Earnings Call: Q1 2021

May 24, 2021

Earnings release

Tutsi's First Quarter 2021 Conference Call. After a brief introduction, we will give room for a Q and 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 condition. Please refer to our most recent 20 F filed with the SEC 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 Chairman. Please, Sebastiano Tucci. And setting of a press release this time. And to be honest, Antonio, our new CEO, he helped us really to design that in order to make much clearer the nature of our business, obviously. I would highlight the most important goals that we have reached that 87% of the sales are what we have Natuzzi Italia and we have Natuzzi Editions and we have also Divani and Divani. And we have DOS, we have franchising and we have also Gallery. Altogether, the 3 brands and the 3 channels represents 87% of the total sales, while before it used to be 66% 76%, I'm sorry. So we improved almost 11% the sales of branded sales, which means better margin. In the meantime, I would like also to emphasize on the operations side. We last year, we downsized the factory in China, which was 88,000 square meter, we reduced it to 38,000 square meter because of the trade war between China and America. And because we were manufacturing and exporting almost 80% of our total production in China and United States, the duty the raise of duty impacted obviously on our P and L. So that's why we decided to reduce the factory in order to dimension the factory based on the need and the grow of the Chinese market, which is performing very well. In China, we are opening the store months after months and we expect that within next 2 or 3 years, the Chinese production will be absorbed almost 75% from the Chinese factory. And then even with the growth in the rest of Asia. So in other words, the factory, our goal regarding the factory in China is that we will are we still connected because Yes, we are. Are we connected? Vittorio, do you hear me? Jason, do you hear me? Absolutely hear you. We are, sir. Oh, that's wonderful. Okay. I was concerned that probably you're missing me. Okay. So again, the factory in China in the next 2, 3 years will be used just for the Chinese needs and for the rest of Asia. So even last year and this year, we started the outsourcing in Vietnam for the big customer in United States of America and Canada in order to avoid the duty and improve the margin. So the outsourcing in Vietnam has been already well executed, I must say. And we already are starting and I believe that in the next 60, 90 days, we will start the production also in Mexico in order to improve the margin and improve also the service level to the American customer for Natuzzi addition. So those are the most important issue. The rest is including in the press release, which I'm sure you already took note you noticed. But the most important novelty is represented by the fact that we as a company, we attracted Antonio Aquile, our new CEO, which will start officially June 1, 10 days from now or even less. And Antonio, he celebrate his birthday, 50 birthday the day before yesterday. He's a young fellow. He has a lot of energy, but he has also 25 years experience with the best consulting company in the world. Last experience has been with McKinsey as a senior partner at worldwide level in the luxury sector and the retailer. Antonio Aquile has been our consulting for a little while in not little while, for a long time I must say. In 2019. And so he had the chance to know the company and to understand the huge potential that Natuzzi has at the worldwide level. So I really welcome and I ask you please to welcome Antonio that will give continuity to the company for what we have started 15 years ago by transforming our manufacturer company in a lifestyle brand managed by the retailer division. As Chairman, I will be an Executive Chairman in order to manage the transition and to focus also in the long term strategy in order to help the company to execute our goal in developing more retailer, more DOS, better margin and satisfy the expectation of our shareholder. By saying that, I will say thank you very much for listening to me and I'm available together with Vittorio and Jason, our President of Natuzzi America to answer for any question you may have. Thank you. Thank you. You may submit questions via the web meeting at any time. Click the Q and A button on the left side of your screen. Please make sure to request to talk switch is enabled prior to clicking the Submit Request button. Our first question today is coming from David Kenny. Your line is now live. Kenny. Your line is now live. Please proceed with your question. Okay. My first question relates to the transformation of the company. In the future, the next few years, as a lower percentage of our overall revenue is private label and more comes from Natuzzi Italia, Natuzzi Editions, DOS. What do you see as the longer term gross margin profile of our business? When I look at some of your competitors like La Z Boy, Ethan Allen, Bassett, they all have gross margins north of 40%, some even into the 50s. Where do you think we will be going long term as that mix shifts? Thank you. Okay. No improvement, no question about. Okay. And then when I look at your liquidity, to me, I'm struck by the strength of the company, given that you've got €50,000,000 plus in cash €50,000,000 plus in cash, you've got probably $40,000,000 or more real estate you own. My estimation is KUKA is worth over $65,000,000 at this point. So there was an article that was written by someone that claims to know you guys last Thursday, suspiciously right before earnings, where he theorized that the company is going to do something highly diluted, sell shares here, which to me sounds absolutely insane given the low speculating? Hi, David. Can you hear me? It's Vittorio. Sorry for some technical problems. The platform must improve. Okay, we received this question in recent days. Now let me answer to those investors including you that asked about the company plans to issue equity. Given the importance of this question, we want to provide you with a full recap of the context, explanation of where we stay exactly. In February 2020, due to the pandemic Natuzzi was closed to be delisted by NICE and Board of Directors was also forced to ask a financial support to the main shareholder to face the immediate stop of the business and the immediate stop of cash flow as well. The visibility at that time on the business was really, really poor close to 0. The main shareholder immediately granted the requested financial support up to €50,000,000 as you know already. The technical way to grant was a 0 interest credit line refundable with a future share issuance. This option for the company will last till December 2021 for the approval of the in the shareholders meeting and in case March 2022 for the execution of the shares issue. That's the picture, okay, where we are exactly. Now, thanks to the effort of the management team today Natuzzi has not need to call that money. In fact, after the $2,500,000 received in February last year, the company has not asked for the remaining $12,500,000 yet. If the above option will be not exercised, the company will reimburse the $2,500,000 loan to the shareholders in the meantime to the main shareholder. In the meantime the company as you were saying before is continuing its disposal of non core assets in order to find alternative sources. I need to be clear on this. The Board of Directors is the company body in charge of the ultimate decision on this. They will obviously consider the business environment, the financial situation in the interest of the company and its shareholders both minor and major ones. The importance of having the most efficient capital structure is something of which the company is very well aware of and continues paying a paramount attention to. We are hence facing a very different situation from the one where the initial credit line was granted. Should let me underline again, should the equity issue, the equity option be further confirmed, it would be because our team has found very exciting new opportunities to accelerate the growth and require additional investments. This would be done with the objective of creating substantial value upside for our investors, all investors. If so, I hope we will be able in that case if so to convince investors on the opportunity of such a decision and that our shareholders could consider to support their company with the share issuance at a fair price. But again, so far we are not yet at that point on the basis of actual cash position and cash projections. Hope this clarifies the topic. Okay. Thank you. Appreciate that. Thank you. Now it would be the case, I don't know if Jason started as a discussion with us. It would be the case to be great to having Jason commenting on the business momentum in America, our Natuzzi Key market, notwithstanding the very short term visibility we have today for many reasons that you should know already. Thanks, Jason. It's your turn. Sure. Listen, good morning and good afternoon to everyone. I'll be brief this morning. The situation we feel continued momentum in North America. When we look at our branded wholesale business, the full orders demanded at both in our retail and wholesale channels and we compare those to 2019. We're growing at a pace of about 44% year to date versus 2019. When we look at only the retail channel, we're growing at a pace of just north of 50% compared to our 2019 pace. So we're very pleased with our current momentum and are working very hard to maintain and accelerate that pace. And you know, I think from my perspective, those are the key headlines for us at the moment and happy to take any questions if there are Click the Q and A button on the left side of your screen, type your question in the light box, then click submit request. Our next question today is coming from Charles Meadeau. Your line is now live. Good morning, Charles. We can hear you. I can read the question to proceed. Is that okay? A key focus for Antonio is operating margins. Could you help us understand the opportunity NTZ has with improving operating margins with the Polo Notre Sofa and Pultrono Route operating margins in the teens. Excuse me, this is Pasquale. Who is asking this question? This is the operator reading the question from Charles McDougall. He says a key focus for Antonio is operating margins. Could you help us understand the opportunity? I'm assuming that's the Tutsi has, with improving operating margins with Pultronosofa and Pultronafrau operating margins in the teens? Okay. All right. This is Pasquale Natuzzi. So first of all, Antonio, our CEO, he will officially start to operate in the company June 1. So today is not here. We apologize for that, okay? It's still engaged with McKinsey as a senior partner. So again, June 1, he will be here. But anyway, I'm in the position to answer to this question. Certainly, I don't have with me numbers regarding the operation margin of Portrona, Sofa and the POTRONA FRU. But certainly, talking about the POTRONA SOFA, is it gamma Petrone Sofa? Okay. Petrone Sofa, I mean, it's a completely different company. I mean, their best selling product Ole, I mean, they promote sofa for $99 They promote the sofa for $3.99 for $5.99 for $6.99 motion to Seater. I mean nothing to do with us. They don't have a manufacturer. They do just outsourcing without respecting the human rights. I mean nothing to do Natuzzi with Petronas Sofa. Regarding you're welcome. Now regarding POTRONA FRU, it's even completely different company. We are manu table. We are lifestyle brands. We have store in America, store in China, all Asia Pacific. We have a store in Europe. We have a store in Middle East. We have a store everywhere in the world. I mean, we are global. We are an Italian lifestyle brand with a presence everywhere in the world, manufacturing product in Italy, manufacturing product in Romania, in manufacturing in China and in Brazil, completely different company. So to be honest, we don't consider POTRONA FRO as our fear and absolutely not Patrona sofa. It's a completely different world, okay? I hope I answered your questions. Our next question today is coming from the line of G. Cohen. Can you guys hear me? Yes, please. We can now. Thank you. Hi. Question for Jason Camp. How many stores do you think we could open in the U. S. In the next 2 to 3 years? And how would you kind of describe the current trading environment relative to prior periods in your career including at RH? So thanks, Greg. Let me start with what I see as kind of the current trading environment in the U. S. It feels I mean, I've been retailing in home furnishings for 25 years. I've never seen growth like this at a macro level. When I when we observe what we're able to observe in the market, we're seeing people growing generally at 20 percent to 40%. And so we're very pleased to be in that 40% to 50% range ahead of the general market. We see continued opportunity to build a strong foundation on this business and accelerate it further. We believe when you when we look at the opportunity to open stores and we think of those opportunities both with Natuzzi Italia and Natuzzi Editions, both independently owned and company owned that we can open in the range of comfortably 10 stores a year and potentially accelerate that as we continue to learn more about our model and the opportunities ahead. Thank you. Our next question today is coming from David Tennant. Your line is now live. Coincidentally, the previous caller actually posed the question that was on my mind, but I'm going to spin it a little differently. The stores, the 50% growth from retail that you saw in Q1, was that all organic or were there stores added that were in the calculus? Thanks, Dave. So that it's purely an organic number and that's a January through April number. So it's pretty current through the end of April. Okay. And then, I don't know if this is a question for you, Jason, but obviously in North America, the growth is impressive. We know that Europe literally just reopened. I'm sure it's starting to come back to life. Do you think that you can see numbers comparable getting up around, let's say, 25%, 35% up versus 2019 in UK, Italy, etcetera, or in the initial reopening here in April, it's below that? I think that probably is a question for, for Victoria as open right we saw substantial increase in our incoming order rate of about 16% on a global level. So you can feel the impact of what their reopen business does to our globe. And I'll let Vittorio add any additional color. Yes, you're right. The percentage after 18 weeks, the global percentage for 'nineteen is 15.7%. But consider that we had U. K, for example, but also Italy almost closed for that period. And in fact, the up pace for order flow was better than Q1, the 1st 3 months. So, Vittorio, 16% up overall is inclusive of Europe being very weak for January, February, probably in part of March. So could you speak to specifically April and the 1st few weeks of May in Europe, what kind of increase you're seeing in written orders? I'm sure it's well above 16%, but could you give us a sense as to how that is trending? Mr. Natuzzi, would you comment on the different acceleration of growth by main region? We divide all Europe if we should consider Eastern Europe and even Russia is an European country. Okay, we divide Southwest Europe from what we call emerging market. Now Southwest Europe includes Italy, Switzerland, Austria, Germany, Netherlands, Belgium, France, Spain, Portugal and England. This is Southwest Europe. We have very good managers there and the region has been suffering very much because of the lockdown of several countries. Now until months ago, let's say, 4 weeks ago, we were 25 percent with budget in this region, very important region, while right now we are minus 15%. So already in 4 weeks has been recovered at the 10% endpoints. So we are very much confident that the business will pick up again in Southwest Europe. Then regarding the what we call emerging market, it's just unbelievable. The number I have here with me is that in the 1st 20 weeks, the business is going very, very well, like even in the States of America and like South America. Also South America is doing very, very well for us. But in general, we are very much certainly we want more. We want to see more order. We want to see more volume. We want to see improvement in margin and everything. But I mean, it's a very satisfactory, the way the business is doing so far. David, let me underline a detail on that. While the branded 18 weeks written orders grew 15.7% versus 2019 and branded is down. So the total order flow of the company, if we compare with 2019 is up by a single digit. Okay. Branded is up double digit and branded is down double digits. At the end of the day, we are up for the overall order flow with a single digit increase against 2019, which is your question, I guess. Well, even more specifically though, what I'm trying to understand is the numbers are diluted when you include January, February, March. So what I'm looking to isolate is just April and the 1st few weeks of May. Southwest Europe, I know emerging markets is doing exceptionally well based on the commentary from Mr. Natuzzi. But can you speak specifically to April and the 1st few weeks of May in terms of written orders? We already told you and that's the detail that we can supply so far. With April pace is up 16% versus Q1 pace, okay, Q1 2021. Why? Because U. K. And other European countries are recovering, reopening and recovering. That's number so far about order flow in April. Okay. And then is May consistent with what you're seeing in April? April global order flow was better versus Q1 2021 pace, thanks to the contribution from Western and South Europe that reopened, just reopened by 16%, 1.6%. Yes. No, I understand. But what I'm asking is the 1st few weeks of May, have they been consistent with April? Yes. The year to date order flow is consistent. Okay. Thank you. No problem. Thank you. Thank you. Our next question is follow-up from Fred Cohen. Your line is now live. Can you confirm your camera and audio is live? Can you hear me? Greg, we can see you if that helps. I do apologize for any technical info. You just may have to unmute yourself on the platform itself. There should be a microphone. Just one moment please. And if there are no further questions, I'll turn the floor back over to management at this time. Someone with management just acknowledge you can hear me? Yes, we do. Okay. I believe that does conclude our question and answer session. Would you like to make any closing remarks? I do not believe we have any further questions. No further questions. Okay. There are no further questions at this time. And if there are no you have any closing remarks? Or would you like me just to close the call? Maybe Mr. Natuzzi would like to close the meeting. Yes. Over to management for any further or closing comments, please. Mr. Natuzzi? Okay. Certainly, I'd like to thank you very much for all the attendees, which I'm reading are 33. Very pleased to have you as a listener. And I hope that next time or any time you need to ask a question about our company. We would be very pleased to answer all of you. Again, thank you very, very much for the confidence and I wish you all the best. I wish you to be safe first, okay? Seems that the pandemic also in Italy is disappearing and even in Europe. And I'm anxious together with Mr. Antonio Quile, our CEO, to start traveling again and meet people around the world. Thank you very much again. All the best to everyone. Thank you all. Thank you. That does conclude today's teleconference and webcast. You may