Natuzzi S P A Q2 FY2025 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi S.p.A Second Quarter 2025 Financial Results. Joining us on today's call, as usual, are Pasquale Natuzzi, Executive Chairman and Chief Executive Officer, Ad Interim; Carlo Silvestri, Chief Financial Officer; Mario De Gennaro, Chief HR Organization and Legal Officer. Furthermore, also joining us on today's call are Ms. Marilena Scaramuzzo, Treasury Vice President; Domenico Ricchiuti, Chief Operations Officer; and then Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. I will now turn the conference over to Piero. Please go ahead.

Okay. Thank you, Donna, and good day to everyone. Thank you for joining Natuzzi's conference call for the 2025 2nd quarter financial results. After a brief introduction, we will give 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 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, Mr. Natuzzi.

Thank you. Good morning, everyone, and thank you for attending this conference call. While all the information regarding the performance of the first 6 months has been available on the press release, which we sent to all of you, I believe that for all stakeholder information, I would like to add also some additional information, which I believe is very important for everyone. What has caused the result, which everyone is finding lumpy, starting from me, from the shareholders, from all the stakeholders, and from the management, has been caused primarily by the Chinese market and the American market. I would like to explain that which I believe is very important. In China, China is an important market for us. So that's why there were technical difficulties in China regarding the tariff. And that has caused a crisis in China, which has impacted our business. The volumes that were forecasted for China were much, much higher than what we are seeing today. To give you an idea, just in 2025, we closed 77 stores in China but we opened 30 new stores. So while we closed 77 stores between Natuzzi Italia and Natuzzi Editions, we opened 30 new Natuzzi stores in China. So there is really a complicated situation. But the fact that we are closing stores and opening new stores, 30 stores with partners that are investing in our brand, this is something that needs to be communicated and understood by everyone. Many times, the tariff and the uncertainty regarding how much it would cost to import the product from China have created challenges. In China, we have always relied significantly on production for the United States for the second line and Natuzzi Editions, manufactured in China. However, since the tariff war began in 2019 when tariffs of first 15% and then an additional 10% were announced, there has been a decline in sales from China to America, which affected our volume and consequently our balance sheet. Recently, which was last October, amid renewed tariff uncertainty and ongoing tensions between the United States and China, we decided to shut down our factory in Shanghai and open a new, smaller factory in Quanjiao province where costs are significantly lower than in Shanghai. We moved the production from Shanghai to Italy to supply the American market and cut down the fixed costs associated with operating the factory in China thereby improving production efficiencies at our Italian plants. That was set in motion last year in October. A few weeks later, the situation evolved as the tariffs between Europe and China began again. When we decided to move production from China to Italy, we had no foreknowledge that the United States would later impose tariffs on Europe as well. This has also negatively impacted our margins. Returning to China, we closed 77 stores there and opened 30 new stores, while also elsewhere in the world, we opened 12 new stores and closed 17 stores. The aim is to improve our retail division by eliminating stores that do not reflect our brand's positioning and to replace them with new stores located in appropriate locations that provide an updated consumer experience. This is a continuous process in which we are investing. We do not give up as a company. We are continuing to invest in our brand in terms of new products, merchandising, and exhibitions. I'd like to show you a few things that I believe will be of interest to all stakeholders. Piero, can you assist me with this? Let’s start from the beginning. No, let’s go after this, please, Piero. To support commercial development, we implemented several initiatives in 2025, trade fairs, client congresses, and design shows. Let’s move ahead. Last April, we participated in the Milano Fair after a six-year hiatus since COVID. Our return was a great success, and we are very pleased with it. Detailed information can be found on our website and will also be provided via press releases. Next slide, please, Piero. Furthermore, at our Natuzzi America headquarters in High Point, North Carolina, we attended two fairs this year—one in April and one in October—where we met with customers and showcased new projects and marketing plans. These efforts highlight our initiatives made in 2025. Next, please, Piero. In addition, we organized headquarters congresses here in Italy that brought customers from emerging markets and Europe to our facility. They spent 1 to 2 days here selecting new projects, products, and updating their stores. For example, the summer edition had 80 clients from Europe and the Far East, alongside our Divani&Divani partners. This requires significant investment to organize the congresses held at our headquarters. Next slide, please. We also organized three congresses in China this year. One in March introduced the Feelwell concept, which is innovative in comfort, attended by 200 journalists, VIPs, and institutional guests as well as 320 dealers. In July, we launched the new Natuzzi Italia store concept in Wuxi, which was attended by 7 media outlets, leading to 40 published articles, with 143 architects participating and 21 VIP dealers in attendance. Also noteworthy was the Natuzzi Editions event held last October in China with 150 dealers, 100 VIPs, and 5 media representatives. In conclusion, while China currently faces challenges that we could not have foreseen, we are closing underperforming stores, opening new ones, attending exhibitions, conducting congresses, and engaging with customers to promote our business. Next slide, please, Piero. We participated in 10 design shows across various locations, such as Riyadh Downtown Design, Milano Design Week, ICFF in New York, and others including major events in Australia, Madrid, Mumbai, and Dubai. Such exhibitions are critical for maintaining market contact with customers and designers. Additionally, we were in Osaka for the Expo Osaka, which organized 791 events in the Italian pavilion with 1,300 official delegations and 7,500 company representatives. Next slide, please, Piero. As for highlights in Trade and Contract, we launched the first Natuzzi Harmony Residences last November in Dubai. With the building under construction, we have already sold several Natuzzi apartments fully furnished by us. We have signed another contract with the same developer for another 80 apartments and another with a developer in Jerusalem, Israel, where we are designing a new tower. There are many more projects in the pipeline. Despite the headwinds we are facing in business, we firmly believe that these initiatives, along with the more than 30 new projects we are developing, will stimulate interest in our brand. We do not give up; we strongly believe in the future and are confident about potential business growth. I can stop here for now and am ready for any stakeholder questions. Thank you very much for listening.

Our first question today is coming from David Kanen.

The first one is I see that you've extended personally a credit line to the company of $15 million. What are the terms of that in terms of the interest rate and then also, you've referenced non-core assets that you can dispose of. Could you quantify for us some of those assets, what they're worth, tannery other property that you can potentially dispose of while we're transitioning the company to profitability?

So as anticipated in the press release, the Board of Directors has just approved the guidelines of a multi-year restructuring plan aimed at optimizing the cost structure, increasing flexibility, and developing the retail business. To implement these activities, targeted investments are likely to be required such as marketing, retail management, and managing redundant workers, etc. Therefore, the board will evaluate measures aimed to strengthen the capital structure to support the restructuring plan. Once the restructuring plan is finalized and approved by the relevant corporate bodies, we will provide further information on the capital strengthening measures required. I have granted a credit line to the company because, as the majority shareholder, I am firmly convinced that effective implementation of the restructuring plan guidelines, particularly those related to the Italian production hub and general optimization of fixed costs, together with our commercial initiatives, can help the group relaunch its activities and pursue sustainable profitability. This credit line will provide the resources needed to address short-term needs and ensure the financial stability required to achieve the group's strategic objectives set out in the restructuring plan. However, as I mentioned earlier, together with the Board of Directors, we are evaluating measures to strengthen the company's capital structure. In the current year, that's it. So that's the story.

David, to further clarify, it is a zero-interest loan. As you know, we are always looking for opportunities to monetize some of our non-core assets. Specifically regarding the tannery, we don't have any news thus far, but we are actively seeking other opportunities to offset some of our non-core assets. This would also be part of our strategy for the near future regarding the resizing of our industry operations.

Okay. That's helpful. Carlo, could you quantify for us two things? First, on the assets, give us a sense of the value of some of these non-core assets as well as the tannery. How many millions are these assets worth? And then, if you could give us some sense of the restructuring, once we move past it. Right now, our gross margins in the last quarter were only 34%. After the restructuring, assuming similar revenues, what type of gross margin do you think we can achieve? And in terms of operating expenses, what kind of reduction do you think we can achieve? Will we be positioned to be profitable as a $320 million company?

Thank you very much for all the questions, David. Let me elaborate a little bit because it's a bit long. I will try to summarize it effectively. First of all, in terms of assets, our total net asset value is around EUR 70 million. To specify which assets are core and non-core, for now, I cannot give you precise figures as investigations and internal analysis discussions with the Board are ongoing. So this will be quantified once the final operations setup is done. But as I said earlier, this is one of our strategic points. In terms of the tannery, it had a value of EUR 5 million during the last evaluation. However, it is important for you to understand that we need to go on the market, and these are the latest valuations for the tannery. It is not an easy market for finding a buyer at this moment. Regarding the other assets, when I talk about EUR 70 million, it is composed of the plants and the machinery. Hence, we need to tread carefully—we cannot fully monetize this value because, as for the machinery, evaluation methods differ. This covers the assets. Now let’s discuss the gross margin. I can provide indications on what we are working toward, although I can’t disclose detailed information just yet, but I will share what is currently in progress. Mr. Natuzzi, our team, and I are working toward making us sustainable, especially from a financial perspective. Increasing margins is a significant goal, especially considering the direct impact from falling retail sales that typically offer higher margins. We are currently collaborating with Mr. Natuzzi and the commercial team to restore those sales and enhance profitability. We are also working on operational efficiencies that will improve margins and reduce industrial costs in a permanent manner while adjusting our price lists to adapt profitability in response to the changing economic environment. Collectively, these activities will increase our margins, allowing us to return to a trajectory with rising margins and profitability based on current sales levels. I hope this provides clarity and addresses all your questions, David.

Yes, that’s very helpful. I appreciate the clarity and detail. So are you saying that at these depressed levels we are running at, after the restructuring, your objective is to be breakeven? Did I hear that correctly?

Yes, the trajectory outlined in the plan is to be profitable. Absolutely.

Okay. And then in the past, I guess this would be a question for Pasquale Jr. I don’t know if he’s on the call, but if you can speak to the commercial initiatives, Mr. Natuzzi highlighted some of these large projects in Jerusalem and Dubai, etc. For next year, could you give us a sense of your internal goal for annual run rate in commercial revenue? Is it $10 million a year, is it $20 million, $40 million? What is a realistic internal goal in terms of run rate? There seems to be enormous upside to it. So if you can provide us with a sense of the magnitude, that would be really helpful.

Okay. I can answer, David. Certainly, you're correct. But to be honest, we wish to communicate only the real contracts that we currently have. We started with one contract in Dubai, and due to its success, we now have a second contract. Additionally, because of the success, we have also secured contracts in Israel. Three towers are in development, and we have other important projects in the pipeline. However, we are not yet prepared to disclose how much volume we will develop with the Trade and Contract business. Attending events in Mumbai, Dubai, and Riyadh as well as New York have been key to promoting our business, and we certainly anticipate good returns from those efforts.

Yes. May I add to this as well? David, to give you an idea of magnitude: it is a startup phase. Therefore, initial numbers will be low, but we expect a multiplying effect. The more projects we undertake, the more visibility we gain, leading to more opportunities. Specifically, each contract has two aspects: design fees earned during the initial phase and payments realized over time as we deliver all the merchandise, which depend on project timelines that are generally unpredictable. Thus, we are in a startup phase, and it is challenging right now to determine the delivery phases for the products.

Okay. That’s very helpful. And then, is there a way that perhaps I can extrapolate? If you can give me a sense, maybe per unit—for instance, for a building with 150 units, what do you think the average spend is per unit? Is it $4,000, $7,000? Any guidance on that would be appreciated.

It really depends on the project, David. The specifics will vary highly based on the project type.

If I understood your question correctly, David, we promote the Natuzzi Harmony Residences and showcase apartments of various sizes. Then we give customers the liberty to choose the Natuzzi products. Therefore, the cost of furnishing each apartment can vary greatly. It depends on whether the customer selects leather or fabric options. The configurations can also differ based on customer needs. We believe that next year, as we furnish and decorate several apartments, we will be in a position to provide average costs.

Okay. And then let me move on to my last question, then I'll go back into the queue if there's anyone else that would like to pose questions. Could you give us an update on the permanent CEO search? Do you have candidates that you feel you're close to deciding on? Is that something you expect to finalize by early next year?

We engaged a headhunting company and started to propose some candidates. I already made a selection and spent two hours on it. Certainly, we need to find a CEO that understands how to develop and manage a high-end brand. Furthermore, this CEO needs to have experience in retail management and operations. We are a company that designs, manufactures, and sells products globally. Finding such a candidate is not easy, but we will continue our search. There are certainly capable individuals for managing our company, but we are moving forward with the process. I have to be the president of the company; I cannot take on all roles myself. I feel a great responsibility in this regard.

I’m going to try and squeeze one more question in there. My apologies. So the last quarter you reported was the second quarter, ending in June. The third quarter is over; are we essentially maintaining the levels we saw in Q2, or have things gotten worse, or are they slightly better in terms of the written orders?

I already declared in the press release, David, so I hope I've been clear. I wrote, I read, and I reread the press release several times. Please do the same for clarity, and you will understand the company's direction.

We're showing no additional questions at this time. I'd like to turn the floor back over to management for closing comments.

So no further questions.

That is correct.

Okay. So thank you very much, everyone, for your attendance. I really appreciate your participation. Thank you.

Bye-bye.