U.S. Markets closed

Edited Transcript of NTZ earnings conference call or presentation 28-May-19 2:00pm GMT

Q1 2019 Natuzzi SpA Earnings Call

Santeramo (Bari) Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Natuzzi SpA earnings conference call or presentation Tuesday, May 28, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

* Gio Danisi

- Private Investor

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Conference Call for the First Quarter 2019 Financial Results. (Operator Instructions) Joining us on today's call are Natuzzi's Chief Officer, Mr. Pasquale Natuzzi; the Chief Financial Officer, Mr. Vittorio Notarpietro; Mr. Nazzario Pozzi, Chief Officer of the Natuzzi Division; Mr. Gianni Tucci, Chief Officer of the Softaly Division; 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 go ahead.

--------------------------------------------------------------------------------

Piero Direnzo, Natuzzi S.p.A. - IR Manager [2]

--------------------------------------------------------------------------------

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 First Quarter 2019 Conference Call. After a brief introduction, we will give room for a Q&A session. Mr. Pasquale Natuzzi, together with the top management team, will be glad to answer your questions.

Before proceeding, we would like to advise our listeners that our discussions 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.

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, and thank you for joining us today. I would like to talk about 2 important areas this morning. First, where we are; and second, where we are going and the specific steps we are taking to get there. I will describe the first quarter 2019 as perfect storm. Sales of upholstery furniture through traditional channels continued to decline, and the position of U.S. tariffs on Chinese goods added significant pressure on price. Natuzzi Group suffered an almost 9% decline in total revenues and showed an operating loss of EUR 3 million. But within this result are some very strong sign of the impact of our efforts on a turnaround.

Our gross margin improved from 28.2% to 30.1% despite the decline in sales of EUR 10.4 million. This is the result of a great efficiency in production and the logistic coming from our new management team and the continued improvement in both our mix of business and in our DOS network.

Our branded sales grew to 76.7% of total, up from 75.1% in the same quarter 2018. We will continue to follow such direction. While these are not the results we have in mind, I'm encouraged by the very strong sign that we are taking the right strategy and that our efforts are finally bearing fruit.

Our customer base continued to shift in the price focus at sales lower end and total experience at the higher end. The Natuzzi customer is one who seeks a high-end lifestyle, combined with high-end retailer experience, the result of our direct retail sales proved this observation. As such, we will continue our efforts to build out both our direct operating store as well as a network of mono-brand franchising for both Natuzzi Italia and the Natuzzi Editions. This represents the best path to grow and the higher margin we desire.

At the same time, we will continue to eliminate unprofitable business in our private label, like Softaly. We will no longer make sales that are not profitable, and we will recover the working capital from this business to devote to the accelerated growth of our retailer structure. This is an effort that has been underway for the past several quarters, but I have decided that we will now accelerate this transition. This would allow us to reconsider the structure and management of our entire organization as we shift from wholesale business to a retail business. We will seek efficiency, infrastructure and cost of our company on a global basis as we go forward.

Lastly, let me comment briefly on tariffs. The trade war between the U.S. and China is a real issue for our industry. Fortunately, we do not own our Chinese manufacturing plant and we are able to consider moving production closer to the market we serve, notably, the United States and Europe. We will be considering a new manufacturing option with a focus on efficiency and margin as we continue the transformation in the high-end branded lifestyle experience. We remain dedicated to returning our company to stronger profit, and we will stay on our current course as the results say we are going in the right direction.

If there are questions, I would be very pleased to answer to all of you. Thank you.

--------------------------------------------------------------------------------

Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [4]

--------------------------------------------------------------------------------

In the meantime, Mr. Natuzzi, let me go through some more details about (inaudible) our numbers.

--------------------------------------------------------------------------------

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [5]

--------------------------------------------------------------------------------

Okay. All right, so our numbers.

--------------------------------------------------------------------------------

Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [6]

--------------------------------------------------------------------------------

Our numbers, but let me go through some detail in order to check if something progressed in Q1. This quarter, I said, were -- was negatively impacted in large part by the uncertainty surrounding tariffs. As a result, revenues declined in the quarter by roughly EUR 10 million compared to last year. Even though mitigated by better mix and price increase, so far, sales expressed in terms of volumes which are fixed went down by 16% in the quarter, while we have a stable business with furnishings.

Brazilian and Romanian plants are okay with the capacity utilization. We have instead the redundant workers in Italy, but we are addressing that, as said in previous quarters, with a new scheme agreed with Italian authorities that allow us to shift our first significant portion of the production to Romania. China plants has the impact of lower sales deriving from tariffs but already reacted by lowering workforce, variable and even some fixed cost. All the plant increased their productivity, that's the main reason for the improvement of gross margin. So the production efficiencies improved even in difficult times.

Thus, the directly operated stores chain has been under development and has until now incurred a net loss. We have assumed control of several stores previously ran by third parties and restructured the operations. As these, of course, have been largely completed, today, our DOS looks like this. In Q1, we had 65 point of sales, of which 39 Natuzzi Italia DOS, 14 Divani&Divani by Natuzzi store and 12 Natuzzi Italia concessions.

In Q1, the operating profit of the entire DOS chain was EUR 0.7 million or 4.1% of net sales.

Spain, where we operate 11 stores, broke even; France, where we recently opened 2 stores to enter the market, showed a small loss; U.K. still loss-making -- U.K., I mean. And so we have, in Q1, closed down the concessions we had and started restructuring the 4 stores business.

In Switzerland, we operate 3 stores, which almost broke even in Q1. The 4 Natuzzi Italian DOS in Italy shows a small loss. Divani&Divani DOS in Italy, after difficult years, showed a very positive result, thanks to the new format, new merchandising and new management.

Florida, 6 consolidated stores plus 1 just opened in Sarasota, is going quite positively. Mexico, 3 stores plus 12 concession, is improving, both show profits. And finally, United States of America DOS which, as said by Mr. Natuzzi, is and will continue to be the most important market for Natuzzi. So the DOS chain in the United States of America showed in Q1 a dramatic improvement from last year first quarter. U.S.A. 5 DOS chain is finally profitable.

In addition, the 55 like-for-like stores shows a 7.6% increase in sales and a turnaround from a loss to positive EBIT, so retail is improving, too.

Rest of the year. Our fiscal budget for 2019 includes the following areas of focus: a significant improvement in the DOS chain; a better mix, including some price increase; lowering raw material price, especially leather; a positive contribution by shifting production from Italy to Romania; a better performance of our plants; and reduced expenses resulting from the phaseout -- progressive phaseout of unprofitable customers.

In Q1, we have done what we planned. However, the weak overflow of the last 8 to 9 weeks likely will affect our results in Q2 2019. But in these days, we have the Spring Congress here in Santeramo, and we are meeting all our clients worldwide. I'm sure Nazzario will elaborate on that.

In spite of Q2 order flow difficulties, we will continue, as said by Mr. Natuzzi, to stay on the path.

Our JV with KUKA in China is progressing. They are doing the planned roll out for Natuzzi Editions and Natuzzi Italia stores. In Q1 2019, the contribution of JV to Natuzzi has been EUR 0.4 million profit. While last year, in Q1, the full EBIT impact was EUR 0.2 million. We believe we have chosen the right partner in China, and are encouraged.

The company has EUR 49.1 million cash by the end of the quarter, and we are focusing on the working capital. The increasing focus on the more profitable branded business will reduce the overall complexity. The lower complexity will result in lower working capital needs. In doing that, we will continue to operate on the reduction of our fixed cost basis, SG&A included. Thank you so much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from David Kanen with Kanen Wealth Management.

--------------------------------------------------------------------------------

David L. Kanen, Kanen Wealth Management Llc - President & Portfolio Manager [2]

--------------------------------------------------------------------------------

So in terms of the softness that's seen during Q2, is that coming from all lines of business, or is it primarily Softaly? And if it's impacting DOS, can you give us some idea of how much? And then my second question is in the agreement with the Italian government allowing you to shift some of your production over to Romania, should we anticipate better gross margins because of that?

--------------------------------------------------------------------------------

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [3]

--------------------------------------------------------------------------------

Pasquale Natuzzi speaking, David. The decline in order flow is coming from United States primarily, but even a little from the rest of Asia-Pacific and China. But from China and Asia-Pacific, in April, we have a very important affair in Milano, Salone del Mobile, where we show Natuzzi Italia as we do primarily Natuzzi Italia business in Asia-Pacific and China. So the customer, they came to Milano and they placed the order in April. And we started just 1 week ago, a Congress in Santeramo, where we invite all the franchisee customer their store. They come and they spend 1, 2, 3 days with us here, choosing the new product, making a new media plan, a new marketing plan. So from China, the high-end business, we are already recovering the business.

While in United States, we have Natuzzi Italia store and we are performing very, very well. We have 2 customer -- 2 cluster of distribution and customer in America. One, they embraced the brand. For example, I know that you live in Florida probably, and we have Baer's. Baer's is a very important customer for us. We do a $7 million business and they buy Natuzzi Editions, and they have a gallery. So they embraced the brand. So because they do very well with our brand, other customers (inaudible) we have many of those customer that we classify as A customer where we make good margin, and they leverage our brand. That basically is doing well. The business that is suffering is primarily with the -- what we call mass merchant. Those are distribution channel that, for them, price is the issue. It is the only issue, there are no other one. And so consequently, because we have been forced to increase our price since the tariff went up to 10%, we increased our price by 5%. And then when the announcement for the additional increase was another 15%, we increased another 10%. So to make it short, 10% plus -- 5% plus 10% is 15%. But because the impact on the price, on our price list, would be only on manufacturing cost, not on transportation, on marketing, on regional commercial cost. So the impact on tariff based on our price increase, that will damage 1.5% to 2% our margin.

So the mass merchant customer, they didn't accept the price increase, they moved to Vietnam, they moved to Cambodia, they go somewhere else. They've done -- I mean price for them -- it is exactly what we are planning to do, to take off out from Softaly our private label. Okay?

--------------------------------------------------------------------------------

David L. Kanen, Kanen Wealth Management Llc - President & Portfolio Manager [4]

--------------------------------------------------------------------------------

Okay. So -- but your higher-end branded product, Natuzzi Italia, Editions with your A customers and DOS is doing well. Is that what you're saying?

--------------------------------------------------------------------------------

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [5]

--------------------------------------------------------------------------------

Absolutely, yes. I mean, yes. I mean, Natuzzi Italia, made in Italy, is growing in America. Our retailer is growing -- is making wonderful progress. We are having also a business with the trade -- with the designer, architect community. I mean, our DOS and even our franchisee store are performing very well everywhere in the world, not only in America. And we are planning, obviously, to focus on brand, Natuzzi Italia and Natuzzi Editions, and primarily on the retailer distribution.

--------------------------------------------------------------------------------

David L. Kanen, Kanen Wealth Management Llc - President & Portfolio Manager [6]

--------------------------------------------------------------------------------

Okay. And then in terms of cost savings going forward, could you give me more color on that, Vittorio?

--------------------------------------------------------------------------------

Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [7]

--------------------------------------------------------------------------------

Yes, Dave. The answer is yes. Shifting from Italy to Romania gives us benefit, of cost. In order to get there, we had a very rude discussion last year with Italian authorities. At the end, we got a new scheme that is allowing us, allowed us already to shift a portion of production from Italian plants to Romanian plants. Labor cost makes a difference, so the answer is yes. Now we're starting to get more orders in order to fulfill that plant and the profit and loss.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question is from Gio Danisi who is a private investor.

--------------------------------------------------------------------------------

Gio Danisi, - Private Investor [9]

--------------------------------------------------------------------------------

Can you hear me?

--------------------------------------------------------------------------------

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [10]

--------------------------------------------------------------------------------

Sure, Giovanni. Pleasure.

--------------------------------------------------------------------------------

Gio Danisi, - Private Investor [11]

--------------------------------------------------------------------------------

Okay, guys, I have a set of questions this afternoon, okay. I will limit myself to 4, so I will just make the first 2 questions now, and after, I will step up in the queue if there would be time after. So my first one is related to the improvement of cost consequently to the shift of the production to the Romanian plants. So I would like to know if -- so where are your -- which is your target for the gross margin improvement this year? So we should expect an improvement in the range of, I think, absolutely more than 30%, but I think in which range, like 32%, 33%? Again, in terms of improvement in gross margin of your total net sales. And the second one is related also to the Italian workforce, that clearly, as you stated several times, is redundant. So I know that your Italian employees are more or less 2,500. Okay, you say that is redundant, but which is the rate, the percentage of this redundancy? So we should say that -- can we say that at least 500 or 600 of these employees are redundant, or the percentage is less or more? And which is the rate of like natural quitting for age limit, like people who go to the pension or reach pension schemes, et cetera? Like U.S. is quitting at the rate of 50 per year or 60 per year, which rate, more or less? If you can add some color on these 2 parts, please.

--------------------------------------------------------------------------------

Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [12]

--------------------------------------------------------------------------------

I will try to do my best. Let's start from the age, average age of this company. We are in the 50s, so we are too far from the pension, okay? So we don't expect to -- people to leave the company because of that. About redundant workers, this is something that we can say because it's official that the -- what we agreed with Italian unions last year. In our Italian plants, we have almost 1,600 people. Last year, we got 500 of them to go to a new scheme, which is a new organization of work, giving them the possibility to be trained in order to take some skills for some production steps that are currently done by third parties. I mean, in wood, in foam steps, production steps. So the answer is around 500 in production.

As far as the gross margin is concerned, this is also related to the volumes. Let me say that the gross margin, which are the drivers for the gross margin, and then you would be capable to understand how far we are, considering also the Q2 that will be unfortunately lower than expected. With quite stable volumes that we had in mind for 2019, we have in mind to increase our gross margin by around 2%, 3%, okay. That's the goal we have in mind before the lowering of overflow in recent weeks. This factored not only the shifts, but also the improvements of the DOS chain, a further improvement, which is coming, and some price increase and some lowering in the raw material prices. Then we had also in mind, and we are progressing in that direction, lower cost for quality and some advantage from foreign exchange. I think it's enough, isn't it?

--------------------------------------------------------------------------------

Gio Danisi, - Private Investor [13]

--------------------------------------------------------------------------------

Okay. Yes, okay.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And we have no further questions in the queue. (Operator Instructions) And we have another question from Gio Danisi, who is a private investor.

--------------------------------------------------------------------------------

Gio Danisi, - Private Investor [15]

--------------------------------------------------------------------------------

Okay. So if I can, I will go ahead with my other questions. So the first one is related to the profit of joint venture in Q1 -- so the progress of the joint venture with KUKA. In Q1, you said -- and also in the report, you said a profit of EUR 0.4 million in the Q1 -- is this okay? This is profit on the base of equity of the joint venture?

--------------------------------------------------------------------------------

Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [16]

--------------------------------------------------------------------------------

That's right. This is...

--------------------------------------------------------------------------------

Gio Danisi, - Private Investor [17]

--------------------------------------------------------------------------------

Yes. I would like to know if the -- if you have, because I found it in the last records. So if you have also the operating profit of the joint venture in Q1. And the second question is related to the manufacturing reorganization, which Mr. Natuzzi was suggesting. So in order to face the tariff increase in the U.S. So we should expect this reorganization as the opening of new facilities or millennium facility or rather than like an improvement or an enlarging of the lines, of the production lines in existing facility of the group.

--------------------------------------------------------------------------------

Vittorio Notarpietro, Natuzzi S.p.A. - Chief Financial & Legal Officer [18]

--------------------------------------------------------------------------------

Let me start first with your question about JV. Yes, this quarter, we have on an equity method basis EUR 0.4 million contribution to our profit and loss, which is showed in that line of profit and loss, which is 49% of net profit of the company. Last year, the contribution to the EBIT, the full contribution, because last year, we fully consolidated the company, was EUR 0.2 million at the EBIT level, so they are doing better. And then Mr. Natuzzi, about the development of our production footprint, vis-a-vis, the recent tariffs, things that are changing.

--------------------------------------------------------------------------------

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [19]

--------------------------------------------------------------------------------

Okay. Let's start from which market are strategic for us. China is an important market for us because we have a plan that in the next 5 years, we should have around -- more than 500 store altogether between the Natuzzi Editions and Natuzzi Italia. Today, we are close to 200, so we have a plan to open additional 300 stores. So consequently, we need to keep the production in China to support the growth of our Natuzzi Editions business in China. So we should stay there, absolutely because we have already 150 Natuzzi Editions store. We are planning to open additional 300 or even more. And consequently, we need to have a Natuzzi Editions production in China. Obviously, while we will be there for the domestic business, we will also leverage the manufacturing know-how and production, supplying the rest of Asia Pacific. And that has to do with Asia -- rest of Asia and China.

Regarding Italy, we keep always doing the Natuzzi Italia production because Made in Italy is very, very important for the consumer, for our targets. Romania manufacture Natuzzi Editions. So far, it is still manufacturing some Softaly and more Natuzzi Editions. We will focus on Natuzzi Editions because our margins are higher, and the defocus from low-margin customer business. America is an important market for us. We are there since -- more than 40 years now. We have a very high brand awareness. Brand recognition is very high. Consumer, they go in the store, they want to buy a Natuzzi product.

So we are considering based on our strategy which market are important, which market we want to grow for the next 3 years, and then we should also decide the production footprint. It's something that management is working on that issue. Okay?

--------------------------------------------------------------------------------

Gio Danisi, - Private Investor [20]

--------------------------------------------------------------------------------

Okay, okay. So actually, it's still a work in progress. You didn't decide yet in which direction to move -- to improve your manufacturing footprint.

--------------------------------------------------------------------------------

Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [21]

--------------------------------------------------------------------------------

Exactly.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And there are no further questions in the queue.

--------------------------------------------------------------------------------

Piero Direnzo, Natuzzi S.p.A. - IR Manager [23]

--------------------------------------------------------------------------------

Okay. Thank you, all. It seems that there are no further questions. Therefore, this concludes the conference call today. Please feel free to contact us should you need further information. Thank you, and have a nice day.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

This concludes today's call. Thank you for your participation. You may now disconnect.