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Edited Transcript of NTZ earnings conference call or presentation 2-Dec-19 3:00pm GMT

Q3 2019 Natuzzi SpA Earnings Call Santeramo (Bari) Dec 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Natuzzi SpA earnings conference call or presentation Monday, December 2, 2019 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Italia Casalino Natuzzi S.p.A. - Head of Retail Channel * Pasquale Natuzzi Natuzzi S.p.A. - Chairman & CEO * Piero Direnzo Natuzzi S.p.A. - IR Manager * Vittorio Notarpietro Natuzzi S.p.A. - Chief Financial & Legal Officer ================================================================================ Conference Call Participants ================================================================================ * David L. Kanen Kanen Wealth Management LLC - President & Portfolio Manager ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter and First 9 Months 2019 Conference Call. (Operator Instructions) Joining us today on the call are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi; the Chief Financial Officer, Mr. Vittorio Notarpietro; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. And now I would like to turn the conference over to Piero. Please go ahead. -------------------------------------------------------------------------------- Piero Direnzo, Natuzzi S.p.A. - IR Manager [2] -------------------------------------------------------------------------------- Thank you, Kathy. Just a short notice, together with the Chief Financial Officer and the Chief Executive Officer, we also have today Mrs. Italia Casalino, who is in charge of the retail channel; and then we have also Mr. Cosimo Bardi, who is in charge of the Wholesale Branded Channel; and then we have also Gianni Tucci, who is in charge of the Wholesale Unbranded Channel. So 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 Third Quarter and First 9 Months 2019 Conference Call. After a brief introduction by the Chief Executive Officer and the Chief Financial Officer, we will give room for a Q&A session. Mr. Pasquale Natuzzi, together with the top management team, will be glad to answer your question. 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 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. -------------------------------------------------------------------------------- Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you. Good morning to everyone. Despite the unpleasant number that we generated during the first 9 months of 2019, which disappoints everyone, but caused primarily by the trade war between United States and China and like still without a solution, the management has taken initiatives aiming to overcome this difficult situation. In fact, I would like to emphasize that the retail division, represented by direct operating store and franchising one, the percentage of volume has increased to 49% of the entire business compared to 44% of last year. Within the retail business, the rollout of franchising store in China proceeds according to the plans. By the end of this year, we will have 240 stores in China, thanks to the 55 new Natuzzi store openings overall in 2019. We will continue to open stores in China with this intensity, and this will positively support our revenue in that region. In United Kingdom, we have recently reached an agreement with the 2 historical partners for the aggressive development of the retail business. Within end of this year, we plan to open 5 Natuzzi Editions stores in United Kingdom. The Italian Divani&Divani by Natuzzi store network continues to deliver a positive sales performance and be profitable. In consideration of the ambitious program, we have for the retail development recently hired a new corporate retail manager, Ms. Italia Casalino, who will be responsible in supporting the regional manager for the achievement of their P&L early targets and the execution of the retail business model. The wholesaler branded channel, consisting mainly of Natuzzi Gallery, represents 32% of the total business, the same percentage as the last year. The strength of Natuzzi brand has allowed us to limit volume and margin erosion in America caused by the U.S. tariff. This distribution channel is now entrusted to Mr. Cosimo Bardi, who will support the regional managers in the development of such business. Eventually, Mr. Bardi and Ms. Casalino, they are available for any explanation, if needed. The wholesale branded -- unbranded -- the wholesale unbranded division, led by Gianni Tucci, represents 19% of the total business. It was 24% 1 year ago. The performance of this division has reflected the imposition of such U.S. tariffs. Of course, finally solution is still unpredictable, unlikely. So in order to overcome the U.S. custom duties, we started the revision of the entire group industrial allocation to recover volume and margin, including outsourcing action in both Asia and Europe. The first step of such revision started from China. In fact, our plant in China has become less competitive because of the above-mentioned tariffs. So it must be downsized. Therefore, the current 88,000 square meter plant will be replaced in third quarter of 2020 by a smaller plant, 38,000 square meters, in order to satisfy the development plans only for China and the rest of Asia Pacific market, which they are not impacted by U.K. We are now in an advanced stage of negotiations for an outsourcing production in Vietnam that will manufacture unbranded product for the North American market. Production in Vietnam will start gradually from the first quarter 2020. As for the production of wholesale branded for North America, our Brazilian plant, which has production capacity, will start serving the East Coast within the first half of 2020. That will improve the margin for this channel -- business channel. At the same time, we are progressing in negotiations with an external player to find additional outsourcing production capacity in Mexico to serve the United States of -- West Coast. We believe such outsourced production in Mexico could start in the second half of 2020. To recap, North America market will be served from plants in low-cost countries outside China to avoid the U.S. tariff, the unbranded production for mass market will be made in Vietnam, the wholesale branded production will be made part in Brazil and part in Mexico. The complete industrial review, we have almost completed the shift of certain low-margin production from Italy to Romania as it was no longer sustainable here in Italy. So we need a further industrial capacity in Eastern Europe, that's why we are negotiating with third-party production players located in Belarus to get low-cost production capacity in outsourcing. To favor the unbranded business in EMEA region, we believe the production in Belarus could start gradually in the second half of 2020. The Romanian plant will continue to manufacture wholesale branded for the EMEA region. Nothing has changed for the high-end Natuzzi Italia production, that will remain based in Italy, regardless of the market to be served. Lastly, we are progressing in the selling process of certain assets no longer consistent with our strategy. We have also decided to hire an adviser firm to support us in the sale, and if needed, in the financing of such sale process. And now I will pass the conference over to Vittorio, who will go through numbers in more details. And then, obviously, I'm [available] for any question. The management is here even in this meeting, and any question, we would be very pleased to answer to you. -------------------------------------------------------------------------------- Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [4] -------------------------------------------------------------------------------- Thank you. Thank you, Mr. Natuzzi, and good day to everyone. By the end of 2016, we all remember that the company reached a positive earnings before interest, taxes, depreciation and amortization. Then we experienced a slowdown in sales for reasons already explained many times and with all the consequences in terms of profitability. But at least in the last 3 years, the company has been capable to improve its direct retail operations, to improve its Brazilian operating results, to reduce its workforce in Italy and lower its working capital needs. In fact, in spite of lowering sales for the first 9 months of this year, earnings before interest, depreciation and amortization was positive at EUR 0.8 million, little but positive. Even with the poor sales of the third quarter 2019, EBITDA has been only a little negative. Having said that, let me first address 2 questions we have received from investors during the weekend. First, our partnership in China is consolidated at equity since we just own a minority stake of 49% in that company. So the cash flow we displayed does not include any cash got by the JV legal entity, of course. We will start getting cash as soon as shareholders will be in the position and the company will be in the position to distribute dividends. In the meantime, our partners in China continue to grow the business in Natuzzi retail business, and we have got EUR 1.4 million as our share of net profit of the equity method in this field. Having said that, let me go through the cash flow in more detail. For the first 9 months of 2019, net loss has been EUR 26.8 million. Then we had EUR 22.3 million of positive adjustment for nonmonetary costs, mainly for depreciations and amortization, plus the profit of the JV in China, for example, and others. Then we had a total of positive items for EUR 17.1 million, mainly deriving -- basically deriving from lower working capital needs and, in particular, following the actions carried out to lower inventory and trade receivables. Notably, such working capital reduction is proportionally higher when compared with the slowdown in sales. Secondly, such positive total of EUR 17.1 million includes already EUR 4.6 million of cash out for the reduction of workforce in Italy since the restructuring costs are included into the operating results. Then we used EUR 6.3 million to pay back interest on financial debt and taxes. As a consequence, cash provided by operating activities, as displayed in our press release, was positive by EUR 6.3 million. We have then paid EUR 4 million for capital expenditures. This means, to address another question we have just received, that we had a small but still positive free cash flow of EUR 2.3 million, which came out in third quarter this year. Then we had EUR 36.1 million used as follows: $4.5 million reimbursed on long-term borrowings; EUR 10.5 million used to pay back lease contract related to our owned stores; and $21.1 million to reimburse short-term debt, mainly related to lower sale of trade receivables through the securitization financing vehicle, in line with lower sales. What we do expect for the next quarter, we will have sales a little higher than those in the third quarter 2019 just displayed, but still lower compared with fourth quarter 2018. In spite of that, we should display an improvement of operating results when compared with that reported in the third quarter 2019. Thanks, everybody. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll go first to David Kanen of Kanen Wealth Management. -------------------------------------------------------------------------------- David L. Kanen, Kanen Wealth Management LLC - President & Portfolio Manager [2] -------------------------------------------------------------------------------- My first question is in regard to Q4, the guidance that you gave for improved results. What do you expect adjusted EBITDA to be in Q4 if we take out onetime charges and so forth? And what do you expect cash flow from operations to be in Q4? -------------------------------------------------------------------------------- Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [3] -------------------------------------------------------------------------------- We cannot anticipate so many details, David. We know that the order flow will allow us to make a sustained amount of sales, which again will be higher than Q3 but lower than Q4 last year, okay. We know that we will have a single digit in terms of million euro loss in Q4, which will be better than the Q3 just displayed. So EBITDA should be a little bit positive. We don't expect any particular improvement of free cash flow, so we should be more or less in line with the positive, I would say, results in terms of cash flow displayed in Q3. -------------------------------------------------------------------------------- David L. Kanen, Kanen Wealth Management LLC - President & Portfolio Manager [4] -------------------------------------------------------------------------------- Okay. And then can you speak a little bit to your direct operated stores? At this point, how many new stores do you think you'll have in Q4, in the current quarter openings that you have in queue, and then also in 2020? So my question is, ending the year, how many more DOS stores will we have by the end of 2020 versus currently? -------------------------------------------------------------------------------- Italia Casalino, Natuzzi S.p.A. - Head of Retail Channel [5] -------------------------------------------------------------------------------- Okay. For the -- Italia Casalino speaking. So for the Q4, our expectation is to reach additional 30 shops. So 28 FOS and 2 new DOS in U.K. that we are going to open for the -- at the Boxing Day. For the 2020, we are consolidating the figures. So we are going to open most of FOS than DOS, but in the next quarter, we will give you more details about these new opening. -------------------------------------------------------------------------------- David L. Kanen, Kanen Wealth Management LLC - President & Portfolio Manager [6] -------------------------------------------------------------------------------- Can you just clarify for me, FOS versus DOS? What is FOS again? -------------------------------------------------------------------------------- Italia Casalino, Natuzzi S.p.A. - Head of Retail Channel [7] -------------------------------------------------------------------------------- Yes. Sorry. FOS, I'm talking about franchising. And DOS, we are talking about the direct retailer, our shops, our stores, sorry. -------------------------------------------------------------------------------- David L. Kanen, Kanen Wealth Management LLC - President & Portfolio Manager [8] -------------------------------------------------------------------------------- Okay. So the FOS stores, are these -- where are these going to be located primarily? -------------------------------------------------------------------------------- Italia Casalino, Natuzzi S.p.A. - Head of Retail Channel [9] -------------------------------------------------------------------------------- Yes. So the 28 are 11 in China, we have 6 in South America, 1 in North America, 3 in Italy and 4 in Europe. -------------------------------------------------------------------------------- David L. Kanen, Kanen Wealth Management LLC - President & Portfolio Manager [10] -------------------------------------------------------------------------------- Okay. So you're going to have 28 franchise stores open in Q4, 2 DOS... -------------------------------------------------------------------------------- Italia Casalino, Natuzzi S.p.A. - Head of Retail Channel [11] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- David L. Kanen, Kanen Wealth Management LLC - President & Portfolio Manager [12] -------------------------------------------------------------------------------- Stores in England. And then for 2020, how many FOS stores do you anticipate? -------------------------------------------------------------------------------- Italia Casalino, Natuzzi S.p.A. - Head of Retail Channel [13] -------------------------------------------------------------------------------- So to be honest, I will -- we are going to consolidating during these days, so I will give you an exactly number in the next call for the next quarter. I will be provide you exactly also by quarter what we are going to open. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- (Operator Instructions) And it seems that we have no question. -------------------------------------------------------------------------------- Piero Direnzo, Natuzzi S.p.A. - IR Manager [15] -------------------------------------------------------------------------------- Kathy, this is Piero Direnzo. Okay. It seems that there aren't further questions at the moment. So this concludes today's conference call. So please feel free to contact us should you need further information. Thank you, have a good day. Bye. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And again, ladies and gentlemen, that does conclude today's call. We thank you again for your participation. You may now disconnect.