Natuzzi S.p.A. (NYSE:NTZ) Q3 2023 Earnings Call Transcript

Natuzzi S.p.A. (NYSE:NTZ) Q3 2023 Earnings Call Transcript November 27, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi 2023 Third Quarter Financial Results Conference Call. As a reminder interested person can join the conference call by dialing plus +412-717-9633 then Passcode 392-52103#. Once again, to dial in by phone, please dial +1-412-717-9633 and then Passcode 392-52103#, in addition to the link already provided to join the video webcast. At this time, all participants are in a listen-only. Following the introduction, we will conduct a question-and-answer session. Instructions will be given at that time. Joining us today 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; and Mr. Jason Camp, Senior Vice President of Retail for the 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 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 third quarter 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 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 today’s 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, Kevin, and thank you, Piero. Good morning, good afternoon to everyone. I hope our audience from US enjoyed joyful Thanksgiving last week. So let me brief illustrate the development of this year focusing on the third quarter. As you’ve seen, sales in the third quarter have been significantly below what we reported in the last year same period and 15% below what we reported in 2019 that we keep using as a parameter of comparison given the seasonality of the last cycle. It’s still important to detail the difference between 2022 because 2022 benefited for a significant amount equal to EUR28.3 million from previous quarter backlog. As you will remember, due to the unprecedented spike in demand in the aftermath of the COVID, we struggled as all the industry did in fulfilling the demand.

And that resulted in the backlog that during 2022 helped us to keep busy the top-line. So if we compare 2023 third quarter, with, let’s say, a normalized third quarter of 2022, the decrease has been up 15%. The component of our business, which has been clearly more affected and I will say that is partially because of some clients leaving us, but is very much consistent with our strategy is the unbranded component of our business. As a reminder for those participants that might not know in depth Natuzzi, Natuzzi is now a branded retail group. But historically, it was also producing unbranded products. So brand is a product which was sold on the floor of large retailer without coming out of the factory with the brand Natuzzi. If we look at the branded company in total, branded and unbranded sales, we closed the third quarter of 2022 at 94% roughly.

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Q&A Session

So I would say, almost entirely sales are done under the brand Natuzzi. Whereas if we compare the percentage to what happened in the third quarter of 2019, it was 78%. So almost an increase of 16 percentage points. This is — and I will spot some more, a confirmation that despite the unprecedented times we live, we are not deviating from our long-term strategy, which is to become a brand-wide company. Of course, the company of business fully leverage our heritage of 65 years and also carry higher marginality. That’s the reason why that is the way — the direction in which we want to invest. Another important element I would like to flesh out is that since a week 29 of this year, we have witnessed a change in direction, in the sense that the weekly order flow, so what we receive in terms of fresh order has been resulted higher than the previous year 2022, so for 19 weeks in sequence, right now, we are closing week 47, we are reporting order flow, which is above 2022 or previous period.

And that interrupted a cycle of 15 months where the fresh orders were below the same period of the previous year. I think it’s too early to say if that is structural, let’s say, turning point, but I believe it’s encouraging to see that now for 19 weeks, we are reducing that. Another element, which I believe is important, is to testify that the marginality, so our gross margin has been at 35.4%, which is again above the average over the last three years. This comes as a consequence of our restless focus on pricing discipline and cost management, which compensated to a large extent the disadvantage we reported in absorbing the fixed cost with lower volumes because that’s absolutely what happened with our factory. The sum of those, let’s say, element of the equation, led to loss — operating loss in the quarter of EUR1.3 million.

which, of course, not what we wanted to achieve, I believe it’s still useful to put it in perspective. For instance, that loss of EUR1.3 million reported achieving EUR74.9 million in sales compared with a loss of EUR8.7 million reported in 2019 but with EUR88.1 million sales. So that means that in 2019, adding EUR14 million more sales, we were losing EUR8.7 million. This year, we are losing EUR1.3 million with EUR14 million less. So I believe that directionally give you a sense that we are working to strengthen our operating model and to lower our breakeven, so that when growth come back, and we are likely working for that, and have no doubt that will happen. We will have a better profit on our asset and cash conversion. Talking to cash. Also this quarter has been positive from the operation.

It’s been positive by EUR2.3 million, which compared to a negative cash of EUR4.2 million of previous year. And this, again, is a proof that our model is resilient even under extreme circumstance like the one we’re witnessing. You will see that it is in a way self-financing. We will discuss later, but we are not deviating from our long-term strategy. And even in this quarter — sorry, yes, even in this quarter, we invested EUR1.8 million in retail and EUR1.1 million in restructuring and modernization of our factories, which are basically the long-term priority for us. On one side, enhancing brand retail, on the other side, continue our restructuring and modernization of our factory. So this is, I would say, the highlight of a quarter where, as everybody in the industry, we are still witnessing a soft demand.

I believe the circumstances are very evident. We have an ambition, as you know, unfortunately, it’s not only for us, but for human kind, we are living this additional humanitarian crisis in the Middle East, which, of course, does not contribute. So how we are equipping ourselves to make sure that Natuzzi, which has 65 years heritage that’s been through a series of moment of glory, more difficult, can continue and get out of this crisis even stronger. As you can imagine, we’re really focusing on ensuring resilience and the strength of our balance sheet and our cost structure. We are continuing on the restructuring front. Since 2021, we reduced our working force by 649 units, which compared just to give a sense of acceleration, with 577 of the past quarter.

So in one quarter, we let go another 72 people. This I think is important to notice that the net reduction because in the meantime, we are strengthening our organization. So we are changing the plot. Just to name the last addition, we started a collaboration with a gentleman called Brian Waidelich which come from Mitchell Gold and Bob Williams, that didn’t make it through this crisis, but it was definitely a very good retailer. And Brian has been managing for this cost $90 million business of 14 stores and is now actively collaborating with our global retail division in the quarter to keep strengthening our approach on retail. So I use this as an example to ensure that we are working to make our business more efficient. But since we deeply believe in the growth and the strengths of our brands, we are, at the same time, investing to uplift competencies.

The other area where we have not been decelerating has been the retail front. So we’ve been opening since the first nine of the year, 1,900,000 square feet of retail capacity, or retail commercial surface. I challenge every one of you to find somebody that during a crisis has the courage to keep investing in this dimension, apart from players in US, the open large box, but I’m talking about traditional retail. As you know, North America is still very central to our strategy. In fact, five new stores Italia Natuzzi has been opened or flagship, which means primary location with surface of 1,000 square feet and above. We inaugurated three new cities, so Atlanta, Houston and San Diego, where we were not present. We opened a really fantastic store in Manhasset.