Natuzzi S.p.A. (NTZ) on Q1 2021 Results - Earnings Call Transcript
Operator: …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.
Piero Direnzo: 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 might differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial condition. Please refer to our most recent 20-F filed with the SEC for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call.
Pasquale Natuzzi: Okay. Good afternoon and good morning to everyone. I hope that you have noticed that the different setting of a press release this time. And to be honest, Antonio, our new CEO, he helped us really to design in order to make a 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 Editions, and we have also Divani&Divani , and we have DOS, we have franchising, and we have also gallery; all together the three brands, and the three channels represents 87% of the total sales. While before it used to be a 66% -- 76%, I'm sorry; so improved almost 11% the sales of 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 meter, we reduced it to 38,000 square meter, because the trade war between China and the America, and because we were manufacturing and exporting almost 80% of our total production in China in the 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 the store months after months, and we expect that within next two or three 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 words, the factory -- our goal regarding the factory in China is that we will we're still connected because -- are we connected? Vittorio, do you hear me? Jason, do you hear me?
Jason Camp: Absolutely, hear you.
Vittorio Notarpietro: We are, Sir.
Pasquale Natuzzi: Oh, that's wonderful. Okay. I was concerned that probably, you know, you missed me. Okay. So again, the factory in China in the next two, three years, will be used just for the Chinese needs, and for the rest of Asia. So even the 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 that -- which I'm sure you already took note, you noticed.
Operator: Thank you. You may submit questions via the web meeting at any time. Click the Q&A button on the left side of your screen. Type your question in the white box, then click submit questions. If you'd like to verbally ask the question, please make sure to 'request to talk' switch is enabled prior to clicking the 'submit request' button. You may also use this field to request technical support. Our first question today is coming from David Kanen. Your line is now live. Hello, David, your line is now live. Please proceed with your question.
David Kanen: Okay. My first question relates to the transformation of the company. In the future over the next few years as 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%, you know, some even into the 50s. Where do you think we will be going long-term as that mix shifts? Thank you.
Pasquale Natuzzi: Okay. No improvement, no question about.
David Kanen: Okay. And then, when I look at your liquidity, you know, the -- to me, I'm struck by the strength of the company, given that you've got $50 million plus in cap, €50 million plus in cash, you've got probably $40 million or more 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, would 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 speculating?
Vittorio Notarpietro: Hi David, can you hear me? It's Vittorio.
David Kanen: Yes.
Vittorio Notarpietro: Sorry for some technical problems, you know, the platform must be -- must improve. Okay, we received this question in recent days. Now, let me answer to those investors through 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 conquest, explanation of where we stay exactly. In February 2020, due to the pandemic Natuzzi was close to be listed by NICE and Board of Directors was also forced to ask financial support to main shareholder to face the immediate stop of the business and the immediate stop of cash flow as well. The visibility at the time on the business was really, really poor, close to zero. The main shareholder immediately granted the requested financial support upto €15 million, as in already. The technical way to grant was at zero interest credit line, refundable with a 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 need to hold that money. In fact, after the €2.5 million we received in February last year, the company has not asked for the remaining €12.5 million yet. If the both option will be not exercised, the company will reimburse the €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 it's disposal of non-core 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 it's shareholders, both minor and major ones. The importance of everything , the most efficient capital structure is something a wish the company is very well aware of, and continuously paying at paramount attention to. We are hence facing a very different situation from the one where the initial credit line was granted.
David Kanen: Okay, thank you. Appreciate that.
Vittorio Notarpietro: Thank you. Now, it would be the case -- I don't know if you know, Jason started, you know, the -- as you know, discussion with us, it would be the case to -- it would be great to have him, Jason commenting on the business momentum in America, our Natuzzi key market. Notwithstanding the very short-term visibility we have today, for many reasons that you should know already. Thanks. Jason, it's your turn.
Jason Camp: Sure. Listen, good morning, and good afternoon to everyone. I'll be brief this morning. You know, the situation -- we feel continued momentum in North America, when we look at our branded wholesale business. The full orders demanded at -- the 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 -- we're very pleased with our current momentum and are working very hard to maintain and accelerate that pace. And I think, you know -- I think from my perspective, those are the key headlines for us at the moment, and -- happy to take any questions if there are -- if there are them.
Operator: Thank you. As a reminder, you may submit questions via the web meeting at any time. Click the Q&A button on the left side of your screen, type your question in the light box. Then click 'submit request'. If you'd like to verbally ask a question, make sure the 'request to talk' switch is enabled prior to clicking the 'submit question' button. You may also use this field to request technical support. Our next question today is coming from Charles . Your line is now live.
Vittorio Notarpietro: Good morning, Charles. We can't hear you.
Operator: Charles, you are muted? Please confirm. 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 Poltrona sofa and Poltrona Frau operating margins in the teens? Forgive my pronunciations, please proceed.
Pasquale Natuzzi: Excuse me, this is Pasquale. Who is asking this question?
Operator: This is the operator reading the question from Charles Megduwin . 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 Poltrona sofa and Poltrona Frau operating margins in the teens.
Pasquale Natuzzi: Okay, all right. This is Pasquale Natuzzi. So, first of all, you know, Antonio, our CEO, he will officially start to operate in the company June 1, so today he is not here; we apologize for that, okay. He is still engaged with McKinsey as a Senior Partner. So again, June 1, he would be here. But anyway, I'm in a position to answer this question. Certainly, I don't have with me numbers regarding the operation margin of Poltrona Sofa, and the Poltrona Frau. But certainly, talking about Poltrona Sofa -- okay, Poltrona Sofa; I mean, it's a completely different company. I mean, you know, the -- their best-selling product or I mean, they promote sofa for $99; they promote sofa for $399, for $599, for $699 motion, two-seater; I mean nothing to do with us. They don't have manufacture, they do just the outsourcing without respecting the human right; I mean nothing to do Natuzzi with Poltrona sofa.
Operator: Thanks.
Pasquale Natuzzi: Regarding -- you're welcome. Now, regarding Poltrona Frau, it's even completely different company. We are a man-tailored , we are lifestyle brands; we have a store in America, store in China, all 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 a presence everywhere in the world; manufacturing the product in Italy, manufacturing the 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, Poltrona Sofa; it's a completely different world, okay. I hope I answered to your questions.
Operator: Our next question today is coming from the line of G.Cowen . Your line is now live. Please proceed with your question.
Unidentified Analyst: Good morning, Greg.
Operator: Hello, Greg Cowen , your line is now live. Please proceed with your question. Can you confirm hearing me?
Unidentified Analyst: Can you guys hear me?
Operator: Yes, please.
Unidentified Analyst: Okay, now. Thank you. Hi, question for Jason Camp. How many stores do you think we could open in the U.S. in the next two to three years? And how would you kind of describe the current trading environment relative to prior periods in your career, including at RAH?
Jason Camp: 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 observed what we're able to observe in the market, we're seeing people growing generally at 20% to 40%, and -- 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 -- you know, 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.
Operator: Thank you. Our next question today is coming from David Kanen. Your line is now live.
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?
Jason Camp: Thanks, Dave. So that -- it's -- that's purely an organic number, and that's a January through April number; so it's pretty current through the end of April.
David Kanen: Okay. And then, I don't know if this is a question for you, Jason. But, you know -- 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 to let's say 25%, 35% up versus 2019 in UK, Italy, etcetera? Or in the initial reopening here in April it's below that?
Jason Camp: I think -- I think that probably is a question for Vittorio as -- but you know, I think before we turn it over to him clearly, you know, we reported in our release that -- 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 -- to our globe. And I'll let Vittorio add any additional color.
Vittorio Notarpietro: Yes, you're right. You know, the percentage after 18 weeks, the global percentage of written orders versus the same quarter 2019 is 15.7%. But consider that we had UK, for example, but also Italy almost closed for that period. And in fact, you know, the uphill pace for order flow was better than Q1, the first three months.
David Kanen: 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; 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?
Vittorio Notarpietro: Mr. Natuzzi, would you comment on the different acceleration of growth by main region?
Pasquale Natuzzi: We divide all Europe, if we should consider Eastern Europe and even Russia, as an European country, okay; we divide Southwest Europe from what we call emerging market. Now Southwest Europe includes Italy, Switzerland, Austria, Germany, The Netherlands, Belgium, France, Spain, Portugal and England; this is a Southwest Europe. We have a very good managers there and the region has been suffering very much because of the lockdown of several country. Now, until a month ago, let's say four weeks ago, we were 25% with the budget in this region, very important region. While right now, we are minus 15%; so already in four weeks has been recovered at 10 percentage points. So we're 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, the business -- it's unbelievable, it's going very, very well. Like, even Natuzzi America -- like South America also, that is doing very, very well for us. But in general, very much certainly -- we want more, we want to see more or we want to see more -- we want to see improvement in margin and everything. But I mean, it's very satisfactory, the way the business is doing so far.
David Kanen: Okay.
Vittorio Notarpietro: David, let me underline a detail on that. While you know, 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 the 2019, is up by a single digit, okay. Branded is up double-digit, unbranded is down double-digits. 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.
David Kanen: Well, even more specifically though, what I'm trying to understand is if 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?
Pasquale Natuzzi: We already told you and that's the detail that we can supply so far; April pace is up 16% versus Q1 pace, okay; Q1 2021. Why? Because UK and other European countries are recovering -- reopening and recovering; that's the number so far about order flow in April.
David Kanen: Okay. And then, is May consistent with what you're seeing in April?
Pasquale Natuzzi: 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%.
David Kanen: Yes. No, I understand. But what I'm asking is the first few weeks of May, have they been consistent with April?
Pasquale Natuzzi: Yes. You know, the year-to-date order flow is consistent.
David Kanen: Okay.
Pasquale Natuzzi: Thank you.
David Kanen: No problem. Thank you.
Operator: Thank you. Our next question is a follow-up from Greg Cowen . Your line is now live.
Unidentified Analyst: Greg, your line is now live, please proceed. Greg, can you confirm your camera and audio is live? Can you hear me?
Piero Direnzo: Greg, we can see you if that helps.
Operator: Greg, we need you to unmute on the platform; so 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.
Pasquale Natuzzi: Sorry, we cannot hear you. If you can hear me; we cannot hear you, Greg. I do apologize for any technical issues, you just may have to unmute yourself on the platform itself, there should be a microphone.
Operator: Ladies and gentlemen, once again to ask a question, you may click the Q&A button on the left side of your screen, type the question to the light box, then click 'submit request'. If you'd like to verbally ask a question, make sure the 'request to talk' switch is enabled prior to clicking the 'submit question' button. One moment, please, while we pull for further questions. One moment please. One moment please while we pull for further questions. If there are no further questions, I'll turn the floor back over management at this time. Management, just to acknowledge, can you hear me?
Pasquale Natuzzi: Yes, we do.
Operator: Okay. I believe that does conclude our question-and-answer session. Would you like to make any closing remarks? I do not believe that we have any further questions.
Piero Direnzo: No further question?
Operator: 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 to just close the call?
Piero Direnzo: Maybe Mr. Natuzzi would like to close the meeting.
Operator: Yes. Over to management for any further or closing comments, please. Mr. Natuzzi?
Pasquale Natuzzi: Okay. Certainly, I 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 anytime, you need to ask a question about our company, we will be very pleased to answer 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 CEO, to start traveling again and meet people around the world. Thank you very much, again. All the best to everyone.
Piero Direnzo: Thank you.
Operator: 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.
