Natuzzi SpA (NTZ) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Natuzzi S.p.A. second quarter and first half 2004 financial results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. If you should require assistance during the call please press star then 0. This is a reminder that today's conference is being recorded. I would like to turn the conference over to Nicholas. Please go ahead.

Good morning, and thank you. Good morning, to the listeners connected from the United States. And good afternoon, to those of you that are listening from Europe. Welcome to Natuzzi second quarter and first 6-months 2004 earnings call. Today with us we have our CEO and Chairman of the Board, Pasquale Natuzzi, and connected from the United States, the President and CEO of Natuzzi Americas, Fred Starr, and also Giuseppe Desantis is here with us, Vice Chairman of the Board. Today we'll give the Natuzzi 2004 financial results and as usual after today's conference we will open the call to you for questions. You should have already received a fax on the results. If you have not received the information you can catch them on our website www.natuzzi.com or call our Investor Relations Department at 39-080-8820-412, so we can send you a copy of the earnings release. Any questions, please call at the number I said or write your questions to Investor Relations at natuzzi.com. We would be pleased to respond to you as soon as possible.

Before proceeding, we would like to advise the listeners that our discussion today could contain certain statements that constitute forward-looking statements under United States securities laws. Obviously, actual results might differ materially from those in the forward-looking statements because of risks and uncertainties can affect our results of operations and financial conditions. All of these risks and uncertainties have been discussed in our annual report on the Form 20-F for the year-ended December 31, 2003, and that is available on our website or directly from the United States Securities and Exchange Commission. The currency rates important factors in analyzing our numbers are the following for the second quarter 2004, the Euro strengthening against the United States dollar by 5.71% versus the same quarter 2003 and the rate was 1.2047 dollar Euro.

Let's turn now to the Natuzzi second quarter 2004 financial results. Net revenues for the period were substantially flat for 202.6 million Euros. In the second quarter 2004 upholstery sales increased by 1.1% to 181.1 million Euros versus 179.1 million Euros we reported in the second quarter 2003. The increase, the 1.1% increase in upholstery sales. So it was due to the following factors. We had 2.5 decrease determined by the position of Euro gains to the major currencies, of course, especially gains to the United States dollar. A 0.4% increase in units sold. A 6.6 prize-mix factor and we had also another negative impact of about 2.6% coming from the sellout contribution from our directly owned stores. The geographic breakdown of revenues sees that in the second quarter 2004, we reported a decrease of 3.6% over the same period in 2003 in the Americas, a growth of 0.8% in Euro. Put wide in the rest of the world net upholstery sales increased of 46.7%. In terms of seats sold we had an increase of 6% in the Americas and 19.8% increase in the rest of the World. In Europe, total of seats sold increased by 4.6%.

Looking quickly at the reasons that explain this different patterns for the different regions, we can say that in the second quarter 2004, the decrease in the Americas both in terms of sales and units sold was easily understandable also mainly due to the position of the Euro gains to the U.S. dollar. But also to the general uncertain economic condition, as well as to the persisting pricing pressure. In Europe, the positive results reflected good performance of Italsofa that more than counterbalanced the unfavorable performance of the Natuzzi products. The contrasting performance reported for the 2 brands in Europe are explained mainly by the difficult economic conditions that make this market more price oriented in this period and this means from our point of view, this is a market in which Italsofa, as the numbers and the figures say, it's a product that is sold more than the other Natuzzies.

In the rest of the world both brands keep on well performing. The coverings, leather and fabric, sees that leather upholstery increased 0.9% in terms of seats sold and 2.5% in sales. Fabric covered upholstery sees a decrease by 4.7%, while in terms of revenues we had a decrease of 5.2%. The 2 brands Natuzzi, the medium-high brand and the Italsofa, the brand dedicated to the promotion of market, the performance of these 2 brands, what they say? They say that Italsofa in the quarter represented 34.5% of total seats sold, while in terms of revenues 23.1%. One year ago, in the same quarter, I mean, in the second quarter 2003, the percentages were 31.8% and 20.5% respectively. The brand, the Natuzzi brand in which we include also the [Sofaspen.] The regular and the Pasquale Natuzzi Collection that represented a very high top of the collection, accounted for 65.5% of total seats sold, while in terms of revenues, this brand represented in the quarter 76.9% of total sales. In the same quarter 2003, the Natuzzi brand was 68.2% in terms of sales, and 79.5% in terms of revenues.

Our change that included Divani & Divani by Natuzzi, the one represented in Italy, Kingdom of Leather in the U.K., and the Natuzzi stores in some countries around the world, sees that our sales due to retail operations were up 11.4%. So 31.4 million Euros, versus 28.2 million Euros, we reported in the second quarter of 2003. The stores during the quarter, we continued to open stores and the galleries, of course, during the quarter because the opening of this dedicated distribution represents one of the focal points of our strategy of development and improvement of the positioning of the brand. And the stores increased to 140 in Italy and 122 abroad. While 1-year ago we had 128 in Italy. So we have 12 more in Italy and 90 outside of Italy. So we opened 32 more than the same-period one year-ago. In terms of galleries, the gallery represents a kind of "shop in the shop," a floor dedicated only to the Natuzzi product, opened 73 new galleries in the second quarter, which means more than 1 gallery per day, bringing the total number of galleries to 457. Today we have 138 stores in Italy and 125 abroad. The other sales in which we include polyurethane, and some other raw materials, some other minor staff decreased by 8.5% to 21.5 million Euros.

Gross profit -- profitability in the second quarter of 2004 gross profit increased 13.1% to 78.7 million Euros. While the gross margin and I should say has a consequence, the gross margin increased to 38.8% from 34.4% in the last year's period. The increase is explained by more favorable conditions in the markets over raw materials and also by internal factors. I mean efficiencies achieved in the purchasing and manufacturing process. Looking into the next month, we see a possible price increase for some raw materials, in particular for polyurethane in which the oil price explicit has some substantial effects, and also leather could be a possibility. [Italy Operator] One momenti.

Ladies and gentlemen, please continue to hold. We're having technical difficulties. Please continue to hold. Ladies and gentlemen, please continue to hold. We'll go re-establish the host-line momentarily.

Can you open the call to Fred Starr so I can hear him --

Yeah, I'm okay. I'm here.

Okay, where we were. Did you lose the connection?

No, I was okay all the way.

Okay. By the way, I will go back, let's say, talking to the gross profit and if we didn't get -- if we didn't give you information about revenues, please make question and we will go more in detail about the call.

Nicola, you were right at the -- when you cutoff you were right at the impact of higher oil prices.

I'm sorry ladies and gentlemen, there seems to be technical difficulties at the host site. Please continue to hold. Mr. Dell'Edera, your line is open.

You guys, I don't know what's going on with the lines. Here the weather is perfect. So I cannot say the reason for the phone. So please AT&T double check what's going on with the telephone lines. So let's start again from the gross profit. I was talking about the gross profits, I assume that the line disconnected when I was talking about this. I said that we reported in the second quarter an increase of the gross profit of 13.1% and margin went up to 38.8% from 34.4% we reported in the last year's period. The reason for this increase summarizing, are more favorable conditions in the market or raw materials, efficiencies we achieved in the purchasing and manufacturing process. And looking ahead in terms of outlook for the raw materials prices, I said it's possible some price increase, especially for polyurethane, for the oil increase of the price, and leather. The SG&A were substantially flat as a slight increase 0.8%, and the slight increase, I would say was mainly due to higher transportation costs. The transportation costs are still underpressure because of the increasing demand, especially coming from China and Brazil that is putting stronger pressure on the market for shipment. And looking ahead putting together this higher demand compared to the other, plus the increasing price of the oil, we see another possible increase of the transportation costs. The operating income in light of the [inaudible] more than doubled to 16.8 million Euros from 8.2 million in the last year's quarter, and the margin as well more than doubled to 8.3%. The [product] line says that we had contribution from this line, a gain of 1.4 million Euros. So while in the same-period of last year the increase was 4.1 million Euros, the gain coming from 0.5 [inaudible] Euros we had on the closing of the [hedging] contracts. A gain of 1.4 million Euros, an actual gain, coming from the difference between the exchange rate of the invoice and the exchange rate of the collection of the money. And we had some unrealized losses and gain. Losses are realized for 1.6 million coming from the mark-to-market of the receivables and payables. And another unrealized loss coming from translation and the consolidation of foreign operation. While non-realized gain was achieved over 1.3 million Euros, from the mark-to-market of the foreign contracts on exchange rate.

The tax rate after we lost the last tax advantage we had in 2003 in Italy went up to 31%, reported in the second quarter versus 17.9% we had in the second quarter 2003. The increase was mainly due to the expiration at the end of 2003, as I said of the last exemption. The net income in the second quarter 2004 increased 6.7% over the prior-year quarter to Euro 12.7 million, in U.S. dollar 15.3 million. The earnings per share or ADR were 0.23 Euros, 23 cents of Euro or 28 cents of dollar. In the 6-months of 2004, the net income decreased 22.1 million from 26.7 million we reported in the first 6-months of 2003. This quarter was quite a good one in terms of cash flow from operations. As a matter of fact, we reported 45.6 million Euros of cash flow from operations. We doubled the cash flow we had in the second quarter 2004 that was 22.4 million Euros. And in terms of ADR the cash flow per share or ADR was 83 cents of Euro or 1.02 cents of dollar per share per ADR of cash flow from operations.

The CapEx we are continuing to invest and we spend -- or we invested -- to a 19.2 million Euros in the first 6-months. And we are stick to the forecast of almost 40 million Euros to be invested in full-year 2004. And last, but not least, the Natuzzi has net financial position is moving up and is about -- was at the June 30, 2004, 86.7 million Euros, that compare to December 31, 2003, says that at that date we had 53.3 million Euros. So we piled up another 33.4 million Euros. Okay. I think I have finished with this introductory comments and sorry again for the disconnection. And now, we are as usual, open to any questions coming from all of you. Thank you. Ziggy go ahead.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. We do have a question from the line of Don Noon.

Hi there I just have a quick question regarding your new store opening and your CapEx program. And I know some of the amount of money that you spend on new stores shows up in your CapEx, and some of it is expensed like the associated marketing costs. I was wondering if you could give us some type of breakout between the two, how much of this new store investment program is being capitalized versus how much is being expensed?

Okay. In terms of amortization, of course, we, as you said, we capitalize part of the cost related to the opening of the new stores and they are different from the countries where these new stores are opened. So they can go from 3 to 5 years, say to advance on where we ought to position then located. And I think this is the answer to your question.

Do you have any sort of dollar figure to the amount that gets expensed each year on that?

Until today, how much we have spent in opening our stores, this is what you mean?

Yeah. And of that amount that you spent in opening the stores, how much of that gets capitalized versus how much of that gets expensed?

Let's say again, if we look at all the expenses that we incur in opening the stores, there are different kinds of startup costs. Some of them are capitalized because it's permitted by the Italian Principle, but also by the International Accounting Principles. Some of them are directly expensed to the income statement. Even though at the moment of a consolidation, of course, we apply to all of them what are the accounting principles we use in the making the consolidation. So basically a large part, if not all the expenses, that are related to the startup of the stores are capitalized in the income statement and in the balance sheet. But the number, the figure, the number of years in which we amortize is different. To make an example, if we go to amortize -- if we pay some key money in opening a store, it depends, of course, on the number of years over the contract. And so it's different from contract-to-contract. If we wanted to capitalize some assets related to the opening of the stores that are more tangible assets, we can go up to 5 years. Looking at the intangibles, we can go up to 5 years as well or we can stay on 3 years. So it's quite a mixture of a situation for which I think the best thing to do is that we can give you more detailed answer on -- through the mail or in some other way. But taking into consideration also as I said that we expect, based on the Italian Accounting Principles, we expect also those costs that I don't know if you're calling from United States.

Yes, yes, I am.

Yes, from -- and in the United States, there are some costs that are not capitalized, while in Italy is allowed under the Italian Accounting Principle. Let me make an example, advertising cost. And there is a different treatment for the intangible assets that are treated in a different way if we use the International or the U.S. GAAP Principle, then if we use the Italian Principle. But if you would like to have a description of what could be the impact just to get an idea. If you look at our 20-F you will see in the last pages of the 20-F we make a reconciliation, in which we translate the Italian Accounting Principle, and the U.S. GAAP Accounting Principles. And so you can understand what are the difference moving from one kind of principle to the other kind. But let's say that on -- as a general statement, and as you most probably know, there is a different accounting treatment for the intangible asset in Italy than from United States and the International.

And then the other quick question I have of the amount of CapEx that you're planning on spending this year, how much of that will be for new stores versus how much of that will be maintenance?

The opening of maintenance -- maintenance, the opening of stores owned directly by Natuzzi, it's quite a new activity I would say. We are opening stores directly owned by Natuzzi 2 or 3 years. So talking about maintenance, it's a little bit early I would say. While to open -- we said that we were planning to open 14 new stores 2004, and we said that we were planning to spend something between -- about $10 million, $12 million to open all these stores and to make them on operation. Including, of course, if there are to pay some key money that represents sometimes the large part of the investment based on where we go to open the locations. And since we are trying to find for our location very good location and very appealing places, sometimes we have to pay key money that -- let me repeat. Until we will use the Italian Accounting Principle will be depreciated in the income statement, so capitalized on the balance sheet based on the duration of the contract, on the length of the contract.

Great. Well, what I may do is I may send you an e-mail later on with a little bit more detail --

Okay.

But I appreciate your answers.

No, of course. I would be really happy to give you a more detailed answer. And, of course, I would be very happy looking forward to receiving from you the e-mail.

Great, thank you.

You're welcome.

There are no further questions from the phone lines.

Hello? Ziggy?

Yes. There are no further questions from the phone lines.

No other questions?

No.

Okay. Thanks to you. And we will be in touch. I gave you my phone number. Any time please call me. And again good afternoon, and good morning from me, and from Mr. Natuzzi, Mr. Desantis, and Mr. Starr from the United States. Hello?

Yes. Is that the end?

Yes.

Okay. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.