are in a listen-only mode. Following the introduction, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions. Joining us today on the call are Mr. Antonio Achille, Natuzzi’s Chief Executive Officer; Mr. Pasquale Natuzzi, Founder and Executive Chairman; Mr. Jason Camp, President of Natuzzi Americas; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. I would now like to turn the conference call over to Piero. Please go ahead.

Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi’s conference call for the third quarter 2022 financial results. After a brief introduction, we will give room for a Q&A session. Before proceeding, we’d 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 annual report on Form 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 Chief Executive Officer. Please, Antonio.

Thank you, Piero, and good afternoon, everyone. Thank you for joining our third quarter press release. Let me share a few highlights on the third quarter, but also as we are pacing at the end of the nine months of 2022. The third quarter closed with a positive tone both in terms of revenue. We reported revenue of EUR160 million, which means an increase of almost 50% versus 2021 that, as you remember, was a strong year for us with an increase of 30% versus 2020 and an increase of 32% versus the year 2019, which can be considered the last year of normality before the pandemic. I also would like to flesh out the growth of the branded business. As you know, Natuzzi operates two main brands: Natuzzi Italia and Natuzzi Edition. That revenue was EUR103 million with an increase, which is higher than the average increase of the total revenue or 22.5% versus 2021 and 57.6% versus 2019. This means that the branded business is growing faster than the overall revenue, which is very consistent with the strategy that Pasquale Natuzzi, our Chairman, initiated a decade ago to transform the company into a brand lifestyle company and a retail company. One of the priorities we gave ourselves with my new mandate is working on marginality to extract more value to give to investors in the business, but we extract more value also for the benefit of the majority investor and every investor. When it comes to marginality, we closed the quarter with a 37.7% margin, which compares with 36.6% of 2021 and with 28.7% of 2019, so versus 2019, almost 10 additional percentage points of marginality. This is in a year which has been still characterized by a significant increase in cost in some of the materials and a true spike in the energy cost. As a result of those elements, our continued growth and a better marginality, we closed the third quarter with EUR4.1 million profit, compared with a loss of EUR0.4 million in the third quarter last year and a loss of EUR8.7 million in 2019, so quite a significant improvement during the quarter. If we look at the nine months of 2022, the profit has been EUR6.7 million, compared with EUR4.3 million in the first nine months of 2021. It's important to remember that in 2021, Natuzzi, like all major companies, benefited from COVID-related measures which, in our case, in the first nine months amounted to EUR4.2 million. So if we want to compare the profit of the first nine months of 2022 versus 2021, the improvement netting the one-off COVID-related measure has been very significant, clearly much more significant compared to where the first nine months ended with a loss of EUR19.5 million. When we look at profit per American Depositary Receipt, which is basically what everyone of you owns, that means we closed with EUR0.50 of profit per share per ADR, to be compared with a loss of EUR0.35 in 2021 and EUR1.05 in 2019. So from the very beginning, we discussed in our call that the priority for our business is to create value for our shareholders, employees, and customers. And this is somehow happening. Cash-wise, we're close to a position that is very similar to what we had at the end of last year. Last year, we closed with EUR53.5 million cash. This quarter, we closed with EUR53 million, so almost exactly the same. This is despite the fact we are having some more inventory due to the slowing of the business. In essence, I hope you appreciate our effort to manage the company in a way to extract more value and to have tighter cash management. Clearly, it’s very early days. We don’t want to be celebrating any success, but I believe the numbers show that the work is paying some results. I want to also state candidly that the trend we already discussed in the last press release, which means the slowing down of the business since April, has not reverted the trend. Both in our retail and the business with our clients, we see a pace of new orders that are below our expectations, which means our budget. We keep comparing notes with the remaining players in the industry, and we see this is quite a general trend given whatever is happening around us, which at this point seems redundant to repeat. We don’t take, of course, this as an excuse. We are working very hard. We're also making some changes in our organization, most notably in our wholesale team in the U.S. and in our European emerging market team to reinforce our team and to make sure we stay closer to our existing clients and reinsert new clients selectively by strengthening our pipeline of business. This is a bit the executive summary. I would say a quarter that ends on a positive note. Unfortunately, we're experiencing quite strong headwinds, which is not helping our turnaround. We're very committed to continue the growth journey, which is part of our five-year plan. But we need to acknowledge that this is happening in a market context that is not necessarily favorable. We know the industry is difficult, so we definitely hope this situation is not going to last forever. We're working so that despite these headwinds, we keep our business up and our factory busy. Just providing a few additional highlights on our cost structure before opening to Q&A, when it comes to G&A, there's been a better absorption and also SG&A given our business leverage. Regarding raw material, the spike in energy is noticeable, and as I mentioned before, we had an extra cost of EUR2.8 million for energy. Material is a bit of a multifaceted dynamic. Labor costs are improving, but fabric and metallic parts, particularly steel, are on the rise because those industries themselves use a lot of energy in production. So they pass the additional cost to their clients, which in our circumstances are players like us. Another point to note is transportation, which is normalizing, not yet at the level of 2019, but especially from China to the U.S. and onward to us, has been steadily reducing, allowing us to be competitive again from those platforms. This is a bit the executive summary I wanted to provide. Let me stop here for observations and questions as usual.

Thank you. We will now move on to the question-and-answer session. Our first question today is from David Kanen. Your line is now live.

Good morning. Can you guys hear me?

Yes. Dave, we hear you very well.

Okay. Well, first, congratulations. I know the quarter didn’t turn out exactly as you would like and to your long-term potential, but to earn EUR0.50 per ADR is certainly an accomplishment and demonstrates how undervalued the company is. So congratulations, and it's encouraging what the potential is long-term? So a couple of questions. One of your comments in the press release is in response to the tough market conditions. We've launched a set of actions to lower the cost of our G&A, tightly managed our working capital, and protect our cash position. So could you speak specifically to what's going on in terms of lowering the cost of G&A? And implicitly, what it tells me is that there's more leverage in our financial model to the upside during periods of normalization. But if you could just quantify that for us and give us some specific success in the areas that you're targeting?

Okay. Well, thank you for the positive note and encouragement, Dave. We know that you have been a long-term investor, and hence, this comes from a deep understanding of our business. That's highly appreciated. So when it comes to the management of our cost, we went back to basics in the sense that in 2019 the company, also with external support from McKinsey, put together a process to manage in a tight way the restructuring costs, looking at every individual dollar spent across all categories, including purchases, transformation costs, industrial costs, G&A, and other costs. We have replicated that methodology internally. I was part, of course, of the McKinsey team there. So a lot of people also here are already black belts on that methodology. We have a weekly meeting, and we have accounted around 13 responsible individuals, which, as you can imagine, are the typical functional responsible ones. We have put down a citizen initiative to tightly manage the different costs and also the working capital. So I can give you a few examples. One is focusing on streamlining and accelerating the restructuring in the quarter, where we identified potential to accelerate the rightsizing over the quarter also as a way to allow bringing in new capabilities. We are looking at all possible ways to reduce the impact of additional energy costs on our factories, so we are reramping all our factory processes. When it comes to working capital, we are applying a lot of scrutiny at all the different working capital that we have in the company, which means the raw material that we have and also the finished products that we have in some of our geography. So we are having really tight management of those items to ensure that there is no cash trapped in those areas. We are also addressing some more structural opportunities like the simplification of our offering where we want to be very compelling and appealing to our consumers, but we also acknowledge that there's a lot that can be done to simplify the coverage assortment and the way in which we make intermediate stock on that level. So it's a holistic approach managed with strict methodology where every week, we appreciate the progress, and we intervene to change and resolve situations that need to be accelerated.

So can you quantify what the cost savings are in terms of millions? Is it a low single-digit, mid single-digit, or high single-digit number when it's fully implemented?

So Jason, please, can you mute? We are receiving notifications for all of the messages or whatever you're getting from. So I think if we just look at the third quarter, also to compensate for a slowdown in the revenue, we're looking at, I would say, a material potential impact, so in the order of EUR3 million to EUR4 million for a quarter, which doesn't mean that we'll increase the EBIT, but it means that it will also allow us to counterbalance the negative effect of the loss of revenue momentum. So I believe this is a company that has sustained, and we know that. We've always been mentioning the opportunity around restructuring. This is a company that has an opportunity to manage its business more tightly, and that opportunity can be quite substantial.

Okay. And then in the press release, you referred to the impairment of a trade receivable, which increased SG&A. What was the dollar amount of that?

I will pass over to Piero for that. If you have the answer.

Impairment of trade receivables, it is written in the table.

Okay. Can you provide us that, Piero?

Yes, it was EUR0.1 million for the third quarter.

Okay. And then a quick question for Jason. In North American DOS like-for-like, how did we do?

So we're spending a lot of time looking at both kind of how we're comparing to ‘21 and to ‘19. And so when you look at year-to-date, we're trending down 8% to 2021 and up 50% to 2019 year-to-date.

Okay, thank you.

Like-for-like.

Okay, and then final question. Antonio, you've referred in the past to your Factory 4.0 sequential rollout. Can you give us an update on that? In the past, you referred to a mid to high single-digit improvement in gross margin once that's implemented. Where are we? And when do you expect that to be fully rolled out?

So I confirm that is the range of the potential benefit, which means that if the factories are sufficiently saturated, they operate with the right level of saturation. That in our business means 80% plus; the application of that working approach, which is more than technology, as a way of having a lean manufacturing way of organizing the floor can produce the kind of result we’re expecting. The plan is to roll out that in most of our Italian factories by next year, and we’re also considering a potential relocation of the factory in China to make sure the new plant can fit this new way of working. The next wave will be Romania and our Brazil operation, so that can be the benefit. I need to be candid here because before modeling the benefit in the margin, we must acknowledge that the reduction in volume is also translating to a reduction of factory utilization, which, being a fixed cost business, has a direct impact on the cost per minute. So we are even working harder on the Factory 4.0 because we see it as not only a long-term opportunity to enhance margin but also as a short-term opportunity to counter the potential negative impact on cost per minute derived from lower capacity utilization of our factories.

Okay. Well, thank you. I appreciate the commentary. Good luck and you guys have a nice holiday.

We will definitely discuss things before the holiday. We plan to take a break after completing our plans, and we will have holidays in 2027.

Thank you. If there are no further questions at this time, I’ll turn the floor back over for any further or closing comments.

Hi, I feel I've spoken enough. I leave the floor open maybe also if Pasquale wants to comment or Piero or Jason, then I will do a summary myself. But I also want to leave the floor open for the Chairman and the rest of the team if they want to comment on anything. And then I can provide my final remarks.

You provided clear explanations, Antonio, regarding our actions and the current situation. What we may not have emphasized is that to reduce general and administrative expenses, we are reviewing our organizational structure, consolidating areas such as the Southwest Europe market with other regional markets under a single manager, and streamlining customer care and related functions. This organizational review and consolidation will help us enhance service quality while lowering costs, and we are actively pursuing this. Aside from that, you addressed all the key points, Antonio.

Thank you, Pasquale. It's been a very appropriate comment on your side. So in closing, I want to restate how committed we are. We're really working as one team with just one strategy. The Chairman, myself, you see Jason, our leader in North America, but also the remaining of our team, we're very cohesive and committed to the long-term plan. We know that there are challenges ahead of us, but we are very equipped for those challenges. We have a good cash position. We ensure the company is managed adequately on that front. And as I mentioned before, we're going to step up in terms of aggressiveness on cost reduction due to this phase. As everyone you have seen is doing, starting from the large digital companies in the U.S. So this is, let’s say, the third quarter result. In terms of long-term strategy, nothing has changed; we're still committed to making Natuzzi the most successful high-end European brand globally. I believe that with the current strength of the brand and the brand's heritage, this is something that is due and achievable. Having said that, thank you so much for your attention. I wish you a great continuation of the day, and I hope to reconnect soon in our next press release.

Thank you.

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