Natuzzi SpA Q2 2021 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Kyle Travers - Lightning Crashes Research - Analyst : Hi, I'm unmuted. Can you guys hear me? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 27, 2021 / 2:00PM, NTZ.N - Q2 2021 Natuzzi SpA Earnings Call

Question: Kyle Travers - Lightning Crashes Research - Analyst : Hi, good morning, guys. I appreciate you taking the time. I had some time over the weekend to go through your press release and appreciate it. So one question I had in particular was about your US stores that I think you said are trending at around $4 million, at over 70%, I guess, contribution margins. And I was curious. How many of your stores are headed in that direction? And if you could also remind me just of your total US store count.

Question: Kyle Travers - Lightning Crashes Research - Analyst : Okay. And I think the, I guess, other six stores, I guess, dream big with me for a second. How long do you think it would take for the other six stores to get to the $4 million run rate? When do you see this the soonest that could be achieved?

Question: Kyle Travers - Lightning Crashes Research - Analyst : It does. I appreciate it.

Question: Kyle Travers - Lightning Crashes Research - Analyst : And I guess just one other question; this is a little bit broader. And I don't know if you guys might be able to point me in the right direction. But there's some things that are off balance sheet, you have some land and you have a JV in China. And I guess I was wondering where I could find, one, the China, the Kuka information about their operations and how those are trending. Maybe you guys could just summarize sort of the land opportunity and some of the stuff that -- maybe not particularly strategic to the longer-term vision and how much you guys think you could be able to monetize by selling real estate. Something's that are (technical difficulty). So two questions there.

Question: Kyle Travers - Lightning Crashes Research - Analyst : From somebody who is new to your story, I think you guys (technical difficulty). But I think it would be incredibly helpful for somebody on my side to have a little bit more granularity on what's going on with Kuka, and even the metrics we always look at are sort of sales and EBITDA. And we're going to pop a multiple on there and just to understand what your 49% is worth. Just so it's little bit clear, because people that are new to your story, there's obviously no (technical difficulty) coverage here. So it's a little harder to do a full sort of sum of parts here and understand what's completely (technical difficulty). I will leave it at that and I appreciate the details. And I appreciate you guys taking my questions. So thank you very much.

Question: Greg Cohen - Rambleside - Analyst : Hi. So congrats on the strong growth in Q2, particularly in the US. My first question is: are you seeing these strong trends in written orders continue into Q3? We're almost at the end of Q3 here. So just I was wondering if you can give some color on the trends in sales, whether they're accelerating or staying the same or what you're seeing. If you can provide some guidance on that.

Question: Greg Cohen - Rambleside - Analyst : That's helpful. I guess my question is on the US in particular. From my perspective, that's our key growth market. So is there any more detail you can give on how the US is doing in particular over the past couple of months or so?

Question: Greg Cohen - Rambleside - Analyst : Got it. That's helpful. And I guess as we look forward, can you just kind of give a little bit more color on our store opening plans? I know in previous calls, we had discussed, I think, there were six or seven that were going to be open in sort of a near-term timeframe. If you could just kind of give us a little bit more color on the pace of store openings in the US, I think that'd be helpful.

Question: Greg Cohen - Rambleside - Analyst : Got it. And just one last question for me and then I'll hand it over to the next caller. Could you give an update on some of the other strategies in the US and globally that we're pursuing, such as e-commerce? And kind of the second ancillary to that would be where we are in the opening of the Mexico plant to service the North American and South American markets.

Question: Greg Cohen - Rambleside - Analyst : Thank you. That's incredibly helpful. And I know you've only been there for three months, but the work you've done so far is very impressive and energizing. And I think shareholders really appreciate your focus on return on invested capital and a new focus on profitability, as well, obviously, as high-quality product. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 27, 2021 / 2:00PM, NTZ.N - Q2 2021 Natuzzi SpA Earnings Call But personally, I'm very much looking forward to the years to come. And it seems based on current trends, we're set to grow in a very big way and be very, very profitable. So look forward to hearing the update on the next quarter.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Good morning. Dave Kanen on Charles McDulin's line. Are you guys able to hear me?

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. Sorry about the earlier problems. So in terms of the new store openings, it's encouraging to hear there are 10 -- your goal is about 10 for next year. Looking out three, four years, how many stores do you think you can have in North America? And the reason I'm asking for more color there is your statement that branded and DOS stores contribute 74% gross margin. Obviously, we'd like for that ramp to occur as soon as possible. So if you can give us a longer-term goal. Is that 10 stores per year sustainable? Where are we going to be in three or four years?

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. I appreciate that color. I'm sorry. Go ahead.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. Yeah, I appreciate the thoughtful approach to the expansion. That completely makes sense and sounds like you are learning from other people's errors. In terms of gross margin, I know that you've seen inflation in raw materials. You pass through about a 15% price increase. Can you give me the timeline on that? What I'm kind of wondering about is on a go-forward basis, are we going to see an expansion in gross profit on a consolidated basis from these cost increases. For example, if they were passed through in May or June, you did not have the full-quarterly benefit. So that's what I'm trying to ascertain, if you could speak to that. Again, the timing. And if on a go-forward basis, the price increases are going to help improve gross margin.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. So, the price increases that we've taken recently are going to have a favorable impact on gross profit going forward?

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. You guys kind of beat me to the punch on transportation. That was really my next question. Transportation costs were up 420 basis points. And if you look at the history of that, shipping containers, it's somewhat cyclical. And historically, when they've had large price increases, they've been followed by price declines. So I would like to believe that over the next 12 to 18 months, we're going to recapture some of those 420 basis points along with the price increases that we've taken that will drive gross margin higher. I know you don't give guidance, but looking out 12 to 24 months, as you most likely reclaim some of that 420 basis point increase in transportation, you start to get the benefit of price and declining raw material prices. Being that operating income adjusted for the one-time Canadian issue was about almost $3 million, is it possible that we can get well into a double-digit EBITDA margin? I mean, we were at about -- pro forma, I think we are at $8 million of adjusted EBITDA for the quarter. Could we get to a 10% or better margin over the next 12 to 24 months?

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. So in other words, you have other initiatives to mitigate cost inflation in transportation and raw materials. You're controlling the things that you have control over. That's good to hear. And then I have a question for you, Mr. Natuzzi, on product development. Today, it seems like you're moving more towards training your sales force in-store where they're more designing a room for a customer as opposed to just taking an order for a product, where I come in looking for a sofa but taking a more holistic view. Are you going to be increasing the number of SKUs in product development to further increase the penetration that you have with that customer, quote, designing a room, as opposed to just selling them a product? And if you can give any color there of some of the -- if you are, what would some of those product categories and SKUS be?

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : I see. So you have enough SKUs to meet the customer is what you're saying.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : And then just last question, I don't want to monopolize. In terms of e-commerce, when is your launch? And if you can provide any color around that and expectations of shareholders that we should have.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : I'm sorry.

Question: Dave Kanen - Kanen Wealth Management, LLC - Analyst : Okay. That's very helpful. Thank you, guys. Congratulations and good luck in the upcoming year.

Question: Stanford Wyatt - August Partners Investment Management, LLC - Analyst : Hi, guys. Thanks for taking my question. I appreciate it. And I'll echo what one of the previous callers said, that all the additional detail in the press release was really helpful and the focus on the return on capital and some of the other changes you made have been great. So thank you. And just to circle back on one of the previous questions, I'd love to hear, I know you're not giving guidance, but just on the long-term EBITDA margin potential in this quarter. I thought the EBITDA margins were pretty strong, considering all the headwinds with transportation and supply chain cost. But love to hear just any thoughts on over the long term what the EBITDA margins can get to. And then I've got one more question after that. Thank you.

Question: Stanford Wyatt - August Partners Investment Management, LLC - Analyst : Yeah, that's great. Thank you. And just to follow-up on that. I saw you guys also look to have spent $800,000 this quarter to reduce the redundancy of your Italian factories. And just kind of curious along those lines if there's more opportunity there and what the potential is.

Question: Stanford Wyatt - August Partners Investment Management, LLC - Analyst : Thank you. And then just my second question -- also great to see the alignment and you mentioned your stock compensation plan, your stock option plan that starts next year. And I think at the end of your prepared remarks, you mentioned MBO or some -- it sounds like you might already own some stock. Any more detail on what that is? I wasn't sure what that was referring to. And then also just on the option plan, I guess, why wait until next year? I mean, you guys are working on a lot of good stuff. Why not incentivize the management team right now? I guess, just any details on what that -- are you going to grant the options now and they vest next year? Is that what that means, or any further detail would be helpful? Thank you.

Question: Stanford Wyatt - August Partners Investment Management, LLC - Analyst : Yeah. That's great to hear. Yeah, it sounds like so the strike price will be the 30 days before you join. So you obviously (multiple speakers) --

Question: Stanford Wyatt - August Partners Investment Management, LLC - Analyst : Yeah. You're incentivized now and going forward, and it sounds like a great opportunity, and love to see that alignment as a shareholder. So thanks a lot for your time and keep up the great work. Thank you.