Earnings Call Transcript - NTZ Q4 2020

Operator, Operator

Please standby. Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi Fourth Quarter and Full Year 2020 Conference Call. At this time, all participants are in a listen-only mode. Following the introduction, we will have a question-and-answer session, instructions will be provided at that time for you to queue up for questions. Joining us on today's call are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi; then Mr. Pasquale Natuzzi Junior, Chief Marketing and Digital Transformation Officer; the Chief Financial Officer, Mr. Vittorio Notarpietro; 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 over to Piero. Please, sir, go ahead.

Piero Direnzo, Investor Relations

Good morning to our listeners in the United States, and good afternoon to those of you connected from Europe and Asia. Welcome to Natuzzi's fourth quarter and full year 2020 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 Chief Executive Officer. Please, Mr. Natuzzi.

Pasquale Natuzzi, CEO

Thanks, Piero. Good day and good afternoon to all and thank you for being present at this conference. It is a real pleasure to communicate and interact with you for an update on 2020 financial results and business plans in general. As you know, we are a global company with factories in Europe, Italy, Romania, in Asia, China and South America. And with a distribution network and store worldwide as well. Therefore, we had to face the pandemic at the global level, starting from China in January 2020 until the complete lockdown in many European nations, unfortunately. As planned, in 2020 we completed the downsizing of our factory in Shanghai, reduced the transformation costs and started outsourcing in Vietnam to improve the margin. We see that selling, general and administrative expense, and in particular, the cost of labor in 2020 were €320 million, a decrease of 15.1% compared to 2019. EBITDA was a positive €12.3 million, significantly improving compared with the previous year. Sales in the fourth quarter were €99.9 million, a decrease of 0.6% compared to 2019, but with a positive EBITDA of €7.6 million and EBIT of €2.4 million and with an improvement in cash generation, on which Vittorio Notarpietro, our CFO, will provide further details. We are satisfied with the 2020 order flow, which was only 2% less than 2019, considering the entire year of the pandemic. In the second half, the order flow was higher than our production capacity. In fact, at the beginning of 2021, we had a backlog that was €45 million higher than the previous year. The order flow during the first 15 weeks of 2021 reported an increase of 18% compared to 2020, with excellent performance in our market, with the only exception being South West Europe, mainly thanks to the excellent performance of the North American market. Jason Camp, our President of Natuzzi America, will provide further details. It should be noted that because we have not been able to participate in market fairs during the lockdown, we used new technologies to digitalize sales through virtual sales and conferences, which Pasquale Natuzzi Junior, our Marketing Director, will provide further details on. I will now turn the conference call over to Vittorio for further details on financials. I will be here for any questions you may have. Thank you.

Vittorio Notarpietro, CFO

Thank you very much, Mr. Natuzzi. Welcome and good health to everybody. In March 2020, the international authorities declared the pandemic. The business stopped in almost every part of the world, and we were immediately forced to make a very difficult exercise for new cash projections to understand, under sustained conditions, what could have been the cash needs for Natuzzi in that situation. The result of such an exercise done in March was that we would have needed €55 million. €15 million of those were immediately made available by our main shareholders. Thank you, Mr. Natuzzi. Then we had to find the rest. In comparison with that forecast, by the end of the year, we were capable of finding €25 million in working capital, which includes trade receivables, inventories, payables, discounts, or suspension of rents, marketing and travel expenses, taxes, and so on, plus €22 million from a financial facility. In particular, in July 2020, Natuzzi renewed a five-year financial credit facility, more flexible to use, and with this, plus €8 million from suspending or delaying and partially selling capital expenditures, the total of €55 million was met. In fact, the company so far has used only €2.5 million from the credit facility from its main shareholders and has €12.5 million still available. Looking ahead, what really matters is that the company is still facing the pandemic right now. In Europe, the situation of contagion is still difficult. People are in stringent lockdowns, and commercial activities are still limited. At the same time, with the accumulated backlog, the main goal these days is to continue producing and delivering to our customers worldwide, facing difficulties due to shipping disruptions and the lower availability of certain raw materials. Our production facility in China is currently running well, while in Italy, Romania, and Brazil, we still have to address pandemic difficulties. We are reinforcing, at our own expenses, the statutory checks and actions to prevent contagion and let people feel comfortable doing their job. As you can imagine, our first priority is manufacturing, followed by daily challenges for shipping and semi-finished goods availability. Despite such pandemic difficulties, Natuzzi has been capable of producing during the first quarter of 2021 better than in the fourth quarter of 2020, which in turn, as you know, was better than the third quarter of 2020. Assuming a positive evolution of the pandemic situation, we are working for an improvement of Natuzzi's business performance this full year versus 2020. We will continue to manage the company with the primary focus on preserving cash. Cash is more important than ever. It is also true that the vaccination campaign has started and is accelerating, giving all of us a better outlook for the foreseeable future. Our weekly cash projections indicate that available cash will continue to increase, helped by a new financial facility of €5 million that we secured a few weeks ago, which will be used to finance additional working capital needs arising from the acceleration of production in the first quarter this year. By the end of 2020, like any other industry, the company experienced a significant increase in raw materials and shipping costs, impacting our costs positively by increasing selling prices worldwide. In light of the uncertainties related to the pandemic and our goal to preserve cash, we will hopefully start investing in retail development with particular regard to the key markets, especially America first. Regarding the North American market, I am pleased to let Natuzzi Americas President Jason Camp give us more insights into the current business situation. Thank you.

Jason Camp, President, Natuzzi Americas

Thank you, Vittorio, and Mr. Natuzzi. Good morning and good afternoon to everyone in the US and around the world. It's a pleasure to be with you today. As many of you know, I joined our passionate team about 18 months ago. I spent the last 25 years helping home furnishings companies build and rebuild their businesses. Before I share recent and relevant results, I thought it would be helpful to provide some context. When I first joined, I spent that quarter listening, learning, and identifying opportunities. I set a new cultural tone in the region, focusing on six key areas: 1) being curious, 2) thinking rationally to architect a compelling vision, 3) building a formidable team to recapture the essence of the Natuzzi brand, 4) focusing on fewer bigger ideas, and 5) most importantly, committing to play to win. In the first quarter of 2020, my second quarter here, we spent all our time rebuilding and reorganizing our leadership team across marketing, merchandising, wholesale sales, and retail stores. Unfortunately, in Q2, we experienced a hard shutdown and with no e-commerce and no real way to sell digitally, the shutdown was much harder for us than for other competitors. This led to furloughs and salary cuts but also gave us time to think. In retrospect, this time was a blessing for our team as we laid the groundwork for our turnaround focusing on talent, merchandising, marketing, and store growth strategies. Fast forward to Q4 and into Q1; we've seen encouraging results. All figures are in US dollars, focused on order flow, not net sales. Our year-to-date region now represents about a third of the company's business. We operate about 20 retail stores across both brands, with my comments focusing on the 13 Natuzzi Italia stores we operate ourselves. In Q4, after being open for a few months, we began to see increased momentum in both wholesale and retail channels. Branded wholesale order flow was up 39% in Q4. Our Natuzzi Italia retail stores, those 13 I mentioned, were up 28% over last year. We ended the fourth quarter pleased, and what surprised us was the further momentum we confirmed in the first quarter with branded wholesale growth at 67%. The 13 retail stores grew 124% over the prior year, which, while not completely comparable due to last year's lockdown, indicates that our growth is accelerating. Additionally, in our retail stores, Q1 '21 volumes grew 29% over Q4, showing strong sequential quarter-over-quarter growth. Looking back at our retail group's history from 2018 to 2019, our best stores were averaging about $2.5 million. Now, if we annualize our Q1 volumes, our best stores are pacing at $4 million. We have about 20 stores in the region and plan to open six to seven new stores across both brands this year, working closely with our HQ partners to get e-commerce live in the back half of 2021. While it will take time to be financially significant, it's an important and symbolic step to being able to sell online. I understand there are questions about our multi-year growth plans and strategies; we’re looking forward to sharing them in a more purpose-driven communication later this year. Thank you for having me join you today.

Pasquale Natuzzi, CEO

Thanks, Jason. Great presentation. Very clear on the vision and strategy. Thank you.

Operator, Operator

We'll take our first question from David Kanen with Kanen Wealth Management.

David Kanen, Analyst

Good morning. Good afternoon. Thank you for taking my questions and congratulations on reaching an operating profit in Q4. I appreciate Jason Camp's commentary, it's very helpful to investors. I think you guys landed a potential rock star, so I commend you. Again, congratulations. My first question is about the business in the US and North America. I know that Europe has been affected and continues to be behind North America in terms of vaccine distribution and reopening. Specifically, could you give me some color on your largest European market, the UK? Have you looked at data during the brief periods when they have not been in lockdown? How did sales perform during those periods?

Pasquale Natuzzi, CEO

So, regarding the United Kingdom, the sales have decreased. I mean, not sales specifically, but the order flow has declined. As I mentioned before, we had a good backlog at the beginning of the year. So we have been manufacturing and delivering product to consumers despite the country's lockdown. However, regarding order flow, the United Kingdom, within the European region, has been the most affected. It’s been 90 days since the stores closed, so we are down with order flow by 64%. But we are reopening, as it seems that stores will open soon.

David Kanen, Analyst

I'm not sure if you totally understood my question. I am aware that they will be reopening shortly, but I asked specifically about sales performance during those windows when the UK somewhat reopened. Can you give me an indication of how sales or written orders performed during those brief periods?

Piero Direnzo, Investor Relations

Yes, last year during the brief reopenings, the vision was the UK and Europe were performing very well. The first three months of 2021, almost all of Europe has been in lockdown; primarily the UK, Germany, Austria, etc., have been shut down for almost 90 days.

David Kanen, Analyst

I have a couple more questions. As sales start to ramp up and you begin shipping backlog, assuming North America can continue at this robust pace, hypothetically, at €120 million in quarterly revenues, where would gross profit settle based on your projected mix? Would it get back to mid-30% level?

Vittorio Notarpietro, CFO

The €120 million is too high compared to our actual improvements. Our industrial platform will be lower than that but higher than Q4, and the comparison with Q1 ’20 will show a double-digit positive increase. I cannot anticipate the gross margin at this point.

David Kanen, Analyst

I'm trying to understand what I would call fixed cost overhead and how that affects gross profit as revenue rises. Can you provide any commentary as to what gross profit potential at higher levels would be?

Vittorio Notarpietro, CFO

The higher the portion of direct retail, the higher the gross margin in consolidated financial statements. We must start reopening stores and managing as Jason is capable of doing while we have made improvements worldwide. This year, despite significant increases in raw material prices and transportation costs, we have managed to provide the market with some price increases to offset those costs.

David Kanen, Analyst

Regarding Jason’s perspective, Restoration has around 65 locations in the US. In the future, what is the potential for Natuzzi's total store count in the US?

Jason Camp, President, Natuzzi Americas

It's a great question. We are entering the market with two brands and expect to open at least 150 stores in the US over the next 10 years. If we look at RH with 65 stores, or Ethan Allen with 200 stores, the numbers are fairly achievable for us. We've also established strong wholesale partnerships which are productive, and we will build our store network around those partnerships to avoid conflict.

David Kanen, Analyst

Could you articulate your digital or e-commerce strategy and how it plays into your opportunity?

Jason Camp, President, Natuzzi Americas

E-commerce is key, but we believe the anchor of our business will be through stores. We plan to build a stronger connection between our website and retail stores while maintaining an omnichannel approach. This will allow us to serve customers who prefer to shop online after visiting our stores. We are still in the early stages of establishing our e-commerce engine in the US, so projecting financial impact is premature.

Pasquale Natuzzi Junior, Chief Marketing and Digital Transformation Officer

Allow me to give you a brief overview of our digital initiatives. Despite challenges, we've quickly set up a platform of digital tools and integrated technologies. We launched our first mixed-reality store leveraging virtual experience-based technologies to enhance customer experience. We integrated various technologies into a web-based platform allowing consumers to buy online and book appointments at stores. This has allowed for 48-hour delivery of stocked products in the UK, for example. We will launch our new website soon with a fully functioning e-commerce engine that will also cater to the US.

David Kanen, Analyst

Thank you Pasquale Junior; that’s very helpful. It seems like you’re doing well on the digital side. I’ll step back and allow others to ask questions, but I’d like to hear about Southeast Asia partnerships when possible.

Operator, Operator

We'll go next to Greg Cullen with Ramble Sign.

Unidentified Analyst, Analyst

Hi everyone. Thank you for taking my question. Following up on what David mentioned, could we get more color on the nature of your partnership in Southeast Asia? Can you provide details on the valuation of that business and the commercial strategy in markets like Vietnam and Singapore?

Pasquale Natuzzi Junior, Chief Marketing and Digital Transformation Officer

To provide some context for our initiative in Singapore, we recently reached a preliminary agreement with a local partner to boost our presence in the region. Our goal is to manage the business closely in Southeast Asia, focusing on the market opportunity available.

Pasquale Natuzzi, CEO

We managed to develop the business in Asia until 2018 when we created a joint venture with Kuka in China. This allowed us to establish a separate company in Singapore to oversee developments throughout Southeast Asia, including Australia and New Zealand.

Vittorio Notarpietro, CFO

This year, we plan to open a maximum of three stores in Australia for Natuzzi Editions. We have chosen the locations already and have a strong retail manager in place. Awareness of our brand in Australia is high, as Mr. Natuzzi started business there about 30 years ago. Our medium to long-term plan includes establishing more stores.

Unidentified Analyst, Analyst

Are you still pursuing the Italian government-backed loan? Given the cash on hand, are you fully funded or considering that loan still?

Vittorio Notarpietro, CFO

The loan program is still available, as the Italian government extended timeframes for guaranteed loans. While we could secure some financing, the overall conditions were not flexible enough for our needs. We decided to avoid that loan, as our financial position is sound thanks to shareholders' contributions and the €55 million planned for recovery.

David Kanen, Analyst

I think this company is incredible, and the transformation happening is impressive. The story of growth in the US under Mr. Camp is exciting, along with the e-commerce strategy. It seems undervalued on the NYSE and I’d encourage outreach to investors to communicate the positive developments.

Pasquale Natuzzi, CEO

I’d like to acknowledge your comments, Mr. Kanen. I appreciate your insights. I can assure you that we are committed to conveying this positive evolution, as we work diligently to achieve our goals.

Vittorio Notarpietro, CFO

Thank you, Mr. Kanen. Your support means much, and we are optimistic about our future.

Operator, Operator

Thank you, everyone, for your participation. Since there are no further questions, we would like to conclude our conference call.

Piero Direnzo, Investor Relations

Since there are no further questions, we are all available for any kind of inquiries you may have via email or telephone. Thank you for joining us today. Have a nice day ahead.

Pasquale Natuzzi, CEO

Thank you, all.

Operator, Operator

That does conclude today's conference. We thank everyone again for their participation.