Natuzzi, S.p.A.

Thank you, Kevin. Good day to everyone. Thank you for joining the Natuzzi's third quarter and first nine months of 2021.

Financial Results 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, I might differ materially from those in the forward-looking statement because of risks and uncertainties that can affect our results of operations in financial conditions. Please refer to our most recent annual report on FON20F 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 company's chief executive officer. Please, Antonio.

Thank you so much, Piero, for your introduction. Good morning and good afternoon, depending on the time zone, to our analyst and investor and potential investor attending this call. I'm here today with, beyond Piero, other three people who are very relevant and will be involved in our conversation. The first person is clearly Pasquale Natuzzi, who is our chairman, beyond being the founder and the life history of the company. I'm working very closely with him on any strategy and organization matter, so I will definitely involve him when the subject pops up. The other person is Jason Camp. I believe most of you already know him. He's an executive with 25 years experience in the sector who leads our North America and Central and North America operation. And the third one is Vittorio Notarpietro, our CFO, long-standing CFO. So let me open the conversation along to the press release, which has been just released, to say that on one hand, we are very pleased to see the growth for our product continue. That has not always been the case in the past. We're now on a positive trajectory which lasts a few sequential quarter. Written orders are even stronger than invoices sales. Invoices sales were 20% above the third quarter of 2020 and 15% above the pre-pandemic level, so 2019. So the demand for our product continue to be strong across most geography. And if you double click, which is interesting, is that the branded product, so the product which are sold with our two brands, Natuzzi Italia and Natuzzi Edition, post very relevant growth rate. They are 40% above 2019. And currently they represent and nearly 90% of what we do. So the company, which has been going to different phase of history, now is clearly focusing on brand, increasing focusing on having direct access to consumer, and this seems to be paying off in terms of growth. When it comes to fulfilling the demand, we've been experimenting, and of course we're not being the only one, but today we should talk about Natuzzi, We're experimenting, especially in the third quarter, difficulty to keep up with increasing demand. And this, again, is a matter of availability of product, availability of workforce in our plant, and availability of third-party producer to keep the demand, which has been, again, posting very positive momentum. This basically bears two consequences. The spiking material has been really pressuring our P&L structure. I believe here the company has done a good work in mitigating that. In fact, if you see our gross margin has been actually increasing, arriving at 36% versus 32%. in 2020 and 28.7% in 2019. So despite the strong pressure in cost of material, which often has been in the space of double-digit increase on our main material, like leather, like wood, we've been able to contain and actually the gross margin has been improving. And this has been systematically by optimizing our purchases, but also by reflecting some of those price increases in our retail and selling prices. The other element in term of cost which has not been so easy for us to fully reflect and pass over to clients has been shipping cost. Shipping cost giving the global nature of our supply chain are a relevant part of our cost structure. We've been to be a fair party to our partners Vittorio, I think you should mute. I guess there is some noise coming. I'm sorry. Yeah, no worry. So I was saying we've been able to pass this in terms of additional freight cost, but not always in a timely manner. And as a result of that, we absorbed... between Canada one-off cost and some of this one-off freight cost additional 5 million this quarter. So the net result could have been clearly including that net negative impact and could have been higher. The second element which is a consequence of the disruption of the supply chain is that our backlog is increasing which in a sense could be also positive because we're going to start Next year was already some, you know, meat in the freezer. And it's been increasing by 20 million, arriving to 110 million. I'm talking euro here. So we have a significant backlog, which gave us a good kick for the next year. At the same time, we need to work carefully to make sure the level of service across geography remains consistent. So this is a bit what you can read in our number. So I would say a good continuation of our trajectory to regain growth and regain quality growth. At the same time, this could have been even higher if we managed the supply chain in a way to fully catch this growth momentum. We are working very much not only to do this for the short term, to kind of enhance the output of our supply chain, but also to sustain our midterm goals, which clearly are very significant in terms of top-line growth. What are we doing? Basically, we're working on three main areas. One is secure material availability, so we're working to Pre-book some of the material, especially the one which have a longer cycle. We're also trying to near-shoring, so get supplier closer to our factories for some material which have strategic relevance, but they don't bear a major implication in term of cost. So the first area is secure material availability. The second area is increase factory output. and later I will invite Pasquale to comment on that. As you know, one of our potential advantages is to have a very articulated supply chain. We have production in Italy, we have production in China, we have production in Romania. In each of those plants, we are very carefully working to increase the output. Each plan has its history. In Romania, we have added two lines. We hired 60 people. In Italy, we are piloting a factory pointeaux, which is an innovative way of producing, much integrated with the supplier through information systems. And in China, we continue adjusting the capacity to the output. This is the long-term perspective. In the short term, as I mentioned before, we are facing a series of complexity factors linked to the level of absenteeism, which was higher than we predicted due to COVID. It must also be remembered that in Italy, our factory shut down for two weeks during August, and this also affected the third quarter production capability. The third area where we're working on is increasing the strategic outsourcing. The company, as you must know if you've been following our story, has been always producing in-house everything. This will continue being the case for Natuzzi Italia, which we proudly produce in Italy and for which the Made in Italy is a dominant part of the value proposition. For Natuzzi Edition, To recognize that we want to have a more agile supply chain model, we are basing the production where it makes sense from a delivery standpoint. So we will have Romania and Europe for Europe. We will have our Shanghai and Vietnam for Asia and for some part of our North America demand. and we will build up Mexico for North America. This is something you will not see happening in one quarter, but it's something that progressively we believe will be delivering significant advantage to our ability to fulfill demand. So this is a bit of a very transparent view on our Thank you very much. The trend of written order keeps very, very robust, so we don't see any weakening in terms of written orders demand. I've been, hopefully, and I wish to be more specific in the Q&A, be very transparent of the hard work we are doing to evolve, modernize, and enhance our supply chain and production. During this month, we also did other interventions to solidify the fundamental of our business. One is the organization. We believe that the hour will be a people-led transformation. So in close symphony with the chairman and our HR responsible, we have been evolving our commercial organization. In coherence with what I said at the opening, the Natuzzi is almost entirely a brand company. We made the strategic decision to create two brand divisions. So now we have a chief brand officer for Natuzzi Italia and a chief brand officer for Natuzzi Edition. Each of them is in charge for setting up the strategy and for controlling the P&L of his own brand. clearly interact with the regional head like Jason and the other. So we introduced a matrix where the region have the full autonomy and accountability to grow the brand in the regions and the chief brand officer set up the destiny and the strategy of those brand. Beyond the organization, we continue working on increasing what I can call the access to the sea. where the C is our final customer, the clients. So in that direction, there have been a few, let's say, announcements in this quarter. The first one of which I'm quite proud of is the launch on our new global digital platform. We had before 46 individual platforms representing Natuzzi in the different markets. Starting for last Thursday, we sunset all those platforms and we introduce just one global new digital premises. This will represent a window for both Natuzzi Italia and Natuzzi Edition. They will be fully transactional toward 2022. We started from having e-commerce fully transactional in U.S. for Natuzzi Italia. So now the window in term of displaying the product is operational in all the geography. The e-commerce is fully operational in U.S. and we start recording the first sales during the Black Friday. And digital will be, of course, one of the major priority for the development of the company. In the new organization, digital will be reporting to me and I will be closely following this development. When I said I'm particularly proud, that means I'm not proud for the end result. This will be continuing evolving. It will be the result of an agile implementation approach. I'm proud because when we, four months ago, we set up the You know, the planned date for the new launch, which was last Thursday, it sounded a bit a challenging task. And I'm proud to report that our team exactly matched the data. So it gave me a good sense of delivery on that aspect. The other area where we are continuing expanding our access to the sea is North America retailer. Jason will be providing more color about that. But we are significantly higher, I would say, very double digit high, depending how you cut, sometimes almost triple digit high, versus 2019 and 2020 on our U.S. and North America. And this, again, will be a very important area of priority for investment for me going forward. Starting from this price, we provide a bit more color on our JV in China where we currently have more than 300 stores with 60 new openings also this year. The brand is positioned in a very strong way with Natuzzi Italia being really positioned as a luxury brand and Natuzzi Edition being more an aspirational furniture brand. So the combination of digital North America and China, in my view, are clear confirmation that we are a brand recognized by the consumer. The consumer is appreciating not only our brand, but the experience he can and she can receive of the brand in our retail. And this is again in full transparency to provide you with a visibility on what could be my agenda as CEO, but also the agenda the company is working on. The other point we flesh out in this press release is a bit a reflection on our trajectory. As you know, the company has been going through different phases. The phase we are in Potentially started some 10 years ago when Pasquale has this very visionary view of moving a producer, a manufacturer into a brand retailer. We are now accelerating the trajectory and looking at the last four years, I think it's encouraging to see some of those indicators confirming the viability of that strategy. Let me flesh out a few numbers. The revenue of the first nine months has been growing, as I mentioned, 36% versus 2020, interrupting a cycle of declining lasting four years and more. The branded sales on total sales are 86%. In 2018, we're 76%. So they are 10 percentage point more. Growth profit percentage moved from 28% in 2018 to 36%, so 8% more. In absolute number, we were posting a loss of, let's say, 70 million in 2018, 90 million, sorry, 70 million in 2018, 9.5 million loss in 2019, and 13 loss in 2020. We are now posting a profit of 4 million operating profit. The retailer, it was a new adventure for the company, even in U.S., which has been always one of the strongest market. He was posting negative results till this year where we are posting a positive operating result of 2.3 million. So the job, in my view, just started. There is a lot for us to do, but I want to share some indicators that in my view confirm that the direction is the right one. And of course, myself and my team are highly committed to confirm and accelerate that trajectory. Let me stop here. I might ask maybe Pasquale, since you've been named a few times in my summary, to comment with any comments. Antonio, you have been the best analyst that I have ever met in my life. So you have been able to analyze the company, understand the strength