Natuzzi, S.p.A.

Ladies and gentlemen, thank you for standing by. Welcome to the Matute 2022 Fourth Quarter and Full Year Financial Results Conference Call. As a reminder, if you'd like to join via telephone, please dial plus 1-412-717-9633, then passcode 39252103, and then the pound sign. Once again, to join by phone, that's 1-412-717-9633. 412-717-9633, then the passcode 39252103, then pound. In addition to the link provided to join the video. At this time, all participants are in listen-only mode. Following the introduction, we'll conduct a question and answer session. Instructions will be given at that time. Joining us for today's call are Mr. Antonio Achille, Natuzzi's Chief Executive Officer, Mr. Carlos Silvestri, the Chief Financial Officer of the Natuzzi Group, Mr. Pasquale Natuzzi, Founder and Executive Chairman, and Mr. Jason Kemp, President of Natuzzi Americas and Piero Lorenzo, 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.

Thank you, Kevin. Good day to everyone. Thank you for joining this conference call for the fourth quarter and full year 2022 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 security 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 conditions. These refer to our most recent annual report on 420F filed with the United States Security and Exchange Commission 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, Piero and Kevin, for an introduction. Good morning and good afternoon to all the attendants of this 2022 fourth quarter and fiscal year press release. I will actually start more from an overview of how the 2022 closed for us. Then I will let Carlo Silvestri, who has been announced already, joining our group from Ferragamo, our new CFO, to comment more specifically on figures regarding full quarter and fiscal year. So we closed 2022 in terms of revenue. at 468 million euro, which is 10% more than last year and some 20% more 2019. If we go back to 2020, that is an increase of 40%. So we kind of added 140 million business from the 2020, which was really affected by COVID. So I would say high single-digit top-line increase. This happened also in parallel, continuing working on gross margin. As you might remember, 2022 was dominated by a strong inflection on general cost and raw material. We were working so to protect and expand our marginality, which is currently 5% of the point above what was in 2019. So we were able to protect and expand marginality. In terms of BABIT, in terms of operating profit, that resulted in 8.4 million euro, which could have been an higher figure, could have been close to 13 million, if we didn't have to do a call for very specific one-off element, which would be commented by Carver in the section. So, in general, the trajectory is, let's say, going north on the two fundamental dimensions that we have in our long-term plan, which is top-line growth and profitability expansion. At the same time, which is another, let's say, proxy of value creation, we expanded our cash flow from operation. which was close to 19 million in 2022, and that figure compared to 0.5 million in 2021 and 4.7 million in 2019. So, again, through the discipline we're trying to have also in terms of working capital, even though our business has been growing, we've been able to enhance the cash flow generation from operations. Cash position was pretty much the same as the previous year, so we are dealing at 54.5 million euros in terms of cash, which is significantly higher than what we need from operation. And I also reminded that we don't have long-term debts, so in a situation of uncertainty, like the one we are all facing in the industry, I believe that also should convey a positive message to the investors. Looking a bit more at the quality of what we've done, I'm pleased to report that we are continuing executing the journey that has been initiated by Pasquale Matuzzi of transforming the company into a brand retailer. We set some long-term target to measure that trajectory, and I was surprised to anticipate reaching some of those targets versus our plan. For instance, in 2022, 92% of our total sales came from branded product compared to 89% versus previous year. That is pretty much a significant transformation because, as you all remind us, Natuzzi Original started as more an operator and a manufacturer, and the percentage of branded product was not dominant. We set ourselves a target to, you know, reach almost, you know, the vast majority of sales generated by branded, and we are ahead of that target. And the interesting, if we measure our, let's say, strengths of the brand in the eyes of the consumer, which means measuring it at sell-out, the brand is 830 million euro brand. So if we consider what we do in terms of selling with a retail multiplier, the brand is on pace to become a 1 billion retail brand. These are things is a useful figure. to compare it with the player in the industry, which are pure retailers, and to compare it with those numbers, Apple with Apple. The other dimension we're working on is to continue working on retail. Retail, for us, is an objective to accelerate growth, is an objective to expand originality, and is also an objective to have a better control of the brand. Listen, maybe you want to mute because we're hearing your message coming in. If you can continue, thank you. So, at the end of 2022, the percentage of total sales done through retail, either directly or through franchising, was 61% versus 53% of the previous year. So, from this dimension, we're well on track on our objective to complete our retail transformation. And we overcome, in 2022, the number of 700 store, freestanding store, carrying inter-notice title and notice edition. I believe with a global coverage, this is one of the highest figure in terms of number of stores distributing a single brand in the industry. And this leads to another consideration that a lot of the work we are doing currently is to expand organically the performance of the stores. We continue seeking opportunities to expand our network, and I will discuss in a minute our plan for accelerating the opening of additional stores directly operating in the U.S. But if we recognize that one of the, in a sense, less capital-intensive opportunities that we have to grow the top line is to make those 700 stores performing more in terms of sales per square meter and marginality. So a lot of effort which is currently being done in the organization, which led also us to create a new division, is really to try to create a common methodology that can become an asset, a competitive asset, for our direct-to-operated stores and for the one operated by our franchisee. I'm happy to report that we continue also working in strength in our team. Carlo has been long waited for, has been announced in a separate press release. We just brought on board a few weeks ago another senior executive, Scott Kruger, who is now in charge on the wholesale business in North America. North America is a special reality because wholesale distribution is still a relevant part of the market. Natuzzi is one of the most known brands in the channel, actually the first in terms of brand awareness among European brands. So we envisage a parallel opportunity as we are building the retail to continue serving the market. We realized that we wanted to change gear. So there's been a change in the leadership. We equally realized that we want to increase the coverage in terms of rep across the states. And we are now onboarding with very positive results agency. So not the exclusive agency, but the agency that would bring along the lines also . I was in the U.S. very recently, two weeks ago, and I was particularly happy to see how well is received this opportunity by top agency, definitely see an opportunity of creating business in their accounts with Natuzzi, which is still a very, very well-respected and inspirational brand for the large retail in the U.S. So that is another area where we are working. I believe that you are, as we are, interested in the future. The future remains to be, I would say, difficult to read. As you know, we are clearly for the durable industry, for the furniture, leading a phase of transition. After two years, which has been dominated by booming demand and difficulties in fulfilling the demand, the wind changes dramatically. turning into mid of April, mid of 2022, we don't see yet a clear, you know, change in trajectory in the sense that the demand remain weaker than it used to be in the previous year, both at wholesale and in terms of traffic in our store. Looking at the first weeks of the year, we do see encouraging sign when it comes to fuel geography, like China, especially for our Natus Edition business, which has been back on growth, and also U.S., especially Natus Edition. So we are... cautiously optimistic that the, let's say, the bottom has been reached and we can hopefully see a recoup of demand. So that is our hope. But at the same time, we are planning and acting as this, let's say, negative phase of the economy should last. What does it mean that? We are very cautious about spending, as is made, and our cash position. Regarding the cash position, we continue seeking actively the opportunity to sell non-strategic assets chiefly in the US and in Italy. We are with active process on those assets, and I hope that in the coming conversation, we can report some positive outcome in that sense. Let me stop here for, let's say, a more general overview of what has been the year so far, and also we'll say our mindset. In essence, our mindset is the one which has been put in writing our long-term plan, which is to exploit the potential of this brand on this group, continuing the growth on both the brand, and continue achieving that through retail. So our long-term plan has not been changed, and we have the highest confidence we can achieve it. At the same time, we need to recognize that for the industry, the shift in gear has been pretty brutal, and so we are managing our group to make sure we can navigate these negative circumstances without affecting the industry. the overall goal contained in our internal strategic plan. Okay, let me stop here. If you agree, I will pass it over to Carlo, who will comment some of the figure of 2022. I believe that would be useful, especially in consideration We had several material one-off events affecting our P&L in 2022, which I believe is useful to characterize to kind of get to a more normalized performance of the year. So I suggest that Carlo does this comment on our structure of the P&L, and then we open up for questions, both on my section, which is more to say a strategic framework, as well to the technical reading of the figure that Carlo is now doing.

Thank you, Antonio. Good day, ladies and gentlemen. Let me first briefly introduce myself. This is my first conference call with the Natuzzi Group. Before doing that, allow me to thank Mr. Natuzzi Antonio for the opportunity of this incredibly exciting experience and my team for the great support that I've received so far. Now, going back to myself, I spent my last 16 years in Asia, and recently I served in the last nine years as a CFO for Salvatore Ferragamo, that is a luxury brand listed in Italy in the Milan Stock Exchange and is also distributed in China to a joint venture as Natuzzi is doing. I was serving at the same time as CFO, but I was in charge also about the retail excellence and managing directly the stores of Hong Kong and Macau. Thank you very much. Going back to the figures after the quoted comments of Antonio, I will start with an overview of the 2022 fiscal year with some hints of the fourth quarter. In 2022, total revenues were at 468.5 million, up by 9.6 versus 2021, and by 21.1% versus the pre-pandemic 2019. During the year, we were also able to recover from the major supply chain disruption of the end of 2001, and gradually we benefit in the reduction of our order backlog. Talking specifically about the gross margin, we achieved a 35.1% versus a 36% in 2021, As a reminder, in 2022, our industrial operations were deeply affected by both spike in energy costs and inflationary environment. Together, the company decided to protect the margin, and during the year, through different phases, we did apply price increase all over the world. This has been fully effective only in the last part of the year, where we did achieve in the last quarter a margin of 37% compared the yearly 35.1%. Talking about the cost of sales is important, as Antonia was mentioning, that we record a 2.2 million accrual not related to our core operation, but related to the cost of the labor to restructure our Italian operations. If we exclude these from the fourth quarter 2022, when it has been recorded, the gross margin of the last quarter would have been 38.8%. Operating expenses that, as Antonio was mentioning, is always a focus of the company to find efficiencies, and includes the selling and other ministry expenses, were impacting 33.3% on our revenues compared to 34.8% in 2021 and 35.5%. Regarding detailed expenses, it is important to underline that we see a decrease in the impact of the transportation costs over the total sales that now impact 11.9% versus a 12.8% in 2021. Talking about effects or was not related to our core business, we reported two main factors. The first one is a cost of labor related to our stock option plan for one million euro, and the other one is a one million contingency for a legal dispute over a land in Brazil. Therefore, the operating profit in 2022 landed at 8.4 million, compared to 4.9 million in 2021, and versus an operating loss of 22.5 million in 2019. this phenomenon not related to our core business, we will now compare a 12.9 million operating profits equivalent to 2.7% of revenues versus a 5.8 in 2021. The spike of interest provoked an increase in our that landed 8.5 million Euro versus the 6.8 million in 2021. It's important to also underline that in this 8.5 million, there are 2.8 million related to the rental contract and the application on the IFRS 16. The last quarter was impacted by the FX effect. We did not change our strategy, practices, and edge technique. Just due to the reversal of the Euro-US depreciation, we recorded in the last quarter 2.4 million loss. But over the year, we did achieve a 2.4 million positive results. Talking about, precisely about our joint venture in China, the difficult business remained through over the year. And at the end, the significant slowdown in the activities brought our profit to 400,000 euro. I just remind that we own a 49% stake in our joint venture. And in 2021, we recorded a profit of 3.6 million. But talking about the joint venture, it's extremely important that in 2022, we receive 3.7 million euros in dividend, and we receive in 2023 a 3.2 million in capital reduction. The profit of the joint venture, nevertheless, is important to underline that even in this challenging year has been profitable. Making a last reference to the comments of Antonio, cash for us is extremely important, so we were able to maintain our cash position at 54 million euros, and it's extremely important to underline that our operation were able to achieve a positive cash flow of 18.7 million, that we did invest in 9 million capital expenditure and in repayment of a long-term loan. This is overall the picture of our performances in 2022, and I would like now to give room to Q&A session.

Thank you. And now we'll be conducting a question and answer session. If you'd like to be placed into question queue, please do so via the platform. Once again, ladies and gentlemen, if you'd like to be placed into question queue, please enter via the platform. Or if you're on the phone, you can press star 1 to be placed. There we are. David, your line is now live. Please go ahead, David Cannon.

Hi, good morning. Morning, Dave. Morning. Good morning. Personally, I cannot hear Dave. No, not even here.

Maybe, as in the past, Dave, you might want to use the telephone line.

The telephone line is not live. Please stand by, everyone. David, your line is now live. Here we are.

Kevin, I don't know if there is any way to suggest they have to use the phone line. I remember that in one of the previous press calls, we encountered the same technical issue, and that was bypassed by using a fixed telephone line. I don't know if that is a suggestion you can drop.

This may be him dialing in right now. Just please stand by, and we can see if there's him dialing in right now. Okay. David, if you're on the line, I'm going to unmute your line. The thing is, he is disconnected. Here he goes. He's back on.

David, can you hear me? I can hear you.

Yeah, there you are, my friend. Please go ahead. Please ask your question. I do apologize for the technical issues. Go ahead, sir.

Okay. Hello. Thank you, the TTC team. So, sorry about the first attempt to ask a question. So I guess I'd like to call out what I would call the encouraging signs. You know, if we add back the non-recurring item, the labor costs that affected gross margin, we would have been nearly 39%. And then there was some non-recurring items, extraordinary items in the OPEX lines. whereby we would have had a significant operating profit. So I'd like to just call that out. What's exciting is as we grow and scale the business, we see the significant leverage in the financial model. Now, that being said, it would have been nice to show after, you know, all of these items a bigger profit, but it is encouraging. In the past, you guys have called out backlog in written orders. We know that traffic is down, you know, at the retail level. Could you give us some sense where backlog is currently? I believe last quarter, I'm going by memory, it was around $80 million. And then also, what type of declines are we seeing in written orders given the weaker housing market economic backdrop?

So thank you for the question. I might take this one. So the reason why we were putting a lot of emphasis in the past to the backlog because it was a main, for two reasons. One, because it was a main obstacle for us to delivering the revenue we could have delivered. And second, because it was becoming a very visible obstacle to maintain the service to our clients who aspire. The backlog now went back to what they can define as physiological level, to standard level, which is pretty much 60 million, which is what typically we need to do a proper planning of the factories. In terms of written order, the year, as I mentioned in my press release, started for a level that is let's say, below our expectation. What is somewhat positive is that if we read these first 14 weeks and we divide it by two, the last seven weeks show a relatively stronger trend versus the previous one. But clearly, we are facing a level that is not in line with what we want to have and we aspire to have, also in light of our production capacity. As you all remind, Natuzzi Italia gets produced globally in Italy, where we have a significant population of workers and a significant mistake production capacity with five factories. And at the moment, especially for Natuzzi Italia, the level of order we're receiving does not allow us to fully occupy those factories. So that is the main element we are working to improve both as a combination of opportunity to sustain our growth ambition, but also as a need to keep busy a reasonable level our factories. So that's a bit of a long answer. So inventory is back to standard level. I don't have the figure in front of me, but it's in the ballpark of 55, 60 million. And when talking about the pace of orders is, as I mentioned before, below our expectation. And it's a different situation among the region. We have China. which was extremely, extremely, extremely different across region and channel. So China, which is mostly operating to franchising, we see a recovery of Natuzzi Edition business, while Natuzzi Italia was quite stocked in the channel and the recovery is lower. Natuzzi Edition North America is above budget, but below last year. And Europe is a more mixed picture. And I think at the moment, Europe is the continent which is a bit more difficult to predict because the economic environment is the one which is still struggling to find a way out of the last past gloomy months. So I think we will see first recovery coming from U.S. and Europe. China as a combination of both the market condition and also the action we are taking. And I think the, let's say, turning point for West Europe is less easy to predict in time of time.

Okay. And guys, you know, just to recap the progress, which is Gross margins moving up significantly. This is the result of a shift in mix, primarily the branded product, it seems, away from wholesale. And, you know, in the past, you've talked about opening up 10 stores in the U.S., 10 DOS stores, which would continue to grow DOS and flow through the P&L market. higher margin branded product, and then also you've talked about Factory 4.0. Just a suggestion, you know, as an investor, you know, what I read in your press release is postponement of some planned investments for Factory 4.0, which I understood as being accreted to gross margin, and then also pairing back the number of openings in North America from 10 to 6, I would encourage you to actually put your foot on the gas pedal to, I know you're trying to conserve cash, but perhaps to get rid of non-core assets, real estate, to accelerate this transformation to higher margin product and to greater efficiency in the factory. During this time, you know, of let's call it slowness economically, we can place on offense and yield even better results than what we did on an operating basis in the long term versus Q4. So that's my feedback. I mean, I would love to hear your commentary on that. If those investments are going to yield better operating profit, why would we be pulling back?

No, strategically, Dave, and I speak for the group because we have constant alignment with the board, with the chairman. Strategically, we cannot be more in line and in agreement with you. We definitely don't want to pull out from our retail strategy. In 2023, we actually confirmed six openings, and I would say some of those are pretty signature openings. Like the Manasseh, it's going to be at 2,000 square feet in the Golden Mile near the Anton. So really kind of flagship location. It would be Houston. It would be Denver. It would be Atlanta. It would be San Diego. And then there would be the first Dolphins in Frisco for natalization. So we are keeping the pace, considering the constraints. We are trying to remove, as you mentioned, the constraints. The way we're trying to move some of this financial constraint is also the rate of disposal of strategic asset. You know, the largest one is like point. We're actively working on that dossier. As I mentioned, it's something that cannot be more precise, but I hope that sooner rather than later, I can give you some positive outcome. As you can imagine, given the high interest rate, it's not the easiest moment to sell a real estate asset because the loan-to-value for a potential buyer is not easier. But really because of the termination you mentioned before, that those money could be actively reinvested to increase efficiency in our factory and to open more U.S., we are continuing pushing for that option. So we are not stepping back in terms of strategy. We just need to finance the strategy, and we're looking also at the standard way to achieve that goal.

Okay, so you're reiterating those plans to continue with Factory 4.0 and to continue to open branded DOS stores in North America then?

Correct. I don't know, Jason, if you want to comment. And, again, I think, as I mentioned before, it's a dual strategy when it comes to retail because, yes, we want to open new stores. But the other things we want to continue is to increase like for like, because we do see that among our 52 stores, which are directly operated, there is still a significant variation of performances. Some of those variations are justified by structural elements. The company has been opening stores since a few years now, and the location may be that were initially spotted for some of the stores. won't be locations that now we would consider ideal, so there is some structural factor. But other than that, we want to improve the productivity of the store. So for us, when we talk about retail, yes, there is new opening, but we see a very important opportunity also of increasing the productivity of the current store. That will also facilitate the opening because given the current economics is already very attractive. By the way, if any of you investor wants to open a franchisee, you're welcome. One of our store normally has a payback in 16, 18 months and then starts generating double digit data. But working on organic improvement will also shorten the payback of those investments. So we also working that as a way to facilitate the enrollment of additional franchisee partners. Jason or Pasquale, if you want to provide any color respectively on US or retail, of course, I don't intend to monopolize the dialogue. You're very welcome to join in. I must say Pasquale is an active force also in driving this acceleration of retail. Jason, do you want to provide any color on US maybe?

Sure. I'd be happy to, Dave. Like first, you know, forward-looking, you know, as the release suggested, we've got six DOS that we plan to open this year. In this case, all Natuzzi Italia, adding volume to our flagship factory in Italy, plus three FOS in around the U.S., mostly Natuzzi editions. So a total of nine openings projected in the U.S. for the year. You know, I would say that as we look at our like-for-like performance, we finished 22 basically flat to 2021 from a like-for-like retail performance. Obviously, a stronger start to the year, slower finish. But I think what's most important is that when we look at, let's say, our current pace of business, the last three months, six months, those like-for-like stores are still up between 40% and 50% to 2019. So while a lot of companies' retail business has kind of reset down much closer to 2019, our like-for-like performance has kind of been reset to a much higher average. And it really encourages us for the kind of the future strength of our growth as we open new units.

Okay. I appreciate you calling out the focus on organic growth or same-store sales. That's a critical metric. A couple more questions, then I'll go back to Q in case there's anyone else.

Sorry to interrupt you. Sorry. But just to give a bit of color why we are so passionate about this. We see that in store, so just to give you some color, we saw that in stores where we change, for instance, just the leader of the team and we do a more accurate management of some of the leaders we have, the results are pretty astonishing. Just let me pull out the two stores. One is Westin, which is one location we had for Nato Citadella in London in a high-end retail park. The store is performing 68% above last year, but as you remember, it was a strong part of the year, and is significantly above our internal budget. This is because we've changed the theme. We're creating better dynamics. Same, and Jason can comment, is happening to our medicine store, which historically, despite the iconic location, was not as sales productive as all we wish. Again, new theme. attention to details. Now, Madison is, depending on the monster, either the first or among the first four top stores in the US. So that's the reason why we say, let's, you know, of course, spend our footprint. We already have 700 stores, we're going to spend it. But let's recognize that if those 700 stores today were performing homogeneously on a certain level, that would be solving a lot of our growth Sorry, Dave, I didn't frustrate you by interrupting you.

No, no, I appreciate that color. I mean, that's actually been my belief and assumption that there's a tremendous opportunity to increase average unit volume when I compare you to your peers. So I appreciate that call out. So just two more quick questions. How much cash is in the China JV? That's the first sign.

Just a clarification, and then let's call in Carlo. The JV, of course, is part of a listed company, so we can report the last certified figure, which is gone in the 20th. So we can just show that figure. So please, Carlo and Piero, show the figure.

So the JV reported a 33 million euro in terms of cash, and that has been the results of the sales, the distribution of dividends and the capital reduction together versus the last part of the year, an increase in the purchase of the stock, the JV, and a decrease of the orders. So that's the results, but we still have 33.

Okay, when you say 33, is that the total an hour portion is roughly half of that, or are you saying after 49%, it's 33 million?

It's the total that these are referring on not audited numbers by, let's say, that are not published by the JV.

Okay, and then if you can... So that's just a clarification, but that's important, right? So if we look at the, and again, we should be just reporting official number because it is also part of a, is also owned by KUKA, which is also a public company. So what happened in looking at the Delta of cash versus plus last reported year, it definitely two events. One is a cash distribution, a capital deduction. of some 9 million in total, if you talk Euro. Then, as I referred before, the JV itself invested some 15 million in stock. Why that? Because, as I mentioned before, we've moved from a phase where the issue was having the product to a situation where you know, is more about selling. So in the first part of the year, 2022, the GV took the decision of investing in some inventories in a significant manner. So when you look at the total active balance sheet of the GV, you find that between fixed asset and cash, the total is a change, net of distribution. What changes distribution? Because it's been reduced. the cash in favor of inventory. So there's been no dilapidation of cash. There's been just a different use of that cash. Correct. Absolutely correct.

I understand. And then if you could take a stab at gross margin post-factory 4.0, I know we've deferred or postponed some of those investments, but I'm thinking longer term, one, two, three years out, And it seems to me like we can get to a low 40%, maybe 42% type of gross margin. What would have been the effect if we had fully deployed Factory 4.0 at the current revenue run rate? Would we get into the low 40s or not quite yet?

So I'm going to answer you in a bit more elaborated way, but it's not just because I don't want to go too straight to the point, but because it's a complex reality. So we have four main area of production, which are directly operated. So we have Italy, we have Romania, we have Shanghai, just China, with Shanghai and another city, Xinjiao, and then we have Salvador de Bahia. Each of those production facilities has very different cost of production as a matter of cost of labor, efficiency authorization of the factory, and cost of materials, because the material depends very much on where you produce. In addition, we are, as we planned, working in outsourcing for the time being in Vietnam, which has a strong advantage in terms of duties So the first way to reduce the cost of production to spend margin is an optimal utilization of those platform. So for instance, just to quote you a figure, moving production unit from China to Vietnam allows On average, between 15 and 18 percentage points more is a combination of labor costs, but especially duties. So you can easily understand that that provides us an incentive to do so, especially for those large clients that can be served with stockholders from Vietnam. to optimize the cost of production and the span cost margin is an optimal location of the sourcing and production choices. When it comes to Italia, as I told you, is an Italian producer in Italy. There, it plays the game of the factory 4.0, especially on that part of production. So, I don't have a precise figure. to quote on what should be the short-term expectation. But clearly, 4.0, you know, we assess it in the pilot that we've done, and it's beneficial in terms of margin improvement. The topics that is of paramount importance at this phase, even more than, you know, rolling out this factory 4.0 technology, is ensuring an adequate utilization of the factories because factories have functioning costs which are fixed. label to withstand is fixed because you know we cannot allow people so we need to make sure that we have a good level of utilization of those factories which is of an higher relevance in this phase than the benefit that can provide the factory 4.0 technology there's a reason why we're also saying that in this phase we are um having a more gradual rollout of the factory 4.0 technology in Italy, because the priority at this moment is really to fill the capacity, because that will bring the highest benefit in terms of production, of course, of production.

Okay. But in the past, you've said that you expect a mid to high single-digit improvement in those factories that have been automated with factory 4.0. Is that still a fair statement, you know, 5% to 7%?

Okay. It is. I talked about the high single digit. It still is the case, but that needs to happen with factory, which is a good level of authorization. I understand. So that is a good level of authorization. So we need now to make sure we have a good level of saturation of those factories, then the factory 4.0 technology can provide an overdrive, but provided we have a good level of authorization. Good level of utilization for us means 85% plus because it's a fixed-cost business. When you go below that level, the cost of production increase quite significantly because the cost of functioning, so electricity and whatever, plus the cost of labor gets absorbed by a lower volume of production. So if you were to, like it was last year, in a situation of full saturation of the factory, The factory 4.0 would have providing the kind of incremental benefit you mentioned, and we would have accelerated investment. In this phase where we have this saturated factory, the priority for us is more commercial to make sure that Natus Italia can regain the growth momentum needed to fulfill the factories.

Yeah. Okay. I really don't have any more questions. I'm just going to make a comment, and I think we're in agreement here. But, you know, you called out that there's opportunity to grow same-store sales in your direct-operated stores. I would exhort you guys and encourage you to accelerate that, to perhaps go to be even more aggressive, you know, during this soft patch in the economy because, again, Ultimately, as you said, you have more control. You don't have a lot of control with a third-party retailer selling the 2-2 product, whereas you can better train your people and align them and still potentially affect same-store sales growth. And then, of course, we know the impact. As you said, having the factory at, you know, fuller capacity improves gross margins and Okay. And then of course we know selling branded product, you know, is, is in the, you know, probably mid 70% gross profit, uh, range. So I would actually encourage you guys again to play offense and to accelerate, uh, the deployment of stores in North America. And that's pretty much all I have guys. Uh, I'm encouraged, you know, by the, um, operating profit, excluding the one time items and, uh, I'm sure by the end of the year, we'll be looking at a better economic backdrop. So thank you.

Thank you, Dave. Also, thank you for your continuous dialogue. It is highly supportive for us to set the priority. You, of course, have been invested in the company for enough time to understand our trajectory and our challenges. So your contributions are particularly valuable to us.

Thank you. If there are any further questions, you can either press star one on your telephone keypad or use the platform to enter the question queue. One moment, please, while we poll for questions. Once again, that's star one to be dialed in by phone to ask a question, or you can enter the question queue on the platform. If there are no further questions at this time, I'm going to turn the floor back over to management for any further closing comments.

Thank you for all your attention.

As we mentioned before, we keep focusing on our priority. I must say our team is very cohesive. We do experiment headwinds, reading what's happening in the market. We are not alone. We are paying particular focus to our fundamentals and cash position to ensure we can go through this turbulent time without jeopardizing our long-term objective. And I look forward to reconnect with you either in individual conversation if you want to have more color on what has been discussed today or in our next press release for the first quarter of 2023. On my side is a thank you. I don't know if Pasquale wants to, you know, provide him a final word.

Antonio, you did a good job, and even Carlo, and I thank you very, very, very much. Obviously, the short, you know, speech was very well done, and thank you very much today, our shareholder, and we are all committed, you know, to overcome any kind of, I mean, difficulty as far as, you know, we can. Thank you again. Thank you very much. Thank you very much, everybody.

And ladies and gentlemen, ladies and gentlemen.

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

Thank you.

Thank you.