Natuzzi SpA (NTZ) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Fourth Quarter and Full Year 2020 Conference Call. (Operator Instructions)

Joining us on today's call are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi. Then Mr. Pasquale Natuzzi, Jr., Chief Marketing and Digital Transformation Officer, 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. Please, sir, go ahead.

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, I 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 filing 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.

Thanks, Piero. Good day, and good afternoon to all, and thank you for being present at this conference. It is really pleasure to be able 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 distribution network and stores at worldwide level.

Therefore, we had to face the pandemic at the global level starting from China in January 2020 until the current lockdown in many European nations unlikely.

As planned in 2020, we completed the downside of our factory in Shanghai, reduced the transformation costs and started the outsourcing in Vietnam to improve margin.

We reduced it, the selling, general and administrative expense, and in particular, the cost of the labor and in 2020 were EUR 320 million, minus 15.1% compared to 2019. EBITDA was positive for EUR 12.3 million, significantly improving compared with the previous year.

Shares in the fourth quarter at EUR 99.9 million, minus EUR 0.6 million compared 2019 with a positive EBITDA of $7.6 million, an EBIT of EUR 2.4 million with an improvement in the cash generation on which Vittorio Notarpietro, our CFO, will give you a further details.

We are satisfied with the 2020 order flow, which was only 2% less than 2019. If we consider the timing of pandemic, obviously.

In the second half, the order flow in second half of the year, obviously, the order flow was higher than our production capacity. In fact, at the beginning of 2021, we had a backlog that was EUR 45 million higher than the previous year.

In same way, the order flow during the first 13 weeks of 2021 reports an increase of 18% compared to 2020 with excellent performance in all markets. The only extension on the South West Europe, and in particular, thanks to the excellent performance of the North American market, of which, Jason Camp, our President of Natuzzi America will, be able to provide further details.

It should be noted that as we have not been able to participate in the market shares during the lockdown, we have used the new technologies to digitalize the sales through virtual fairs and contests, on which Pasquale Natuzzi Jr., our marketing director will be able to provide further details.

I will now turn the conference call over to Vittorio for further details on financials. And then I will be here available for any questions that you may have. All right. Thank you. Vittorio, it's your turn.

Thank you very much, Mr. Natuzzi. Welcome, and good day to everybody there. In early March 2020, the international authority declared the pandemic.

The business stopped almost in any part of the world, and we were immediately forced to make a very difficult exercise for the new cash projection in order to understand under certain and supposed conditions, which could have been the cash shortage, the cash needs for Natuzzi in that situation.

The result of such exercise done in March was that we would have needed EUR 55 million. EUR 15 million of those were immediately available by our main shareholders. Thank you, Mr. Natuzzi. And then we had to find the rest.

In comparison, at the end of the year, in comparison with that forecast made in March, we have been capable in 2020 to find, EUR 25 million in working capital, I mean, trade receivables, inventories, payables, discount or suspension of rents, marketing and traveling expenses, cost, taxes and so on, EUR 25 million, plus EUR 22 million with finance in particular.

In July 2020, Natuzzi renewed a 5-year financial credit facility more flexible to be used and with this. Plus, EUR 8 million by suspending or delaying and partially selling capital expenditures for a total of EUR 55 million.

In fact, the company so far has used only EUR 2.5 million from the credit facility from its main shareholders and have EUR 12.5 million still available.

Looking ahead of us, what really matters is that the company is still facing the pandemic right now. In Europe, Italy included the situation of contagion is still difficult. People are in a stringent lockdown regime and commercial activities are still limited.

At the same time, having accumulated sound order backlog, the main goal in these days is to continue to produce and deliver to our customers worldwide. Facing the difficulties deriving from shipping disruption and from a 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 face some pandemic difficulties.

What we do to face that? We are reinforcing at our own expenses, the sanitary checks and actions to prevent the contagion and let people feel comfortable in doing their job.

As you can imagine, manufacturing is so far the first item in our agenda, followed by the daily fighting for shipping and semifinished good availability.

But in spite of such pandemic difficulties, Natuzzi has been capable to produce during the first quarter of 2021 better that in the fourth quarter 2020, which, in turn, as you know, was better than the third quarter 2020.

So assuming a positive evolution of the pandemic situation, we are working for an improvement of Natuzzi business performance this full year versus 2020.

At the same time, we will definitely continue to manage the company, having in mind, first of all, to preserve cash in hand to keep it safe. Catch is king more than ever.

It's also true that the vaccination campaign has started and now is accelerating, giving all of us a better feeling for at least a better off for the foreseeable future.

Our weekly projection, cash projection, sales that available cash will continue to increase also thanks to a new financial facility for additional EUR 5 million we have just got a few weeks ago, which has been used to finance the additional working capital needs deriving from the acceleration of production in the first quarter this year.

By the end of 2020, the companies like any other in the industry, experienced a significant increase of raw materials and shipping costs, which has been balanced by increasing our selling price worldwide.

Having said about the uncertainties related to pandemic and according with the goal to preserve cash, we will hopefully start again this year investing in retail development with particular regard to the key markets and America first.

And with regard to North American market, I am pleased to let Natuzzi Americas President Jason Camp to give us more flavor on what the business situation today in your country. Thank you, Jason. Please.

Thank you, Vittorio, very much. And Mr. Natuzzi. Good morning and good afternoon to everyone in the U.S. and around the world. It's a pleasure to be with you today.

I think as many of you know, I joined our passionate team about 18 months ago. I've spent the last 25 years helping home furnishings companies build and rebuild their businesses. And before I share maybe more recent and relevant results, I just thought it would be helpful to maybe give you some perspective and context.

Again, I joined in Q4 of 2019. And I really spent that quarter, listening, learning, and mining for opportunities, right, kind of going to school on the situation, if you will.

The other thing I really wanted to do when I first joined was to set a new cultural tone in the region. And I really have focused my time culturally on 6 things.

One, for us to be curious in the region, study hard, think freshly; two, architect a competitive and compelling vision for who we want to be and how we will compete; 3, build a formidable team; 4, recapture the sole and spirit of the Natuzzi brand in our region; 5, focus on fewer, bigger ideas; and 6, but maybe most importantly, play to win.

I think in many ways, in our region, we had been too comfortable losing. And we have recommitted ourselves to playing to win. In the first quarter of 2020, my second quarter, we spent all of our time and energy, rebuilding and reorganizing the leadership team, marketing, merchandising, wholesale sales, retail stores and store development.

And then, of course, very quickly, in Q2, we experienced a very hard shutdown. And with no e-commerce and no real way to sell digitally, the shutdown for us was much harder than a maybe one of our other U.S. retail competitors.

Immediately, furloughs, salary cuts and maybe more importantly, time to think. I think in retrospect, maybe this time to think was a blessing for our team. We are on dozens of video calls, essentially laying the groundwork for our turnaround. Spent hours and hours on talent, merchandising, stocking programs, marketing and store growth strategies.

That kind of takes us to Q4 and maybe and even this quarter of Q1, I'll share a few results. All of them will be in U.S. dollars because that's what I live in, all focused on order flow, not net sales, just for clarity's sake.

Today, our -- year-to-date, our region represents about 1/3 of the company's business. As most of you know, we have about 20 retail stores in the region across both brands and both company-owned and independently owned. My comments will focus on the 13 Natuzzi Italia stores we operate ourselves.

So in Q4, after a few months of being open, we really began to see signs of increased momentum in both the wholesale and retail channel. Order flow for the branded wholesale side of our business was up 39% in the fourth quarter.

And our Natuzzi Italia retail stores, those 13 I mentioned were up 28% over last year. So we ended the fourth quarter very pleased with ourselves. And what surprised us, honestly, was what began to happen in the first quarter.

And our further momentum really has been confirmed, branded wholesale growth grew 67%, although not completely fairly comparable, it gives you some indication of an accelerated pace of growth and at least continued growth. And maybe even more importantly, our 13 retail stores grew 124% over the prior year, again, not completely fairly comparable based on last year's lockdown. But you get a general sense that our growth is accelerating, not in decline right now.

And maybe even more helpful. In our retail stores, our Q1 '21 volumes grew 29% over Q4. So our sequential growth quarter-over-quarter grew 29% in our retail group, which we're incredibly proud of.

When we kind of -- when I look into our history for our retail group, in 2018 and 2019, our best 5 to 7 stores were averaging about $2.5 million. Today, as we sit here in Q1, if we annualize our Q1 volumes, our best stores are pacing at $4 million.

We -- as I mentioned before, we have about 20 stores in the region across both brands, in-company and independently owned. We're working on opening 6 to 7 new stores across both brands and all types of ownership this year.

And we are working very closely with our HQ partners to get e-commerce live in the back half of 2021 in the United States. It will take time to be financially significant, but it's still an important symbolic advancement for our group to be able to begin to sell online and have stronger digital tools at our fingertips.

I'm sure many of you have questions kind of about our multiyear growth plans and growth strategies, and we're really not prepared to answer those on this call, but we are looking forward to sharing those in probably a more purposeful communication later this year.

And with that, thank you again for allowing me to join you guys today.

Thanks, Jason. Good speech. Very clear revision and the strategy. Thank you. Questions?

(Operator Instructions)

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

And congratulations on reaching an operating profit in Q4, and I appreciate the commentary from Jason Camp. I think it's very helpful to investors. I think you guys landed a potential rockstar. So I commend you guys. And again, congratulations.

So my first question is, clearly, the business has inflected in the U.S. and North America. And I know that Europe has been affected, has continued to be effective and is behind North America in terms of the vaccine distribution and things starting to return to an opening state.

Could you give me color specifically in your largest European market in the U.K., have you guys looked at data when they have not been in lockdown, when things have briefly reopened for a period of 2, 3 weeks, can you tell me -- give me some color or indication of how the sales have done during that period so I can potentially apply that to the future when things reopen in the near future in Europe?

Okay, Pasquale speaking. So talking United Kingdom, the sales are down, I mean, not sales, the order flow because it's different, they flow from the sands because as I mentioned before, we had a good backlog at the beginning of the year.

So we have been manufacturing, delivered the product to the consumer despite the lockdown of the country.

But regarding the order flow, United Kingdom within European country or, let's say, region has been the most penalized one because it's 90 days that the stores are closed. And so we are done with order flow, 64% in United Kingdom.

But we are hoping -- not open, seems that they will be open the store within next week. So that's the information we have.

Okay. I'm not sure if you totally understood my question. I'm aware that they're going to be reopening shortly. But my question is specifically and during the pandemic, there have been windows where the U.K. has somewhat open and people have gone out to the stores and so forth.

So during those periods, could you give us a color or an indication as to how sales or written orders performed during those many windows, if you will, of reopening, so I can apply that to a projection for the future, was the demand there like in the U.S.?

Oh, yes. Last year, okay, let me see if I understood the question well, okay. I mean, last year, the business in United Kingdom, in Europe, in general, was great. I mean it was up talking about order flow, last year, Europe was performing very, very, very well. Suggesting those in the first 3 months of 2021 that almost all Europe has been locked down, primarily, United Kingdom, Germany, Austria, those countries are shutdown lockdown is almost since 90 days.

Okay. And I've got a couple more questions. As sales, as you start to ship backlog, some of these written orders and sales start to ramp up when Europe comes back line, assuming North America can continue at this robust pace.

Hypothetically, this is more a question for Vittorio. Hypothetically, at EUR 120 million in quarterly revenues, where would gross profit settle in based on your projected mix, would we get back to mid-30% level at EUR 120 million? Or what level do we need to get at to get back to a 34%, 35% gross profit?

David, the EUR 120 million is too high compared with the actual improvements we have done, we have already got in our industrial platform, will be lower than that, but higher than Q4. And the comparison with Q1 2020 will be a double-digit positive comparison. I cannot anticipate the gross margin, sorry for that.

Okay. I'm trying to get an understanding of what I would call fixed cost overhead. And as you drive higher revenue, what kind of leverage would you get in gross profit? Can you provide any commentary or indication directionally as to -- at higher levels, what the gross profit potential is?

The higher will be the portion of direct retail, the high will be the gross margin and consolidated financial statements, as you know, very well. So as soon as practicable, we have to start again, opening stores, managing like the way Jason is capable to do.

And we also did some improvements worldwide. For this year, we have -- although we have significant increases in raw material prices and transportation costs, so far we have given to the market some price increase in order to offset those price increase. This is what we can afford so far.

Then it will be a function of the DOS portion on total sales, as you know, very well.

Okay. And then if I may ask a question to Jason. I believe restoration has around 65 or so locations in the U.S. and North America.

In the future over the next several years, what number do you think is an opportunity for Natuzzi in terms of total store count in the U.S.? Can you get to that level, should you get to that level or a little bit under over? What's your opinion on that?

That's a great question. As you know in the branded business, we are going to market with 2 brands, and we expect to open retail stores across both brands. And we believe between both brands of stores we can open at least 150 stores in the U.S. over the next 10 years or so.

And when you study RH of 65 stores or an Ethan Allen at 200 stores or even a La-Z-Boy at north of 300 stores. For me, those numbers are pretty easy to get to. And of course, in our case, we've built some really strong and excellent wholesale partnerships.

That become very productive and successful for us. And we'll generally build our store network around those best partnerships, meaning, be careful to not create conflict.

Okay. And then just -- and then I guess this would apply to North America. But could you articulate your digital or e-comm strategy? And potentially, is this incremental? How should we look at it in terms of the opportunity?

E-commerce and let's just call it, the large ticket business, right, a special -- even more so in special order upholstery. I believe the anchor of our business will always be through our stores.

And so our -- I almost think of this opportunity more as one where we'll focus having a stronger connection between our website and our retail stores and the ability to sell through e-commerce. But -- so we'll just try to build more of sort of an omnichannel business where we're channel agnostic.

And if they spent 3 hours in the store, but want to go buy a sofa at home because they left count or they're on vacation, we can make that easy for them.

This is a heavily research category. And so it's important for us to compete successfully in that research process. And I think, honestly, it's too early to -- for us to be making projections about the financial impact of kind of having an e-commerce engine in the U.S. We're in so much of the early innings here. I think it's probably yet to be understood.

If I may, may I ask Pasquale Jr. to give us more flavor about what we are doing, what we plan to do for the future in terms of digitalization. Pasquale, are you there?

Yes, I'm here, hello, everyone. Well, allow me to give you a brief overview of where do we stand today and what we've done in the last 13 months.

So in principle, while pursuing our path into the design and implementation of our omnichannel strategy, as Jason was saying, over the last year, we strive to set up pretty quickly a platform of digital tools, hence, physical and digital solutions, meant to mine the gaps generated by the movement of trade fairs on 1 but also by the contingencies represented by the pandemic and the always growing effect on brick-and-mortar and retail.

As you know, 2 years ago, we partnered with Microsoft for the launch of the first mixed reality store in our direct operated stores, leveraging on virtual experience based technologies in order to maximize the sale conversion rate, but also thanks to this gamification, allowing consumer to enhance their customer experience within our stores.

But this year, COVID had to make us more smart, let's say, and tactical and forced us to change strategy, getting closer to our consumer digitally.

So basically, we integrated different technologies in one in a web-based platform that allows more consumers buying -- to buy basically on our website, selecting a specific store, booking an appointment with the store and selecting the specific store staff they want to talk to and they want to talk with.

And while they jump on a virtual, let's say, conference with a specific store and a specific store staff member, they can either select they can either visit a store, that means that the solar will be open.

But in the later months, we also allowed them to have a virtual conference in which they can see, they could have seen the value proposition and that you see available in the store.

So, of course, this experience can happen both physically and virtually. But as we have our e-commerce up and running in U.K., Spain and Italy, we started to integrate our store 3D virtual tour with an e-commerce availability in order to display our store design, in order to give an idea of our harmony, but also highlighting some of the specific items that we eventually selected for our stock program.

So by doing so, we were able in the U.K. to deliver in 48 hours, products that we had stocked in the U.K. that we were displaying online in our virtual stores of the 5 stores that we have in London, for instance.

So all the above technology were designed for both a darkly operated stores and our franchise stores.

Last but not the least, in the latest months, we had to think about how to overcome the enrollment of trade shows and trade events and fares. Until we launched our first V show, which is an interactive virtual event in which we displayed new products through high-definition videos, 3D renders and customization feature that allows our dealership to see and consequently by our latest collection.

For your information, by the early days of May, we will also launch our new website that will come with a fully new design user experience and user interface and with a fully working e-commerce engine that will also be available in the U.

Okay. Pasquale Jr. That was very helpful. It sounds like you guys are doing a great job on the digital side. And I appreciate how you articulated that. It gives us a good picture. I'm going to just step back and allow other listeners to post questions. I do want to hear about the partnership in Southeast Asia, but I'm going to go back into queue and potentially ask a follow-up. Congratulations and looking forward to the future.

Thanks, David.

(Operator Instructions)

We'll go next to Greg Cohen with Rambleside.

I guess, just following up on -- I know what David just alluded to, but it would be great to get some more color on the nature of the partnership in Southeast Asia, if you can give some specificity around the valuation of that business, the cash that we're going to receive.

And then also, if you can talk about kind of the commercial strategy in terms of number of stores going to be open galleries, et cetera, in most markets in Vietnam, Singapore and broader Southeast Asia, that would be helpful?

Mr. Natuzzi, I think you are the best person in order to give a flavor with regard to the initiatives in Singapore and the fact that we recently had that preliminary agreement with that guy in Singapore, a legitimate guy from Singapore entity. So in order to give our shareholders the idea of the potential we have in mind in that region.

Okay. So in -- let's say, we were managing the business until 2, 3 years ago, until 1998, exactly, of 2018 until 2018 business in China and all Asia was managed by our company in Shanghai Natuzzi Trade. Then because we did the joint venture with Kuka in China to just develop and manage the business in China.

Since then, we separate, I mean, we -- let's say, we decided to incorporate the company in Singapore in order to manage the business in North, South East Asia and even Australia and New Zealand.

So -- and the company has been recently incorporated and we joined the joint venture with Mr. Richard Tan, which is one of our best managers, been working with us for 20 years.

So again, but primarily, the reason why we incorporated the company in Singapore is to be close to the market and develop the business in that area, which represent a huge opportunity for our company. Was that's the question, Vittorio?

Yes. If you can give more flavor about the gentlemen that has intention to join us and Mr. Tan from Vietnam? And if you can give us more flavor about 2021 plans for that company. I know like you that we intend to open 2, 3 stores of the editions in Australia, if I remember well?

Vittorio, are we talking about -- you said again, joint venture in Italy...

Joint Venture in Singapore is the master is the question. Yes. You talked about Mr. Tan, which is already in the venture with us. But we just announced also the intention of Mr. Tin from Vietnam to...

Okay. Okay. Okay. So Mr. Tin -- I mean, first of all, is a potential partnership, okay? Mr. Tin, I know this gentleman since almost 30 years. He is a good business person, I mean, he is a athlete person and is well-known in Vietnam and we operate in the contract business.

So -- and he has an interest to become our partner, and we have an interest to become a partner with Mr. Tin. Because we can enter in the contract business, which is something that we are very much interested with. But we are still exploring this potential, this possibility.

Just to follow-up regarding the partnerships that we already have, the company we already have incorporated in Singapore. I think Vittorio alluded to a certain number of store openings. And I'm curious kind of if you can give more detail on the number of stores that are going to be opened in Southeast Asia over the next few years?

Yes. Let me say about this year. We have just planned to open in Q3 and Q4 2 maximum 3 stores in Australia for Natuzzi Editions, which will be served of cars from Natuzzi China, which is a producer in that area. So Mr. Tan will provide merchandise for Australia to opening that.

We have already selected the locations. We have a very good retail manager over there, joe Francis, she is a lady. She is with us since 2 years, maybe Mr. Natuzzi, I don't remember exactly. And since we have that lady over there, we started from Australia, where the awareness of Natuzzi is really, really, very high.

We started -- Mr. Natuzzi started business in Australia, I think, 30 years ago, if I'm not wrong. Then we are planning for the medium, long term, for sure, we are not building up a new company and finding new people in order to stay with 2, 3 DOS in that area.

But as said by Jason, let us do the medium and long-term job while we face the day-by-day difficulties and goal, short-term goals, which is to produce and deliver in 2021. But we have a plan for that for sure.

Okay. That's helpful. And just one other question I have. I know that over the past 9 months or so, there had been discussion about getting a loan guaranteed by the government of Italy. Is that still something that we're working on or just given the fact that we have a lot of cash on the balance sheet right now, and we're generating a lot of cash and are we fully funded? Or are we still considering pursuing that loan?

Thank you for the question. The program is still there. So the Italian government gave another 6 months in order to get some, let's say, guaranteed loan. The discussions we had this year, they allowed us to get some financing, but the overall conditions not only cost, but the overall conditions were not in line with the flexibility the company needs in order to react to the market.

So like covenants or other legal things that we did not accept. But we were in the position. We were capable to do this and to keep flexible the company because of the shareholder, Natuzzi shareholder contribution.

And because of the EUR 55 million that I described at the beginning of this meeting. So we are happy to say that we can -- we are in sound financial position so far is increasing this year.

We'll continue to increase, hopefully, according with our plan, and without weekly projections till mid of July, very detailed.

If in the meantime, since -- in the meantime, the program from Italian government is still there we are working for some other facilities bank by bank. I mentioned the EUR 5 million we got recently from Romania. We are, and we will continue to work to have some other facilities available in the next weeks.

Of course, they are waiting the full year financial results in order to get a decision. So it was our decision to avoid that kind of loan and -- but we have time enough to get some additional credit facilities with an Italian bank.

Okay. That's helpful. And just one last thing before I hand it back over to you guys. I think that this is an incredible company and the transformation that's going on is quite amazing. And the growth story, especially in the U.S., run by Mr. Camp is a very, very exciting story with 6 stores opening this year.

And hopefully, many more in the years to come. And certainly, the e-commerce strategy right on top of that presents a very compelling story for investors. And I know that Mr. Natuzzi owns quite a lot of the company and is certainly aligned with us. But I would be remiss if I didn't point out that this is maybe one of the most undervalued publicly listed companies in the world, especially listed on the New York Stock Exchange.

And I would think we're at the point where we have a very good story to tell to Wall Street to make sure that the valuation of our companies appropriately reflected in the stock price.

And you guys know better than me that years and years ago, the stock is trading for hundreds, if not $1,000 a share, and now we're at much, much less. And it seems like there's a great opportunity to get out and speak to investors and potentially put an investor presentation on our website and get equity research and et cetera, et cetera, because the stock is just way, way, way too cheap.

And the company is doing extraordinarily well and it's time that you guys get out there and tell the story because I think it will be especially well received.

If you look at RH and other companies in the States, this is a very hot sector, and we would do very well. So I would just leave it at that. And thank you, Mr. Natuzzi, and I'll hand it back over to you guys.

I'm sorry. I mean, are you Mr. Cohen? Because, to be honest, the connection is not working very well.

I am having a hard time...

Yes, I'm Mr. Cohen.

Are you Mr. Cohen?

Yes, that's me.

(foreign language) That's Mr. Greg Cohen.

Mr. Cohen, I'm sorry. Again, the connection is not working very well. And -- but I understood that can you repeat please in the floor because I'm very sorry. I'm unable really to understand what you're saying and...

I'm sorry. Can you hear me now?

Yes.

If you hire the voice a little bit because I'm having a hard time, as I told you.

I'm sorry. I'll speak a bit louder and concisely. So what I was just saying is that you're doing an amazing job transforming the company, and it seems like Natuzzi is firing on all cylinders and sales are growing going up like crazy and company having...

Mr. Cohen just please video call by Teams in another time, and I would be very pleased to communicate with you. Communication is not working well. And...

Mr. Natuzzi, can you hear me? Can you hear me?

Sounds better, Vittorio. Yes. Okay. But the question is quite simple. You are doing a great job. You are transforming this company, but the market cap is still what it is.

No, I cannot. I'm sorry, sir, we have to organize the call. The connection doesn't work at all, even with us.

And we do have another follow-up question from David Kanen with Kanen Wealth Management.

(technical difficulty)

One second, please. (foreign language)

I'm sorry, we should be capable to answer.

Mr. Cohen, Vittorio, probably -- I mean, I'm talking with you and connected by my home because I'm working in a smart working way to make sure that we don't get infected by this horrible virus.

But anyway, Vittorio told me the, let's say, the assets, the content for what you said. And I totally agree with you. That's why we are working, putting our total passion, work and commitment to achieve exactly what you are asking for. I can promise you. That's our -- the goal that we are following. Mr. Cohen?

And our next question comes from David Kanen with Kanen Wealth Management.

Yes. Vittorio, so in regards to raw material price increases, are you starting to see that flatten out or come down? What is your prediction over the next year for raw materials if they peaked?

And if there is the potential for margin improvement if we can keep these price increases?

$100 million, considering the market today. Anyhow, the very -- this is a day-by-day check is. We have built up a committee that is working on a weekly basis in order to check prices and availability as far as shipping are concerned.

So we are following day-by-day because the situation is really a crazy situation. I know you follow other peers in America, and we are all in the same situation.

So far, so far, prices seems to be stable in the very last days or a few weeks, but the problem is the volatility on that.

Today, transportation costs are quite crazy. I would hope that this crazy will stop sometime in the future as soon as the economy will start to run again in a more normal situation. These are consequences of pandemic, and these are consequences of someone which is doing some business on that, especially on shipping cost.

The growth -- the growth -- assuming the today, cost of raw materials and on the basis of the price increase we did, the leverage for us is, obviously, volumes versus fixed asset. We mentioned and Mr. Natuzzi mentioned in the beginning, the fact that we cut by 50% in China our fixed cost is not something just that it's very, very important.

We are speaking about a double-digit reduction in transformation costs in China '21 versus '20. So far, thanks to the backlog and order flow Italian plants are working and all the plants are working almost at full capacity.

Full capacity, considering the absent days that we have to face because of pandemic. But we are running. We have already closed our shipping for Q1. So we are confident about the fact that we did better.

Because we are improving day by day, facing every day new problems, but the company is progressing anyhow. So it will be just a matter, Dave, in terms of revenue recognition, financial statements, but we know exactly the production, how much -- how high was the -- has been the production in Q1 versus Q4 last year.

Okay. And then in regards to the KUKA joint venture, what's your outlook for the next 1 to 3 years in terms of contribution and profits from that joint venture?

I can answer. Again, the Southeast Asia together with Australia, where we have a very -- I mean, it's not just Australia, but we are very high brand awareness. We are planning now to open in this year, 2 stores and then to focus on Australia in order to maximize our supply chain to maximize the cost of the organization. So I would say that will be our priority.

But also, we are exploring possibility to partner with another gentleman in Vietnam. He operated contract...

I'm sorry, Mr. Natuzzi. I'm sorry to interrupt you, but I have a better connection. The question is about KUKA partnership. Can you hear me?

But again, I mean, the connection is absolutely.

I understand that. I understand that. The question is about the KUKA joint venture for Chinese market?

Business in China is going well. We are -- our growth is double digit. I mean, since we did the joint venture in 2018, 2019 was -- the growth was double-digit compared with the previous year. 2020, we had another growth, in 2021, we are planning to open also several new stores. I mean, the business in China, doing very well with us.

We did also something which we have to grow because before we had already an organization that was developing and managing Natuzzi Gallery and Natuzzi Edition.

Now we separate the organization just in order to allow the management to focus one division for Natuzzi and the other division for Natuzzi Edition. So we are maybe much optimistic about the growth and the opportunity we have in China.

Okay. Did you say several hundred new stores in China?

No, no. Several stores.

So far, we have, in total, approximately 250 stores, something like that, okay? Between Natuzzi Gallery and Natuzzi Edition. We are planning to open, certainly in the next 3, 4 years, another 100 stores. It's possible to forecast something like that.

Okay. And then if I could ask a question for Mr. Camp. Specifically about the wholesale business in the U.S. Could you give us some color there if that business is coming back?

I would say 100%, Dave. I think there's generally tailwinds in the furniture business at every price level. We are definitely seeing it come back. Hopefully, my earlier comments resonated, but we have been for the fourth quarter, the branded wholesale business grew by almost 40%. And in Q1, again, although not fairly comparable grew by approximately 70%.

So we've definitely seen that business come back. I mean, today, the profile of the region I lead is still predominantly wholesale. And I am as passionate about building the branded wholesale side as I am about building retail.

Okay. That's helpful. I appreciate it. So I mean, I guess what's so exciting is here in North America, the business is so strong. When they flip the switch, so to speak, in Europe and we're clicking on all cylinders, it's exciting to imagine what the full potential of the company will be. So guys, thank you so much to update.

If I may add just a quick comment. I mean, I -- we all wake up to seeing sales by region every day. And there's -- what I can tell you is that what I see what I wake up is that in the regions and countries where we are not in lockdown and stores are not closed. The business is broadly very, very healthy.

And obviously, when the U.K. is on lockdown, it's very hard to do to do a normal level of business. But in general, around the world, the order flow is growing at strong double-digit pace when where things are open for business, if that helps.

Yes, that's very helpful. That's actually a follow-on to the question that I had previously. So again, guys, thank you so much, and I look forward to the next update.

(Operator Instructions)

Okay. And it looks like we have no further questions at this time. So I'd like to turn it back to our speakers for any additional or closing remarks.

So there's no further questions. So we are -- of course, we are all available for on kind of questions, you can -- you would like to send over e-mail or if you want to reach out a telephone.

So for anything, please contact us. Thank you; for joining us today. Have a nice day ahead.

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