Natuzzi SpA (NTZ) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Natuzzi SpA's Second Quarter and First Half 2006 Financial Results Conference Call. [OPERATOR INSTRUCTIONS] I'd now like to turn the conference over to Mr. Greco, Chief Executive Officer. Please go ahead, sir.

Okay thank you. Ladies and gentlemen, first of all I would like to thank you for taking part in the Natuzzi Second Quarter and First Half 2006 conference call. As you probably know, I joined the Natuzzi Group as CEO at the beginning of June 2006 and therefore this is my first financial release conference in Natuzzi. And I want to express my enthusiasm in being part of the Natuzzi Group. In assuming my responsibility and commitment I have very clear in mind the prestige of the Natuzzi brand, the group history and the tremendous success story that here represented in the upholstery business, around more than four digits.

At the same time, we all realize that we have to face a very challenging business environment as well as an aggressive competitive scenario. For such reasons we are aware that we will have to work hard, very hard, with the aim of innovating our products, of better matching the customer expectations, strengthening all the distinguishing and the unique features that have made Natuzzi a symbol of the Italian style worldwide.

Here are the directions toward which we need to head for. The first one is the Natuzzi brand repositioning. This repositioning should be toward the high-end of the market where margins are higher since price is not the major decisive factor in the consumer's purchasing choice. To do that we need to speed up toward a path that the group has already taken in the recent past. That's the investments to support the Natuzzi brand necessary to compete in the markets with a made in Italy product and at the same time to develop an appropriate distribution network of [mono]brand stores.

Second a more aggressive and innovative product offer for the promotional line Italsofa with a non-market brand positioning and differentiation from the Natuzzi brand. The third line of intervention must be a reassessment of the group's operations in order to make the group more efficient as a whole, keeping in mind the commitment of Natuzzi to its territory. These are ambitious goals for the achievement of which we are going to re-engineer virtually all the group processes, with the aim to better serve our customer and seize the competitive environment.

But now let's move on the financial results. On the 2006 first semester we have results which show a strong revenue performance, up to 15.6%, versus the same period of the previous year. The gross profit, thankful to the increased production capability usage went up by 27%, representing 35.3% of the revenues. Last year, same period, the gross profit margin was only 32.2%, and because the LG&A expenses have remained almost flat in the two periods, we had a strong increase of the EBIT, which moved from a loss of EUR 9.3 million to a profit of EUR 21 million. Then considering non-operating expenses for a total amount of EUR 2.1 million and taxes and minorities for EUR6.4 million, we come up to a net profit of EUR16.7 million versus a loss of EUR12 million reported in the first semester of 2005.

Unfortunately, the order taking performance was not as good as the revenues one, and achieving only a mid single-digit unit growth caused a material reduction in the order backlog amounts. This fact, in addition with a challenging revenue comparison base, will very likely affect the second semester growth performance.

Now I would like to pass it over to Nicola, which will give us all the details. Thanks.

Okay thank you and from me a good morning to those connected from the United States and good afternoon from those connected from the old continent. Some usual reminders before beginning. One is that if you have not received the press release, you can find a copy on our website, www.natuzzi.com, or you can call the Investor Relations department, 0039-080-8820812. And before proceeding, let me advise all of you that our discussion today can contain certain statements that constitute forward-looking statements under the US Securities Laws. Obviously, the actual results could different materially from those in the forward-looking statements because, as you can imagine, of the risks and uncertainties that can affect our results of operations and financial condition. Such risks and uncertainties have been discussed in the 20-F for the fiscal year ended December 31, 2005. This report is available on our website or you can have a copy from us calling us in the same department, Investor Relations department, or a copy is filed with Edgar or with the US SEC.

The currency rate, let's look at the currency rate. Please note that during the second quarter 2006, the euro was almost flat with regard to the US dollar, passing from an average of $1.2581 per euro in the 2005 to $1.2576 in the second quarter 2006, so substantially flat. I will go a little bit more in detail for the financial information considering that the highlights have been already illustrated by Mr. Greco. So in the second quarter 2006, as we said, total net revenues were EUR195.6 million, so an increase of 18.1% over the same period in 2005. In terms of units sold, the company reported an 18.1 increase with respect to the prior year second quarter. Upholstery net sales for the second quarter of 2006 were EUR176.7 million, the increase was 21.9% from EUR145 million we had in the second quarter 2005.

The second quarter's 21.9% increase in upholstery net sales was due to the following. We had a 0.2% decrease determined by the large strengthening of euro, as I said before, an 18.1% increase in units sold and a positive 4% price mix effect. Furthermore, as already anticipated by Mr. Greco, the double-digit growth in the units sold was mainly attributable to the soft comparison base of last year as well as the higher utilization of the order backlog existing at the end of 2005. In first half 2006, the total order amount expressed in units was up mid-single digits versus the same period last year.

Looking at the geographic breakdown of the revenues for the second quarter 2006, and always being focused on the upholstery net sales, let me say that we reported a 9.5% increase in the Americas, a 31% increase in Europe a 22.2% increase in the rest of the world. We had increase also in terms of units sold, in fact. In Americas we had a 2.6% increase, in Europe a 26.5% increase and in the rest of the world a 15.6% increase. And [we also saw] the second quarter 2006 upholstery sales based on the performance of the two basic coverings we use, which are leather and fabric, [we rose] that leather upholstery increased 28.5% in terms of seats sold and 27.5% in terms of sales.

As far as the other covering is concerned, so fabric, seats sold decreased by 18.4% a unit while 5.8% decrease was reported in terms of sales. Splitting the overall upholstery performance into the two brands, Italsofa and Natuzzi, during the second quarter 2006 Italsofa represented 49.6% of total seats sold and 35.3% of total sales compared to 47.5% and 32.9% respectively in the previous year comparable period. The Natuzzi brand of country addresses the medium [inaudible - accent] segment of the furniture market, accounting for 50.4% of total seats sold and 64.7% of total sales versus 52.5 and 67.1% respectively reported in the second quarter 2005.

Turning to our retail activities, in the quarter ended on June 30, 2006 sales to the Divani & Divani by Natuzzi Stores and Natuzzi Stores totaled EUR38.6 million versus EUR27 million we had in the second quarter 2005. The total number of stores during the quarter decreased 127 in Italy while increased 152 abroad. One year ago we had 138 in Italy and 139 outside of Italy. The other distribution concept we have, The Gallery, which let me remind, is a kind of shop in the shop, which is called the Gallery, we had 548 galleries as of June 30, 2006, 46 less than three months earlier. The other sales that represent some raw materials the company sells and accessories and some other minimal stuff, decreased by 8.3% at EUR18.9 million. And in particular sales of accessories increased slightly by 1.5%, while valuations from sales increased by 4.4% and sales of raw materials increased by 28.4%.

The gross profit for the quarter ended June 30, 2006 was EUR70.7 million, 36.8% up from EUR51.7 million reported in the previous year comparable period. In terms of a percentage on revenues, the gross margin improved substantially at 36.1% from 31.2%, or almost 5 percentage points, thanks to the fact that the fixed costs were better absorbed by the higher level of units sold.

On a constant exchange basis, gross margin goods have improved with that being 37.2% in the second quarter 2006. The other expenses, selling, general, administrative were EUR58.6 million, down by 2.2% over the prior year comparable period, in terms of percentage of revenues decreased 30% from 36.2% reported in the second quarter of 2005. Such improvement was due to the aforementioned increase in turnover as well as the strict control the company is putting on the SG&A expenses, although at the same time the company kept on investing in advertising to support the Natuzzi retail and brand project.

The operating income in the second quarter 2006 was EUR12.1 million, whereas during the same period of last year the company reported a loss, a net operating loss of EUR8.2 million. The [4x], we had a net 4x loss of 1.1 million compared to a net 4x loss of 1.6 million reported in last year's same quarter. So we were substantially flat. And the tax rate was 19% more or less, 18.9%, and we paid EUR 2.3 million. Summing all of the above, the company reported net earnings of 9.9 million in the quarter, EUR9.9 million, while in the same period of 2005 the company reported a loss of EUR8.4 million. On a per ADR basis, net earnings were EUR0.18 or $0.23, while in the second quarter 2005 we had EUR0.15 and $0.19 of losses.

The company has confirmed in this first six months of 2006 is a strong cash flow capacity. As a matter of fact, the company had net cash flow from operations at EUR35.6 million. And part of this was utilized in investment so that CapEx in the same period, net CapEx were EUR6.7 million. This cash was included in the net financial position, this large capacity, so that the net financial position as of June 30, 2006 was EUR102.7 million, increasing from EUR67.2 million reported in the same period of 2005.

Thanks a lot for your attention. And, Andrew, now we are ready for the questions of our guests.

Certainly. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Mark Heilweil with Spectrum Advisory. Please go ahead.

It's Marc Heilweil. Good luck in your new position. I'm wondering about the large cash position that you're holding. If you could just give us an idea of how it's currently invested? And secondly, if you could give us any comments on how you expect to use that cash or any changes in the use of cash over the next year or so?

Okay, first of all, thank you for the wishes -- probably I will need them. As you can imagine, right now we are not yet in a position to give you clear answer to your question because we need some time in order to develop a proper strategy. As initial reaction, I believe that the liquidity that the company has is really a very important heritage, especially because as several times the President, Mr. Pasquale Natuzzi, said is the intention of the group soon to invest in order to push up in the repositioning in the Natuzzi brand, which as we know could require substantial amount of money. So I believe that the story of the group can be very interesting in order to push us to ambitious projects. And certainly the Natuzzi brand we believe that could a right tool for investing money.

If I can add a couple of words to Mr. Greco regarding currently the way we invest cash. By the way while we are looking at the best strategy to optimize the position of cash in the company, over the past few months the company has been investing according to a policy that has always characterized the company, which is to minimize the risk of the liquidity that we have. So if you want to factor any possible yield on the cash that we have in the company, considering the risk that we don't like to have on our balance sheet on the asset side, consider that we usually invest in the money market, but always trying to keep the risk at almost zero.

Is it invested strictly in euros?

No it's not in euros. Our position currently is mainly in euros. We have quite a good amount of US dollars and we have some other currencies. Consider that it's mostly in euro because since we hedge our sales, our net position, of course we try to avoid to keep other -- currencies other than euro on our balance sheet.

Okay thank you very much. That's helpful.

You are quite welcome.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of [Pierre Anamera] with [INC]. Please go ahead.

Yes, good afternoon, gentlemen. Also from my side congratulations, Mr. Greco, on your appointment as Chief CEO at Natuzzi.

Thank you.

I've got a few, well, rather technical questions and one more general question about the company's strategy. Could you elaborate a bit more on the strategy going forward? You mentioned the differentiation of the Natuzzi brand vis-à-vis the Italsofa brand and the significant amount of, I assume, A&P spending that would be required for that. Could you elaborate on that a bit more and give some general guidelines on what you would be looking at? And also which regions?

Okay. In summary I believe that the strategy should be a sort of brand portfolio strategy, which will see Natuzzi as the high end brand which must be offered to a segment of customers which appreciate Italian style, Italian design, Italian quality and of course is ready to pay sort of a premium price. On the other hand, in order to cover all the existing segments in the market, we need also to have a promotional line. Today, we have the Italsofa offer.

Probably in the future we will put more focus in differentiating the offer among these two brands, both in terms of style and also in terms of distribution networks. Of course Italsofa was born some years ago as a sort of reaction to the low labor cost pressure and it was treated much more as a product offer than as a brand. Maybe after having made some experience we could move on the real portfolio of brand management, which of course can give us some opportunities.

I believe that there is some room for gross margin improvement in Natuzzi because selling appropriate products we could ask to our customers offering to them very nice product, also a certain premium, which will enhance our gross margin. On the other hand, with the Italsofa offer, we could go to a volume strategy much more than today. It's sort of exploiting the existing segment in the market much better than in the past. Of course we need to better differentiate the product development of the two brands, which means that probably we have also to apply some organizational changes.

Okay. And you're talking about a distribution strategy as well? Does this involve also retail network outside of Europe?

Yes, probably the answer is positive because especially in the Far East we know, according to the experience made in other businesses, how important is a proper distribution network. In order to well establish in the market a brand the distribution channel is critical, which does not necessarily mean that we have to open our owned, directly-owned distribution thread mill, but certainly we need some exclusive distribution channel, which another way of as a unique product portfolio, the Natuzzi brand. Of course, the importance of the distribution network is much -- the exclusive distribution network is much more critical for the Natuzzi brand than for Italsofa.

Okay. And do you already have specific ideas about phasing for this strategy? Like, would you first move up the, say the prices and move up the A&P spending for the Natuzzi brand and subsequently open stores? Or will this go hand in hand? Or do you have a different idea for phasing?

In a couple of months we are going to prepare our fiscal year 2007 operational plan and I believe that all these details will be contained in this plan. Today we are just working on the analogies of the market.

Okay. Do you have a specific date in mind where you will make your presentation? Or is it at the next quarterly results that you'll make more announcements on this?

Too early to answer to this question. Firstly I would like to first of all understand the internal situation then try to improve the internal process. And only after, we are going to pass to the market the results of our ideas and to discuss with the financial community the operational plans.

Okay, fair enough. Thank you very much. I have some technical questions that I mentioned earlier. In the first quarter there was a large account that was responsible for most of the organic growth on the European side. I was wondering what proportion of the very good growth -- actually, very good performance in the second quarter, was due to this account? And what are the plans for the third quarter with this account?

Okay. Actually I don't have the like-for-like situation you are asking for. But you know the real problem in this first six months was the order backlog because of course in the P&L we are reflecting the revenues situation. And as you know, in our business, the order portfolio is quite important. Unfortunately, while the revenue stream was quite good as you were recalling, the order backlog was penalized and I would say that also the trend, the most recent trend is not actually going in the right direction.

And is this order backlog related to this account today that I was referring to? Or do you mean there's a general --?

This is a general comment -- yes, a general comment.

General. And is it for Europe or the US specifically or --?

I believe that both markets were involved in this process. Clearly in the US, the line which is suffering most is the Natuzzi brand. As you can imagine also, the euro/dollar exchange rate doesn't help, and to be honest we are a bit worried about also the future projections. As you know, many financial institutions are projecting an even weaker dollar against the euro. Of course, we hope that the US dollar will go exactly the opposite, but still this is something on the table.

Yes. So would you expect a negative volume effect for the third and fourth quarter? Specifically, the fourth quarter probably?

Versus the year before you mean?

Yes.

It could be. It could be. The initial trading environment unfortunately is going in this decreased direction.

Okay. Very good. Well, I've got a few other questions, but I'll go back in the queue and give other people the opportunity to ask questions as well.

Thank you for the time being.

Thank you.

And our next question comes from the line of Charles Michaels with CR Global. Please go ahead.

Good afternoon and congratulations on the first half of the year's results. I was wondering the sales, which were quite strong, could you elaborate on the reason that you did see as much strength as you did as it's quite different from the pattern in the past years?

As we were anticipating to one of your colleagues, actually the second portion of 2005 also last year was quite good for Natuzzi group. In addition to that, we had some problems at the production level. So the conclusion of the two factors was a strong ending portfolio of orders at December 2005. Of course going in the new fiscal year, we were able not only to ship the new orders, but also to absorb the previous year backlog. That's why we can notice a gap between the growth in the revenues, the double-digit - the strong, I would say, double-digit growth in the revenues, while the order taking was only mid-single digit. For that reason we were warning you about the possible trend in the second portion of fiscal year 2006.

As far as backlog goes, could you comment on roughly how many weeks of sales a normal backlog would be and perhaps where you are today?

I'm not sure that the company discloses this very sensitive information.

Okay. SG&A, as you highlighted, has come down nicely. Is that a trend that should continue?

Certainly the company in the last 12 months has made a very good job in controlling cost and also in realizing important savings, as you are pointing out. Now probably, especially if we want to push the business, try to revamp some projects to larger distribution networks, probably our first priority will not anymore be cost cutting, rather a most efficient usage of the spending of our money. So I do not expect this trend will continue.

Thank you.

Thank you to you.

[OPERATOR INSTRUCTIONS] And our next question is a follow-up question from the line of Pierre Anamera with INC.

Yes thank you. Well I guess I'm the last in queue. I would like to know, this is also something that was mentioned in the previous quarterly conference call, the -- but really didn't get a complete - well, we didn't really completely understand the answer. The breakdown or the proportional breakdown of the US and European revenues within the Italsofa and the Natuzzi brands? The reason I'm asking is I'm trying to get a feel for the price effect in your numbers because there seems to be a positive price effect again in the US. And I'm trying to figure out if there's a mix effect in there. So the proportion of Italsofa revenue, is that two-thirds Europe, one-third US? And for Natuzzi, basically the same question but then reversed?

Nicola?

Okay, this is a question that you can partially find in our tables on Page 8 and 7 when we make the geographic and the breakdown by brand in the geographic. But on the general terms, even though we do not release this information, let's say that Italsofa since the beginning of the introduction of this brand has found that the United States has an excellent country for achieving successful goals. So Italsofa still represents a very good product for United States, but over the past year, especially thanks to a particular relationship with an important customer, we have been increasing Italsofa also in Europe.

And so that as of today, I would say that there has been quite a recovery in terms of sales for the Natuzzi -- for the Italsofa brand in Europe. And looking at the incidence of the two brands, and I'm looking just at the quarter, but you can get a flavor also for the full year, in terms of sales, Natuzzi and Italsofa represent in the United States in terms of sales again 60/40. And in Europe we're 70/30 and same in the rest of the world. Of course, in terms of seats sold, the situation is quite different and we move to 50/50. So Italsofa is a good product, it's still selling a lot and we are quite confident that we will have good performance still with Italsofa.

Okay. So if I understand you correctly, the breakup in the US is 60 Natuzzi 40 Italsofa?

Yes.

And in Europe it used to be 70/30 but this quarter it was 50/50 because of this -- ?

I'd say that Europe is moving more -- Italsofa is increasing Europe. So it's getting margin also in Europe while in the past it was mostly a brand sold in the Americas.

Okay, I would say that in terms of brands, there is no big differences between the American market versus the European one. The real problem is that, while in the US the total volume defined as the sum of the two brands is not growing very fast at a very good rate, the opposite is in Europe. So the total amount of our revenues is going up. As far as the price mix and exchange rate impact, you are right probably, especially because in the first semester 2005, the average invoicing rate was very close to US $129 versus euro. On the contrary, in this first semester the [accentuator] was only 123. So we've got an extra 4 or 5% helping our revenues at the euro consolidation level.

Okay. So that explains the positive revenue per unit for the US.

Correct.

Okay. Well actually this is a number I got from the dollar amount. Well okay of course, you adjust your pricing to the rates you get at the time the order is placed. I think I understand.

Yes.

The last question I had, yes, in the first quarter also during the conference call you mentioned that there was a valley of supply basically, empty spots in the stores in the US because of the switch to the Brazilian and Chinese sourcing. Has this been completely resolved? Is the sourcing or the supply chain completely on line now?

If I understand correctly your question, you are referring to some production problems that we had in the Brazilian plants?

That's correct.

Okay. Still we have some minor issues and we are going to address them very soon.

Okay. So that is still a live issue?

Yes exactly.

Very good. That's all my questions. Thank you so much and congratulations on the quarter, a very good quarter.

Thank you.

Our next question comes from the line of Bud Bugatch with Raymond James.

Well, good morning Nicola, good morning.

Good morning to you.

I'm sorry I got on late, so I apologize if this question's been addressed earlier and if it has been then I'll just go to the transcript. Do you make any comments about the profitability by region or other breakdowns? I know we get the sales breakdown, but I don't recall if you have made any comments in the past about profitability and I know that --

No, it is not a standard practice for the company to disclose the profitability by regions.

And have you made just any general comments about it?

Not any general comments. We just comment on the revenues level.

Okay. Thank you very much.

Thank you to you.

And at this time I'm not showing we have any additional questions. Please continue.

Okay. So if we don't have any additional questions, I can turn the line to you and say on behalf of myself and the other officers here, participating to the call, thank you.

Thank you very much for the attention. Bye.

And 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.