Natuzzi S.p.A. (NYSE:NTZ) Q3 2022 Earnings Conference Call November 28, 2022 10:00 AM ET
Company Participants
Piero Direnzo – Investor Relations
Antonio Achille – Chief Executive Officer
Jason Camp – President, Natuzzi Americas
Pasquale Natuzzi – Founder and Executive Chairman
Conference Call Participants
David Kanen – Kanen Wealth Management
Operator
Good day ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter 2022 Financial Results Conference Call.
As a reminder, interested people can join the call live by dialing in: (+1) 412-717-9633, then passcode 39252103#. Once again, if ypu would like to join the call live on the phone please dial (+1) 412-717-9633, then passcode 39252103# in addition to the link alerady provided to join via video. At this time, all participants are in a listen-only mode. Following the introduction, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions.
Joining us today on the call are Mr. Antonio Achille Natuzzi’s Chief Executive Officer; Mr. Pasquale Natuzzi, Founder and Executive Chairman; then Mr. Jason Camp, President of Natuzzi Americas; and Piero Direnzo, Investor Relations. As a reminder, today’s call is being recorded.
I would now like to turn the conference call over to Piero. Please go ahead.
Piero Direnzo
Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi’s conference call for the third quarter 2022 financial results. After a brief introduction, we will give room for a Q&A session.
Before proceeding, we’d 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 annual report on Form 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 Chief Executive Officer. Please, Antonio.
Antonio Achille
Thank you, Piero, and good afternoon, everyone. Thank you for joining our third quarter press release. Let me share a few highlight on the third quarter, but also as we are pacing at the end of the nine months of 2022.
The third quarter closed with a positive tone both in term of revenue. We reported revenue of EUR160 million, which means an increase of almost 50% versus 2021 that, as you remember, was a strong year for us with an increase of 30% versus 2020 and an increase of 32% versus the year 2019, which can be considered the last year or normality before the pandemic.
I also would like to flesh out the growth of the branded business. As you know, Natuzzi operate two main brands: Natuzzi Italia and Natuzzi Edition. And that revenue were EUR103 million with an increase, which is higher than the average increase of the total revenue or 22.5% versus 2021 and 57.6% versus 2019. This means that the branded business is growing faster than the overall revenue, which is very consistent with the strategy that Pasquale Natuzzi, our Chairman, initiated a decade ago to transform the company to a brand lifestyle company and a retail company.
One of the priority we gave ourself with also my new mandate is working on marginality to extract more value to give investor in the business, but we extract more value also for the benefit of the investor, majority investor and every invested. When it comes to marginality, we closed the quarter with 37.7% margin, which compare with 36.6% of 2021 and with 28.7% of 2019, so versus 2019, almost 10 additional percentage points of marginality, this in a year which has been still characterized by significant increase in cost in some of the materials and a true spike in the energy cost.
So as a result of those element, let’s say, our continued growth and a better marginality, we closed the third quarter with EUR4.1 million profit, which compare with a loss of EUR0.4 million of the quarter — or the third quarter last year and a profit — and a loss of EUR8.7 million in 2019, so quite a significant improvement during the quarter.
If we look at the nine months of 2022, the profit has been of EUR6.7 million, which compare with EUR4.3 million in 2021 first nine months. It’s important those to remember that in 2021, Natuzzi as all, let’s say, major company benefit for COVID-related measure that in our case in the first nine months amounted to EUR4.2 million. So if we want to compare the profit of the first nine months of 2022 versus 2021, the improvement netting the one-off COVID-related measure has been very significant, clearly much more significant versus where the first nine months ended with a loss of EUR19.5 million.
When we look at profit per American Depositary Receipt, which is basically what everyone of you owns, that means that we closed with EUR0.50 of profit per share per ADR, per American Depositary Receipt, which is to be compared with a loss of EUR0.35 in 2021 and EUR1.05 in 2022. So from the very beginning, we discussed in our call that the priority for our business is to create value for our shareholder and for our employees and for our customer, and this is somehow happening.
Cash-wise, we’re close to a position which is very similar to what we had at the end of last year. Last year, we closed with EUR53.5 million cash. This quarter, we closed with EUR53 million, so almost exactly the same. This despite the fact we are having some more inventory due to the slowing of the business. So in essence, I hope you appreciate our effort to manage the company in a way to extract more value and to have a more tight cash management. Clearly, it’s very early day. We don’t want to be celebrating any success, but I believe the numbers show that the work is paying some results.
I want to also like in a very candid manner that the trend that we already discussed in the last press release, which means the slowing down of the business since April has not reverted the trend. So both in our retail and the business with our clients, we see a pace of new order which are below our expectation, which means our budget. We keep comparing notes with the remaining player in the industry, and we see this is quite a general trend given whatever is happening around us, which I believe at this point is even redundant to repeat.
We don’t take, of course, this as an excuse. We are working very hard. We’re also taking some changing in our organization, most notably in our wholesale team in U.S. and also in our European emerging market team to reinforce our team and to make sure we stay closer to our existing clients and also to reinsert new clients selectively through strengthen our pipeline of business.
This a bit the executive summary. So I would say, a quarter which end up on a positive note. Unfortunately we’re experimenting quite a strong headwinds, which is not helping our turnaround. We’re very committed to continue the growth journey, which is part of our five-year plan. But we need to acknowledge that this is happening in a market context, which is not necessarily favorable.We know the industry is difficult. So we definitely hope it’s not going to be lasting forever. We’re working so that despite these headwinds, we keep our business up and our factory busy.
Just providing an additional few highlights on our cost structure before opening to Q&A, when it come to G&A, there’s been a better absorption and also SG&A given our business leverage. When it come to raw material, it’s noticeable, the spike in energy. As I mentioned before, we had an extra cost of EUR2.8 million for energy. Material is a bit a multifaceted dynamics. Labor is improving the cost. Fabric and metallic part steel on the rise, because those industry themself use a lot of energy in the production. And so they pass the additional cost to their client, which in the circumstances are players like us.
The other point — note is transportation, which is normalizing, not yet at the level of 2019, but especially from China to U.S. and get on to us has been steadily reducing and allowing us to be competitive again from those platform. This is a bit the executive summary I wanted to provide. Let me stop here for observation and question as usually.
Question-and-Answer Session
Operator
Thank you. Now we’ll be conducting question-and-answer session. [Operator Instructions] Our first question today is coming from David Kanen. Your line is now live.
David Kanen
Good morning. Can you guys hear me?
Antonio Achille
Yes. Dave, we hear you very well.
David Kanen
Okay. Well, first, congratulations, I know the quarter didn’t turn out exactly as you would like and to your long-term potential, but to earn EUR0.50 per ADR is certainly an accomplishment and demonstrates how undervalued the company is. So congratulations, and it’s encouraging what the potential is long-term?
So a couple of questions, one of your comments in the press release is in response to the tough market conditions. We’ve launched a set of actions to lower the cost of our G&A, tightly managed our working capital and protect our cash position. So could you speak specifically to what’s going on in terms of lowering the cost of G&A? And implicitly, what it tells me is that there’s more leverage in our financial model to the upside during periods of normalization. But if you could just quantify that for us and give us some specific success to the areas that you’re targeting?
Antonio Achille
Okay. Well, thank you for the positive note and encouragement, Dave. We know that you have been a long-term investors and hence, that’s come from a deep understanding of our business. That’s highly appreciated.
So when it come on the management of our cost, we went back to basic in the sense that in 2019, the company, also with external support of McKinsey, put together a process to manage in a tight way the restructuring cost, looking at any individual dollar, which has been spent across all category, which include purchase, transformation cost, industrial cost, G&A, the quarter cost. So we have replicated that methodology internally.
I was part, of course, of the McKinsey team there. So a lot of people also here are already black belt on that methodology. So we have a weekly meeting, and we have accounted around 13 responsible, which, as you can imagine, are the typical functional responsible. And we have put down a citizen initiative to tightly manage the different costs and also the working capital.
So I can give you a few example. One is really around streamlining and accelerating the restructuring in the quarter, where we identified potential to accelerate the rightsizing over the quarter also as a way to allow to bring in new capabilities. We are looking at all possible way to reduce the impact of an additional energy cost on our factories, so we are reramping all our factory. We are reviewing the processes.
When we come to working capital, we are applying a lot of scrutinity at all the different working capital that we have in the company, which means the raw material that we have, which means also the finished product that we have in some of our geography, so we are having really a tight management of those items to ensure that there is no cash trapped in those area.
We are addressing also some more structural opportunity like the simplification of our offering where we want to be very compelling and appealing to their consumer, but we also acknowledge that there is a lot of — that can be done to simplify the covering assortment, the way in which we make intermediate stock on that level. So it’s a kind of holistic approach managed with a tight methodology where every week, we appreciate the progress, we intervene to change and resolve situation will need to be accelerated.
David Kanen
So can you quantify what the cost savings are in terms of millions? Is it a low single-digit, mid single-digit or high single-digit number when it’s fully implemented?
Antonio Achille
So Jason, please, can you put mute. We are receiving a notif for all of the message or whatever you’re getting from. So I think if we just look at the third quarter, also to compensate a slowdown in the revenue, we’re looking at, I would say, a material potential impact, so in the order of EUR3 million, EUR4 million for a quarter, which doesn’t mean that we’ll increase the EBIT, but it means that we’ll also allow us to counterbalance the negative effect of the loss of revenue momentum.
So I believe this is a company which has sustained, we know that. We’ve always been mentioning the opportunity around restructuring. This is a company which has an opportunity to manage in a more tight ways business and the opportunity per se of that can be quite substantial, quite substantial on the early days. It can be quite substantial.
David Kanen
Okay. And then in the press release, you referred to the impairment of a trade receivable, which increased SG&A. What was the dollar amount of that?
Antonio Achille
I will pass over to Piero for that. If opening that he has the answer.
Piero Direnzo
Impairment of trade receivables, it is written in the table.
Antonio Achille
Okay. Can you provide us that, Piero?
Piero Direnzo
Yes, it was EUR0.1 million for the third quarter.
David Kanen
Okay. And then a quick question for Jason. In North American DOS like-for-like, how did we do?
Jason Camp
So we’re spending a lot of time looking at both kind of how we’re comparing to ‘21 and to ‘19. And so when you look at year-to-date, we’re trending down eight to 21 and plus 50 to 2019 year-to-date.
David Kanen
Okay. Thank you.
Jason Camp
Like-for-like.
David Kanen
Okay, and then final question. Antonio, you’ve referred in the past to your Factory 4.0 sequential rollout. Can you give us an update on that? In the past, you referred to a mid to high single-digit improvement in gross margin once that’s implemented. Where are we? And when do you expect that to be fully rolled out?
Antonio Achille
So I confirm that is the range of the potential [Foreign Language], which means that if the factory are quietly saturated, they operate with the right level of saturation that in our business means 80% plus the application of that approach of working, which more than technology as a way of — having a lean manufacturing way of organizing the floor can produce the, kind of, result.
The plan is to roll out that most — most of our factory — Italian factory by next year and as we’re also considering a potential relocation of the factory in China to make sure the new plant can be fitting this new approach of working. And then the next wave will be Romania and our Brazil operation, so that can be the benefit.
I need to be, again, candid here because before modeling the benefit in the margin, we need to acknowledge that the reduction in volume is also translating in reduction of factory utilization, which being a fixed cost business, of course, has a direct impact on the cost per minute. So we are even working harder on the Factory 4.0, because we see it not only in the long term something we believe — deeply believe on there’s an opportunity to enhance margin, but also as an opportunity short term to counter fight the potential negative impact on cost per minute deriving for — from a lower-capacity utilization of our factories.
David Kanen
Okay. Well, thank you. I appreciate the commentary. Good luck and you guys have a nice holiday.
Antonio Achille
Well, we’re definitely going to talk to before holiday. For us, holiday — we will do holiday after the plan is completed. In 2027, we do holidays.
Operator
Thank you. [Operator Instructions] If there are no further questions at this time, I’ll turn the floor back over for any further or closing comments.
Antonio Achille
Hi, I feel I’ve spoken enough. I leave the floor open maybe also if Pasquale want to comment or Piero or Jason, then I will do a summary myself. But I also want to leave the floor — open for the Chairman and the rest of the team if they want to comment anything. And then I do my final remark.
Pasquale Natuzzi
You gave plenty clear explanation, Antonio, for what we are doing and what is happening. So I’m — probably what we missed regard — what we missed to explain [indiscernible] is that in order also to reduce G&A, we are reviewing the organization, consolidating some organization like, for example, the Southwest Europe market, together with [Technical Difficulty] market under a single regional manager and also aggregating and synergizing the customer care and other function.
So, I mean, you know, reviewing the organization aggregation certainly will allow us to improve the service, improve — I mean and reduce the cost. This is something that we are following. For the rest, you gave all the major explanation, Antonio, okay?
Antonio Achille
Thank you, Pasquale. It’s been a very appropriate comment on your side.
So in closing, I want to restate how committed we are. We’re really working as one team with just one strategy. The Chairman, myself, you see Jason, our leader in North America, but also the remaining of our team, we’re very cohesive, we’re very committed on the long-term plan. We know that there are challenges ahead of us, but we are very equipped for those challenges. We have a good cash position. We ensure the company is managed adequately on that front.
And as I mentioned before, we’re going to be stepping up in term of aggressiveness on cost reduction as due to this phase. And as everyone you have seen is doing also starting from the large digital company in U.S. So this is, let’s say, third quarter result. In term of strategy long-term, nothing has changed, we’re still committed to make Natuzzi the most successful high-end European brand globally. I believe that with the current strength of the brand, the current heritage of the brand, this is something is due and is also achievable.
Having said that, thank you so much for your attention. I wish you a great continuation of the day, and I hope to reconnect soon in our next press release.
Pasquale Natuzzi
Thank you.
Operator
Thank you. That does conclude today’s conference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
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