Natuzzi S.p.A. (NYSE:NTZ) Q2 2023 Earnings Call Transcript

Natuzzi S.p.A. (NYSE:NTZ) Q2 2023 Earnings Call Transcript October 2, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi 2023 Second Quarter and First Half Financial Results Conference Call. As a reminder, anyone who like to join this conference via telephone may do so by dialing +1-412-717-9633, then passcode 39252103#. In addition to the link already provided to join via video. As a reminder, if you’d like to join via telephone it’s +1-412-717-9633, then passcode 39252103#, in addition to the link already provided. At this time, all participants are in a listen-only mode. Following the introduction, we’ll conduct a question-and-answer session, instructions will be provided at that time to queue up for questions. Joining us on today’s call are Mr. Antonio Achille, Natuzzi’s Chief Executive Officer; Mr. Carlo Silvestri, Chief Financial Officer of the Natuzzi Group; Mr. Pasquale Natuzzi, Founder and Executive Chairman; then Mr. Jason Camp, Senior Vice President of Retail for North American Market; and Piero Direnzo, Investor Relations.

As a reminder, today’s call is being recorded. I’d now like to turn the conference call over to Piero. Please go ahead.

Piero Direnzo: Thank you, Kevin and good day to everyone. Thank you for joining the Natuzzi’s conference call for the 2023 second quarter and first half financial results. After a brief introduction, we will give room for a Q&A session. Before proceeding, we would like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States securities laws. Obviously, actual results 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 annual report on Form 20-F filed with the United States Securities and Exchange Commission 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.

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Antonio Achille: Thank you, Piero and thank you, everyone to join our second quarter press release on 2023 results. Let me share — let me start by providing some facts about the market. I believe the fact that most analysts in our sector still refer to 2019 to compare 2023 data, speak by itself. We’ve been through an unprecedented cycle that brought the sector to potentially one of the most positive momentum in its dynamics to a very difficult situation. If we look at what’s happening around the globe in the real estate market, we do see signs of perduring uncertainty. I believe everyone has read with interest the news about the CEO of Evergrande being de facto put (ph) under physical restriction. We do see that the continuing tension on the depth side because of the high interest limits the purchase of new houses, which is a primary driver for the industry.

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Q&A Session

I want to share these elements to put in perspective our 2023 second quarter performances. As you have seen by now, unfortunately, our top line have been suffering versus 2022. Quite seriously, in terms of decrease and also in terms of sales, total sales, we are below 2019. I think that it’s still important to notice that if we look at the branded invoice sales, which is in a sense the strategic direction the company is heading to, the sales are above 2019, so above 5% 2019. Currently, our business is composed by more than 90% by brand sales, which means sales which are done under the name Natuzzi Italia or Natuzzi Edition, which are our dominant brands. This is important to us because we stated clearly in our long-term strategy that we are here to fully leverage the strengths of the brand of the company and act in more high price point segment in the market.

Another element which is important to share is that despite the very low sales, we have been working to compensate at the gross margin level, the tension on production cost which has been necessarily higher because of lower utilization of our factory. As you know Natuzzi is a [indiscernible] which means which is vertically integrated, which means we have fixed cost not only in the retail but also in the factories. So despite the non-saturation of our factory, we achieved 36.4% gross margin compared to 31.4% in 2022. And again, looking at normalized year, 27.8% in 2019. So versus 2019, the company increased by 9% the gross margin despite the impact on production cost of reduced sales volumes. How this has been achieved? This has been achieved by a better discipline in terms of pricing and a better cost management.

In 2023, we didn’t do any price increase. The last price increase was put in place in June 2022 the U.S. — to the U.S. listing. So it’s almost one year, we didn’t do any pricing increase even more than one year. But what we had done, especially in 2022 has been carefully looking at all our price list to make sure there was no situation in which a specific market or specific partner benefited from price condition not allowing us an adequate marginality. In terms of cost, we of course, did a lot of effort to contain the cost of our raw material and utilization of our raw material. I remind you that gross margin does not include the cost of transportation which has been deflationary this year. But in this gross margin, we don’t take an advantage for that.

So this allow us to achieve in the second quarter 2023, an operating breakeven. I think it’s important to notice that this compare with, for instance 2019, a loss of nearly EUR8 million with a base of sales, which is — which was EUR10 million above than 2023. What it means? It means that by working diligently on our cost structure, we kind of lower the breakeven of EUR20 million and more of sales per year, which as you will see is a kind of underlying topic of this press release. To make explicit this journey, we’re not having the sales that we aspire to because most of the market condition, we try to accelerate the optimization of our, let’s call it, back of the house operational machine, so to extract more value, more cash when as I’m sure growth will come back.

Let’s look at cash. Cash at the end of the period, so June 2023 was of EUR44.5 million, which compared to EUR54.5 million at the end of 2022. Here, despite the difficult year, we didn’t stop investing in a critical area. We invest EUR10.6 (ph) million of which EUR5.3 million went to optimize the Italian factory and EUR2 million to open direct stores. Operating activity were positive despite the lower level of sales by EUR1.6 million. So as you can understand by now, we don’t anticipate a quick inversion of the market cycle, at least for the end of the year. And in this market context, we believe and we are acting accordingly, the cost and capital efficiency are of paramount importance. For that reason, we launched a set of initiatives to reduce cost and improve working capital discipline, which Carlo, who will comment later more in detail, but this includes, for instance, really working on our SG&A structure, including the account.