Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi first quarter 2022 financial results conference call. As a reminder, if you'd like to join via telephone, you may do so by dialing in the following number, 1-412-717-9633, then passcode 39252103, then the pound sign. Once again, that's 412, +1-412-717-9633 and passcode 39252103, then the pound sign, in addition to the link provided to join via video. At this time, all participants are in a listen-only mode. Following the introduction, we'll conduct a Q&A session. Instructions will be given at that time. Joining us today are Natuzzi Chief Executive Officer, Mr.
Antonio Achille, the Executive Chairman, Mr. Pasquale Natuzzi, then Mr. Jason Camp, President of Natuzzi Americas, and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. I will now turn the conference over to Piero. Please go ahead.
Thank you, Kevin, and good day to everyone. Thank you for joining Natuzzi's first quarter 2022 financial results conference call. 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 SEC for the 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. Good morning, for the investors joining from Eastern Time, U.S., and good afternoon for the European one. Just a quick point of view of where we ended in terms of first quarter 2022. We continue executing our strategy. As you know, we are outgrowing the market. Our revenue grew by 17% versus the first quarter 2021, and 43% versus 2020. We continue also improving the mix of our branded product. In terms of order flow, roughly 90% of order flow comes from brands, which is four or five percentage points above the respective period of 2021 and 2020. We continue also focusing on key geographies. All three key geographies which are central to our strategy have been growing double digits.
North America is growing 32% in revenue, Southwest Europe 19%, and China 14%. We also continue our focus on retail. I believe here two data particularly significant. We added 19 freestanding store in the quarter, all in franchising, 16 of which are in China, where you know we are really a critical mass of above 380 stores. Two are in U.S. and one in Italy. We added 19 freestanding store in the quarter. Another data which I believe is significant, in North America, like for like is above 50% versus 2021. Again, a strong sign that, our retail formula start working. As a result, the weight of retail, direct operator store and franchising on total revenue grew to 52% compared to 49% in quarter 2021. We continue also investing to modernize our factory.
The pilot we are running based on the 4.0 technology is delivering very solid results and will be the base for future investment in our factory. We also continue accelerating our growth through partnership. We just signed a partnership for the development of rest of Asia Pacific with TTF, which is a listed company, who join our Singapore venture with 22% share with an investment of EUR 5.2 million. Lastly, we continue strengthening our governance and trying to create a more committed team. As you have read from our press release, Gilles Bonan, which is a senior executive which cover several position, including the one of CEO of Roche Bobois, joined our board as independent. Also the board approve the stock option plan, which should become effective in the next few months.
I would say a quarter very in line with where we want to go. This despite clearly some headwinds, which we are experiencing as everyone in the industry, in terms of significant inflation in raw materials and higher than usual transport costs. We wish this to be a phenomenon that stayed in the COVID, but clearly this inflation is continuing beyond COVID. We are monitoring these costs and adjusting our pricing, but this in the quarter limited our ability to expand farther the margin than what we achieved. As you have seen in the press release, we also mentioned that in China, we are dealing with the restrictions imposed by the local authorities, which are affecting our factory in the Shanghai area. It is an important factory.
The first two months of the second quarter, nothing that you will read in the first quarter, but the first two months of the second quarter in terms of revenue generation is being affected by the partial ability to operate full speed, our Shanghai factory. This is, in an extreme synthesis, a reading of the quarter. I think it's always good when you see your company going the direction you are driving it, and the direction is the direction we want to go to create value for our shareholder. Clearly, we wish that COVID was the biggest challenge we had to face in this plan. We're now dealing also with other additional element, which is the continued inflation, the COVID restriction in China, and clearly the war in Ukraine. Let me stop here.
I try to be as brief as possible to leave even more space than usual to Q&A.
Thank you. We'll now be conducting a Q&A session. We ask that you please ask your question in a slow, clear and concise manner. If you'd like to ask a question, please use the raise your hand feature on the web platform, and you'll be placed into a queue. For those dialed in by phone, please press star one to verbally ask a question. Once again, you may use the raise your hand feature on the web platform to ask a question, or if you're dialed in by phone, please press star one on your telephone keypad. Our first question today is coming from Dave Kanen from Kanen Wealth Management. Your line is now live.
Hi, guys. Thanks for taking my questions. The first one is regarding the price list increases that you're taking. In the press release, you said that they'll start to take effect during Q2, so I'm kind of looking past Q2 as a extraordinary event or temporary period, you know, vis-a-vis the lockdowns in China and so forth.
Looking to the second half of the year and beyond, given the price increases that you're passing, and then also, you've alluded to modernization, investments for capital expenditures at the factory level to improve efficiency, should we expect higher gross margins, assuming no further increases in inflation in the back half of the year from that combination of price increases as well as, some of the investments in technology at the factory level?
Okay. If I say, Dave, thank you very much for your question. If I take literally your question, the short answer is yes, in the sense that if we are not to assume any further inflation pressure, the answer is yes. In reality, we keep reporting strong inflation. European Union just reported today an inflation for the month of May of 8.1%, which is the highest since the creation of European Union 1999. Let me maybe expand a bit on how we work on pricing. Every year at the end of the year, and we take decision at the beginning of the year, we look at what to expect the dynamics for raw material and cost of different form, plus transportation, and how we should reflect this into price increases.
We act typically between the third and fourth week of January, so that we start the new year with a pricing scheme that should be allowing us the target margin given the certain dynamic in costing. This normally should be a decision which is taken once in a year and should be protecting your marginality for the full year. What we've been dealing is a situation where we, in certain months of the year, reported an inflation which has been higher than what normally we're reporting in one year. We also reported that, for instance, when it comes to matter like energy, given the war in Ukraine, a complete surge of cost overnight of fuel and other energetic costs.
We keep reviewing the pricing list, maybe not just one, but multiple times during the year to make sure that we can protect the marginality we want. This of course cannot be done every day because dealing with partner and client, you cannot change the condition every day. We try to be discreet in doing maybe a couple of time in a year. We also need to recognize that given our model, whatever decision we take today, it will be effective in term of revenue two-three months afterward because the fulfillment timing between the order taking and the order recognition, the revenue recognition is two months. It's a delicate game where we want to protect margin, we're always in pricing. We carefully look at the you know the dynamics of the material.
If inflation should stay reasonably stable, this should be more than enough to protect our marginality. In reality, these dynamics have been particularly crazy over the last few months. A second element.
Okay. Yes, I'm sorry. I'm assuming you're gonna touch on.
No, no. Yeah, I want to go through. I think it's good to use this discussion to provide full transparency on our operating model. A second element, which came to my attention and we are acting on, is the use of discounts. Given a certain price list, typically the industry invest in selling discounts, so specific privileged condition you recognize to your wholesale partner, and sell out discount, which is basically the discount you do at the retail level to your final customer. This historically is significant for the industry and has been very significant for Natuzzi, which is another way to protect marginality, of course, acting on this. We are reviewing the types of discount which are allowed, and we are getting a better controlling of those, because those also protect, is a way to protect marginality.
Not only the listing price, but also the management of commercial, discount and privileged condition. Sorry, Dave, you were further articulating your question.
Yes. The second part of it was the investments that you're making in the modernization of your factory for the purpose of getting some cost benefits and efficiencies. When would we start to realize those benefits?
While pricing is, as you can imagine, more an immediate decision, capturing the benefit require two element. One, investment in the factories, and also training of our team to work in different way, of our workers to work in different way. We started this pilot called 4.0, basically at December 2021, so we are like five months. It's progressively is doing well. It's based on three concept. One is simplification of the assortment. Second is managing them through lean process, so kind of continuous flow. The third one is integration of the suppliers, which are processes, which are way of working, which are quite new to the industry, to this specific industry, while maybe they are standard for the automotive industry. The pilot is progressing well. It's delivering result above our internal expectation.
This is becoming the new blueprint, the new standard for the new factory we'll develop, and for the investment we're doing to modernize existing factory. Starting from the second part of this year, we'll start acting on our Italian factory, where the cost of labor is higher and where the benefit of this new technology are expected to be higher. We expect this to be a way to contribute to better quality for our clients and to reduce, quite importantly, the cost of production.
Okay. Can you give us some sense as to what those improvements will be as it relates to margin and what the ROI is on some of this, I'm assuming it's capital equipment that you'll be purchasing?
Yeah. We're looking at potentially high single-digit margin improvement in terms of cost of production, so I would say significant, of course, for an industry like us, where industrial margins are not, let's say, infinite, so it can be significant improvement. In terms of timing on investment will be between second part of this year and next year, the bulk of the investment in Italian plants. In terms of ROI, I would say we look at that as attractive compared to the use of capital we want to do. It's higher than the current, let's say, average return on capital. It should be a good way to invest the resource of the company.
Okay. Could you just give us an update, maybe this is a question for Jason. In the past you've talked about the expansion of your North American footprint, direct operated stores, with a goal of opening up approximately 10 per year. Is that still the plan? As an investor, you know, that was one of the reasons why we liked the story is because it would be that pivot to much higher margin branded product north of 70%. So it's, you know, critical to our investment thesis. Haven't heard you speak about that at all. If you or Jason could touch upon that, if we are on track to open approximately 10 stores a year for the foreseeable future in North America.
Also if there's an opportunity in Western Europe and elsewhere, if you can touch on that as well?
Great. I'll kick off with North America. You can see that we did open two stores in the first quarter, and we expect to be on track to open, you know, approximately 10 stores this year by year's end. We are still committed to that growth target of approximately 10 stores in North America a year.
Great. Thank you. Antonio, can you talk about Western Europe? Is there an opportunity to increase your DOS footprint?
There are. I would say there's definitely an opportunity to increase DOS and FOS in U.K., which is a market where we already have a good established operational base in terms of store and brand awareness. There's clearly an opportunity in Spain, where we have a team and we have 11 stores and a good brand awareness. I was yesterday in France, and also here we used to be quite significant in terms of distribution. We now are with one store, which by the way we are renovating, and here we're also exploring ways to come back.
As you know, the company is distributing in other markets, so definitely there are opportunities beyond U.S., beyond U.K. and Spain, but we need to be very focused because my view is that, especially when it comes to retail, you need to be strong locally to be strong globally. What I won't suggest the company do, I will not want the company to do, is to be scattered and to have one store here and one store there, because then it's very difficult to manage them, to attract talent, to kind of have a payback on marketing. We look at individual geographies in Europe to do that. Differently is for FOS, where, you know, we have opportunities we are capturing.
We just opened a new fantastic store in Vienna, in the real center of Vienna. It is a franchising with a partner which is willing to open 10, 15 in that area. Our model of franchising is very attractive. Beyond the U.S., we look at franchising for both brand as a way to accelerate our retail transformation. On that front, I believe Europe and emerging market are quite promising because different from North America and Asia, there is still a significant amount of traditional mom and pops furniture store. As the industry is modernizing, they can see now our franchising a perfect plug and play business to substitute their mom and pops, which, you know, with this inflation, with the supply chain, is very difficult to manage and become part of our family with a predictable return and a predictable investment.
I believe our franchising can be quite substantial. It can be quite substantial opportunity in Europe and emerging markets.
Okay. That makes sense. I understand wanting to have density in certain markets so that you can make those investments and scale them. The next question, and then I'm gonna turn it over to anyone that is in queue. I don't wanna totally monopolize. My apologies to everyone on the call. In the past, we've looked at the China JV as quote a hidden asset. You know, I'm estimating it as probably worth almost $10 per share or more, that plus the real estate, and yet our stock is not getting credit for it. The core business to me is trading for zero value. Can you give us an update on your efforts or any initiatives underway to unlock that value for shareholders on the China JV?
You don't have to talk about Vietnam or Singapore. We're aware they're much smaller. We like it, but just specifically China.
Yes. The amount of discussion we're having with the board on this kind of option to create more value for the JV and for its individual investor, Kuka, which is listed in Shanghai and Natuzzi, is increasingly board by board. This is becoming more central. I can be partially specific, but we agreed already to do some action in terms of cost reduction and distribution to the partner, and also further recognition of some form of value that Natuzzi is doing in terms of R&D investment for the JV. Those have been already agreed upon, but I cannot be specific in terms of individual amount of those, but it's an initial, you know, step in the direction. Is that the full, let's say, potential of China for us? The answer is no.
As I mentioned, there is an alternative that within the shareholder with Pasquale Natuzzi, the Chairman, will discuss, which include potentially an IPO of the China operation. On that, there's been initial discussion with the partner, but at the moment it's very premature, so it's not something will happen next few months, but also that option is on the table.
Thank you. As a reminder, if you'd like to ask your question today, please use the raise your hand feature, or if you dial the number over the phone, you may press star one to be placed into question queue. One moment please while we poll for questions. Once again, you could use the raise your hand feature or press star one at this time to ask a question. One moment please while we poll for further questions. If there are no further questions, I'll just turn the floor back over to management at this time for any further or closing comments. There are no further questions.
Okay. No, I mean, you have the press release. I mean, we are looking at a quarter which we believe is a good step ahead in our direction of accomplishing our plan, which is around brand, is around retail, is around growing in focused geography, and modernizing our factory. We've been mentioning quite explicitly in our press release the fact that China is in lockdown and this is affecting our factories. Good news is that at just beginning of June, the authority confirmed that we can go back and adding 80% of total workforce operational in the factory, which is positive.
As I mentioned, we also keep investing to make sure that we can maintain our top-line expectation in term of retail and wholesale in a situation where, as you can see, the market in general for retail see a more prudent consumer. This is a bit the, I would say, summary. I hope it stayed with you. We keep investing to make our press release more self-explanatory. We also added one section with a split of revenue by growth, by geography and the relative growth. We will welcome you to pose additional question offline to Piero if you have any. I don't know if Pasquale or the chairman want to do any final remark beyond what I just read.
You covered everything. You are fantastic.
Thank you, Mr. Chairman.
You are welcome.
Jason or Piero, any final remark on your side?
Not on my side.
Thank you. On that note, that does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.