Natuzzi, S.p.A.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Naturopathies S.P.A. First Quarter 2024 Financial Results. As a reminder, you can join the conference call live, also via telephone, by dialing into the following number. Plus 1-412-717-9633. Then pass code 39252103-POUND. in addition to the link already provided via video. Once again, to join via phone, that's plus 1-412-717-9633, then pass code 39252103-POUND. At this time, all participants are in listen-only mode. Following the introduction, we'll conduct a question and answer session. Instructions will be provided at that time, free to queue up for questions. Joining us on today's call are Mr. Antonio Achille, Natuzzi's Chief Executive Officer, Mr. Carlos Silvestri, Chief Financial Officer of the Natuzzi Group, Mr. Pasquale Natuzzi, Founder and Executive Chairman, Mr. Mario De Gennaro, Chief HR Organization and Legal Officer, Mr. Diego Babo, Global Retail Division Officer, and Piero Di Renzo, Investor Relations. As a reminder, today's call is being recorded. I'd like to turn the call over to Piero. Please go ahead.

Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi's conference call for the 2024 first quarter financial results. After a brief introduction, we will give room for the 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 condition. Please refer to our most recent annual report on Form 20F filed with the SEC for a complete review of those risks. The company assumes an 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. Welcome, everyone, and good morning for people joining from the US. Good afternoon from people joining from Europe. I will start by highlighting some of the figure of the first quarter 2024 and then provide more transparency on the strategic agenda and operational agenda myself and the team is focusing on. So we close the first quarter of 2024 with invoice sales pretty much in line with the previous year at around 84.5 million euro. If we look at that split by geography, US and China and the remaining geography are above last year. South and West Europe and emerging market are the geography that reported lower sales versus past year. Clearly, when we talk about emerging market, we include Russia, and it's clearly a region where there is still a very significant geopolitical turbulence, as well as when we talk about emerging market, we talk about all the Middle Eastern area. And Europe is also, in a sense, closer to those dynamic. In terms of sales, I believe it's important to highlight that sales from directly operated stores, so the store that we own and operate directly, have been growing of 20 million, sorry, have arrived at 20 million, growing 13% versus first quarter, same period last year, and 10% versus 2022, that, as you know, was still a very strong year. This doesn't happen by chance, but happens because as we declare several times, we continue executing our strategy to become a more retailer-centric company. And in particular, that's true for North America, where the direct operator sales grew by nearly 30% versus the first quarter of 2023, and 32% versus the first quarter of 2022. Again, Let me restate that retail and U.S. are two words that are very central to our future development strategy. Another element I would like to highlight is that despite the low level of sales, we've been improving on gross margin. Gross margin reached almost 37%, almost 37%, which is... almost 1.5 percentage point above 2023 and is almost 7 point percentage above 2019. This is important and is again another element of our strategy around value creation. The gross margin and the level of sales led us to an operating profit of 0.6 million. which compare to a loss of 0.9 in 2023 and a loss of 3 million versus pre-COVID level 2019. When we look at operating profit, it's more difficult to compare to the year in between because there's been a lot of one-off support measures and restructuring measures that affected those figures. Another element which is worth fleshing out is that we continue executing our restructuring. So in the first quarter, some 94 resources left the company, bringing to almost 18% the total reduction that we reported and achieved since 2021. This is, I would say, the overall profile of the quarter. I will not spend too many words on the contest that, as you know, you are very seasoned investors and following closer what's happening. Clearly, the markets are not yet bouncing back because the interest rates remain where they are. And we are very much depending on real estate. but I will not spend a word on that. I would rather engage with you on being explicit on what we are working on in terms of management team. And in particular, we are working on eight pillars. The first one, as I mentioned, is expanding margin and lowering our breakeven point. We improved of seven percentage point our gross margin since 2019. And this has been achieved regardless of the fact that we don't have our factories in Italy saturated and also regardless of the fact that 2021 and 2022 were a year of unprecedented high inflation. So if we would normalize for those elements, the improvement would have been more in the range of 10 percentage points of gross margin. That is important because basically we lower the breakeven of the company of some hundred millions in terms of revenue required to breakeven on a yearly basis. This means that when we achieve growth, that growth will be very healthy in terms of margin conversion and cash conversion. And this is not yet the end of the story because we continue working in expanding the margin. And I believe we're going to be achieving our internal results, which are to continue this kind of trajectory for the next years. The other pillar we are very much working on in a context of low traffic is leveraging our brand strengths. We just commissioned a survey performed by independent market research, which reconfirmed what was already been highlighted a few years ago, which is the very strong positioning of Natuzzi among European and even domestic brands in market like US, where Natuzzi is ranked the first brand among European brands. Same is true for China, and same is true for most European market. Building this kind of awareness today will cost 100 million, if not billion, in each of those geography. So that is an inherited asset that we have. In a situation like this, we are increasingly of low trafficking, we're increasingly leveraging the brand strengths to increase food traffic in the stores directly operated and those of our partner. Increasingly, we are doing so also by having a more active digital approach in the early part of the consumer journey. Another way in which we are leveraging the strength of our brand is trading contracts. These are organic way of growing our business because we don't need to open new stores. We established one years ago a new division and the quality of discussion we are engaging on, especially for contract, are very interesting. And they are interesting on a global scale, from Middle East to Europe to US, confirming the strengths of our brand, but also our ability to come out with a really appealing design, not only for furniture, but for living space. I hope I will be able to report more specific wins. We are engaged in some very exciting discussions in the Middle East, but it's premature to share more on those. The third pillar where we're focusing on, and not by accident that Diego Babbo is joining this call regularly, is retail. As I mentioned, retail in terms of direct-to-operated store has been growing nearly 4% in the quarter. at retail the way consumer will look at it which means natuzzi freestanding stores regardless they are operated directly by the group or operated by franchising the weight of the business on the total business has been growing of some 25 percentage points since 2019. In 2019, that percentage of business was 40%. We are now at 66.4%. So a very strong and steady acceleration to become really a consumer-centric and retail-focused company. We have been managing retail somehow before. knowing fully how to do it. And I believe the work that the global retail division has been doing recently to catch up has been very noticeable in terms of tools, training approach, merchandising approach. And the area of retail is an area where we continue investing. I'm pleased to report that the new retail format which is an evolution in the term of sustainability that Natuzzi Italia presented in the Milan Design Week last April, has been really welcomed by a strong acceptance by our dealer globally, from China to emerging market to US. And this is the base now to create a more immersive brand experience in each of the more than 200 stores we have for Natuzzi Italia. And this concept will be part of the future retail development that we will push in our stores. Part of this concept is a design studio, which has been a place specifically created to welcome clients and especially designer and architect To continue the journey, the Nazzuzzi Italia has now really matured, which is to say we want to create harmony not only in a specific space selling a specific product, but in the total home selling project, which means designing living space, being the living room, being the bedroom, being the rest of the house. Wholesale remain still a very important dynamic component of our revenue, especially geography like U.S. And as a fourth pillar of our work, we really wanted to step up in term of quality of the relationship we have with our wholesale partner and quality of the relationship we have with our customer through them. As part of that, we launched what we called reimagined gallery format. As you know, Natuzzi has been historically operating with gallery, which is our shopping shop kind of retail environment. But the quality of the customer experience in those environments was often left to freedom of interpretation by our retail partner. In the intent of becoming more a consumer and brand company, we also standardize that kind of environment to what, as I mentioned, we call reimagining gallery concept, which is a shop-in-shop environment conveying a more comprehensive experience of our brand. Also, this innovation has been and is very welcomed by our partner. Not only in the US, where we have 29 deals of this type, some with important accounts that were not distributed anymore in Atuzi, they decided to reinvest. And the same is happening in other geographies, including Germany, where important partners decided to engage in this type of distribution. This is particularly true for Natuzzi Edition, and in some circumstances also for Natuzzi Italia. But Natuzzi Italia, the privilege channel, is really a freestanding store. The fifth element we are working very hands-on, and Pasquale, we're really lucky to have him still very involved in design, is our collection. Especially for Natuzzi Italia, Milano Design Week, which just ended in April, has been a very important moment to show to the global partners the maturity of the Natuzzi Italia project, which is a maturity achiever, somehow leveraging even more our DNA, which is a DNA which talks about harmony, is a DNA which talks about comfort and the new collection which has been presented based on those elements are receiving very strong positive feedback and orders. As you know, our time to market is quite as for the industry, long because once the collection are purchased by our partner, it takes a few months to be delivered and basically is when they start being presented to the final consumer. This will happen in a few months and we are very confident the freshness of this new collection from Natus Italia will help providing a better experience of our brand and, which is very important, support sales in the stores where they will be presented. The sixth pillar is about geography. Natuzzi, being a global brand, operates in more than 100 markets. And this is definitely an advantage of being a global brand. But in the discussion with the board has been clearly highlighted and agreed on that a global strong position can only be achieved with a stronger local position. And we identified three macro opportunity. One is U.S. As I mentioned, U.S. is central to our future strategy as has been central to the historical success of the company and to U.S. goes all our effort in terms of supporting the retail and also supporting the organization where we are still working on to finalize the final, let's say, structure. China is the second continent of geography where our brand has clearly a strong potential. We now operate some 340 stores between the two brands. As you know by now, we don't consolidate line by line China. So you don't see that sales in terms of sell out, but you see that sales in terms of selling. We are working very intensively to make sure that China is integrated in the journey we have been doing, especially for Natus Italia. And this integration is continuing as a sum of more cohesive interaction with the management. The key team of China will be in July in Italy. is continuing by means of integrating IT systems. So China is now in progress of being integrated in our IT system and also in the way of operating stores. End of July, there will be a new opening of a Anzhou store. Anzhou is one of the largest city in China, 40 minutes by train from Shanghai. And that store has been designed by us in terms of layout, merchandising and customer experience, really to become a first flagship that can talk the language of Natuzzi Italia. We believe that having the GV, which has by governance the authority to, the legitimacy to complete this design, having gained the legitimacy to do it ourselves is an important sign of the journey we are doing with them. And in September, there will be a similar store opening in Shanghai. So we really start reviewing the network of the stores directly operated by DJV to really set up a standard of what should be Natuzzi Italia experience in China. Europe, beyond the UK and Italy and Spain, which are really three geography, We are working to re-enter some of the countries where Natuzzi had a historical, even significant footprint, but for a reason of the focusing has been somehow neglected. One example is Germany. We have recently signed an agreement with the key age group to reopen 22 galleries in the next month. The seventh pillar we're working on is the restructuring and modernization of our factory and the restructuring of our SG&A. We've been extensively commenting during the last press call with Mario, the effort we're doing to reducing our account while reinvesting in areas like consumer experience, marketing and retail. This process continues. Of course, the speed of this process is determined by two main elements. One is the regulatory framework that, as you know, in most European countries is very strict, and especially in Italy when it comes to workforce reduction. And the second is our ability to invest in the restructuring because, of course, most of those restructuring outside the U.S., they are quite demanding in terms of one-off restructuring, even though then they have a very promising payback more mid-term. This leads to the last point of our agenda, which is dismissing no strategic resource, because in a time where, given the level of sales, we don't have the ability to invest as much as we want, we continue exploring, actively exploring, how to sell some of the assets that are not clearly any longer strategic. This includes a point where there have been several discussions. The high interest rate clearly don't favor, at the moment, this kind of sales for the right values, and we don't want to undersell the building. This also includes the tannery we have in Italy. which is part of our value chain, but for which we could think of alternative setting and includes some minor asset such as terrain we have close to Romania. So this is what gets our attention. Clearly, in a situation like this, there's always the risk of compromising more the mid-term for the short term. This is not the case. We're definitely focusing on the short term in terms of cash management, but we want to keep our eyes on what will create value more in the near term, considering the strengths of our company, the strengths of our brand, which is globally recognized, and the strengths of our nearly 700 stores globally. Let me stop here for your question. Of course, then with Carlo, we can also double click on working capital and, you know, case management and other elements. But let me stop here for initial reaction to this general overview of our strategic agenda.