Natuzzi SpA (NTZ) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi SpA first quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded today, Thursday May 25, 2006. I would now like to turn the conference over to our host, Mr. Nicola Dell’Edera. Please go ahead sir.

Okay. Thank you, Holly. And good morning to the listeners connected from the United States, and good afternoon to the listeners that are in Europe. Welcome to Natuzzi’s first quarter 2006 earnings call, the first of this year.

With us today are Pasquale Natuzzi, Chief Executive Officer and Chairman of the Board, Daniele Tranchini, Chief Sales and Marketing Officer and, connected from High Point, North Carolina, Fred Starr, President and CEO of Natuzzi Americas.

In this call we will review Natuzzi’s first quarter 2006 financial results, and then, as usual, we will open the call to your questions. You should have already received a copy of our results. But if you have not received that, you can find a copy on our website, Natuzzi.com, or please call our investor relations department at 0039.08.0882.0812.

Any information can -- any request for information can be sent to our email address investor_relations@natuzzi.com. We will respond to you as soon as we can.

Before presenting, let me remind you that our discussion today could contain certain statements that constitute forward-looking statements under the United States Securities Law. Obviously, actual results may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results and operations and financial condition.

We have discussed such risks and uncertainties which have in the past affected, and could continue to affect our results and operations and financial conditions, in our annual report and Form 20-F for the fiscal year ended December 31, 2004. As for the 20-F Form, the one of 2005 is forthcoming and will be filed with the SEC before June 30.

These reports are readily available on our website, by the way, at natuzzi.com, or from us at your request. A copy of the 20-F is also available from the United States Securities and Exchange Commission.

The currency has been converted at the following conversion rates. The first three months of 2006, euro weakened against the United States dollar by almost 90% versus the same period of 2005. So we went from an average of 1.3112 that we had in the first quarter 2005, to an average of 1.2033 we had in first quarter 2006.

In the first quarter of this year, net revenues were €188.2m, up 13% over the first three months of 2005. In terms of units sold, the Company reported a 6.1% increase with respect to the prior year first quarter.

Upholstery net sales for the first three months of 2006 were at €167.4m, increasing by 14.3% from €146.4m reported in last year’s first quarter.

Let's give a look at the reasons that have determined this increase, at least on percentage terms. A 3.9% increase was determined by the weakening of the euro against major currencies during the quarter, in particular the United States dollar. As I said before, a 6.1% increase was reported in the units sold and a 4.3% increase was due to the price mix effect.

Breaking down the first quarter 2006 Upholstery net sales we see that, from a geographical point of view, we reported a 6.5% increase in the Americas, and a 21.1% increase in Europe, and a 9.2% increase in the rest of the world.

In terms of units sold, we reported a 6.7% decrease in the Americas, whereas in Europe and in the rest of the world, we reported a 20.6% increase, and a 3.9% increase respectively.

The general recovery of sales was mainly attributable to the good performance of our promotional line, Italsofa, whereas the Natuzzi brand performance was conditioned by the deflationary environment still characterizing the U.S. market in particular.

Overall, the bulk of the increase was made in Europe. And this was due, in particular, thanks to the growth of a key account.

Furthermore, first quarter turnover was also positively affected by more currency commissions during the quarter, even if we have to say that the recent depreciation of the U.S. dollar could affect our performance.

An analysis of first quarter 2006 Upholstery sales, based on the performance of the two basic coverings, leather and fabric, sales of leather upholstery increased 13.7% in terms of seats sold, and 19.1% in terms of sales. As for the other covering, fabric sales decreased by 18.8% in units and by 7.7% in terms of sales.

Looking at the two brands that the Company offer, Italsofa and Natuzzi, in the first quarter 2006, the former represented 48.2% of total seats sold, and 34.8% of total sales, as compared to 40.5% and 28% respectively reported in previous year comparable period.

The Natuzzi brand, which addresses the medium/high end of the furniture market, accounted for 51.8% of total seats sold, and 65.2% of total sales, versus 59.5% and 72% respectively reported in the first quarter 2005.

Turning to our Retail activities, in the first quarter 2006, sales to Divani & Divani by Natuzzi Stores and Natuzzi Stores totaled €34.2m, versus €30m reported for the first three months of 2005.

During the quarter, the total number of stores both franchised and/or directed by the Company, decreased to 132 in Italy, and increased to 148 abroad, while one year before they were 139 in Italy, and 132 outside Italy.

At the end of March 2006, the Company had also 594 galleries. Galleries are some kind of shopping shop corners in a shop which are characterized by Natuzzi Leathers and other distinctive signs. So 594 galleries as of March 2006, and there were 11 less than three months earlier.

Other sales, the other line we have on the revenue side, during the first quarter 2006, other sales increased by 2% to €20.8m. In particular we report increase in sales of accessories by 17.7% to €5.5m. [inaudible] sales increased 9.6 to €10m, while sales of raw materials decreased by 26.6% to €3.7m.

In first quarter 2006, the gross profit was at €64.5m, an increase of 17.1% versus €55.1m reported for the last year’s first quarter. The gross margin was 34.3%, as compared to 33.1% in the first quarter 2005, so 1.2% of margin that we achieved in the quarter more than in the previous quarter and the same quarter 2005.

On a constant exchange basis, gross margin would have been 34.1% in the first quarter 2006. Improvement in the gross margin was mainly due to a more efficient allocation of the manufacturing costs.

In the first quarter 2006, SG&A expenses were €55.7m, down 0.9% over the prior year comparable period, while, as a percentage of sales, decreased to 29.6% from 33.7% reported in the first quarter 2005. Such improvement is due to strict control in the G&A expenses, in particular, although, at the same time, the Company kept on investing in advertising and support Natuzzi retail and brand products.

For the first three months of 2006, the operating income was €8.8m, whereas in the same period of last year, the Company reported a net operating loss of €1.1m.

In the first quarter 2006, we had a net ForEx loss of €0.5m, versus a net ForEx loss of €1.5m we reported in the prior year’s quarter. The net ForEx loss was due to the following. We had a natural loss of €1.7m on the forward contracts we used to hedge the currency risk, an actual loss of €2.2m, given by the difference between the advised exchange rate and the exchange rate on the date of the collection payment. And we had, besides, an unrealized loss of €2m coming from the mark to market of receivables and payables, and an unrealized gain of €5.4m coming from the mark to market of forward contracts.

During the first three months of 2006, income taxes were €4m, and the tax rate was 37.3%.

In the first quarter of 2006, the Company reported net earnings of €6.8m, versus net losses of €3.5m reported for the first three months of last year. On a per-ADR basis, net earnings were €0.12 or $0.14, as compared to €0.06 of losses per ADR, or $0.08 losses reported in last year’s first quarter.

In this quarter -- in the first quarter 2006, net cash flow from operations was €23.7m, so a substantial increase from €8.7m generated in the first quarter of 2005. On a per-ADR basis, net operating cash flow was €0.43 from €0.16 reported in the same period of 2005.

The investments, CapEx were €3.6m in the first quarter. And lastly, a look at Natuzzi’s net financial position, which is still solid at €98.2m, increasing from €77.4m as of March 31, 2005.

Thanks for your attention. And now, Holly, we can open the call to questions.

[OPERATOR INSTRUCTIONS]. I am showing no questions at this time. Please go ahead. I do apologize, our first question comes from Nigel Waller from Oldfield Partners. Please go ahead. Mr. Waller?

Hello?

Yes, please go ahead with your question.

Okay. Hello? Yes, can you hear me?

Sure.

Okay. Great. Sorry about that.

I’m sorry. Okay. Go ahead.

Okay. Thank you. My first question was really about average selling prices in the Americas. Average selling prices were up 14% in euro terms. I wondered how much of that was currency, how much of that was actual pricing, and whether you could talk about why that is so much lower than the average selling price everywhere else globally. And how much of that is to do with mix, both in terms of brand and in terms of covering?

I will answer the first part of the question, and probably I will leave to Fred the other part regarding the mix of sales in the United States.

And let me tell you that, of course, there is also, as I said also in my introductory speech, there is a currency effect determined by the fact that quarter over quarter there was almost a 10% depreciation of the euro against the U.S. dollar. So, from an accounting point of view, this really helped in having a better performance for overall the Company but, in particular, for the conversion of the U.S. sales in euro sales. So this is -- this explains in part the reason for which we had an increase in sales in the United States.

Now, I give way to Fred, if Fred -- can you go ahead regarding the other parts of the question, regarding the mix of sales and product?

Nigel, your -- our part is in the mix and if -- clear of currency. And a couple of factors have affected the mix. Number one, our Italsofa, which is the promotional end of the Natuzzi business, is up. We’re up double digits right now this year. So that would have some depressing effect on the actual mix.

Beyond that, and this is the significant, in a sense, valley we’re going through right now, but we’re starting to come out and it is affecting the numbers, is the movement of a part of our Natuzzi branded business from Italy to offshore facilities in both Brazil and China. And that -- as that business now grows, we are pricing that competitively in the marketplace, but it has affected the overall pricing.

We have not been able to pick up the business in Italy which would be at higher prices. And so you’ve got a -- in a sense, a transition of some Natuzzi-branded product to a lower-priced status. And those are the two factors, Italsofa, and then this move offshore.

And how much of -- thank you, in terms of Italsofa’s sales and volumes, how much are actually in the Americas? How much --?

It runs around 40%.

So it’s Italsofa, okay.

Yes.

And what are the margins? Can you give me an idea of the margins between the brands, Natuzzi and Italsofa?

Well, I’ll turn that one over to Nicola.

Well, actually, we do not release information about the different margins we have on the products.

Okay. What about -- can you give me any sense at all, a sort of quantum or how about even between the coverings?

Sorry.

Okay. And the other question was on the balance sheet. You have an employee leaving entitlement of €32.4m. I wonder if you could just tell me what that is and how that’s likely to change over time.

Those are provisions that the Company makes in favor of the employees for their retirement. And we do not insist -- we do not have any [system] like you probably, if you are calling from the United States or the U.K., you probably have. So is the Company that makes this kind of contributions that will be paid to the employee when he or she leaves the Company.

This is some -- quite stable for the Company, so it’s a kind of financial resource that the Company has and it’s not volatile. So it’s so quite financially stable for the Company. But those are money of the employees.

Okay. Fine. But it’s paid when they leave. It’s cash that you spent to take out --

Yes, it’s paid when they leave.

Operations when they leave?

Yes.

And then in terms of the changes in short-term assets and liabilities, there’s some quite big moves in terms of accounts payable. Is that down to any particular account or --?

No, it’s only a matter of -- we had -- it’s a temporal. It’s only a problem of temporal allocation of some purchases we made. In the fourth quarter of 2005 we had the most of the purchases made in October, while the situation was more split in an equal way in the first three months of 2006. That’s why you see a lower account payable at the end of 2005. And we had what looks like an increase in first quarter 2006 that, by the way, if we look historical at the Company, it’s the normal level for the Company. So it was only a temporary situation.

Okay. And in terms of the cash on the balance sheet, we’ve got 25% of your market cap. If you exclude -- including the employees leaving entitlement, I suppose, as debt, which we probably should do, then that takes you down to, what, 17% of your market cap in cash. What are your plans for that cash?

At the moment, there isn’t a particular plan for the cash. The Company historically has been using the cash to make investments. And we made important investments over the past four or five years, especially for our Italsofa plans abroad.

We paid some extraordinary dividends some years ago and we made also a buyback. So we have different options that the Company has used in the past. And we do not exclude, by the way, that in the future -- in the near future, we can use again these options. But, at the moment, I cannot anticipate that one of these options, investments, dividend, buyback, whatever it is, has been authorized by the Company, by the Board or by the shareholders. So they will stay there, at least for the moment.

And can I ask whether -- perhaps a question to Mr. Natuzzi, would he participate in any buyback? Would his stake rise or change with the buyback, or would he offer stock into the market to keep the sort of listed portion of the Company the same, or the free float the same?

So far any decision by the Board has been made.

Okay. And finally, in terms of production, Italsofa is all made outside of Italy at this point, is that right?

Almost 90%. So we manufacture Italsofa overseas from Italy, right.

Okay. And in terms of Natuzzi brand, how much of those is made in -- is currently made in Italy?

80%, I would say.

And if we look forward two years, where do you think that percentage might be?

We plan to keep the same percentage - 20% overseas and 80% in Italy because the Natuzzi production overseas is only for the U.S. market due to the currency situation.

Okay.

Otherwise we prefer to make a Natuzzi product which require some knowledge, some kind of organization here in Italy.

Okay. Okay, great. Okay, thank you very much. That’s all my questions.

You’re very welcome, sir.

Thank you. Our next question comes from the line of Bart Cole from International Market Makers Company. Please go ahead.

Hi. This is Bart. Can you hear me? Hello?

Yes, I can hear you.

Sorry. Actually, I have a question concerning the valley Mr. Starr was talking about. You also mentioned in the conference call the fourth quarter. And I’m not sure I quite understand what it is because basically, what I understood on the last conference call, the valley is that there was some kind of transition period which would also affect the sales.

And if I actually look to the sales in America, there have been -- and I’m looking through the statement right now, sales are actually -- in dollars they are almost the same. They go from 78.5 in the first quarter 2005, to 76.8. And I’m wondering if you can give me some more light on this whole valley issue.

Sure. This -- I must say just at the outset that this has been a challenging time for us because it affects our retailers as well as our internal operations. What we’ve done is, again, taken certain models from Italy and begun to produce them in both China and Brazil.

The long-term opportunity here is substantial because not only will we have a more competitive position in the marketplace, but also it certainly supports and really benefits from the Natuzzi brand. So we become stronger in the marketplace. And this program fits both our large retailers and our galleries as well. So, in a sense, it’s a win-win all the way round.

The difficulty has been in just getting this transition of having people -- our retailers get their floor models off the floor, the old models, and put the new ones in. And that’s what we’ve been going through. And actually this has lasted longer than we thought it would. We had originally set a target of having everything completed in the transition by, say, I’d say, at the latest, April. But we’re still doing it. And these models are still coming on floor.

So we’re at the point right now where we can see light out there. But I wish we could have hit the target and had this all competed sooner. And that’s affected sales because what we’ve had is just open slots on floors. There’s just been no product selling because there’s been no product on the floor. That’s what you’re seeing in those numbers.

Okay. So that gives some explanation for why the Americas is down sales-wise. But on the other hand, if I look to your press release, and basically it’s the statement of Mr. Natuzzi himself, and it’s about, I’m looking to it right now, it’s about -- I’m sorry, I’m not sure if I can find it. Well, it’s actually about deflationary pressure. But if I look, and I’m not sure whether this is the press release, but it is a statement about deflationary pressure.

But as a link to the units sold and the sales in America compared year over year on a quarterly basis, so first quarter 2006, first quarter 2005. Then basically average price or sales per unit is 236 in 2006 and 225 in 2005. And the same goes for Europe. It’s 245 and then it’s, of course, a number in euros, against 244. And actually, to make an even more firm statement, the 236 which was basically the average sales price per unit in the first quarter of 2006, it has never been higher than that. So I’m wondering what kind of deflationary pressures there are.

Okay. It’s Nicola speaking. Consider that the numbers we are looking -- the figures that you are looking at there in euros, so the --

No, but I adjusted them for the exchange rates and also for the different exchange rates in the different time periods. So the appropriate exchange rates for the appropriate period -- quarters.

Okay. Consider also that when we talk about the deflationary pressure, we are more focused on the Natuzzi side. And we look at this like a kind of factor curbing the possibilities for the Natuzzi brand to penetrate the market, in particular in the United States. It’s a matter of fact that there is a stronger price competition in the United States, as Mr. Natuzzi and Mr. Starr were saying before.

And if there is increase in the price of seats sold, this is due also to the fact that we have made some increase in the prices of product. In the United States, in particular, we had two or three increases over the past 18 months that are beginning to produce their effect on the price per seat.

But our comment is a noble comment. It’s something that can be seen in the market. It’s in the market that there is still a strong price pressure in the market. So the same situation that we had two or three years ago, one year ago, is still there. And that’s why Mr. Natuzzi said before, we had to produce part of the Natuzzi product abroad. That is called the offshore production, because we are seeing that the deflationary pressure in the market is still there, is still strong. And in order to be more competitive we had to produce abroad. So we don’t see a kind of conflict in these two situations.

Well, I’m not saying it’s a conflict. But it seems a little strange to me, when you have deflationary pressure in the market, that basically the pricing per unit goes up and basically, yes, same in America and in Europe. So I have difficulties understanding it. Even in the -- it’s a huge difference, let’s say, with the other quarters in 2005.

And then if you look to date, in the first quarter it was 225. And I’m talking about dollars in America - 211 in quarter two, and 222 in quarter three, 210 in quarter four. So it’s a huge up trend. And I’m trying to get some feeling about what’s driving these price increases because you talk about basically getting the production overseas. And that, in the end of the day, should lower the cost price. So you should be able to price it lower also and sell units. So to me it’s a little bit contradictory.

We don’t see this contradiction. We are in the market and we see the factors that are still affecting the market. And, as I said before, there is still a strong price pressure coming from low-cost countries. But what we are reporting here is a couple of things that we have to take into consideration.

One, I said there has been a price -- there have been price increases over the past 18 months that pushed up the price and so the average price per seat. And secondly, you have also to consider the mix. So the mix --

Let’s take the price increases first then. Basically what was the reason for you to basically go to an increased price because, in a deflationary market, then basically your pricing is all over the market very aggressively?

I can answer that. We -- the price increases were put in on Natuzzi products as a result of the difficulties with the currency primarily, and then some factors in terms of labor and materials. But primarily it was the currency.

And we had, as Nicola has said, we had two price increases that have really kicked in over a period of time. It took a little while because of the time it takes to ship and the time we gave for the retailers to accept the price. But that’s part of what you’re seeing from the U.S.

Okay. And basically --

Sorry, this is Natuzzi. There is another justification, because in those low-cost countries, they are attacking everyone in the upholstery business or furniture business, in general, on the promotional product. So we are improving -- we are developing more high-end product because we cannot compete on price basis with those companies. So we are developing a different product with a different innovation technology. And the mix, in relation to the average price per seat. That’s another reason, obviously.

Okay. Thanks for that.

Alright. You’re welcome.

And basically indirectly also the answer for the mixed -- basically the mix is also increasing the price. But then are you saying that you’re basically trying to get the Natuzzi brand somewhat more higher?

Exactly. Exactly. Exactly.

Okay. Okay. And then a question also on the average sale price per unit in Europe, because it’s also gone up. It’s not huge, but it’s 245 against 244 in the first quarter 2004.

That’s the intention of the Company. Always to reposition the brand through the product, through the point of sales, through advertising, that’s the strategy of the Company.

Which, of course, as a shareholder, we all like, especially if you sell more of them. But it seems also strange to me because when you hear in Europe, and actually I think you had some huge advertisement series, basically, and I’m not sure I understood it right, you get one chair free if you buy four or three seating places. And how much the seat -- when also the average selling price is up, because normally, with discounting, to give it a name, you see that average selling prices are going down.

Sorry. Sorry. Could you repeat please because it’s not -- I didn’t understand very well?

Well, when you’re in Europe, and especially in the Netherlands, of course, I know the Netherlands is only a small country where you sell your products, you see a couple of discount advertisement starting. And basically you get something free if you take, let’s say, three chairs, you get the fourth free. And that’s not --

Who does that? Who does that? We don’t do anything like that.

It’s basically --

Are you talking in general, the business, or just Natuzzi?

I’m talking specifically about an advertisement program that Natuzzi has. It’s in the magazines here.

I don’t know. We never did any advertising like that. Probably it’s been one of our retailer or our customers. But we control our advertising very well. If you could please send to us this copy because this is really new for me. I never heard anything like that. We don’t do any product for free. This is not the way we advertise in the Natuzzi brand.

Okay. Well, I have to ask my girl if she still owns the magazine, but if I can cut it out then you will get one on the fax.

I would really appreciate that because this is something that surprise me.

Okay. Basically that’s it for now for me.

Alright. Thank you very much, sir.

Thank you very much.

Very kind of you. Thank you.

[OPERATOR INSTRUCTIONS]. And our next question comes from [Pierre van Yello] from International Market Makers Company. Please go ahead.

Yes. Hello. This is Pierre. I had a few -- actually one follow-up question about the supply chain in the U.S. Could you indicate what percentage of your total sales in the first quarter has been sourced basically from, let’s call it off-shore?

Well the -– this is Fred Starr. Here, you have to understand that these are our own factories. We have two factories in Shanghai and then two in Salvador, Brazil. So in a sense we’re not third party sourcing. And does that answer your question or can I do something more?

No, I’m actually trying to get a feel of the, let’s say, the progression throughout the year of the switch over from Italian sourcing?

Sure, okay. We would, right now -– if you take Italsofa which is, of course, produced in these off-shore facilities and then add in the, what we call, A models, the Natuzzi branded product off-shore, it would be something in the 70% range.

And 70% range, that’s currently?

Correct, that’s correct. No, I would say for the first quarter it’s been gradually creeping up, but there has been a violent win. We’re just slowing adding in these A models, that’s taken it up by -– if you look at the first four months it’s about 70%.

Where’s it going? We would say probably 75% by the end of the year, something like that but not too much more. And we’ve got programs in place to protect the business that’s being done in Italy too.

So, just 30% of your sales volumes, sales revenues are from Italy?

Yes, that’s correct.

Okay. I guess the biggest increase is behind you basically.

Yes.

Okay. Very good, thank you very much.

My second question is regarding Europe. It’s been quite a boost in volumes over there. You indicated in your introduction that there was a major account growing or added to the roster. I would like to know if this is a one-off for the quarter, is this sustainable and if there’s been a volume –- you indicated in your press release there’s been a considerable increase in European market. Has this been a broadly driven increase in sales volumes?

It’s Daniele Tranchini, hello. To answer your question about the sustainability that is that particular business that we’re referring to is absolutely sustainable. Its part of a growing program with the key account that we referred to which will be a multi-year one.

Okay. Could you indicate what the, excluding this account, what the development has been of the volumes in Europe?

The development of the volume in Europe, if I look at the order flow is about slightly under 10% quarter-on-quarter.

Okay.

I’m talking about orders now, not talking about invoiced.

Right. And for the first quarter do you have a number excluding this added account, or would it be too much detail?

No, not too much detail. But I would say that this key account represented the largest part of the increase.

Right, okay. It was basically single digit increase or flat sales for the rest of Europe?

Yes.

Okay. Was this an incline actually, this key account you mentioned?

It was growth in an existing account.

All an existing account.

Right, but it’s growing –- spectacularly.

It’s growing.

Spectacularly. Okay, very good. Then there was a bit a dichotomy between the Leather and the Fabric revenue development in the quarter. What was behind this development? Leather was up, I believe, 19% and Fabric was down 7.7%, that’s quite a big delta. Is there a shift in the market or is through trading up towards, as Mr. Natuzzi actually mentioned, trying to get into the higher end of the market?

[inaudible].

The question is that there is a change in the mix between Leather and Fabric which is more favorable for Leather in respect of Fabric. This has to be considered a countenance of our strategy?

No, I don’t think so. I believe that this need for change compared with our, let’s say, expectation has been due to the big [grey area] of this key account. It is selling more Leather then Fabric, that is the answer.

Right, okay. So the major shift is this key account basically?

Exactly. Yes.

This development.

Otherwise the presentation would be the same. Even if we are pushing more Fabric, to be honest, because it’s in our brand strategy to increase more Fabric in our mix.

So your strategy is to have more Fabric in your mix?

Yes sir.

That’s detailed so far.

No, no. I’m talking Natuzzi brand.

Right. So you’re trying to get more Fabric in there, rather then the volume.

Yes.

So you don’t want to rely on the fashion for Leather?

No, Fabric helps to be more, let’s say, trendy.

Can you repeat that?

I’m saying that in our mix product that we show in our store, the customer asked for more Fabric and we believe that Fabric will make sofa more trendy.

More trendy, right, I get it.

If I can jump in from a sales and marketing standpoint, do not forget that there’s a very large Fabric market out there. It’s not only a Leather market. And, in terms of future growth prospects for the Company to be out of that market is a little bit of a shame, particularly given the fashionable elements of that particular covering that Mr. Natuzzi was referring to just now. So, we’ve actually been putting a lot of investment and a lot of attention in developing a Fabric offering which actually qualifies us as a player in that segment. Our Leather leadership is recognized and our Fabric presence is beginning to become an important one which clients are recognizing and actually appreciating. Because we are taking all the expertise that Natuzzi has, as far as developing upholstery, and applying it to what is undoubtedly a very popular covering for many customers and consumers.

Pierre van Yello. Okay, very clear. And then I have a question about basically –- more about the long term. Looking back in your history you’ve had some very attractive margins. And the main line item that has increased quite dramatically has been the selling expenses from 17%, or approximately 17%, in the 1990s until 2002. It’s around 25% now. Is there a strategy to get back to this 17% or is it that you have to spend more to get the same or able to sell more seats basically? So is this structural this 25%?

You know, in actual terms, of course, our selling expenses have been increasing over the past few years because they’ve been supporting the development of the Natuzzi brand project, the opening of new stores owned by the Company. And there’s so much other marketing investments that are required in order to keep on supporting the brand and the positioning of the product in the market. So, in actual terms I would say that is a necessary level.

In terms of a percentage of sales, of course we have been suffering in the past two, three years in terms of the percentage of selling expenses of turnover because we didn’t get back from the market in terms of sales what we were investing in marketing. But now we are seeing a more affordable level in terms of our percentage of sales on terms of sales of selling expenses on sales. But we have still to work on this. And so we hope to recover some other margins and to take back this margin at a more affordable level. I don’t think will be the same of the 90s’ in which we were only a manufacturing Company. But it will not be the same as the 2004/2005 in which we were very involved in this investments without getting back the margin of this investment. So there will be an improvement. I cannot anticipate how much this will improve but there will be an important improvement.

So somewhere between 17 and 25% is what we will be aiming at basically?

Yes, that is the spread but I hope to be at least 2, 3% less then this.

Okay. And what sort of Group margin would you be aiming then? I don’t know if you have stated a goal for operating margins or net margins for the long term? I’m talking long term now.

Long term and it’s not a policy of the Company to release outlook on long terms. We also give outlook for the full year, for 2006. As we said, and Mr. Natuzzi confirmed in the press release, we are doing our pricing in order to achieve for 2006 a 3% net profit margin on an increase of sales of 5%. But, of course, we’re doing our best -– hope that not only market, but let’s look the U.S. dollar, we hope the U.S. dollar comes back to a more competitive level. The one in first 2006 really helped the business of the Company. But the dollar at $1.30 is -– I cannot say it’s a problem but doesn’t help the Company in making business especially in the United States.

But it’s not as big a problem it was of course with the 75% coming out of non-Euro land, let’s put it that way?

Yes. At the end of the ‘80s and ‘90s it was 80% coming from the United States. But the Company has been able over the past 15 years to achieve also diversification, geographical diversification. So we are, today, thanks to the mix of geographic sales, we are able to reduce the risk coming from places like United States. But, still, United States represents an important market for the Company, for the Natuzzi brand and with the dollar at 1.30, not only Natuzzi but a lot of Italian companies it’s really well know, have problems selling in the United States. And if we put together this with the fact that important competitors of ours come from a country like China where the Renminbi, the Yuan are close to U.S. dollars, so they do have this depreciation effect. This is a problem as well and we have to fight also with this, what we call, unfair competition.

Of course, I understand. You’re doing the right thing. I’m not criticizing anything.

Thank you very much. I will take the opportunity to let other people to ask some questions as well. Thank you.

Okay.

Our next question comes from the line of Mark [Hywell] a Private Investor. Please go ahead.

Hello. Hello.

Hello.

Yes, okay. My question is the nice segway into the importance of the American market. Can you elaborate on the High Point Furniture Show and how you did there, particularly in respect to some of your other Italian –- some of the other Italian Leather competitors?

And secondly, can you elaborate on why the program is going a little slower to get some of the A brand, I believe, into the showroom so it can be shown up?

And thirdly, for Fred, all related somewhat, is there a need for more management hirings to take place in the United States?

Well that’s quite a portfolio. Okay, let me start with the High Point market. The market first of all, as you may have read, the attendance overall was down. It’s estimated down slightly. We saw in our own attendance about 5% drop. However we feel most of that is related to people having fewer people come to High Point for the markets and then some attrition of smaller retailers as well. Certainly we saw all our important customers and we felt we had quite a good market.

In terms of what we were able to accomplish, we continue to build our retail sofa business primarily with the very large retailers in the United States and Canada. And so that’s grows. We’re seeing double digit growth in that area. So that’s going quite well.

The second part was again these A models, and we continue to build that program. The good news is that where we have the product on the floor now, and it’s settled in, the sales results seem to be quite encouraging at retail. So we have that momentum coming into market and that helped to encourage people to expand their programs.

And then we had a lot of interest in our higher end line built out of Italy, the Pasquale Natuzzi collection. And we showed that on our first floor and it’s shown beautifully and we are in the process now of building that product line and we will have some things to say about that later in the year. But we did get quite encouraging response there as well. So, we felt we had, overall, quite a good market. But again, I must just emphasize, that this A model transition has been a tough one. And that addresses you second question, why did this happen? Why has this taken so long?

And really it’s kind of a twofold issue. One is what the retailer faces and the second is what we at Natuzzi face. On the retailer side, we had indicated to the retailers that we should be able to re-supply them with the new floor samples and any back-up stock in that March/April period at the latest. And we did not do it. And the reasons for that primarily are because it just took longer for the models –- the new models into production in China and Brazil. It’s a whole new line-up. it’s a very challenging situation for a factory that’s faced with this kind of turnover of transition. And then on top of that we had the raw materials, getting the raw materials there, even things like legs, feet on the furniture, we just had to build up all the support entities that do provide the materials to make up our product. So, that we ran into some glitches and delays there as well. And so we’re working our way out of it but this just didn’t happen, I guess it’s just because of the magnitude of the transition, the changeover and it’s just taken longer then we thought. Again, I will just say on the positive side that we are out there now and where we are out there with the new models we’re seeing some very, very, encouraging sales results.

In terms of management, we feel we’ve got an outstanding team here in the United States. I think I would say we always can probably strengthen it, but in terms of bringing more people in, we really feel at this point we’re quite well covered in terms of the needs of the market place and in terms of adding any key positions at this time we really don’t see that need.

Okay. Well, thank you Fred and incidentally we’re not exactly Private Investor in sense of individual, we’re respected advisors.

Sure. Thank you for the questions, good questions.

Our next question is a follow-up from [Bart Cole], International Market Makers Company. Please go ahead.

Hello gentlemen. I have basically two or maybe three follow-up questions.

One is related to page 6 of your press release, basically the break down by covering. What you see actually the Leather going up from €120m to €143m and Fabric goes down from €26m to €24m. And I’m wondering if you, that’s of dollar and euro sales in there, I’m wonder if you get out the euro/dollar aspect what is it then? Actually I can also rephrase my question. On page 6 it is stated in euros, how many dollar sales are in there, on the Leather side and on the Fabric side?

Hello. Okay, so we are talking about the average price per seat.

No, no, no. I’m talking about sales price in total, the total number for the quarter, €143.4m and I think expressed in euros and the €120.4m basically the same quarter 2005, expressed in euros of course you see an uptrend but I’m wondering in this euro figure how many dollars are in there?

You mean in terms of sales made in U.S. dollars.

Yes, if you could give me that, the split off in Leather and Fabric and the split off between the two currencies?

The split in Leather –- I’m sorry, I’m not getting the question.

Basically you had a first quarter sales in 2006 of €143.4m and that’s basically divided between a certain amount of euros and a certain amount in dollars. And I’m wondering if you could give me the split up?

Okay, so how many sales we made in U.S. dollars compared to the 40%?

No, the €143.4m is basically the Leather sales you had in the first quarter. Part of that is sold in America, part of it is sold in Europe and part of that is sold in the Rest of the World. I’m wondering if you give me the split up number for all the nominal sales in their own currencies?

At the moment I do not have split of how much we sold in Leather in U.S. sold in U.S. dollar or in Fabric in Europe. I will answer in this way. Of course I will be able to give you an answer by email or I’ll call you. If you can send the question by email please.

Perfect, we’ll go back to that. And then maybe a follow-up on Mr. Natuzzi’s statement about Fabric and Leather. I find it quite interesting because, I’m not sure if I am able to mention the names, if you look at some other brands in the market, like [Anochio Morosso] they are producing, what you see in the shops right now, and basically [Morosso] much more Fabric then Leather. Basically is that what he’s saying about Leather and Fabric? That the trend goes to Fabric instead of Leather?

No, as I said before, first of all what I wished to say before is that on the Leather there is so much competition, so much pressure on the price, obviously on the lower end product. In fact all the Chinese competition -– competitors, just to give you an idea, they sell a sofa, three seater, two seater, a L shape for $399. We don’t know how they can do that. The position is they are depressing the image of the leather upholstery. While our direction and our strategy is to reposition the brand so we are having, especially in the Natuzzi brand, more Fabric then before. So that was the strategy.

Basically because it was easier to differentiate from those price hitters?

Yes, differentiate first but also still today worldwide the Fabric percentage is 65% while the Leather is at 35%. So we have been focusing for almost 30 years on the Leather. Now we believe that -– not that we believe, we are almost sure that there is an opportunity there with the Fabric.

Okay. And if you relate the average selling price over Fabric product –-

Strange enough we get more, let’s say, dollars per seat on the Fabric then on the Leather.

Strange people.

Absolutely, that’s absolutely true.

Okay, that was it for me. Actually also the same as Pierre I would like to congratulate actually a very quarter in these difficult markets.

Appreciate that. Thank you very much.

Okay.

Thank you very much.

[OPERATOR INSTRUCTIONS]. I’m showing no further audio questions at this time. Please go ahead.

Okay. Thank you everybody. Thank you Holly, good morning and good afternoon.

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