Natuzzi SpA (NTZ) 2005 Q4 法說會逐字稿

Ladies and gentlemen thank you very much for standing by and welcome to today's conference call, the Natuzzi SpA Fourth Quarter and Full Year 2005 Financial Results.

[OPERATOR INSTRUCTIONS]

Now at this time I would like to turn the conference over to your host, Finance Director, Nicola Dell'Edera. Please go ahead sir.

Good morning and good afternoon. Welcome to this conference call in which we are talking about the fourth quarter and full year 2005 financial results for the Group.

Today, in the conference call we have Pasquale Natuzzi, our CEO and Chairman of the Board, Daniele Tranchini, Sales and Marketing Officer and Fred Starr, President and the CEO of Natuzzi Americas.

We will review the fourth quarter results in particular and some highlights about the 2005 performance. And then, soon after, we will open the call to your questions.

You should have received a copy by mail or by fax of the press release, yesterday night. If you don't please go on our web site, www.natuzzi.com or call our Investor Relations department, telephone number is (0039) 0808 882 0812.

Before proceeding, just a note to advise you that during the course of the discussion today we may make certain statements that can constitute forward-looking statements under US Securities Laws. Obviously, actual results might differ materially from those in the forward-looking statements because of the risks and uncertainties that can always effect our source of operations and the financial conditions.

We have discussed such risks and uncertainties, which have in the past affected and may continue to affect our results of operations and financial condition, in our Annual Report on Form 20-F for the Fiscal Year 2004, which is currently filed with the SEC, but is also available on our web site, www.natuzzi.com.

As usual we give a look at the exchange rate because for the Group like ours selling in 124 countries this represents a very important factor, to understand the numbers we are going to discuss.

In the last three months of 2005 the euro stands against the US on average by 9.5% to $1.1890 as compared to $1.2991 reported for the fourth quarter of 2004, which by the way represented really the peak of the trend in 2004 over the US dollar against the euro.

On a full year basis we were almost flat in fact in 2004 the average exchange rate was $1.2438 while in 2005 it was $1.2449 per euro.

The revenues, sales, that during the fourth quarter 2005 net revenues decreased by 1.5% to EUR190.6 million from EUR193.6 million reported one year ago. Whereas over the same period of time upholstery sales increased by 3% to EUR173 million from EUR167.9 million recorded for last quarter 2004.

In 2005, the full year, naturals totaled EUR659.9 million decreasing from EUR753.4 million accounted for in fiscal year 2004, 2005 upholstery naturals were at EUR594.8 million, down from EUR665.5 million we had in 2004.

Lets give a look at the 3% increase in upholstery sales that we had quarter-over-quarter and this increase was explained by a 4.2% increase determined by the appreciation of the euro against major currencies, a 4.1% increase in units sold and a 5.3% price mix effect.

Looking at the geographic breakdown of the upholstery sales during the fourth quarter 2005, we reported a 19.7% increase in the Americas whereas in Europe and the rest of the world we reported a 4.6% and a 7.4% decrease, respectively. In sets sold we had a 78.1% increase in the Americas whereas in Europe and the rest of the world we [reduced] a decrease of 4.5% and 8% respectively.

The double-digit increase reported in the Americas reflects mostly the good performance of the fourth quarter 2004. But it's the case to say also that we are pleased by the fact that the last quarter of 2005 is more in line with the performance made by the Continent in the previous, very difficult, four quarters.

In Europe and the rest of the world the situation is mixed with some indications of a recovery, progressive recovery for example in Belgium, Germany, Saudi Arabia. But some difficulties still we have reported in the countries like France, UK, Australia. In UK for example let me recall that there were some big companies that retain us, that closed, like Furniture Land and [Courts].

And besides, we have to consider also that the environment the company is dealing with is still unfavorable for the next quarter, like Natuzzi exporting from Europe to the United States, in particular. And this difficult environment was due to the obviously high level of the euro against the US dollar that of course has a negative impact on the competitiveness of the Natuzzi branded products that are made in Italy. The rising energy costs and also the interest rates that negatively impacted the consumer confidence. And still a very competitive environment that has lowered the product mix overall and our sales as well.

By breaking down the upholstery sales, under our two basic coverings, leather and fabric, the leather upholstery sales increased by 6.4% to EUR147.4 million, whereas fabric upholstery sales decreased by 12.10% to EUR25.6 million. And from percentage leather upholsteries represented 81.3% of total seats sold in the quarter, while fabric represented 18.7%.

Looking at the quarterly upholstery net sales also, with reference to the two brands seat and sofa, and Natuzzi, the first one is the promotional line while Natuzzi is the brand positioned at the medium-high end of the market. It has so far represented 52.1% of total seats sold in the quarter and 38.5% of total sales compared to 33.8% of seats sold and 22.6% of value, respectively reported for the previous year's comparable period.

The Natuzzi brand which will include the sofas for the regular and the Pasquale Natuzzi Collection accounted for 47.9% of total seats sold and 61.5% of total sales. Last year in the same period the mix was 66.2% and 77.4%.

Fourth quarter figures keep on confirming that downward price pressures still characterize the upholstery market. Looking at the retail activities, some numbers about the stores opened in the period, in the fourth quarter 2005 we had opened nine new stores and specifically we opened four new stores in Australia, one in France, in Denmark, Czech Republic, Latvia and Saudi Arabia while three stores were closed, two in Italy and one in China. So the total number of stores as of December 31, [2001] was 290, 126 in Italy, 154 outside of Italy.

The sales in the fourth quarter to Divani & Divani by Natuzzi, Natuzzi stores and Kingdom of Leather stores totaled EUR32.3 million, down 21% from EUR40.9 million reported in the fourth quarter 2004. During the same quarter 22 new galleries were opened thus bringing the total number of galleries at 605 as of December 31, 2005.

Looking at retail developments that happened in 2005 let me mention that recently we have also closed eight Kingdom of Leather stores in UK. In the fourth quarter 2005 the other sales were EUR17.6 million in the previous -- from EUR25.7 million we had in the last quarter 2004.

2005 gross profit in the fourth quarter was at EUR55 million, down by 14.9% from EUR64.6 million the company reported last year. And the gross margin decreased some 43.4% to 28.9%. On a full year basis the gross margin decreased from 35.7% that was achieved in 2004 to 31.4% in 2005. However, it is important to say also that the decrease of the gross profit, and the margin consequently, was mainly due to some extraordinary items mainly related to the depreciation of raw materials in overstock. Net of these extraordinary, non-recurring items the gross profit would have been EUR61.9 million or 32.5% of sales.

During the fourth quarter 2005 sales, general and administrative expenses were at EUR60.4 million, so slightly down from EUR61.8 million we accounted for in the fourth quarter of the previous year. In terms of percent of sales they were substantially flat at 31.7%.

The operating income for the quarter actually was an operating loss of EUR5.4 million. While in the last quarter of 2004 we had an operating income of EUR2.8 million. Net of the unusual items, I mentioned before, the operating result would have been positive for EUR5 million.

On a full year basis the company had an operating loss of EUR14.7 million while in the previous year, same period, fourth quarter, had an operating income of EUR40 million. So again, net of non-recurring items full year 2005 the operating loss would have been lower at EUR6.1 million.

In fourth quarter 2005 the company reduced the foreign exchange net income of EUR2.04 million versus a [products] loss of EUR500,000. And in terms of tax expenses, in the three months, 2005, because of high non-deductible expenses reported by the parent company, particularly in some subsidiaries, the company paid -- had corporate taxes of EUR4.1 million compared to EUR6.1 million we had in the fourth quarter of 2004.

Net income, looking at the net result, in 2005 the company reported net losses of EUR2.8 million, in US dollar $3.3 million versus net losses of EUR9.3 million or $12.1 million. On an ADR basis this means a loss of EUR0.05 or $0.06 while EUR0.17 of losses or $0.22 opposed to the full quarter of 2004.

On a full year basis in 2005 the company had net losses for EUR16.7 million or $20.8 million versus net earnings of EUR18.4 million or $22.9 million recorded in 2004. In terms of ADR the company, in 2005, had reported EUR0.31 or $0.39 of losses per ADR. While in 2004 we had EUR0.34 or $0.42 per share of ADR. Notwithstanding the losses we have reported the company, in consideration also of the consistent and non-recurring items that add mostly the value of provisions, was able to achieve a positive cash flow of EUR23.2 million, in the same period it was EUR68.3 million at year end 2004. Which means on ADR basis the company had EUR0.42 of cash while in 2004 it was EUR1.25.

CapEx, net CapEx in 2005 we invested about EUR20 million. In 2004 the investment in net CapEx was EUR42.5 million. Last note, but it's important to last but not least, note regarding the net financial position which is still strong for the company, actually we had EUR78 million increasing from EUR76.41 million registered one year earlier.

So these are the introductory comments. At this point Pat, we are open to questions from our listeners. Thank you.

Very good sir.

[OPERATOR INSTRUCTIONS]

Yes, we have our first question from the line of [Todd Shoal] of Raymond James. Please go ahead sir.

Hello, I was wondering, in your press release you talked about some initiatives you were taking to improve your operational efficiency. I was wondering if you could maybe go into that a little bit?

Okay. The initiatives we are taking to improve the operational efficiencies, in the fourth quarter specifically or you were talking about 2005 overall?

Well actually, 2005 and going forward?

Okay. In 2005 as we mentioned in our restructuring plan announced in May, 2005 we announced the decision of the company to implement some important initiatives that were finalized to improve the overall efficiency of the company. And we made this activities especially in the third quarter of 2005 in which we have used, but also in the fourth quarter we made something of 2005, we have used the so call, in Italian is [inaudible-speaking Italian] which is a kind of temporary lay off of some workers of the company. Both on the manufacturing line or in the offices. So both of white and blue collars.

The total savings coming from these initiatives were about EUR6.5 million. And together with this -- the company continued to make some initiatives finalized to eliminate from the activities, those activities that were non-performing, in particular in the retail operations. And as I said, I was speaking before about the restructuring costs related to the retail operations, just to give you an idea we had an extra ordinary impact on the Income Statement of 2005 of about EUR4.5 million regarding the closing of some stores in the UK and Switzerland. So we have been working therefore on the sales side, but also on the manufacturing side. And there is still commitment of the company to continue to work on this restructuring plan.

In the fourth quarter of 2005 the -- because of the -- in the recovering orders in the overflow that we announced in the last conference call, in the last press release we temporarily pulled back some workers and we announced also that, in a specific press release, because we had this recovery in orders. And I can say that the results of the fourth quarter of 2005 say that this was an initiative that was absolutely to be done.

And we still are reporting this increase in the order flow, we are not talking about big numbers, we are talking about an encouraging recovery in the order flow even though we have to say it's more oriented to Italsofa than Natuzzi, so far. But I would say that the initiatives we have implemented in 2005 and we are still implementing in 2006, are saying that we can recover in terms of efficiency and also in terms of results.

Okay, thanks. I did have one other question. I also was curious to see where are you seeing the most growth internationally, which particular market?

[inaudible-microphone inaccessible]

Hi. Good morning and good afternoon it's Daniele Tranchini, Chief Sales and Marketing Officer. We are seeing encouraging levels of recovery in the United States and perhaps Fred Starr can speak to that in a moment.

As far as Europe is concerned we are coming out of the doldrums in the UK, the UK, as Nicola was mentioning earlier, was a terrible year from particularly a retail standpoint in 2005. I'll just give you a number for reference, if my memory serves me right something like 480 furniture, retail doors closed in the UK last year. And a lot of the decrease in the results in our retail business are actually recondusable to our performance in the UK.

We are seeing interesting growth trends in Spain in particular and in our Scandinavian business. And two markets that were flat one and decreasing last year, instead in the beginning of the year are showing interesting trends, are China and Australia.

Okay, thanks. And I just have one final question. I think that Bud had actually asked you this last time and we just wanted to see. You have quite a bit of cash on your balance sheet and we just were interested to know are you still not considering a stock repurchase plan or is that something that is maybe changed between now and last quarter?

No, actually we're not considering at the moment a stock repurchase plan.

Okay, thank you I appreciate that.

Thanks to you.

Very good. We have at least two additional questions in our queue at this time.

[OPERATOR INSTRUCTIONS]

Next we'll go to the line of Edwin Flick, of Citadel Value Fund. Please go ahead sir.

Yes, good morning gentlemen, Edwin Flick speaking can you hear me?

Yes, yes we can hear you very well. Good morning.

Just a couple of questions also to verify, did I understand it correctly that you took 4.5 million closing costs related to Kingdom of Leather in fourth quarter, not in EBIT?

No, I said more than EUR4.5 million closing costs, in euros, regarding not only Kingdom of Leather, but also Natuzzi Switzerland.

Okay, and that's included in the EBIT of 2000 -- the fourth quarter of 2005?

It's included in part in the EBIT region. I would say that in the EBIT region you should consider about EUR1.2 million of this which is related to the depreciation of the inventories. While the other are more considered as extraordinary, so -- are in the line looking at the [inaudible].

You should consider these in the Other Income line, yes, Other Income Net line they are located in that line.

Okay, and related to that, you were talking about depreciation of inventories. There was a 1.2, there was the amount you mentioned during the conference call, didn't you?

Yes, I didn't mention in particular this 1.2 million. I said that we have depreciated, we had some extraordinary costs to the gross profit level and it was related to the depreciation in inventories. And in total this was 1.6 plus 6.6 million, so -- regarding the full year of course. While looking at the fourth quarter in particular you should consider about 6.6.

Okay, so 6.6 is for the full year depreciation of excess inventory?

Yes, overstock, we are talking about overstock.

Is that leather or is it finished products?

We have some -- there is a mix of course. The main part is related to the leather we use. The other part is related to some accessories and some fabric which is the other raw material, the other covering we use in this. But, just to be clear on the number, once again, for 2005 the total depreciation was 6.7 for the inventories used in manufacturing and accessories and 1.2 for Kingdom and Switzerland. While, again on the fourth quarter, the depreciation was EUR5.7 million inventories which we are talking right now, and 1.2 Kingdom of Leather and Switzerland.

Okay, thank you for that. Another question would be could you give us some flavor on the volume developments of, respectively, Natuzzi-branded furniture and Italsofa and then split for the Americas and for Europe?

It's Daniele Tranchini again, thank you, hello. Volume development for Italsofa continues to be encouraging, just a second, going to the actual numbers. We are showing positive order flow trends throughout the world and if I look at it on a regional level, as I said earlier, all regions at the moment are positive versus last year, this is in terms of order flow.

And then go and look at in terms of lines, we on an average basis we are on a like-for-like basis flat on regular which is an improvement on previous years. We are still suffering a little bit in the US, but we are up in Europe and the rest of the world, this is comparing to previous year.

And you are talking about what line now?

I'm talking about Natuzzi.

In Natuzzi-branded furniture?

Yes.

So you are up a bit in the US and down in --.

No, we are still suffering a bit in the US because as you know the Natuzzi-branded furniture is the furniture that comes out of Italy so it's still under the pricing pressures of the US market, whereas in Europe and in the rest of the world, we are up.

If I could just ask a question on this, I'm a partner of Edwin Flick my name is [Darrel Dutzi]. Regarding the order flows, is this the reason why you called people back from the [Cassian Di'Gratziona], was it the order flow --?

Yes. We had a -- quite a substantial increase in order flow in the last part of last year and that was the primary reason why we called the people back from the Cassian Di'Gratziona. Not having done that would have meant not being able to deliver.

Just the reason I ask is we're looking at the volume figures in the fourth quarter they're not exactly very encouraging.

We -- the volume figures are not exactly very encouraging, but keep in mind that some of the production that was produced in the last quarter of last year will have gone into the delivery at the beginning of this year.

Okay.

So there is always a lag between orders and actual invoice numbers.

Okay, maybe one final question from my side. Is all Natuzzi-branded furniture still manufactured in Italy and if so how are your [inaudible] for manufacturing some of this in some of your other factories in the world?

The vast majority of our Natuzzi-branded furniture is, yes, still manufactured in Italy with one exception. We have introduced a collection which we have called Natuzzi Off Shore, as a product line, specifically for the US market at the [High-Point] Fair there last fall which is manufactured in Brazil and China.

And how is that doing, is this something that you will continue or extend?

Yes, but perhaps Fred, speak to that?

Hello Darrel, this is Fred Starr with Natuzzi Americas, and your question gives me a terrific opportunity to bring everybody up to date on where we stand. This was a major decision to move Natuzzi-branded product from Italy, from Italian production, to our facilities in Brazil and China.

We had put in second factories in both of those locations that went into production around March of last year, if not slightly earlier. And so during last year we were able to get up and running on a better plant, able to produce a better product under the Natuzzi brand. And as Daniele said, in the October market of last year we introduced these new models, really existing models that were now to be produced in lower labor-rate countries and that is of course Brazil and China.

So we've gone through a very challenging period in terms of not only taking product to these new factories relatively new factories, but also it's the logistics surrounding this and it's really working with our retailers to deplete their inventories of the old product, get their floor samples off and get everything up and running. We have had, what we call, a kind of a valley in the Natuzzi-branded product for the last 60 days while we've been waiting for new merchandise to come in from these facilities in Brazil and China.

That started, this flow of new goods, started in February and went through March, most of March, and by let's say another week to ten days, early April, we should have completed the whole transition. And the good news is that the early results at retail, sales results, are encouraging. So we are grateful to our retailers for having gone through a very, very difficult and again, challenging time. But that work is pretty much complete. And as we go into the second quarter we're very encouraged with what we see ahead.

Okay. Maybe really my final question, if this program is extended and continues to be very successful will that mean that part of the production capacity in Italy will become excessive and might be closed?

From our standpoint, in the US, absolutely, we're moving the body of our Natuzzi-branded product to these offshore facilities. So I'll let Nicola and Daniele talk about what the impact is on Italian production.

The -- good morning, this is Natuzzi. The management is commitment to increase sales volume by Natuzzi offshore is made in China and Brazil. And keep the employment and the production capacity as it is today by increasing and improving efficiency through the retail division. And open also a new store, obviously.

Its Daniele again, I just wanted to pick up that -- that particular vein of discussion, to make a couple of points. First, to conclude or complete my answer on what Edwin, I believe you asked earlier on on the order flow. And just to give you an overall sense we are -- of where we are, overall in terms of all of our production we're in double-digit growth.

Natuzzi, as I said, is still suffering a bit in the US, but is up both in Europe and the rest of the world. And Italsofa again, is up double-digit throughout.

Now back to the question that -- the point that Mr. Natuzzi was making just a few moments ago, our commitment to Italian production needs to remain also because we do not have the same pressures competitively in Europe as we do in the US with the Natuzzi-branded product.

And on the back of pretty ambitious, continued growth plans of our retail and brand development project, that production capacity will be necessary.

Okay, thank you very much gentlemen.

Very good. Next we'll go to the line of Mark [Hiehwile] with Spectrum Advisor Services. Please go ahead.

Thank you and Bon journo. My question is perhaps a little more fundamental, my first question, and since I'm just learning about the company can you explain a little the division of retailing versus manufacturing within the company?

I gather that you franchise your Divani & Divani within Italy, but outside of Italy and what kind of metrics for profitability in retailing are there? In other words is that more or less a seperate profit center that has its own metrics before you invest in it or is that used to enhance the distribution of the products themselves, as obviously it does? But do they -- does retailing have to meet certain return on investment criteria, I guess would be the way I would boil this question down?

It's Daniele Tranchini, good afternoon.

Good afternoon.

Since I am the sales and marketing guy, I feel it's up to me to take up that question. Let me, let me -- if you are new to the sector and if you are new to the company let met take it -- let me take you back, asking everybody else's patience a little bit, in terms of what our overall strategy is.

It's a strategy we've been pursuing for the last two or three years with some determination. From a company that was fully dedicated to manufacturing with one product line, when the competitive environment began to change a few years ago we felt the need to actually begin to construct a portfolio of offer-to-market that was a little more articulate. Hence the birth of Italsofa as a promotional line, as a more aggressive line with overseas manufacturing which has given the encouraging results that we have seen over the last few years.

And in parallel to that the development of what we firmly believe is actually the lynch-pin of our going forward strategy, which is for an Italian company in the area of design and furniture, the development of a branded strategy, a branded strategy with the Natuzzi name. Keep in mind that with the exception of Divani & Divani, Natuzzi had not been present to the final customer, certainly not in Europe, previously.

Development of a branded proposition that inevitably goes through the development of a controlled distribution channel, which is actually bringing me closer and closer to specifically answering your question. The development of this dedicated distribution channel, today, sees us having about 290 stores, as Nicola, was mentioning earlier. We shouldn't also forget that this also means about 600 galleries or shop-and-shop retail points as -- we call them galleries, which are distributed around the world with our retailing partners.

Now to date, specifically, the retail operation has not been operating with different metrics. For the simple reason that it has been a way to actually redevelop our approach to distribution and actually consolidate the brand around the world in a fashion that would be completely under our control.

Now the retail gain is beginning to become sufficiently important from a critical mass standpoint, that it will be setup as a seperate unit. We are beginning to develop some metrics. We are beginning to understand how to turn our retail concept and what makes it tick. Please consider that, again, with the exception of Divani & Divani and the Italian market which we know by heart, our oldest experience is Spain which is about 36 to 40-months old.

We know what average sales per square foot or per square metre should be in order to turn a profit. We know what is the average time that we need to actually break even a store and bring it into profitability. We know what is the average level of investment that we have to make to actually get to a representation of our branded concept and retail concept that is satisfactory to us and to the final consumer. So it's high time now to actually give to this line of our business, the dignity of a stand-alone profit center.

This will go through not only some financial control redefinition over the next few months, but actually through the establishment of a dedicated retail unit within our corporate headquarters.

Terrific, I -- that's a very fine answer. Thank you Daniele.

You're welcome.

Okay. We do have at least one additional question in queue at this time. We'll go to the line of [Bart Coole] of IMC. Please go ahead.

Hello, this is Bart. I have basically one question concerning your inventories. When I see your 20F at the end of 2004 you split it up between leather and raw materials, between processed and finished products. If I look through your balance sheet at the end of 2005 I see an inventory split of 115.7 and I was wondering if you could make the same split up for that number?

Regarding the depreciation we had?

No, no, no. Just the number of 115.7 you split it up in the 20F between leather in process and finished products. Am I'm wondering if you can do the split up the same for these numbers?

On December 31, 2005, just give me one second to get the numbers regarding these inventories. Take into consideration of course, always, that in our inventories leather do represent always the major part of the inventories, but I can split to you at least in these lines.

On 2005 we had raw materials, the final inventory, of EUR68.5 million. And we have a [fairly finished] product of EUR13.3 million and finished product of EUR33.9 million and the total EUR115.7 million.

Okay, perfect. And another question from my end is basically more or less in line with the question Edwin asked. You're mentioning about EUR4.5 million in the fourth quarter on the EBIT level in the UK and in Switzerland and basically EUR6.7 for the full year. And you're also mentioning EUR1.2 million on the EBIT level -- no, sorry, the EUR1.2 is on the EBIT level of the UK and Swiss, but you also mentioned, in your first answer, something about Other Income. And to my opinion Other Income is below the EBIT level so I'm not sure as I quite understand how it's --.

I'm sorry, what's your question specifically, I'm sorry?

So if you can confirm and give me --?

It's the number under the operating level is 3.7? Yes, it's under the operating level because we are talking about depreciation, impairment of assets so it's kind of an extraordinary items, non-recurring items.

But the 5.7 and the 1.2 is --?

It's up in the inventory because of the accounting principle it goes directly to rectify the inventories. I'm talking about only the inventories in that case.

And that's the 5.7 in the fourth quarter?

In the fourth quarter, again. In the fourth quarter it's 5.7 plus 1.2, [promptly] to retain the 5.7 Other.

And that's all summarized under the name of Other Income?

Not, okay --. When I say five, let's be focused on 2005. I said, "We have depreciation of inventories overall of 7.8, EUR7.9 million". And this is in the area of the cost of goods sold because these are depreciations that grew to rectify, directly, the inventories.

The other depreciations are related to assets of the retail stores like could be the display systems and there are other extraordinary costs related, for example, to the lay off of the people that was -- that were employed in the stores. And these are considered as extraordinary costs and that's why are not included in the operating income and you will find that underneath the Operating Income.

Okay, okay.

Am I being clear?

Yes, yes, thank you very much.

Okay, you are absolutely welcome.

At this moment we have no additional questions in queue. Please continue.

Okay. Thanks to everybody and I will say good morning again to all of you connected from US and good afternoon to the people connected from Europe. And we will meet again at the conference call for the first quarter 2006. Good bye.

Very good sir. Thank you for the presentation and ladies and gentlemen this does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.