Natuzzi S P A Q1 FY2025 Earnings Call

Thank you, Kevin, and good day to everyone. Thank you for joining Natuzzi's Conference Call for the 2025 First Quarter Financial Results. After a brief introduction, we will leave room for the 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 United States security 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 Chief Executive Officer. Please, Antonio.

Thank you, Piero. Let me start, as usual, by sharing the highlights of the first quarter. We're going to be particularly brief since we want to leave more space—Piero, the translation—to leave more space for a quality discussion with the management. As you see, we invited the core people from the team. Looking at the highlights, we closed the quarter at EUR 78.1 million. This is down from last year by 7.6%, and I will comment on the specific reasons for this shortfall of revenue in addition to clearly challenging market conditions. Gross margin was down to 34.1% compared to 36.9% of the previous quarter. We will elaborate on this because it's particularly important. The primary reason is that in the first quarter, we had a planned transition phase to shift production for Natuzzi Editions for North America from China to the Italian market. I will elaborate later on why this contributed to a slight decrease in margin in this quarter. So the combination of revenue below what we need for scale and margin led to an operating loss of EUR 0.8 million in the quarter. Net financial costs were EUR 2.9 million compared to EUR 2.2 million in the previous year, mostly due to currency movement. As you know, the currency has been particularly volatile in the first quarter. Despite these elements, we continue investing roughly EUR 2 million primarily in the factory side. In terms of cash, we closed the quarter with EUR 22.2 million in cash, slightly above EUR 20 million at the end of the year. In this regard, it's important to note that this was also the quarter where we completed the transaction of High Point, which contributed to the cash position. We will have plenty of opportunities to discuss with you what we are experiencing as an industry, I would say, the global sickness in the world in a market that continues to be very challenging. I don't want to expand on this element because it's obvious the reason why I am making this statement. I was just reading the data on consumer confidence, the Board confidence for the U.S., which went back to the beginning of 2023. I also saw the data for confidence in Europe, which was down 3.1 percentage points. So it's quite evident that we are still working in a market where consumers tend to postpone durable purchases. As I mentioned, I will keep it very short and light. I will return later to comment on some elements. Let me now pass to Pasquale for an overview of the commercial achievements in the quarter.

Well, good morning, everyone. Just for everyone's information, I’m Pasquale, my position is Executive Chairman. So in other words, I'm working together with our CEO to put all my experience at the company's disposal considering the situation, which is complicated. No question about that. The business environment is very, very difficult. So because I have commercial responsibility, I'd like just to recap what I wrote in my press release to stimulate questions, which would be very welcome from all of you shareholders, analysts, or bankers, whoever. That's why I also invite the Channel Director, Diego Babbo. Diego Babbo has the responsibility for the retail channel. Codrin has responsibility for the wholesale channel. Pasquale Junior Natuzzi has the trade and contract responsibility, while Daniele Tranchini is our Chief Marketing Officer. Again, I will read what I wrote in the press release just to remind everyone or to stimulate everyone to ask any questions. There’s no question about the markets we operate in have not shown signs of improvement that we expected. The business environment has been further affected by the introduction of United States trade duties on April 2nd, the ongoing Russia-Ukrainian conflict, and more recently, the escalation of tension in the Middle East. In this context, we have intensified our efforts to support commercial deployment. We continue to implement our brand commercial strategy that integrates collections, marketing, and customer experience while closely monitoring its effectiveness in a challenging market environment. The brand guidelines have now been centrally codified to accelerate a global and consistent rollout. This year marked our return to the Salone del Mobile Fair in Milano after a 5-year absence that coincided with the pandemic and post-pandemic period. At the Milano Fair, we unveiled the new Natuzzi Editions collections, Feelwell, Dolce Vita, and Neo Heritage. During the Milan Design Week in April, we also presented the Natuzzi Italia Comfortness and Circle of Harmony collection, which reflects our evolution into a global lifestyle brand. True to our heritage, the Natuzzi Italia collection has been enriched through collaboration with international designers such as Andrea Steidl, Karim Rashid, Marcantonio, and Mauro Lipparini for both Natuzzi Italia and Natuzzi Editions. The new collection has been supported by tailored high-quality marketing campaigns, which I’m sure if you want to have deeper information, Daniele will provide you with plenty of explanations. We have worked to support and innovate the three channels in which we operate: Retail, Directly Operated Stores (DOS), and franchising; Galleries; and the newly established Contract channel. In Retail, we have made significant investments to improve analytics and intelligence. We have built the infrastructure to monitor store performance in real-time, focusing on key indicators such as foot traffic, conversion rate, average ticket, and product category performance. This enables a data-driven diagnostic of each store across our network with the objective of progressively improving the performance of our retailers. The Reimagined Gallery format that was introduced late last year has become operational in the first quarter of 2025. While still in its early stage, it has started to show some initial signs of positive impact, both in terms of new offerings and remerchandizing, particularly in the United States. Following the launch of Natuzzi Harmony Residences in Dubai last November, we are seeing early signs of growing interest in our Contract division, an area we consider having significant growth potential and strategic relevance for our group. Our immediate focus is on the full and effective deployment of this strategy in our main market, where we have prioritized initiatives aimed at strengthening sales and engagement across all regions, although the full impact will depend on market dynamics and execution over time. Natuzzi America remains a strategic priority. We have implemented a new organization with the appointment of the new Vice President of Retail, Justin Christensen; and the new Vice President of Human Resources, Sharri McIntyre, who will focus on improving our retail and commercial operation. Justin has over 25 years of experience in the retail industry, particularly in fashion, having worked with European and American fashion groups, including Brioni and Ralph Lauren. Sharri, with over 20 years of experience, has held the position of Vice President of Corporate Human Resources at Louis Vuitton and Human Resources Director at Williams-Sonoma. In Europe, we have taken direct control of our largest market, the United Kingdom, by appointing a new Country Manager, Antoine Nicolay, to lead the commercial development for both the retail and wholesale channels. Antoine brings over 10 years of experience in luxury and consumer goods. In Italy, the recently appointed Country Manager, Rocco Rella, is positively contributing to improving the quality of both our direct and franchising distribution. In China, we have worked closely with our local joint venture team to enhance the quality of our retail network and strengthen brand presence. In July, we will present a new Natuzzi Italia collection to our dealers, replicating the Milan Design Week format at a local level. Our new collection has generated interest among both existing and prospective clients, leading to commitments to open new galleries in France and Germany. We believe that the steps we have taken on collection, marketing, and retail management represent a solid foundation for improving our commercial performance over time. Our objective remains to strengthen the brand and enhance operational efficiency with the aim of delivering sustainable value for our stakeholders. However, the actual results will depend on market conditions, consumer sentiment, and the effective execution of our strategy. That's the reason why I involved the Channel Director and also the Marketing Director. If you have any questions, we will be very pleased to provide all the explanations. Thank you.

Okay. My apologies. Are you able to hear me now?

Yes, please go ahead.

Okay. In the prepared remarks, you highlighted that you moved production for various reasons out of China and over to Italy and that caused some disruption in gross margin. Furthermore, you explained that you enacted a price increase of 10%. So last quarter, Q4 gross margin was 38.1%. Therefore, we have gone backwards about 400 basis points. With the moves now completed, should we expect a return back to the 38% level, assuming we're doing EUR 75 million to EUR 80 million a quarter? Is that a good assumption, or will it take some time?

So it's definitely something we want to manage. As you know, since April 2nd, which is after this quarter, the administration also introduced a 10% duty for products exported from Italy. We are definitely reviewing also this aspect in light of the 9 April, which was the 9 July deadline anticipated by the American administration to potentially review this duty because absolutely, we want to take all the measures to reinforce the margin, especially for this component. Additionally, as anticipated in the press release, we are also considering more sustainable production locations for Natuzzi Editions for North America. We have, as you know, factories, including in Romania. Any movement of that production needs to be clearly considered given the rigid preconditions we have in terms of agreements with public institutions and the contracts in Italy. So maintaining margin will be pursued with two actions. Short-term, we will be reviewing our price list in consideration of the duty. More mid-term, we are also considering potentially allocating production for Natuzzi Editions outside Italy, but this is something which needs to be discussed with local institutions as we plan the industrial transition carefully from an operational standpoint. In case you want more context regarding the constraints and pre-existing agreements, Mario is the best person in this team to provide that.

My question is about Q2 and the rest of the year. It seems there will be a 10% tariff on products from Italy unless a special deal is made. Assuming the tariff will be 10%, should I expect gross margin to stay at 34% in Q2 and after, or will it improve due to the price increase and other adjustments? I'm not sure I have a clear understanding.

It's a central question. As you know, we don't provide specific guidance on these figures. Not also because they are the result of a complex algorithm where there is price realization, product mix, production cost, and materials. So we don't provide specific guidance. What I can reassure you, at least in my capacity as CEO, is that we're going to be determined in readjusting the margin on Natuzzi Editions towards North America in light of also the tariff. We need to protect our margin because the tariffs don't depend on us as an industry standard. So definitely, we're going to take price adjustments there. In terms of production allocation, this is a more structural move, but the company is very serious about having discussions with the government to face some of the historical constraints that prevent a more effective allocation of this production.

Okay. And then operating expenses for the quarter were down to EUR 27.4 million in Q1. So if you had done 38% in gross margin, you would have actually had almost a $3 million operating profit, $2.5 million to $3 million. So that's why I'm focusing on margin. That reduction in operating expense to EUR 27.4 million, is that sustainable? I know there are some variable costs, specifically transportation, commission, etc. But assuming all things equal, let's say, EUR 78 million with the same mix more or less in revenue, can you maintain that EUR 27.4 million operating expense level? Or was there something anomalous that drove it lower?

So I'm going to be—going back to your question to make sure I answer it correctly. Provided the scale is the one we are discussing because, of course, there’s a matter of absorption of those expenses. I am confident that we are on a good track to reduce operating expenses. We're also implementing a contingency with our CFO on all discretionary expenses. We just discussed and implemented with Domenico here, a contingency on all discretionary expenses. We launched a review of the cost of purchasing materials and transportation. Provided the scale and mix, which was in your opening question, remains at the level we are witnessing today, I am confident that the expenses will go down in percentage. They will decrease in absolute terms, but it’s also a matter of maintaining or increasing the scale to potentially witness a reduction in percentage.

Okay. And then Mr. Pasquale Natuzzi called out some of the changes that you've made in your new technology platform to track retail locations, and he said something like you're seeing early signs of improvement. Could you just speak to that a little bit, what these differences are? And when did you see this improvement? And how profound is it?

I'll let Pasquale comment on this.

Sincerely, I mean I don't – I mean the communication is not really the best here, and I haven't understood what David said. Could you repeat, please, David?

Yes. Mr. Natuzzi, you had said that you had implemented some changes in terms of, I'm assuming, technology, information flow between headquarters and your retail locations. And this new platform you said is showing early signs of improvement. I believe you said that both for the commercial unit and your North American retail. So if you could explain what some of these changes are, before and after. What it was like before, and the magnitude of the improvements that you're seeing and why? Just give us more color or depth on these early signs of improvement.

Okay. All right. So I ask Diego Babbo. Diego is our Retail Director. So he will give you explanation about that, okay? Diego.

Yes, David. Well, actually, Mr. Natuzzi is referring to the fact that we have institutionalized a robust process of ongoing performance assessment with actionable insights, translating into precise and timely action plans. This is part of our culture of continuous improvement, which has allowed us to swiftly address underperforming categories and capitalize on emerging opportunities. We are based on a software platform, the Power BI platform, which allows us on a rolling basis to look at each single store, not only directly operated but also including all our dealers that chose to join our system, which are increasingly embracing the idea. We can now really make sound business decisions based on facts and figures, as was a practice probably in most advanced retail, but not very much in our industry. I have to say we achieved a good threshold and level of excellence in that. To provide some context, a cornerstone of our progress lies in our re-merchandising strategies that have been measured through the system. By meticulously analyzing consumer behaviors and in-store dynamics through the system, we have refined our product placements and visual storytelling, making our showrooms more engaging and effective in driving conversions. It’s a data-driven approach paired with enhancing performance analytics that has empowered our teams to anticipate market trends and consumer needs with greater agility. For example, by analyzing trends in our stores, we have set action plans to offset a significant decrease in traffic. The key factor mitigating the decline in store traffic has been the dedication and professionalism of our store staff who have benefited from targeted training programs. This has been achieved by using the system, measuring results, and offsetting the decline in traffic, mostly in the U.S., through three main pillars and actions. One, as PJ could comment further, is the fact that we are addressing the trade business through our architectural design in our stores, which is now part of our double-check activity through our software, achieving considerable results. Mostly in the U.S., we have stores where we are exceeding 25%, 30% of our business made through the trade. Furthermore, we also implement actions to improve the conversion rate of the fewer consumers entering our stores alongside measures to protect the average ticket in our stores. Everything is now rolling out through the system, strengthening our internal collaboration by integrating feedback loops between retail operations, merchandising, and supply chain to ensure optimal execution at every level.

Okay. I'm going to go back into the queue in case someone else would like to ask questions. But I have a request, Antonio, if you would be kind enough to make an introduction to Justin Christensen, the new North American Retail VP. I would appreciate that.

Sure. I will put you in contact with our local team, absolutely.

Our first question is coming from David Kanen.

If there are no other questions, people...

David, I have David. David is on, but I just want to make sure he is unmuted, okay.

Okay. Please, please, please. Otherwise, I would have moved to comment on the figures in more detail with Carlo. Please go ahead, David.

My last question is on the Commercial division. Also, you called out that you're seeing early signs in that business. If you could give us an update. Longer term, what is the potential size of that business? And any color that you can give us in terms of the early signs that you’re seeing now that are encouraging?

I'm not sure if you're referring to—are you referring to the project business, the trade, and contract business?

Yes. Is that now what you call the Commercial division, like selling to hospitality...

Well, we call it—we call it the Contract division. Commercial is the term we would use for all divisions. Contract refers more to this, let’s call it, B2B or B2BC opportunity, which is led by PJ. PJ, I believe you are the one best suited to address David's question. Please go ahead.

So Mr. David, as you know, we're overseeing for sure, first of all, a phenomenon that is quite positive for consumers: the growth and extended lifespan of furniture products. This is causing a significant slower pace in the repurchase cycle for consumers. That is a phenomenon we're looking at on the retail side. Then if you consider the macroeconomic pressures that we are all feeling, this clearly impacts consumer confidence and purchase intentions. Now we are observing a shift in our retail business model. There is a hybridization of what was a purely B2C commercial dynamic into a B2B2C model, where the business-to-business is represented by the relationship with the design community, which is what I'm overseeing with what we call trade and contract division. This is a team and business unit that oversees two main trajectories. On one hand, we develop and deliver bespoke solutions to hospitality operators; hospitality and entertainment, commercial, residential, and bespoke solutions in the residential field, of course, which is also very important. This is what we call contract—bespoke—and it has given life to the incredible best-practice Harmony Residences in Dubai, which started with a relationship with a real estate developer based in Dubai, and that is now being replicated in different geographies. The other aspect is that we are improving the team by ensuring commitment and disciplined growth through design leadership, bespoke project development, integrated customization, and leveraging Natuzzi's control of retail, using our supply base for retail-related endeavors. We are seeing considerable growth in trade business; as Diego mentioned, some stores reached 30% and even more in trade sales. This enables us not only to deliver the design service but also to build long-lasting B2B connections with design professionals. I believe this is the future of our industry. I also sit on the Board of Directors of the Italian National Furniture Association, which attends the Salone del Mobile Furniture Fair. All of our peers in the industry are enjoying significant results by pursuing contract projects and trade, as working with professionals who are specified by contractors creates loyalty and potential that can bridge current economic gaps.

Thank you for that commentary. Last question: I had made an introduction, Antonio, to probably the largest home furnishings e-commerce company. I believe it was something that you were going to get stood up. Could you give us an update on that, when you expect to launch and give us an update?

I will pass it to Codrin, who has been the person implementing this opportunity.

Thank you, Antonio. David, thank you for the question. We have met quite a few times. They have visited us during Milano, during Salone del Mobile. We've had a great time together. We have also met again. They have followed up with a meeting at the High Point market in October. We are now going through some technicalities in terms of finding common ground to move forward. I will also be meeting with their executive leadership team in Florida, where they have a congress upcoming in September. We are confident that we will be able to positively conclude discussions by the time we meet in September in Florida. First and foremost, thank you for bringing this opportunity forward. We're working on it, and we're cautiously optimistic about moving forward in a positive way.

As there are no further questions at this time, I would like to turn the floor back over for any further or closing comments.

So in closing, maybe as we typically do, Carlo, do you want to—Carlo and Piero, do you want to highlight some of the key dimensions of the quarter as reported? Although I believe most of the audience is a well-educated audience, who have had the opportunity to review the figures. But please, if you want to provide any commentary on the performance and more on the economics elements.

Thank you, Antonio. Do you hear well?

Yes, we do.

Thank you, Antonio. I will provide a couple of comments that may be worth underscoring regarding our performances. While we have discussed gross margin, given the situation in both channel mix and the changes in production allocation. It is worth noting that in industrial costs, we see a decrease from EUR 4.9 million to EUR 4.4 million. So we have a saving of EUR 0.5 million due to lower depreciation following the closure of our Shanghai plant and the move to the new plant. In selling expenses, while we have seen an overall increase in transportation costs due to higher tariffs and routing from Italy to North America, on the other hand, we saved EUR 800,000 from this new industrial location. Adding to Mr. Kanen's question, we need to confirm that we closed three nonperforming stores in 2024: one in Spain, one in the U.K., and one in Italy. This has benefited us with USD 700,000 in savings in selling expenses, confirming that our active portfolio management is positively impacting our P&L. In financial matters, while we see the impact of decreased interest rates reflected in financial costs from EUR 2.6 million last year to EUR 2.2 million, we have been affected by unfavorable currency movements on trade receivables and payables. We made no changes to our hedging policy. This was essentially a result of the floating and unpredictable exchange rates of the U.S. dollar during the first quarter that has cost us EUR 1 million in losses compared to a EUR 200,000 profit last year. These are additional details on top of what we fully described in our press release.

Okay. Thank you, Carlo. Kevin, I believe if there are no further questions, and as always, we welcome the audience to reach us separately after the completion of the call. I believe, Kevin, if there are no further questions, we can thank the audience on behalf of Natuzzi. I also thank Pasquale and the whole team who joined us today, and we can close the meeting.

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

Thank you all.