Natuzzi, S.p.A.

We close the quarter with 37.7 margin, which compare with 36.6 of 2021 and with 28.7 of 2019. So versus 2019, almost 10 additional persons employed marginality. These in a year which has been still characterized by significant increasing cost in some of the materials and a true spike in the energy cost. So as a result of those elements, let's say a continued growth and a better marginality, we close the third quarter with 4.1 million profit, which compared with a loss of 0.4 million and a loss of €8.7 million in 2019. So quite a significant improvement during the third quarter. If we look at the nine months of 2022, the profit has been of €6.7 million, which compared with €4.3 million in 2021, first nine months, It's important those to remember that in 2021 Natuzzi as all, let's say, major company benefit for COVID-related measures that in our case in the first nine months amounted to 4.2 million. So if we want to compare the profit of the first nine months of 2022 and many more. In 2019, the improvement netting the one-off COVID-19 late measure has been very significant. Clearly much more significant versus 2019 where the first nine months ended with a loss of 19.5 million euro. When we look at the profit per American Deposit Receipt, which is basically what every one of you owns, that means that we close with 50 cents euro of profit per share per ADR, per American Deposit Receipt. which is to be compared with a loss of €0.35 in 2021 and €1.05 in 2022. From the very beginning, we discussed in our call that the priority for our businesses to create value for our shareholders and for our employees and for our customers. And this is somehow happening. Cash wise, we close to a position which is very similar to what we had at the end of last year. Last year we closed with 53.5 cash. This quarter we closed with 53, so almost exactly the same. This despite the fact that we are having some more inventory due to the slowing of the business. So in essence, I hope you appreciate our effort to manage the company in a way to extract more value and to have a more tight cash management. Clearly, it's a very early day. We don't want to be I want to also like in a very candid manner that the trend that we already discussed in the last press release which means the slowing down of the business Since April has not reverted the trend. So both in our retail and in the business with our clients, we see a pace of new orders which are below our expectation, which means our budget. We keep comparing notes with the remaining players in the industry and we see this is quite a general trend, given whatever is happening around us, which I believe at this point is even redundant to repeat. We don't take, of course, this as an excuse. We are working very hard. We are also taking some changes in our organization, most notably in our wholesale team in the US and also in our European emerging market team to reinforce our team and to make sure we stay closer to our existing clients. and also to reinsert new clients selectively to strengthen our pipeline of business. This is a bit the executive summary. So I would say a quarter which ended up on a positive note. Unfortunately, we're experimenting quite a strong headwinds, which is not helping our turnaround. We are very committed to continue the growth journey, which is part of our five-year plan. But we need to acknowledge that this is happening in a market context, which is not necessarily favorable. We know the industry is cyclical, so we definitely hope it's not going to be lasting forever. We're working so that despite these headwinds, we keep our business up and our factory busy. Just providing an additional few highlights on our cost structure before opening to Q&A. When it comes to GNA, there's been a better absorption, and also as GNA, given our business leverage. When it comes to raw material, it's noticeable the spike in energy. As I mentioned before, we had an extra cost of 2.8 million for energy. Material is a bit... You know, a multifaceted dynamics. Leather is improving the cost. Fabric and metallic parts are still on the rise because those industries themselves use a lot of energy in the production. And so they pass the additional cost to their clients, which in this circumstance are players like us. The other positive note is transportation, which is normalizing, not yet at the level of 2019, but especially from China to U.S. and Vietnam to U.S. has been steadily reducing and allowing us to be competitive again from those platforms. This is a bit the executive summary I wanted to provide. Let me stop here for observation and question as usual.

Thank you. We're now beginning the question and answer session. If you're dialed into the phone and would like to ask a question, please press star 1 on your telephone keypad. You also have the option to click on the ask a question feature and raise your hand on the web platform. One moment, please, while we poll for questions. Our first question today is coming from David Kane, and your line is now live.

Good morning. Can you guys hear me? Yeah, Dave, we hear you very well. Okay. Well, first, congratulations. I know the quarter didn't turn out exactly as you would like and up to your long-term potential, but to earn 50 cents per ADR is certainly an accomplishment and demonstrates how and many more. So congratulations and it's encouraging to see what the potential is long term. So a couple of questions. One of your comments in the press releases in response to the tough market conditions, we've launched a set of actions to lower the cost of our GNA. Thank you for joining us. is that there's more leverage in our financial model to the upside during periods of normalization. But if you could just quantify that for us and give us some specifics as to the areas that you're targeting.

Okay. Thank you for the positive note and encouragement, Dave. We know that you have been long-term investors and that's come from a A deep understanding of our business. I'd appreciate it. So when it comes to managing our costs, we went back to basics in the sense that in 2019, the company, also with the external support of McKinsey, put together a process to manage in a tight way the restructuring costs, looking at any individual dollar which has been spent across all categories. which include, you know, purchase, post-formation cost, industrial cost, GNA, the quarter cost. So we have replicated that methodology internally. I was part, of course, of the McKinsey team there, so A lot of people also here are already black belt on that methodology. So we have a weekly meeting and we have accounted around 13 responsible, which, as you can imagine, are the typical functional responsible. And we have put down a series of initiatives to tightly manage the different costs and also the working capital. So I can give you a few examples. One is really around the streamlining, accelerating the restructuring in a quarter where we identified the potential to accelerate the right sizing of the quarter. Also as a way to allow to bring in new capabilities. We are looking at all possible way to reduce the impact of an additional energy cost on our factories. So we are relamping on our factory. We are reviewing the processes. When we come to working capital, we are applying a lot of scrutiny at all the different working capital that we have in the company, which means the raw material that we have, which means also the finished product that we have in some of our geography. So we're having really tight management of those items. to ensure that there is no cash trapped in those areas. We are addressing also some more structural opportunities like the simplification of our offering where we want to be very compelling and appealing to the consumer but we also acknowledge that There is a lot of that can be done to simplifying the covering assortment, the way in which we make intermediate stock on that level. So it's a kind of holistic approach managed with a tight methodology where every week we appreciate the progress, we intervene to change and resolve the situation that needs to be accelerated.

So can you quantify what the cost savings are in terms of millions? Is it a low single digit, mid single digit, or high single digit number when it's fully implemented?

So, Jason, please, can you put mute? We are receiving a note for all the messages or whatever you're getting from. So I think if we just look at the third quarter, also to compensate a slowdown in the revenue, we're looking at, I would say, a material potential impact. So in the order of 3-4 million for a quarter, which doesn't mean that we'll increase the debit, but it means that will also allow us to you know, counterbalance the negative effect of the loss of revenue momentum. So I believe this is a company which has sustained, we know that, we've always been mentioning the opportunity around restructuring. This is a company which has an opportunity to manage in a more tight ways business and the opportunity per se of that can be quite substantial, quite substantial on the early days. It can be quite substantial.

Okay. And then in the press release, you referred to the impairment of a trade receivable, which increased SG&A. What was the dollar amount of that?

I will pass over to Pier for that. If you're hoping that he has the answer.

And then a quick question for Jason.

In North American DOS, like for like, how did we do?

We're spending a lot of time looking at both kind of how we're comparing to 21 and to 19. And so when you look at year to date, we're trending down 8 to 21 and plus 50 to 2019 year to date.

Okay, thank you.

Like for like.

Okay, and then final question, Antonio. You've referred in the past to your factory 4.0 sequential rollout. Can you give us an update on that? In the past, you referred to a mid to high single digit improvement in gross margin. Once that's implemented, where are we and when do you expect that to be fully rolled out?

I confirm that it is the range of the potential, ceteris paribus, which means that if the factory are adequately saturated, they operate with the right level of saturation that in our business means 80% plus, the application of that approach of working, which more than technology is a way of having a lean manufacturing way of organizing the flow, can produce the kind of result. The plan is to roll out most of our Italian factory by next year and as we are also considering a potential relocation of the factory in China to make sure the new plant can be fitting this new approach of working. And then the next wave will be Romania and our Brazil operation. So that can be the benefit. I need to be again candid here because before modeling the benefit and the margin, we need to acknowledge that the reduction in volume is also translating in reduction of factory utilization, which being a fixed cost business, of course, has a direct impact on the cost per minutes. So we are even working harder on the factory 4.0 because we see it not only in the long term, something we deeply believe on, as an opportunity to enhance margin, but also as an opportunity in short term to counter fight the potential negative impact on cost per minutes deriving from a lower capacity utilization of our factories.

Okay, well, thank you. I appreciate the commentary. Good luck, and you guys have a nice holiday.

We're definitely going to talk before holiday. For us, holiday. We will do holiday after the plan is completed. In 2077, we do holidays.

Thank you. As a reminder, if you'd like to verbally ask a question over the phone, please press star 1 at this time. or use the raise your hand function on the web platform to ask a further question. One moment please while we poll for further questions. If there are no further questions at this time, I'll turn the floor back over for any further or closing comments.

I feel I spoke enough. I leave the floor open maybe also if Pasquale wants to comment or Piero or Jason, then I will do a summary myself. But I also want to leave the floor open for the chairman and the rest of the team if they want to comment anything. And then I do my final remark.

You gave... Plenty clear explanation, Antonio, for what we are doing and what is happening. Probably what we missed to explain is that in order also to reduce DNA, we are reviewing the organization, consolidating some organizations, like, for example, South-West Europe market together with the emerging market under a single regional manager and also aggregating and synergizing the customer care and other functions. So, I mean, you know, reviewing the organization aggregation certainly will allow us to Improve the service and reduce the cost. This is something that we are following. For the rest, you gave all the major explanations, Antonio.

Thank you, Pasquale. That has been a very appropriate comment on your side. So, in closing, I want to restate how committed we are We're really working as one team with just one strategy. The chairman, myself, EIUC Jason, our leader in North America, but also the remaining of our team. We're very cohesive, we're very committed on the long-term plan. We know that there are challenges ahead of us, but we are very equipped for those challenges. A good cash position. We ensure the company is managed adequately on that front. And as I mentioned before, we're going to be stepping up in terms of aggressiveness on cost reduction as due to this phase and as everyone you have seen is doing, also starting from the large digital company in the US. So this is the third quarter. Result, in term of strategy long term, nothing has changed. We're still committed to make Natuzzi the most successful high-end European brand globally. I believe that with the current strengths of the brand, the current heritage of the brand, this is something that is due and is also achievable. Having said that, thank you so much for your attention. I wish you a great continuation of the day and I hope to reconnect soon in our next press release.

Thank you. Thank you. That does conclude today's webcast. We just connect your line at this time and have a wonderful day. We thank you for your participation today.