Ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi 2022 4th quarter and full year financial results Conference Call. As a reminder, if you'd like to join via telephone, please dial +1 4127179633, then passcode 39252103 and then the pound sign. Once again, to join by phone, that's 1 4127179633, 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.
Carlo Silvestri, the Chief Financial Officer of the Natuzzi Group, Mr. Pasquale Natuzzi, Founder and Executive Chairman, and Mr. Jason Camp, President, Natuzzi Americas, and Piero Direnzo, 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 the Natuzzi 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 securities laws. Obviously, actual results may 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 20-F 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.
Now I would like to turn the call over to the company's Chief Executive Officer. Please, Antonio.
Thank you, Piero and Kevin for kind introduction. Good morning and good afternoon to all the attendants of this 2022 fourth quarter and fiscal year press release. I would actually start more for from an overview of how the 2022 closed for us. 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 fourth quarter and fiscal year. We close 2022 in term of revenue at EUR 468 million, which is 10% more than last year and some 20% more than 2019. If we go back to 2020, that is an increase of 40%.
we kind of added EUR 140 million business from the 2020, which was really affected by COVID. I would say high single digit top line increase. This happened also, in parallel, continue working on gross margin. As you might remember, 2022 was dominated by a strong inflation on it, on general cost and raw material. we were working to protect and expanding our marginality, which is currently five percent point above what it was in 2019. we were able to protect and expand marginality.
In term of EBIT, that, in term operating profit, that resulted in EUR 8.4 million, which could have been a higher figure, could have been close to EUR 13 million, if we didn't have to do accrual for very specific one-off element, which would be commented by Carlo later in the section. In general, the trajectory is, let's say, going north on the two fundamental dimension that we have in our long- term plan, which is top line growth and margin 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 EUR 19 million in 2022 and that figure compared to EUR 0.5 million in 2021 and EUR 4.7 million in 2019. Again, through the discipline we're trying to have also in terms of working capital, even those our business has been growing, we've been able to enhance the cash flow generation from operation. Cash position was pretty much the same with the previous year, we are dealing at EUR 54.5 million in term of cash, which is significantly higher than what we need from operation. I also remind you that we don't have long-term debts.
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 journeys that have been initiated by Pasquale Natuzzi of transforming the company in 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 that Natuzzi original started as more an operator and a manufacturer, and the percentage of branded product was not dominant. We set ourself a target to, you know, reach almost, you know, the vast majority of sales generated by brand, and we are ahead of that target. 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 EUR 830 million brand. If we consider what we do in terms of lean and with retail multiplier, the brand is on pace to become a EUR 1 billion retail brand.
This I think is a useful figure, to compare it with the player in the industry which are pure retailer, and to compare it with those number apple with apple. The other dimension we're working on is to continuous working on retail. Retail for us is an objective to accelerate growth, is an objective to expand marginality, and is also an objective to have a better control of the brand. Lisa, maybe you want to mute because we're hearing your message coming in. If you can kindly mute. Thank you. 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.
Also on this dimension, we're well on track on our objective to complete our retail transformation. We overcome in 2022, the number of 700 store freestanding store carrying even a style of Natuzzi Editions. I believe, with a global coverage, this is one of the highest figure in term of number of stores distributing a single brand in the industry. 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 opportunity to expand our network, and I will discuss in a minute our plan for accelerating the opening of additional stores directly operating in U.S.
If we recognize that one of the, in a sense, less capital intensive opportunity that we have to grow the top line is to make those 700 store performing more in term of sales per square meter and marginality. 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 operator stores and for the one operated by our franchisee. I'm happy to report that we continue also working and strengthening our team. Carlo has been long waited for, has been announced in a press, 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 brand in that channel, actually the first, in term of brand awareness among European brand. We indeed as a parallel opportunity as we're building the retail to continue serving that 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 term of rep, across the States. We are now onboarding with very positive results, agency.
Not exclusive agency, but agency that will bring along their lines also Natuzzi. I was in the U.S., very recently, three 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 retailer in the U.S. That is another area where we're 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 and for the furniture, living a phase of transition after two years, which has been dominated by booming demand. Difficulties in fulfilling the demand, the wind changes, turning into headwind, mid of 2022. We don't see yet a clear, you know, change in trajectory in the sense that demand remain weaker than it used to be in the previous year, both at wholesale and in term of traffic in our store. Looking at the first weeks of the year, we do see encouraging sign when it comes to few geography like China, especially for our Natuzzi Editions business, which has been back on growth, and also U.S., especially Natuzzi Editions.
We are cautiously optimistic that the let's say the bottom has been reached, and we can hopefully see a recoup of demand. That is our hope. 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 asset, chief in U.S., and in Italy. We are with active process on those asset. I hope that in the coming conversation we can report some positive outcome in that 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 will 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, continue the growth on both the brand, and continue achieving that through retail. 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. We are managing our Group to make sure we can navigate these negative circumstance without affecting the overall goal contained in our internal strategic intent 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 will be useful, especially in consideration that 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. I suggest that Carlo does this comment on our structure of the P&L and then we open up for question both on my section, which is more, let's 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, since this is my first conference call with the Natuzzi Group. Before doing that, allow me to thank Mr. Natuzzi and Antonio for the opportunity of this incredible, exciting experience and my team for the great support that I received so far. Now, going back to myself, I spent my last 16 years in Asia. 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 as a same time the 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. Now, 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 EUR 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 2021, 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, and 29.7% in 2019.
As a reminder, in 2022, our industrial operations were deeply affected by both spike in energy costs and inflationary environment. Together, we, 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 Antonio was mentioning, that we recorded a EUR 2.2 million accrual not related to our core operation, but related with the cost of the labor to restructure our Italian operations.
If we exclude this 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 include the selling and other administrative expenses were impacting 33.2% on our revenues compared to 34.8% in 2021 and 35.5%. Regarding detailed expenses, 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 FX which is 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 EUR 1 million, and the other one is a EUR 1 million contingency for a legal dispute over a land in Brazil. Therefore, the operating profit in 2022 landed at EUR 8.4 million compared to EUR 4.9 million in 2021, and versus an operating loss of EUR 22.5 million in 2019. Excluding these phenomenon not related to our core business, we would now compare a EUR 12.9 million operating profit equivalent to 2.7% of revenues versus EUR 5.8 million in 2021.
The fact, despite of interest provoked an increase in our finance cost that landed at EUR 8.5 million versus EUR 6.8 million in 2021. It's important to also underline that in these EUR 8.5 million, there are EUR 2.9 million related to 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 hedging technique. Due to the reversal of the euro U.S. depreciation, we recorded in the last quarter $2.54 million loss. Over the year, we did achieve a EUR 2.4 million positive results. Talking about, precisely about our joint venture in China, the difficult business remained through over the year.
At the end, the significant slowdown in the activities provoked our brought our profit to 400,000 EUR. I just remind that we own a 49% stake in our joint venture, and in 2021, we recorded a profit of EUR 3.6 million. Talking about the joint venture, it's extremely important that in 2022 we received EUR 3.7 million in dividend, and we received in 2023 a EUR 3.2 million in capital reduction. The profit of the joint venture, nevertheless, it's 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, we were able to maintain our cash position at 54 million EUR.
It's extremely important to underline that our operation, were able to achieve a positive cash flow of EUR 18.7 million. That we did invest in EUR 9 million capital expenditure and in repayment of a long-term loan. This is overall the picture of our performances in 2022, I would like now to give room to Q&A session.
Thank you. We're now beginning the question and answer session. Antonio, did you have something to say first? 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. If you're on the phone, you can press star one to be placed. There we are. David, your line is now live. Please go ahead, David Kanen.
Hi, good morn-
Morning, Dave. Morning. Personally, we cannot hear Dave. No, not even here. Maybe as in the past, Dave, you might want to use the telephone line.
David, your line is now live. Please stand by everyone. David, your line is now live. There you are.
Kevin, I don't know if, is there any way to suggest Dave 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. Let me just see if this him dialing in. Hang on.
I'd love to.
David, if you're on the line, I'm gonna unmute your line. The thing is, he has disconnected. Here we go. He's back on. David, can you hear me?
Yeah. I can hear you. Can you hear me?
Yeah, there you are, my friend. Please go ahead. Please ask the question. I do apologize for the technical issues. Go ahead, sir.
Okay. Hello, thank you, Natuzzi team. Sorry about the first attempt to ask the question.
No worry at all. No worries.
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've been nearly 39%. There was some non-recurring items, extraordinary items in the OPEX line, whereby we would've had a significant operating profit. 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. That being said, it would've been nice to show, after, you know, all of these items, a bigger profit.
Mm.
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. Also, what type of declines are we seeing in written orders given the weaker housing market economic backdrop?
Thank you. Thank you for the question. I might take this one. The reason why we're 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. Second, because it was becoming a very visible obstacle to maintain the level of service to our clients. The backlog now went back to what I can define as physiological level, to standard level, which is pretty much EUR 60 million, which is what typically we need to do a proper planning of the factories.
In term of written order, the year, as I mentioned in my press release, started from level that is, let's say, below our expectation. What is somehow positive is that if you read these first 14 weeks, and we divide it by two, the last seven weeks show a relatively stronger trend versus the previous one. 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're reminded, Natuzzi Italia get produced globally, in Italy, where we have a significant population of workers and a significant, let's say, production capacity with five factories. At the moment, especially for Italia, the level of order we're receiving does not allow us to fully occupy those factories. 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. That is a bit a long answer. Inventory is back to standard level. I don't have the figure in front of me, but it's in the, in the ballpark of EUR 55 million-EUR 60 million.
When talking about the space of orders is as I mentioned before, below our expectation. It's a different situation among the region. Now, we have China, which is different across region and channel. China, which is mostly operating to franchising, we see a recovery of Natuzzi Editions business, while Natuzzi Italia was quite stocked in the channel and the recovery is lower. Natuzzi Editions North America is above budget, but below last year.
Europe is a more, a mixed picture, and I think at the moment, Europe is the continent that was a bit more difficult to predict, because as the economic environment is the one which is still struggling to find, you know, a way out of the last past gloomy months. I think we will see first recovery coming from U.S. and China as a combination of both the market condition and also the action we're taking. I think the, let's say, turn, turning point for West Europe is less easy to predict in term of timing.
Okay. 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. You know, in the past, you've talked about opening up 10 stores in the U.S., 10 DOS stores.
Yeah.
Which would continue to grow DOS and flow through the PNL, higher margin, branded product. 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. Also, paring back the number of openings in North America from 10 to six. 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 play some offense and yield even better results than what we did on an operating basis in the long- term versus Q4. That's my feedback. I mean, I would love to hear your commentary on that. If those investments are gonna yield better operating profit, why would we be pulling back?
No. Strategically, Dave, and I speak, I say for the group, because we have constant alignment with the board, with the chairman. Strategically, we cannot be more in line in agreement with you. We definitely don't want to pull out from our retail strategy. In 2023, we actually confirm six opening. I will say some of those are pretty signature open, like the Manassas is gonna be a 10,000 sq ft in the Golden Mile, near the Outlets. Really kind of flagship location. It would be Houston, it would be Denver, it would be Atlanta, it would be San Diego, and then it would be the first DOS in Frisco for Natuzzi Editions. We are keeping the pace, considering the constraints.
We are trying to remove, as you mentioned, the constraints. The way we are trying to remove some of this financial constraint is also the rate of disposal of strategic asset. We know the largest one is iPoint. We're actively working on that dossier. As I mentioned, is something I 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 way this moment to sell real estate asset because the loan-to-value for a potential buyer is not easier.
Really because of the determination you mentioned before, that this money could be actively reinvested to increase efficiency in our factory and to open more U.S., we are continuing pushing for that option. We are not stepping back in terms of strategy. We just need to finance the strategy, and we're looking also the standard way to achieve that goal.
You're reiterating those plans to continue with Factory 4.0 and to continue to open branded DOS stores in North America.
Correct. I don't know, Jason, if you want to give any comment. I think as I mentioned before, is 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 variation are justified by structural elements. The company's been opening stores since a few years now, and the location maybe that were initially spotted for some of the store won't be locations that now we would consider ideal. There is some structural factor. Other than that, we want to improve the productivity of the store.
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 would also facilitate new 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 start generating double-digit EBIT. Working on organic improvement will also shorten the payback of those investments. We're also working that as a way to facilitate the enrollment of additional franchisee partner. Jason, I don't know if you want to-
Yeah.
Jason or Pasquale, if you want to provide any color respectively on U.S. or retail, of course, I don't intend to monopolize the dialogue. You're very welcome to join and I must say Pasquale is an active force also in driving these acceleration of retail. Jason, do you want to provide any color on U.S. maybe?
Sure. Sure. I'd be happy to, David. like first, you know, forward looking, you know, as the release suggested, we've got 6 DOS that we plan to open this year. In this case, all in Natuzzi Italia, adding volume to our flagship factory in Italy, plus three FOS in around the U.S., mostly in Natuzzi Editions. A total of nine openings projected in the U.S. for the year. I, you know, I would say is that as we look at our like-for-like performance, we finished 2022 basically flat to 2021 from a like-for-like retail performance. Obviously a stronger start to the year, slower finish.
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. While a lot of, you know, a lot of companies' retail business is kind of reset down much closer to 2019, our like-for-like performance has kind of been reset to a much higher average and, you know, 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, because that's the critical metric. Couple more questions, then I'll go back to queue in case there's anyone else.
Sorry, David Kanen, just to give you a key bit of color why we are so passionate about this. We see 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 levers we have, the results are pretty astonishing. Just let me pull out the two stores. One is Westfield, which is one location we had for Natuzzi Italia in London in a high-end retail park. The store is performing 68% above last year, but as you remember, it was a very strong part of the year, and is significantly above our internal budget. This is because we've changed the team, we're creating a better dynamics.
Same, and Jason can comment, it's happening to our Madison store, which historically, despite, you know, the iconic location, was not as sales productive as all we wish. Again, new team, attention to details. Now, Madison is depending on demands, either the first or among the first four top stores in U.S. That's the reason why we say, let's, you know, of course, expand our footprint. We already have 700 stores. We're gonna expand it. Let's recognize that if those 700 stores today were performing homogeneously on a certain level, that would be solving a lot of our goals already. Sorry, Dave, I.
Yeah. I hope 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 opportunit.
Opportunity to increase average unit volume when I compare you to your, to your peers. I appreciate that call out. Just two more quick questions. How much cash is in the China JV? That's the first one.
Just a clarification and then I'll let come in Carlo. The JV, of course, is part of a listed company. We can report the last certified figure which is gone in the 20-F. We can just show that figure. Please, Carlo and Piero, show that figure.
The JV reported EUR 33 million in terms of cash, and that's has been the results of the sales, the distribution of dividends and the capital reduction together versus the last part of the year. Increase in the purchase of the stock, the JV, and a decrease of the orders. That's the result. We still have EUR 33 million.
Okay. When you say 33, is that the total and our portion is roughly half of that or are you saying after 49% it's EUR 33 million?
It's the total, but these are referring on not audited numbers by, let's say, that are not published by the JV.
Okay.
Just a clarification as you point. If we look at the... and again, we should be just reporting official number because the JV is also part of.
Yeah.
Is also owned by Kuka, which is also a public company. What happened, looking at the delta of cash versus plus last reported year, it happened two events. One is a cash distribution, a capital reduction of some, you know, EUR 9 million in total, if you talk euro. As I referred before, the JV itself invested some EUR 15 million in stock. Why that? As I mentioned before, we've moved from a phase where the issue was having the product to a situation where, you know, it's more about selling. In the first part of the year, 2022, the JV took the decision of investing in some inventories in a significant manner.
When you look at the total active balance sheet of the JV, you find that the, between fixed asset and cash, the total is a change net of distribution. What changed is distribution because it's been reduced the cash in favor of inventory. There's been no dilapidation of cash. There's been just a different use of that cash.
Yes. Correct. Absolutely correct.
I understand. 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. It seems to me like we can get to a low you know, 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?
I'm going to answer you in a bit more elaborated way, but it's not just because I won't go to straight to the point, but because it's a complex reality. We have four main area of production which are directly operated. We have Italy, we have Romania, we have Shanghai, China, with Shanghai and another city, Qingdao, and then we have Salvador de Bahia. Each of those production facility has very different cost of production as a matter of cost of labor, efficiency utilization of the factory, and cost of materials, because also 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 term of duties, to serve U.S.
The first way to reduce the cost of production to spend margin is an optimal utilization of those platform. For instance, just to quote you a figure, moving a production unit from China to Vietnam allows on average between 15 and 18 percentage point more. Is a combination of labor cost, but especially duties. You can easily understand that that provide us an incentive to do so, especially for those large clients that they can be served with stock order from Vietnam. The first lever to optimize the cost of production and the spend gross margin is an optimal location of the sourcing in production choices. When it comes to Italsofa, as I told you, is entirely produced in Italy.
There it plays the game of the Factory 4.0, especially on that part of production. I don't have a precise figure to quote on what should be the short- term expectation. Clearly, 4.0, you know, we assessed it in the pilot that we've done, and it's beneficial in term 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. Labor to great extent is fixed because, you know, we cannot lay off people.
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 the reason why we're also saying that in this phase we are having a more gradual rollout of the Factory 4.0 technology in Italy, because the priority at this moment is really to fulfill the capacity, because that will bring the highest benefit in term of reduction of cost of production.
Okay. 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%-7%.
Yes.
Okay.
It is. I talked about high single digit. It still is the case, but that needs to happen with factory which has a good level of utilization. That is.
I understand.
Function of level of utilization. We need now to make sure we have a good level of utilization, saturation of this factory. The Factory 4.0 technology can provide an overdrive, but provided we have a good level of utilization. Good level utilization for us means 85% plus, because it's a fixed cost business. When you go below to 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. 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 the investment.
In this phase where we have this saturated factory, the priority for us is more commercial. Is to make sure that Natuzzi Italia can regain the growth momentum needed to fulfill the factories.
Yeah. Okay. I really don't have any more questions. I'm just gonna make a comment, and I think we're in agreement here. 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 ultimately, as you said, you have more control. You don't have a lot of control with a third party retailer selling the Tutu product, whereas you can better train your people and align them and still potentially affect same store sales growth. Of course we know the impact, as you said, having the factory at, you know, fuller capacity improves gross margins, okay?
Of course, we know selling branded product, you know, is in the, you know, probably mid 70% gross profit range. I would actually encourage you guys again to play offense and to accelerate the deployment of stores in North America. That's pretty much all I have, guys. I'm encouraged, you know, by the operating profit excluding the one-time items. I'm sure by the end of the year we'll be looking at a better economic backdrop. Thank you.
Thank you, Dave. Thank you for your continuous dialogue 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. Your contribution 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. There are no further questions at this time. I'm gonna turn the floor back over to management for any further closing comments.
Yeah. 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. I look forward to reconnect with you, either 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 any final word.
Antonio, you did a good job, and even Carlo, and I thank you very, very, very much. Obviously, it's Jason and the short, you know, speech was very well done. Thank you very much to David, our shareholder. 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.
That does conclude today's webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Thank you.
Thank you.