Natuzzi SpA (NTZ) 2021 Q1 法說會逐字稿

(Operator Instructions) Joining us on the call today are Natuzzi's Chairman, Mr. Pasquale Natuzzi; the Chief Financial Officer, Mr. Vittorio Notarpietro; 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.

Thank you, Kevin. Good morning to our listeners in the United States and Americas, and good afternoon to those of you connected from other countries. Welcome to the Natuzzi's First Quarter 2021 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 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 company's Chairman. Please, Mr. Natuzzi.

Okay. Good afternoon, and good morning to everyone. I hope that you have noticed the different setting of a press release this time. And to be honest, Antonio, our new COO, he helped us really to design that in order to make much clearer, the nature of our business, obviously. I would highlight the most important goals that we have reached that are 87% of the sales are branded with a better margin.

Now what branded means, as you should know, I hope, we have Natuzzi Italia, and we have Natuzzi Edition. And we have also Divani&Divani. And we have DOS, we have franchising, and we have also Gallery. Altogether, the 3 brands and -- the 3 channels represents 87% of the total sales, while before, it used to be 66% -- 76%, I'm sorry.

So we improved almost 11% the sales of a branded sales, which means better margin. In the meantime, I would like also to emphasize on the operations side. We -- last year, we downsized the factory in China, which was 88,000 square meters. We reduced it to 38,000 square meters because the trade war between China and America.

And because we were manufacturing and exporting almost 80% of our total production in China in United States, the duty, the raise of duty impacted, obviously, on our P&L. So that's why we decided to reduce the factory in order to dimension the factory based on the need and the growth of the Chinese market, which is performing very well.

In China, we are opening a store months after months. And we expect that within next 2 or 3 years, the Chinese production will be absorbed almost 75% from the Chinese factory. And then even with the growth in the rest of Asia, so in other word, the factory, our goal regarding the factory in China is that we will -- (foreign language) we still connected -- because -- are we connected? Vittorio, do you hear me? Jason, do you hear me?

Absolutely hear you.

We are, sir.

That's wonderful. Okay. I was concerned that probably you missed me. Okay. So again, the factory in China, in the next 2, 3 years, will be used just for the Chinese needs and for the rest of Asia. So even last year and this year, we started the outsourcing in Vietnam for the big customer in United States of America and Canada in order to avoid the duty and improve the margin.

So the outsourcing in Vietnam has been already well executed, I must say. And we already are starting, and I believe that in the next 60, 90 days, we will start the production also in Mexico, in order to improve the margin and improve also the service level to the American customer for Natuzzi Edition.

So those are the most important issue. The rest is including in the press release, which I'm sure you already took noted -- you noticed. But the most important novelty is represented by the fact that we -- as a company, we attracted. Antonio Achille, our new COO, which will start officially June 1, in 10 days from now or even less.

And Antonio, he celebrated his birthday, 50 birthday, the day before yesterday. He is a young fellow. He has a lot of energy, but he has also 25 years experience with the best consulting company in the world. Last experience has been with McKinsey as a senior partner at worldwide level in the luxury sector and retailer.

Antonio Achille has been our consulting for little while -- in no little while, for a long time, I must say, in 2019. And so he had the chance to know the company and to understand the huge potential that Natuzzi has at a worldwide level. So I really welcome, and I ask you please to welcome Antonio that will give continuity to the company for what we have started 15 years ago by transforming our manufacturing company in a lifestyle brand, managed by the retailer division.

As Chairman, I will be an Executive Chairman in order to manage the transition and to focus also in the long-term strategy in order to help the company to execute our goal in developing more retail, more DOS, better margin and satisfy the expectation of our shareholders.

By saying that, I will say thank you very much for listening to me, and then available together with Vittorio and Jason, our President of Natuzzi America to answer for any question you may have. Thank you.

(Operator Instructions) Our first question today is coming from David Kanen.

My first question relates to the transformation of the company in the future or the next few years as a lower percentage of our overall revenue is private label and more comes from Natuzzi Italia, Natuzzi Editions, DOS. What do you see as the longer-term gross margin profile of our business? When I look at some of your competitors like La-Z-Boy, Ethan Allen, Bassett, they all have gross margins north of 40%, some even into the 50s. Where do you think we will be going long-term as that mix shifts?

Much improved. No question about it.

Okay.

Improvement. No question about it.

Okay. And then when I look at your liquidity, to me, I'm struck by the strength of the company, given that you've got $50 million-plus -- EUR 50 million-plus in cash. You've got probably $40 million or more of real estate. You own -- my estimation is KUKA is worth over $65 million at this point.

So there was an article that was written by someone that claims to know you guys last Thursday, suspiciously right before earnings, where he theorized that the company is going to do something highly dilutive, sell shares here, which, to me, sounds absolutely insane given the low valuation.

Could you comment on that? Do you -- would you be willing to sell shares here? Or is this person just speculating?

David, can you hear me? It's Vittorio. Sorry for some technical problems, the platform must improve. Okay. We received this question in recent days. Now let me answer to those investors, including you that asked about the company plans to issue equity. Given the importance of this question, we want to provide you with a full recap of the context explanation of where we stay exactly. In February 2020, due to the pandemic, Natuzzi was closed, to be delisted by NYSE, and Board of Directors was also forced to ask a financial support to the main shareholder to face the immediate stop of the business and the immediate stop of cash flow as well.

The visibility at that time on the business was really, really poor, close to 0. The main shareholder immediately granted the requested financial support, up to EUR 15 million, as you know already. The technical way to grant was a 0 interest credit line, refundable with future share issuance.

This option for the company will last till December 2021 for the approval of the -- in the shareholders' meeting. And in case March '22 for the execution of the shares issued. That's the picture, okay, where we are exactly.

Now thanks to the effort of the management team, today, Natuzzi has not needed to call that money. In fact, after the EUR 2.5 million received in February last year, the company has not asked for the remaining EUR 12.5 million yet. If the above option will be not exercised, the company will reimburse the EUR 2.5 million loan to the shareholders, in the meantime -- to the main shareholder.

In the meantime, the company, as you were saying before, is continuing its disposal of noncore assets in order to find alternative sources. I need to be clear on this. The Board of Directors is the company body in charge of the ultimate decision on this. They will obviously consider the business environment, the financial situation in the interest of the company and its shareholders, both minor and major ones.

The importance of having the most efficient capital structure is something which the company is very well aware of and continuous paying a paramount attention to. We are, hence, facing a very different situation from the one where the initial credit line was granted. Should -- let me underline again, should the equity issue, the equity option, be further confirmed, it would be because our team has found very exciting new opportunities to accelerate the growth and require additional investments.

This would be done with the objective of creating substantial value upside for our investors, all investors. If so, I hope we will be able, in that case, if so, to convince investors on the opportunity of such a decision and that our shareholders could consider support their company with a share issuance at a fair price.

But again, so far, we are not yet at that point on the basis of actual cash position and cash projections. Hope this clarifies the topic.

Okay. Appreciate that.

Thank you. Now it would be the case. I don't know if Jason started the discussion with us, it would be the case to be great to having Jason commenting on the business momentum in America, our Natuzzi key market, notwithstanding the very short visibility we have today for many reasons that you should know already. Thanks, Jason. It's your turn.

Listen, good morning, and good afternoon to everyone. I'll be brief this morning. The situation, we feel continued momentum in North America. When we look at our branded wholesale business, the full orders demanded both in our retail and wholesale channels. And we compare those to 2019. We're growing at a pace of about 44% year-to-date versus 2019.

When we look at only the retail channel, we're growing at a pace of just north of 50% compared to our 2019 pace. So we're very pleased with our current momentum and are working very hard to maintain and accelerate that pace. And I think from my perspective, those are the key headlines for us at the moment and happy to take any questions if there are any.

(Operator Instructions) Our next question today is coming from Charles McDulin. I can read the question to proceed. Is that okay? A key focus for Antonio is operating margins. Could you help us understand the opportunity NTZ has with improving operating margins with the Poltronesofà and Poltrona Frau operating margins in the teens. Forgive my pronunciations, please proceed.

This is Pasquale, who is asking this question.

This is the operator reading the question from Charles McDulin. He says a key focus for Antonio is operating margins. Could you help us understand the opportunity? I'm assuming that Natuzzi has with improving operating margins with Poltronesofà and Poltrona Frau operating margins in the teens?

Okay. All right. This is Pasquale Natuzzi. So first of all, Antonio, our COO, he will officially start to operate in the company June 1. So today he is not here. We apologize for that, okay? He's still engaged with McKinsey as a senior personnel.

So again, June 1, he will be here. But anyway, I'm in a position to answer to this question. Certainly, I don't have with me numbers regarding the operating margin of Poltronesofà and Poltrona Frau. But certainly, talking about Poltronesofà, I mean it's a completely different company. I mean, their best seller product or I mean they promote sofa for $99. They promote sofa for $399, for $599, for $699 motion, 2-seater, I mean, nothing to do with us. They don't have a manufacturer, but they do just outsourcing without respecting the human rights, I mean, nothing to do, Natuzzi with Poltronesofà.

Now, regarding Poltrona Frau, it's even a completely different company. We are manutailer. We have lifestyle brands. We have store in America, store in China or Asia Pacific. We have a store in Europe. We have a store in Middle East. We have a store everywhere in the world. I mean, we are global -- we are an Italian lifestyle brand with presence everywhere in the world, manufacturing product in Italy, manufacturing product in Romania, manufacturing in China and in Brazil, completely different company.

Now to be honest, we don't consider Poltrona Frau as our peer and absolutely not Poltronesofà. It's a completely different world. Okay. I hope I answered to your questions.

Our next question today is coming from the line of G. Cohen.

Can you guys hear me?

Yes, please.

Question for Jason Camp. How many stores do you think we could open in the U.S. in the next 2 to 3 years? And how would you kind of describe the current trading environment relative to prior periods in your career, including at RH?

So thanks, Greg. Let me start with what I see as kind of the current trading environment in the U.S., it feels -- I mean, I've been retailing in home furnishings for 25 years, I've never seen growth like this at a macro level.

When I -- when we observe what we're able to observe in the market, we're seeing people growing, generally at 20% to 40%. And so we're very pleased to be in that 40% to 50% range ahead of the general market. We see continued opportunity to build a strong foundation on this business and accelerate it further.

We believe when you -- when we look at the opportunity to open stores, and we think of those opportunities, both with Natuzzi Italia and Natuzzi Editions, both independently-owned and company-owned that we can open in the range of comfortably 10 stores a year and potentially accelerate that as we continue to learn more about our model and the opportunities ahead.

Our next question today is coming from David Kanen.

Coincidentally, the previous caller actually posed the question that was on my mind, but I'm going to spin it a little differently. The stores -- the 50% growth from retail that you saw in Q1, was that all organic or were there stores added that were in the calculus?

Thanks, Dave. So it's purely an organic number, and that's a January through April number. So it's pretty current through the end of April.

Okay. And then I don't know if this is a question for you, Jason. But obviously, in North America, the growth is impressive. We know that Europe literally just reopened. I'm sure it's starting to come back to life. Do you think that you can see numbers comparable -- getting up around let's say, 25%, 35% up versus 2019 in U.K., Italy, et cetera, or in the initial reopening here in April, it's below that?

I think that probably is a question for Vittorio, as but you know I think before we turn it over to him clearly we have reported in our release that as Europe reopened, right, we saw substantial increase in our incoming order rate of about 16% on a global level. So you can feel the impact of what their reopen business does to our globe, and I'll let Vittorio add any additional color.

Yes, you're right. The percentage after 18 weeks, the global percentage of written orders versus the same quarter 2019 is 15.7%, but consider that we had U.K., for example, but also Italy, almost closed for that period. And in fact, the April pace for order flow was better than Q1, the first 3 months.

So Vittorio, 16% up overall is inclusive of Europe being very weak for January, February, probably in part of March. So could you speak to specifically April and the first few weeks of May in Europe of what kind of increase you're seeing in written orders? I'm sure it's well above 16%. But could you give us a sense as to how that is trending?

Mr. Natuzzi, would you comment on the different acceleration of growth by main regions.

We divide all Europe. If we should consider Eastern Europe and even Russia is an European country, okay, we divide Southwest Europe from what we call emerging market. Now Southwest Europe includes Italy, Switzerland, Austria, Germany, Netherlands, Belgium, France, Spain, Portugal and England. This is Southwest Europe.

We have a very good managers there, and the region has been suffering very much because of the lockdown of several countries. Now until months ago, let's say, 4 weeks ago, we were 25% with budget in this region, a very important region, while, right now, we are minus 15%. So already in 4 weeks has recovered at a 10 percentage points. So we very much confident that the business will pick up again in Southwest Europe.

Then regarding the -- what we call emerging market is just unbelievable. The number I have here with me is that in the first 20 weeks that the business is unbelievable. This going very, very well, like even United States of America and like South America -- also South America is doing very, very well for us, but in general very much -- certainly we want more. We want to see more order. We want to see more volume. We want to see improvement in margin every day. But I mean, it's very satisfactory the way the business is doing so far.

Let me underline a detail on that. While the branded 18 weeks written orders grew 15.7% versus 2019, unbranded is down, okay? So the total order flow of the company, if we compare with 2019, is up by a single digit, okay? Branded is up double-digit. Unbranded is down double digit. At the end of the day, we are up for the overall order flow with a single-digit increase against 2019, which is your question, I guess.

Well, even more specifically, though, what I'm trying to understand is the numbers are diluted when you include January, February, March. So what I'm looking to isolate is just April and the first few weeks of May. Southwest Europe, I know emerging markets is doing exceptionally well based on the commentary from Mr. Natuzzi. But can you speak specifically to April and the first few weeks of May in terms of written orders?

We already told you, and that's the detail that we can supply so far, that with April, pace is up 16% versus Q1 pace, okay, Q1 2021. Why? Because U.K. and other European countries are recovering -- reopening and recovering. That's number so far about order flow in April.

Okay. And then is May consistent with what you're seeing in April?

April, global order flow was better versus Q1 2021 pace, thanks to the contribution from West and South Europe that reopened -- just reopened by 16%, 1-6.

Yes. No, I understand. What I'm asking is the first few weeks of May, have they been consistent with April?

Yes. The year-to-date order flow is consistent.

Our next question is follow-up from Greg Cohen.

Greg, can you confirm your camera and audio is live. Can you hear me? Greg, you may need to unmute on the platform because we cannot hear you. If you could hear us, Greg? Greg, you may need to unmute yourself on the platform, if you can hear this. Sorry, we cannot hear you. If you could hear me, we cannot hear you, right. I do apologize for any technical difficulty. You just may have to unmute yourself on the platform itself. There should be a microphone.

(Operator Instructions) And if there are no further questions, I'll turn the floor back over to management at this time. Someone with -- of management just acknowledge, you can hear me.

Yes, we do.

Okay. I believe that does conclude our question-and-answer session. Would you like to make any closing remarks? I do not believe we have any further questions.

No further question?

Okay. There are no further questions at this time. And if there are no -- do you have any closing remarks? Or would you like me just to close the call?

Maybe Mr. Natuzzi would like to close the meeting.

Over to management for any further closing comments, please. Mr. Natuzzi?

Okay. Certainly, I'd like to thank you very much for all the attendees, which I'm reading are 33, very pleased to have you as a listener, and I hope that next time or any time, you need to ask a question about our company. We will be very pleased to answer for all of you. Again, thank you very, very much for the confidence, and I wish you all the best. I wish you to be safe, first, okay. It seems that the pandemic also in Italy is disappearing. And even in Europe, and I'm anxious, together with Mr. Antonio Achille, our COO, to start traveling again and meet the people around the world.

Thank you very much, again, all the best to everyone.

Thank you.

Thank you. 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.