Natuzzi S P A Q3 FY2025 Earnings Call

Thank you very much, Kevin, and good day to everyone. Thank you for joining the Natuzzi's conference call for the 2025 3rd 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 very much. Good morning, everyone. And thank you for taking part in this quarterly call. To what I already communicated in our press release, I would like to add some more details and remarks. While the geopolitical situation has not changed and in some respects is worsening as a result, consumer confidence remains weak. Despite our investment in marketing, foot traffic in our stores, particularly in the United States and Europe continues to lag while in some cases, we are seeing improvement in conversion rates. These gains are not sufficient to offset the decline in overall traffic. Despite the current challenging business environment, we have improved our gross margin this quarter, surpassing the levels recorded in the first two quarters of the year. This achievement was made possible by a more favorable sales mix. In fact, sales of Natuzzi Italia, which delivered higher margins than other product lines, grew by 18% compared to the third quarter of last year, while sales of unbranded products, which are not core to our business, decreased by 20%. We intend to continue in this direction, supporting the branded sales that offer higher margins. The closing of the Shanghai factory last year enabled us to realize cost savings on industrial operations in China. However, it is important to note that the improvements in margin remain limited by labor costs in Italy, following the reshoring process from China to Italy of the Natuzzi Edition production from the North America market, completed in the second half of 2024. Commercial and administrative costs deserve a separate mention; while wages and transportation expenses decreased this quarter, overall SG&A costs remain higher relative to our current revenue base. Therefore, both myself and the management team remain committed to supporting sales while reducing fixed costs at the group level. We continue our discussion with the Italian government, which has recognized the company as an enterprise of strategic relevance for the country. I would like to inform you that next Monday, I will personally be in Rome at the relevant Ministry to seek measures aimed at improving quality, reducing transformation costs at our Italian factory, and thereby increasing production efficiency. Lastly, we continue to invest time and resources in participating in international trade events, as well as in-store visual merchandising and external architecture design to offer customers an engaging and compelling shopping experience. Recently, we were in India, and just yesterday, we completed a commercial road show in China, meeting with the leading architectural firms to develop a project similar to the Natuzzi Harmony residence presented in Dubai and Jerusalem. We are doing our best to satisfy the expectations of our shareholders and stakeholders, and we will continue to do so. So if there are any questions, I would be pleased to answer together with Carlo, our CFO. Thank you very much for listening.

Our first question today is coming from David Kanen.

Are you guys able to hear me?

Yes.

The first one pertains to your meeting next Monday in Rome with the government. And if you could give us some sense as to the outcome—sometimes we talk in terms of the bear case scenario, the moderate reasonable scenario, and then the bull case. What do you expect to come of the meeting? And then on a go-forward basis, what our cost structure will look like given the concessions that we hope to get from labor and so forth?

We are working on a restructuring plan, and one of the main actions that we need to do for that is to rationalize our factory here in Italy. In Italy, we have six factories and one logistic center. We plan to reduce the production in three factories instead of six. To do that, we need to move people from one city to another city, but in the same region. The plan is not so far apart, so we need to move people from one factory to another factory, and that requires an agreement from the government and the union to let us do that. Number two, as everyone knows, we have today in Italy 1,350 workers, but we need 750 to 800 people. The other people, we need some help from the government to provide support to use 800 people instead of 1,350.

I start from here. So David, if I can add on top of Mr. Natuzzi, we have different levels of measures, what is called a kind of furlough. Our target is to negotiate based on some terms that need to be deployed within the next year and then a more medium-term plan to achieve what we discussed last time in terms of financial sustainability. So it’s a double-layer negotiation.

I see. And is your goal, assuming you can get these concessions and rightsize the workforce, do you anticipate at the current levels of revenue that we would actually be profitable and stop burning cash? Obviously, it’s unsustainable to continue burning cash.

Let's say that the target is always to have a profit around what we discussed also in the other call, EUR 28 million to EUR 29 million per month. This means that's the target. Going through some different tools involves the workforce, and also reviewing the price list when our strategic positioning allows this while looking into our retail network rationalizing it. With these different measures, with those numbers mentioned before in terms of monthly turnover, we will not burn cash but create positive cash flow.

As I indicated to you on a go-forward basis, if you can achieve these concessions and we can achieve profitability, we would certainly be interested in putting more money in perhaps through a PIPE transaction to support the company and help you grow and thrive well into the future. We believe in the brand and we believe there's a lot of potential given the right conditions.

Consumer confidence will make the difference, David. Unlikely, the traffic is reducing unbelievably. Consumers are not getting in the store despite the marketing investment that we are doing and the wonderful new products. Our commitment is to work on cost reduction. We should reduce costs, improve margins, and improve sales if consumer confidence improves. We are confident that we can achieve better sales next year compared with 2025. If we are capable to achieve that, we will deliver good profit to our shareholders. So that's our challenge certainly.

We do have a follow-up from David Kane.

So if you could give us an update on the commercial division that PJ has been spearheading. There are companies in that sector doing more revenues than us as a combined entity, meaning $0.5 billion. So I see this as a huge opportunity, and I think we have the right product and brand to succeed there. Can you give me a sense of the progress we've made since last quarter and you know—I'm sure you see the pipeline of opportunities you're bidding on. How big of an opportunity do you think this could be next year 2026?

To be honest, it's not easy to forecast, but I can tell you that we are making huge investments to increase the trade contract business. We launched the first Natuzzi Harmony residence in November 2024. We designed the building with 50 apartments and people are purchasing Natuzzi apartments in Dubai. As far, we are already in the process to sign a second contract with the same dealer in Dubai, and we signed another contract in Jerusalem, where we designed the building, apartments, and common baths. Natuzzi residence proves the value of the Natuzzi brand— they are paying just royalty, $1.2 million to $1.3 million just to use the name. We believe in this new business that leverages our brand awareness.

David, I'll—thank you very much for your question. First of all, because I'll allow us to give you more color about what we are doing. We are treating the Contract Trade Division as a start-up. In this phase, as Mr. Natuzzi mentioned, we are doing a lot of bidding but we don't have yet statistics on the success rate. We are providing and exposing our capabilities in many roadshows and receiving a lot of positive feedback from the market. We are going into the bidding phase that takes time to understand the real potential. Conservatively for 2026, we do not have a very aggressive plan; we are considering it as a cherry on the cake of our numbers. The magnitude of the business we forecast for 2026 will be between EUR 5 million and EUR 10 million, but it's exponential business once you start deploying all the projects. Just to be fair, it’s a cherry on the cake, we are not being very aggressive on it.

Yes. No, I appreciate that. And then one more question. You had indicated—you had implied in the prepared remarks in the press release that you're in the final rounds of a CEO selection, if I'm interpreting correctly. Any additional color you can give there? How many candidates would you say it's been narrowed down to? Do you have—is it 2? Is it 5? Is it 10? And what do you think the time frame is for a decision to be made?

The decision will be made based on finding the appropriate person to cover the position. I'm using my weekend time because interviewing people during the working day is complex. I'm using Saturdays and Sundays for interviews. To be honest, we are going forward, and we hope to give good news in a very short period of time.

That's really all I have. I'd like to wish you and your team a wonderful holiday and Merry Christmas. I know that you have the real Saint Nicholas right there in Bari, so I hope you bring some good gifts.

Thank you.

Thank you very much, and happy holidays.

No other questions?

At this time, it appears there are no further questions. I'm going to turn the floor back over to management for any further or closing comments.

Thank you very much. If there are no additional questions, we are always here to provide any clarification you may need regarding our results and performance in the coming days. Thank you for your kind attention from all of us.

Thank you very much again.

That does conclude today's webcast. You may disconnect your lines, and have a wonderful day. We thank you for your participation today.