Natuzzi S.p.A. (NTZ) Earnings Call Transcript

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Second Quarter 2022 Financial Results Conference Call. [Operator Instructions] Joining us on today's call are Mr. Antonio Achille, Natuzzi's Chief Executive Officer; Mr. Jason Camp, President of Natuzzi Americas; Piero Direnzo, Investor Relations; and Mr. Pasquale Natuzzi will join us in a few minutes. As a reminder, today's call is being recorded. I will now turn the conference over to Piero. Please go ahead.

Thank you, Kevin. Good day to everyone, and thank you for joining the Natuzzi's conference call for the second quarter 2022 financial results. 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 will 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 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, for the introduction, and good morning, good afternoon, all respected investor and analyst. So as usual, let me start sharing a bit what has been the quarter results. As you've seen from our press release, we closed the quarter on a positive note, both in time of sales, which were high single digit above 2021 that, as you know, has been a very strong year for the industry as well for Natuzzi. We closed 2021, 30% above 2020. So having a quarter on alpha, which closed 7.8% on first half, I believe, has been a good result. And of course, we are very much higher than 2019, which has been the last year or normal condition for the market before COVID. We closed roughly 27% both 2019. The driving force of the growth has been the branded business. The driving force of the growth has been the branded business. We will be commenting more in detail, but our branded business now represent 90%. As you know, this is the future of the company. We are on a journey to become a brand retailer and the branded business now is more than 90%, sorry, overall turnover. It's also the 6 sequential quarter in positive with positive results after quite a significant track record of investment of the company that resulted in negative operating profit. We closed with EUR 1 million operating profit in the second quarter. we spell out that in comparing this figure to 2021, you need to take into account the one-off measure that were still in place because of COVID that accounted EUR 1.5 million in 2021. So in other words, the operating profit of EUR 1.1 million for the second quarter compared to $0.1 million operating profit for 2021, while once the official number is netted by the one-off measures. We continue paying a significant attention to cash. Also given the uncertainty times, every business is running through. Our cash position is close to EUR 60 million, roughly the double that we need to manage our daily operation. And this is a bit the picture in essence of the business. We will be discussing the specific actions we are taking as a leadership team to face a market context they remain not only for us, but I would say, for the wood furniture industry, and I would say, for the whole economy quite challenging because of multiple factors. Those factors have also been affecting our business in terms of orders. We had last week, we have seen a trend less positive than what has been at the start of the year. And we are taking, and I will discuss later, both the top line measure and cost measure to ensure that this is a difficult condition are not impacting our financial and our long-term plan. Let me stop here. I'd rather continue the discussion in more Q&A fashion rather than in this opening.

[Operator Instructions] Our first question is coming from Stephen Reagan from Megan Analytics.

We have connection here. Should I say good afternoon, rather. Briefly can you.

British morning, afternoon. it is 4 p.m. .

Okay. Well, enjoy your evening after this call. Can you please just explain your FX strategies? Obviously, we're in unprecedented times with -- in the FX markets globally. Can you please explain how Natuzzi is taking steps to mitigate that? And where -- is most of our money is it in the euro?

Thank you, Steve. So let me start from the last part of your question. So we work in under markets. When we look at the buying is predominantly in dollars because some of our, let's say, key ingredients like the wet blue. So the leather is negotiated in $1, and we buy from China where we source typically motion and other lesser metallic part in dollars. When it comes to selling our business has a significant portion in U.S., which more than offset the purchasing in dollars. So at the moment, we rather benefit than suffering from a stronger dollar. More in general, we're working with similar currency. The way we do to our, let's say, financial treasury department, we don't do covering because the covering will be too costly. We look and develop the position short term to offset the FX fluctuation. So we basically do short-term coverage to offset the FX fluctuation. And I think for what I've seen so far, our treasury department has been quite successful in doing so and navigating quite nicely to this FX volatility period.

Excellent. That's really good news. A follow-up question. The stock trading on the New York is trading at cash, basically U.S. dollar. Trading at cash. What does the company think about that, number one? And what steps can we take to improve shareholder value?

So what I think about it, I will use the polite version of what I think about it. I definitely see a bit of a symmetry year, maybe given the past history of the company have not been systematic in providing a return to investors. Last year, we closed with EUR 25 million EBITDA. As you said, we trade a cash, not even considering the cash that we don't have on our balance sheet, but we have in our JV with this EUR 60 million or $60 million and now where we have a minority, and then an answer we are not consolidating our balance sheet, but also that in a sense is part of the broader value creation story at Natuzzi. So let me take the positive angle. I believe as a CEO and as a leadership team, we need to do 2 things exactly in this order. First is to systematically delivering value to shareholders and also ensuring marginality and profit and cash return on capital employment, and this is let's say, entirely in our end. Of course, these years are a bit more exciting that they wish. The second element is that we're trying to as well do to bring some spotlight or clarity on the story of Natuzzi, which, as you know, is a micro cap in U.S. So we run the risk of being neglected for investors is also not benefiting from an analyst coverage and it is our duty not to do too much moments about what we're doing, but the least to provide clarity. As part of that -- we are doing quite regular call with potential investors. We're also planning to join some events late October, like Eld,Macro -- maybe it's not ideal time, but again, it's not a our show. It's simply sharing our story and what we are doing in a transparent manner.

Your next question is coming from David Kanen from Kanen Wealth Management.

Actually congratulations on turning a profit with all of the challenges that you were facing in the quarter, China inflation, et cetera. So just to scratch beneath the surface in terms of some of the operating lines. It looks like the operating expenses were down from like EUR 37.7 million, down to EUR 35.6 million despite revenues being up about 6.5%. And it looks like that was mostly transportation. Can you just confirm that for me? Or were there other items that contributed to that reduction in OpEx, and as we get into the second half of the year, I mean, when we look at spot rates and container costs, it looks like it's going in the right direction. But can you give us a little bit of update there? .

Let me start, but definitely will have you Jason jump in, and I'll tell you why. So your reading is spot on -- this typically happened. So transportation help us 80% of our transportation costs, which are significant in the range of EUR 60 million towards U.S. given the fact the U.S. does not have production source from different regions. So Natuzzi Italia from Italy and the unbranded business from Vietnam in addition from China, so quite long route. What we are seeing is definitely significant decrease in freight surcharge, not yet at the level of pre-COVID, but significantly lower than what we experimented in the most dramatic part of the -- on the industry last year, especially last year also this year were during Chinese New Year, the tariffs were reporting all-time records. So there, we see long-term trends. On inland transportation, which, again, for U.S. is a bit of an issue. The fuel and other things are contributing not to have the same charge decrease. So we are passing some of these, let's say, decrease cost to our clients, but always in a very cautious manner not to jeopardize our marginality. Having said that, given the fact that the U.S. is really central for this, maybe I will ask Jason. And if you allow me Jason, you can also share a bit. The deal with freight to Natuzzi Italia as opposite to Natuzzi Edition and take it also from there.

Sure, happy to. So during last year, we probably adjusted our landed pricing to our customers 3 to 4x depending on the brand as freight was rising. And we're definitely seeing a strong downward trajectory and together with our global freight team, watching things carefully and adjusting our surcharges downward as it seems prudent. And keeping a careful eye on our competition as well as they make moves with their surcharges and landed pricing. So it's a big focus of ours to make sure that we're protecting our marginality staying competitive as well.

Okay. So in other words, the reduction in transportation costs is persisting into the second half of the year. Now when I look at for example, commodity prices, many of the raw materials that go into your products. We're seeing them decrease now, I know that there is a lag between the price increases and the invoice sale. And when we, through the P&L start to realize the improved gross margins. But I see every indication that, that's going to happen between Factory 4.0, reduction in raw material costs, you guys taking price increases, transportation being down, all of that points to better gross margins in the future. So my question is, will we see that in the back half of the year, start to see it? And then will it be better in 2023?

So let me start answering for what I have visibility on. As you know, Dave -- we don't provide guidance, but let me try to be explicit to your question. In quarter 3, we see benefit also because our price increase typically are embedded in the system in March, April will start being visible in terms of top line. So the second half results don't yet include the impact of 2022 price increase for the business cycle of our order-to-revenue business that you mentioned. So that will happen. Transportation, I share the direction of the trend. Material, I keep review that with our team. It's a bit mixed picture. There are some materials, which are -- start decreasing, notably leather other like fabrics, they're not decreasing, motion, they're not decreasing because, yes, there is less demand, but also those industries are quite energy-intense and we all know the dynamics about energy these days. So raw material, the picture is more the average. They are material where the risk less demand enhance cost start normalizing or they clearly invested the decreasing trends. Like leather, which is a byproduct of meat production. Fabrics, which again is quite relevant related to our business and other metallic parts, they're not decreasing because of the cost of production for those materials and suffer from higher energy cost. But Dave, sorry, maybe it's a long story. Let me give the short story. Clearly, the idea is to keep managing the company for margin, and that's obvious. So that's obvious.

Understood. And then a quick question for Jason, then I'll go back in queue. Can you give us an update on the North American branded product expansion in particular, Italia, how we're doing any stores that have been opened subsequent to our last update and what the next 6 to 12 months look like?

Happy to, Dave. So in -- by the time 2022 ends, we'll have opened 7 stores, 6 of those additions and 1 Italia. And then in the first half of '23 with signed leases, we'll open another 5 stores, all of which will be Italia. And so that's maybe a quick summary of the openings ahead and happy to kind of answer any more specific question that comes does those -- the 6 openings that will open in Italia will include locations like La Jolla in the suburbs of San Diego, Manhasset Houston, West side of Atlanta. So we're really excited to get this going.

I'm sorry, Jason, you partially broke up. So tell me how many have you opened so far this year and then the 6 new openings, when will they be complete?

In total for 2022, we will open 7 stores, 6 of those, which are Natuzzi Editions, and 1 which will be Italia that our first Italian opening will be right around December of this year in La Jolla UTC. And then in the first half of next year, all with signed leases and design complete, we'll open 5 Italia stores in key markets around the country.

[Operator Instructions] Our next question is coming from George Melas from MKH Management.

Good morning, guys. Can you guys give us an update on the China JV, I don't recall whether you actually give information on the revenue of the JV, but maybe you can tell us, I think I think you have 25 DOS stores there, the rest of franchises. Help us remember how the JV is constituted and maybe also what cash the JV has?

I will start maybe I ask Piero. I know them by heart, but I want to be sure to quote it rightly to pull out the information on the DOS and FOS on China. And also if we disclose it before also revenue 2021. So the JV, George, has been constituted at 49%, 51%. So we don't consolidate line by line. We just get benefit of it historically in 2 ways. And now I mentioned a third way we are implementing this year. The 2 ways is the selling margin. So the JV source products from us. And as any third party pays our industrial close to -- margin, and that's the first way we get benefit from it. The second way is dividend. So every year, the JV distributed dividend and 49% of that goes to Natuzzi. And those are the historical avenues that were used to distribute value to Natuzzi. We discussed and agreed with the Board a third way, which is distributing some cash that is sitting in the JV, which is not needed for sustaining this business in form of capital reduction. That has been approved is on their way in terms of execution. We're all working to make it depend within this year. I will disclose the amount as that get, let's say, finalized but that is something which has been agreed by the Board of Directors of the JV based on my proposal to do some capital reduction. Those are the more short-term, let's say, ways Midterm, as I discussed, I believe the JV is quite interesting in terms of growth. And maybe Piero now can comment because it's been almost double business every year. So there might be some long-term let's say, option to get full benefit of our participation. I'm looking forward to be able to travel there because I do believe that those are easy to be discussed with our partner, KUKA in person, but we already mentioned potential options, including separated IPO of the entity. But there is no plan for that yet. So I think you should not take that into account as something already happening, but just to share my view. Piero, if you can share -- the stores. And remind me if we disclose the revenue as well in the past. If so, please do it again now in this call, 2021 revenue.

Okay. Antonio, we generally disclose once a year within the 20-F. I mean, talking about the revenue of the JV because they are listed as well. And as for the number of stores. As of June, we have in China, we have 378 stores and of which 25 are directly operated by the JV itself and 353 are FOS. The Mark of the JV stores are not traditional stores versus -- Italia.

Can you remind the worse I can pull it out. Can you remind that we closed 2021 in the 2020?

Yes. Yes, in terms of revenue, we -- the revenue from the of the JV were EUR 96.3 million in 2021. And during the prior year, revenue was EUR 62 million.

So 50% more. This year, as you know, China is the last big country still affected by COVID. So we had until May hitting stores that were closed. Now stores are open, but the COVID-related procedure are not really encouraging for shopping in the sense that to my latest information available, if a case of COVID was reported in a specific department store, both people entering this department store in that day will have need to quarantine. That, of course, does not create a strong excitement to be in department stores. So that is something which is still affecting our traffic in the store. This year, those we opened, I believe, 38 store in China Piero.

Correct. Correct. 38 stores.

During the 6 months in the 6 months, we opened 38 new stores. So even in these, let's say, circumstances which are not really favorable still our retail progression in China is continuing.

Antonio, I'm here.

Pasquale. Welcome. We mentioned you were in a client call.

I'm sorry, I mean, for being late, but I had a call with the Chairman of a big company where we are trying to do business with.