Natuzzi, S.p.A.

You are now rejoining the main conference. Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi 2023 second quarter and first half financial results conference call. As a reminder, anyone who would like to join the conference via telephone may do so by dialing 1-412-717-9633, then pass code 392- 52103 pound, in addition to the link already provided to join via video. As a reminder, if you'd like to join via telephone, it's plus 1-412-717-9633, then passcode 392-52103 pound, in addition to the link already provided. At this time, all participants are in a listen-only mode. Following the introduction, we'll conduct a question and answer session. Instructions will be provided at that time to queue up for questions. Joining us on today's call are Mr. Antonio Achille, Natuti's Chief Executive Officer, Mr. Carlos Silvestri, Chief Financial Officer of the Natuti Group, Mr. Pasquale Natuti, Founder and Executive Chairman, then Mr. Jason Camp, Senior Vice President of Retail for the North American Market, and Piero Di Renzo, Investor Relations. As a reminder, today's call is being recorded. I'd now like to turn the conference call over to Piero. Please go ahead.

Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi conference call for the 2023 second quarter and first half 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 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 conditions. Please refer to our most recent annual report on Form 20F filed with the United States Securities 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 thank you everyone to join our second quarter press release on 2023 results. Let me share, let me start by providing some facts about the market. I believe the fact that most analysts in our sector still refer to 2019 to compare 2023 data speak by itself. We've been through an unprecedented cycle, the broader sector to potentially one of the most positive momentum in its dynamics to a very difficult situation. If we look at what's happening around the globe in the real estate market, we do see sign of perduring uncertainty. I believe everyone has read with interest the news about the CEO of Evergrande being de facto put under physical restriction, we do see that the continuing tension on the debt side because of the high interest limits the purchase of new houses, which is a primary driver for the industry. I want to share these elements to put in perspective our 2023 second quarter performances. As you have seen by now, unfortunately, our top line has been suffering versus 2022, quite seriously in terms of decrease. And also in terms of sales, total sales, we are below 2019. I think that it's still important to notice that if we look at the branded invoice sales, which is in a sense the strategic direction the company is heading to, the sales are above 2019, so above 5% in 2019. Currently, our business is composed by more than 90% by branded sales, which means sales which are done under the name Natuzzi Italia or Natuzzi Edition, which are our dominant brands. This is important to us because we stated clearly in our long-term strategy that we are here to fully leverage the strengths of the brand of the company and act in more high price point segment in the market. Another element which is important to share is that despite the very low sales, we have been working to compensate at the gross margin level the tension on production cost, which has been necessarily higher because of lower utilization of our factory. As you know, Natuzzi is a monotailer, which means which is vertically integrated, which means we have fixed cost not only in the retail, but also in the factories. So despite the non-saturation of our factory, we achieved 36.4 gross margin compared to 31.4 in 2022. And again, looking at the normalized year, 27.8 in 2019. So versus 2019, the company increased by 9% the gross margin, despite the impact on production cost of reduced sales volumes. How this has been achieved? This has been achieved by a better discipline in terms of pricing and a better cost management. In 2023, we didn't do any price increase. The last price increase was put in place in June 2022 in US, to the US listing. So it's almost one year we didn't do any price increase, even more than one year. But what we had done, especially in 2022, has been carefully looking at all our price list to make sure there was no situation in which a specific market or specific partner benefited from price condition, not allowing us an adequate marginality. In terms of cost, we of course did a lot of effort to contain the cost of our raw material and utilization of our raw material. I remind you that gross margin does not include the cost of transportation which has been deflationary this year, but in this gross margin, we don't take an advantage for that. So these allow us to achieve in second quarter 2023, an operating breakeven. I think it's important to notice that this compare with, for instance, 2019, a loss of nearly 8 million euro, with a base of sales which was 10 million above than 2023. What it means? It means that by working diligently on our cost structure, we kind of lower the breakeven of 20 million and more of sales per year, which, as you will see, is a kind of underlying topic of this press release. to make explicit this journey, where not having the sales we aspire to because most market condition, we try to accelerate the optimization of our, let's call it, back of the house operational machine, so to extract more value, more cash, when, as I'm sure, growth will come back. Let's look at cash. Cash at the end of the period, so June 2023, was of 44.5 million, which compared to 54.5 at the end of 2022. Here, despite the difficult year, we didn't stop investing in a critical area. We invest 3.6 million, of which 5.3 went to optimize the Italian factory and 2 million to open Darrell store. Operating activity were paused despite the lower level of sales by 1.6 million. So as you can understand by now, we don't anticipate a quick inversion of the market cycle, at least for the end of the year. And in this market contest, we believe, and we are acting accordingly, the cost and capital efficiency are of paramount importance. For that reason, we launched a set of initiatives to reduce cost and improve working capital discipline. With Scarlo, we will comment later more in detail. But these include, for instance, really working on our SGA structure, including the account. So more, I would say, a turnaround approach than a transformation. I believe it's important to remind that we have done already since 2021, I would say, a silent restructuring in the sense that you didn't heard about it, despite we work in a highly unionized country like Italy, But we reduce already by 577 units our overall workforce, including a quarter and factory. And we're going to be continuing in this direction. So to streamline and making more agile our quarter and also to optimize and continue optimizing our factory. Additional activity in the, let's say, chapter of cost optimization are the ones which are tackling the simplification and streamlining of our complexity, starting really from the collection, where we have this philosophy of having fewer and bolder launches in the market rather than operating with several launches, which was the modus operandi of the company when distribution was primarily wholesale. In terms of growth, our priority remains organic growth. One distinctive asset of the company is the one of having 700 stores. We believe that that is really where we should start from, because if we make those stores more productive, we're going to get more sales momentum, but also better utilization of the investment we've done directly and the investment our partners have done directly. Of these stores, Of those 700 stores, roughly one half are in China. And I will expand later on on China. So what we are doing to improve retail. We are improving our talent pool. We have built a central retail division, which really helping to capture the best practice, starting from singular individual market like US. codifying them and disseminating them. We also invested in having an improved IT system that helped us to read very carefully the performance at retail level, which is now the standard we use to engage in discussion with the store management, so the store manager, and all the level in the organization up to the country manager. We want to strive to excel in retail management, so to be a credible partner also to our franchisee. As you know, out of 700 stores, roughly 600 are operated by franchisee. So clearly, that is where we expect the benefit to come from as well. So every effort we do in our directly operating store has the ultimate objective to be able to be a credible partner for our dealers to improve their own performances. To support organic growth, we also strengthen our marketing team. We hired and retain a person which was already known to the group, Daniele Tranchini. He brings really a wealth of incredible experience. He held senior position in agency, including Walter Thompson, and publishers, and they're really already making a huge difference in shaping our unique story around the different market. Talking about market, a couple of highlight on two important geography. The first one, China. As you all know, especially the investor and analyst that follow us, In China, we are in JV with KUKA. And we don't consolidate line by line because we own 49%. But our aspiration is not to consider China as a financial investment, but really as part of our operation and to make sure that also China benefits from our learning and especially manage the brands in the way they should be managed. After that, for almost three years, And at least since the beginning of my so mandate was impossible to travel to China. We have been already two times in China since May last year for a reasonable period of time. So every time two weeks with the most important people in the organization, which are our chief brand officer and including our chairman Pasquale, I also in full agreement with our board, take full responsibility to the support of the China operation to work in partnership with our JV. China is clearly a market where the wind, not only for furnishing, but for everything, has changed significantly. I mentioned in my initial speech the potential implication of Evergrande, which was the market leader in real estate, which is down 90% of its market cap and is facing really a difficult situation. So we're really strengthening the quality of the relationship with our JV team in the spirit of making sure they really can benefit from our brand merchandising, retail knowledge and guidance. And in accordance with our board, I'm planning to be back in the next few weeks in China for at least two, three weeks really to support this process. U.S. is the other market, is the second engine of our airplane. U.S. is our potentially largest single opportunity, has been very central to the story of the success of this group, and we believe it can go back to be as important as it has been. To ensure we are closer to our business, we really focused on the true channel with a very talented manager. I already anticipated in the last press release that we were really pleased to have Scott Grooker joining us to lead the world sales and gallery business which is still predominant in terms of business, on total business in North America. Jason, that I know every one of you knows and fully respect for his retail competencies and drive, will focus entirely on retail, where is the future in terms of future growth, especially in Atuzitalia. To make sure that the service provided to these two business units are really sharpened. We asked a senior manager from the group, Ottavio Milano, to take on the role of president, really overseeing the staff function, which includes finance, customer care, HR, really to provide streamlined and more agile services to Scott Kruger and Jason Kemp, who remain the person in charge for running and building business. So in closing, and sorry, North America will ask Jason to comment, but even in a year which, as you see, has been difficult, we didn't decelerate in terms of new opening. We opened seven new stores, of which six are in Italia, located really in primary location for our city development strategy, which include San Diego, there's been a relocation in Miami, Fort Worth, Manassas in Atlanta, and Houston. And we opened one Natuzzi edition in Frisco. Our brand is kind of elevated, especially Natuzzi Italia, and so we are doing with our retail. So we're looking really for location which are flagship and which are a good cathedral for, let's say, our brands. If you have a chance, I invite you to visit our newly opened store in Manassas, which really is a great example of this strategy. It's located in the Miracle Mile in Manassas. So the part of Long Island that goes to the Hamptons is 10,000 square feet on two floors. Really a signature location, a signature design. And this is the kind of quality we aspire from your location. So in conclusion, is it evident that the current situation is unlikely to change in the next week or next month? We see differently the situation to perdure till the end of the year and potentially is something we need to confront with also the beginning of the year. Our strategic direction is more clear than ever. We aim to invest in our brand with a focus on organic growth and retail in our core market, which I remind you is China, is US, and in Europe is Italy and UK. At the same time, we want to continue and accelerate the work to reduce cost and enhance the agility of our organization. So you know that we don't provide the guidance but I want to tell you that we are highly confident in the strengths of our brand and our long-term growth potential. You know, we're talking of a brand which has more than 60 years of heritage, and heritage is something a brand cannot buy or copy. And we believe this is central and will be an important element that eventually will bring us to achieve our midterm plans. Having said so, I stop for potential question at this level. With Carlo, we're definitely gonna be providing more detail on the restructuring effort, which keeps us extremely busy. But let me stop here for potential question on this initial strategic introduction.