Natuzzi SpA (NTZ) 2022 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi first-quarter 2022 financial results conference call. (Operator Instructions) Joining us today are Natuzzi's Chief Executive Officer, Mr. Antonio Achille; the Executive Chairman, Mr. Pasquale Natuzzi; then 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 go ahead.

Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi first-quarter 2022 financial results 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 may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results and 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, Antonio.

Thank you, Piero. Good morning for the investors joining from this time -- US, and good afternoon for European ones.

Just a quick point of view of where we ended in terms of first quarter 2022. We continued executing our strategy. As you know, we are outgrowing the market. Our revenue grew by 17% versus the first quarter 2021, and 43% versus 2022 (sic - see Press Release, "1Q 2020"). We continue also improving the mix towards branded products.

In terms of order flow, roughly 90% of order flow account from brands, which is 4 or 5 percentage points above the respective periods of 2021 and 2020. We'll continue also focusing on key geographies. All three key geography, which are central to our strategy, have been growing double digit. North America is growing 32% in revenue; Southwest Europe, 19%; in China, 14%.

We also continue our focus on retail. I believe year to date are particularly significant. We added 19 freestanding stores in the quarter, all in franchising, 16 of which are in China, where you know we are really a critical mass of above 380 stores, two are in US and one in Italy. So we added 19 freestanding store in the quarter.

Another data, which I believe is significant, in North America, like for like is above 50% versus 2021. So again, a strong sign that our retail formula start working. As a result, the weight of retail -- directly-operated store and franchising on total revenue grew to 52%, compared to 49% in quarter of 2021.

We continue also investing to modernize our factory. The pilot we are running, based on the 4.0 technology, is delivering very solid results and will be the base for future investment in our factory.

We also continue accelerating our growth through partnership. We just signed a partnership for the development of rest of Asia Pacific with TTF, which is a listed company, who joined our Singapore venture with [22%] share with an investment of 4 -- [EUR5.2 million].

And lastly, we continue strengthening our governance and trying to create a more committed team. As you will -- as you have read from our press release, Gilles Bonan, which is a senior executive which covered several positions, including the one of CEO in Roche Bobois, joined our Board as independent. And also, the Board approved the stock option plan, which should become effective in the next few months.

So we'll say a quarter, very in line with where we want to go. This, despite clearly some headwinds, which we are experimenting as everyone in the industry, in term of significant inflation in raw material and higher than usual transport cost. We wish this to be a phenomenon that stayed in the COVID. But clearly, this inflation is continuing beyond COVID. We are monitoring this cost and adjusting our pricing. But, the deals in the quarter limited our ability to expand further the margin than what we achieved.

As you've seen, in total transparency, we also mentioned that in China, we are dealing with the restriction imposed by the local authority, which are affecting our factory in the Shanghai area; it's an important factory. So the first two months of the second quarter -- so nothing that you will read this quarter, but the first two months of the second quarter, in terms of revenue generation, has been affected by the partial ability to operate full speed, our Shanghai factory.

So this is in an extreme synthesis -- a reading of the quarter. I think it's always good when you see your company go in the direction you're driving it, and the direction is the direction we want to go to create value for our shareholder. Clearly, we wish that COVID was the biggest challenge we had to face in this plan. We're now dealing also with other additional element, which is the continued inflation, the COVID restriction in China, clearly, the war in the Eurozone.

Let me stop here; I try to be as brief as possible to leave even more space than usual to question and answer.

(Operator Instructions) Dave Kanen, Kanen Wealth Management.

Hi, guys. Thanks for taking my questions. The first one is regarding the price list increases that you're taking. In the press release you said that they'll start to take effect during Q2. So I'm kind of looking past Q2 as an extraordinary event or temporary period vis-à-vis the lockdowns in China and so forth.

But looking to the second half of the year and beyond, given the price increases that you're passing, and then also, you've alluded to modernization investments or capital expenditures at the factory level to improve efficiency, should we expect better gross margins assuming no further increases in inflation in the back half of the year from that combination of price increases, as well as some of the investments in technology at the factory level?

Okay. So if I -- hey, Dave, thank you very much for your question. If I take literally your question, the short answer is yes, in the sense that if we are not to assume any further inflation pressure, the answer is yes. Reality, we keep reporting strong inflation.

European Union just reported today on inflation for the month of May of 8.1%, which is the highest since the creation of European Union in 1999. So let me maybe spend a bit on how we work on pricing.

So every year at the beginning -- at the end of the year and we take decision at the beginning of the year, we look at what to expect the dynamics for raw material in costs of different form plus transportation and how we should reflect these into price increasing. And then, we act typically between the third and fourth week of January, so that we start the new year with a pricing scheme that should be [along] the target margin, given the certain dynamic in costing. So this, normally, should be a decision which is taken once in a year and which should be protecting your marginality for the full year.

What we have been dealing is a situation where we, in certain months of the year, reported an inflation which has been higher than what normally we report in one year. We also reported, for instance, when it comes to matter like energy, given the war in Ukraine, a complete surge of cost overnight of fuel and other energetic costs.

So we keep reviewing the pricing list, maybe not just one but multiple times during the year, to make sure that we can protect the marginality we want. This, of course, cannot be done every day because dealing with partners and client, you cannot change the condition every day. So we try to be discreet and doing maybe a couple of time in a year.

You also need to recognize that, given our model, whatever decision we take today, it will be effective in terms of revenue, two, three months afterward because the fulfillment time and between the order-taking and the order recognition, the revenue recognition is two months. So it's a delicate game where we want to protect margin, using pricing. We carefully look at the dynamics of the material and if inflation should stay reasonable stable, this should be more than enough to protect our marginality. Reality, these dynamics has been particularly crazy over the last few months. Second -- (multiple speakers)

Okay, and then -- I'm sorry, I'm assuming you're going to touch on --

I think it's good to use this discussion to provide full transparency on our operating model. A second element, which came to my attention, and we are acting on, is the use of discounts. So given a certain price list, typically, the industry invests in selling discount. So specific privileged condition, you recognize to your wholesale partner [hence allow] discount, which is basically the discount you do at the retail level to your final customer.

This, historically, is significant for the industry. It has been very significant for Natuzzi, which is another way to protect marginality, of course, acting on this. So we are reviewing the types of discount which are allowed and we are getting a better controlling of those because those also protect -- is a way to protect marginality, not only the listing price but also the management of commercial discount and privilege condition. Sorry, Dave, you were further articulating your question.

Yes. So the second part of it was the investments that you're making in the modernization of your factory for the purpose of getting some cost benefits and efficiencies, when would we start to realize those benefits?

So while pricing is, as you can imagine, more an immediate decision, capturing the benefit require two elements, one investment in the factories and also training of our team to work in different way -- of our workers to work in different way.

We started this pilot called 4.0 basically at December 2021. So we are like five months, it's progressing extremely well. It's based on three concepts: one is simplification of the assortment; second is managing them through a lean process, so kind of continuous flow; and the third one is integration of the supplier, which are processes -- which are way of working which are quite new to the industry, to this specific industry while maybe they are standard for the automotive industry.

The pilot is progressing well; it's delivering results above our internal expectation. This is becoming the new blueprint, the new standard for the new factory we will develop and for the investment we are doing to modernize existing factories.

Starting from the second part of this year, we'll be start acting on our Italian factory, where the cost of labor is higher and where the benefits of this new technology are expected to be higher. We expect this to be a way to contribute to better quality for our clients and to reduce, quite importantly, the cost of production.

Okay. Can you give us some sense as to what those improvements will be as it relates to margin and what the ROI is on some of this? I'm assuming it's capital equipment that you'll be purchasing.

Yeah. So we're looking at potentially high single-digit margin improvement, in terms of cost of production. So I would say significant, of course, for an industry like us, where industrial margin are not, let's say, infinite. So it can be significant improvement.

In terms of timing of investment, will be between second part of this year and next year. The bulk of the investment in the Italian plants. In terms of ROI, I would say we look at that -- it's attractive, compared to the use of capital we want to do, so it's higher than the currently, say, average return on capital. So it should be a good way to invest the resource of the company.

Okay. And then, could you just give us an update -- maybe this is a question for Jason. In the past, you've talked about the expansion of your North American footprint, direct-operated stores, with a goal of opening up approximately 10 per year. Is that still the plan? As an investor, that was one of the reasons why we liked the story is because there would be that pivot to much higher margin-branded product north of 70%.

So it was critical to our investment thesis. Haven't heard you speak about that at all. If you or Jason could touch upon that, if we are on track to open approximately 10 stores a year for the foreseeable future in North America. And then also, if there's an opportunity in Western Europe and elsewhere, if you can touch on that as well.

Great, so I'll kick off with North America. You can see that we did open two stores in the first quarter, and we expect to be on track to open approximately 10 stores this year by year's end. And we are still committed to that growth target of approximately 10 stores in North America a year.

Great, thank you. And then, Antonio, can you talk about Western Europe? Is there an opportunity to increase your DOS footprint there?

So I would say there's definitely an opportunity to increase DOS and FOS in UK, which is a market where we already have a good established operational base, in terms of store and brand awareness. There's clearly an opportunity in Spain, where we have a team, and we have 11 stores and a good brand awareness.

I was, yesterday, in France and also here, we used to be quite significant in terms of distribution. We now are with one store, which by the way, we are renovating. And here, we are also exploring ways to come back.

So, as you know, the company is distributing in other markets. So definitely, there are opportunity beyond the US, beyond UK and Spain. But, we need to be very focused because my view is that, especially when it comes to retail, you need to be strong locally to be strong globally. What I don't suggest the company -- I will not lead the company to do is to be scattered and to be a one store here and one store there. Because then, it's very difficult to manage them, to attract talent, to kind of have a payback on marketing.

So we look at individual geography also in Europe to do that. Differently is for FOS, where we have opportunity we are capturing. We just opened a new, fantastic store in Vienna, in the real center of Vienna; it's a franchising with a partner, which is willing to open 10, 15 in that area.

So our model of franchising is very attractive. So beyond the DOS, we look at franchising for both brand is a way to accelerate our retail transformation. And on that front, I believe Europe and emerging market, are quite promising because different from North America and Asia, there is still a significant amount of traditional mom-and-pop's furniture store.

And as the industry's modernizing, they can see in our franchising a perfect plug-and-play business to substitute their mom-and-pops, which, you know, with this inflation, with the supply chain, it's very difficult to manage and become part of our family with a predictable return and a predictable investment. So I believe our franchising can be quite substantial -- it can be a quite substantial opportunity in Europe and emerging markets.

Okay. That makes sense. I understand wanting to have density in certain markets so that you can make those investments and scale them.

So the next question, and then I'm going to turn it over to anyone that is in queue. I don't want to totally monopolize, my apologies to everyone on the call.

In the past, we've looked at the China JV as, quote, a hidden asset. I'm estimating it has probably worth almost $10 per share or more, that plus the real estate. And yet, our stock is not getting credit for it. The core business, to me, is trading for zero value.

Can you give us an update on your efforts or any initiatives underway to unlock that value for shareholders on the China JV? You don't have to talk about Vietnam or Singapore where they're much smaller; we like it, but just specifically China.

The amount of discussion we're having with the Board on this kind of option to create more value for the JV and for its individual investor, Kuka, which is listed in Shanghai and Natuzzi, is increasingly Board by Board. So this is becoming more central.

I can be partially specific, but we agreed already to do some action in terms of cost reduction and distribution to the partner, and also, further recognition of some form of value that Natuzzi is doing in terms of R&D investment for the JV. And those have been already agreed upon, but I cannot be specific in terms of individual amount of those, but is an initial step in the direction.

Is that the full, let's say, potential of China for us? The answer is no. As I mentioned, there is alternative that [with inside] the shareholder, with Pasquale Natuzzi, the Chairman will discuss, which include, potentially, as IPO of the China operation. But on that, there's been initial discussion with the partner, but at the moment, it's very premature. So it's not something will happen next few months, but also, that option is on the table.

(Operator Instructions) If there are no further questions, I could turn the floor back over to management at this time for any further or closing comments. There are no further questions.

Okay. No, I mean, you have the press release. I mean, we are looking at a quarter which we believe is a good step [up] in our direction of accomplishing our plan, which is around brand, it's around retail, it's around growing in focal geography and modernizing our factory.

We've been mentioning, quite explicitly, in our press release the fact that China is in lockdown, and this is affecting our factories. Good news is that just beginning of June, the authority confirmed that we can go back and adding 80% of total workforce operational in the factory, which is positive.

As I mentioned, we also keep investing to make sure that we can maintain our top line expectation, in terms of retail and wholesale, in a situation where, as you can see, the market in general for retail see a more prudent consumer.

So this a bit of the, I would say, summary, I hope it stay with you. We keep investing to make our press release more self-explanatory. We also added one section with the split of revenue by growth -- by geography and the relative growth. We will welcome you to pose additional question offline to Piero if you have any.

I don't know if Pasquale or the Chairman want to do any final remark beyond what I just read.

You covered everything. You are fantastic.

Thank you, Mr. Chairman. Jason or Piero, any final any final remark on your side?

Not on my side.

Thank you. On that note, that does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Thank you.

Thank you. Thank you, everyone.