Natuzzi SpA (NTZ) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Natuzzi S.p.A. Third Quarter 2006 Financial Results and Conference Call.

[OPERATOR INSTRUCTIONS]

Now, also the conference is being recorded and now I would like to turn the conference over to your host, Chief Executive Officer Ernesto Greco. Please go ahead, sir.

Thank you. Good morning and thank you to everybody for taking part in the Natuzzi Spa Third Quarter 2006 Conference Call. As previously commented, over the recent months, our bullish environment has been characterized by a certain softness. Actually, after a good start reported in the first months of 2006, in the further months I would say starting from the second quarter, we have seen a progressive general weakness that has continued also during the summer period and up to now.

As a result, net sales growth in the third quarter of 2006, the amount went up by 7.7%, has been lower than the growth performance reported in the first and in the second quarter of 2006. You probably can remember that we had respectively 13% growth and 18%. And then, we expect that the net sales performance in the last quarter 2006 should continue having this down trend. The aforesaid home furnishings sector weakness has been confirmed also at the recent High Point market showing at least for the short term, a weaker and cautious outlook.

Regarding our group, if the market continues to show this uncertain situation, we could be forced to adjust a little bit the production level to the lower order flow. In order to tackle such a challenging retail environment, we are progressing our initiatives regarding manufacturing operations and sales operations. Besides, we continue to be strictly focused on the restructuring plan, which is still underway and that includes an expansive process reengineering program and an important investment in a new information system architecture that should increase the integration of different stages of the value chain. The above initiatives should deliver higher efficiencies as well as cost reductions. And we should deliver an increased product which should enable having a better customer satisfaction.

On the product side, much attention is paid to the new products to be launched starting from the forthcoming Cologne fair, where our new collections of great prestige will be presented. Despite the strong impact of the appreciation of the euro against the major currencies, third quarter 2006 gross margin remained substantially stable at a level of 32.2% versus the 32% reported in the same period of 2005. While in the first nine months of 2006, the rate improved from 34.4% starting from the level of 32.4 of the previous nine months 2005.

Now I will leave it to Nicola to comment on the third quarter 2006 financial results and afterwards we will open the Q&A session.

Okay, thank you. Also from me good morning to our listeners in US, good afternoon to those of you connecting from Europe. Welcome to this quarter call. Let me remindthat the participants are myself, Mr. Greco that made the introductory comments. Here with us is Filippo Simonetti, the new Chief Financial Officer of the group and Pasquale Natuzzi, Chairman of the Board. Today, we will review Natuzzi's third quarter 2006 financial results and then as usual, we will open the call to your questions. You should have received a copy of the earnings result but if you have not, a copy of that can be found on our website, natuzzi.com or call our Investor Relations department at 00-39-08088-0812. Questions can be sent to the email address investor_relations@natuzzi.com.

Before proceeding, let me advise that our discussion today can contain statements that constitute forward-looking statements under the United States securities laws. Actual results might differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial condition. Such risks and uncertainties have been discussed that in the past, affect and may continue to affect our results of operations and financial condition have been discussed in our annual report and Form 20-F for the fiscal year ended December 31, 2005 and filed with the United States Securities and Exchange Commission. By the way, a copy can be requested from us at the Investor Relations department or can be found in our website, natuzzi.com.

Regarding the currency conversion used in our financials, during the third quarter of 2006, euro appreciated with respect to the US dollar that represents for us the main export currency by about 4.3%, passing from an average of 1.29 at a fixed dollar per euro reported in third quarter '05 to 1.2742 in the third quarter 2006.

Looking at the revenues or the top line of the income statement, during the third quarter 2006, total net revenues were at EUR158.5 million, up 7.7% over the third quarter 2005. In terms of units sold, the company reported a 10% increase with respect to the prior year third quarter. Upholstery net sales for the third quarter of 2006 were at EUR142 million, up by 8.8% from EUR130.5 million reported in the last year's third quarter.

The third quarter's 8.8% increase in the upholstery net sales was due to the following reasons. We had a 2.6 decrease determined by the average strengthening on a quarter-over-quarter basis of the euro against the major currencies. But, it was more than offset by a 10% increase in the seats we sold and a consequent price mix effect representing an increase of 1.4%. The positive performance on a quarter-over-quarter basis was mainly due to the utilization of the existing order portfolio that unfortunately has not been compensated by sufficient new orders. But on this point, Mr. Greco has already sufficiently explained the reasons and consequences.

By breaking down the third quarter 2006 upholstery net sales from a geographical point of view, we reported a 1.2% increase in the Americas at EUR60.1 million, a 12.1% increase in Europe at EUR68.8 million and a 33.7% increase in the rest of the world at EUR13.1 million. An analysis made on the basis of the coverings, leather and fabric we use for our upholstery, says that leather upholstery increased 15.5% in terms of seats sold and in leather, 0.7% in terms of sales. Of course I am talking about the third quarter 2006 compared to third quarter 2005, whereas actually the other kind of covering, fabric, decreased by 13.4% in terms of units and the decrease was 7% in terms of sales.

The two brands that the company sells, Natuzzi and Italsofa, looking at the splitting of these two brands says that during the third quarter 2006, Italsofa represented 53.9% of total seats sold and 41% of total upholstery sales as compared to 52.4% and 37.5% respectively in the previous year comparable period. The Natuzzi brand that currently represent -- the Natuzzi brand that currently addresses the medium high end segment of the furniture market, accounted for 46.1% of total seats sold and 59% of total upholstery sales versus 46.6% and 62.5% respectively reported in third quarter 2005.

Retail operations that are composed by Divani & Divani by Natuzzi, Natuzzi stores, they were as of September 30, 2006, 126 in Italy and 152 abroad. While one year before, we had 138 stores in Italy and 146 outside of Italy. At the same date, we have registered 560 Natuzzi galleries that represents kind of a shop in the shop and they are 12 more than three months earlier. During the second quarter 2006, other sales were almost flat at EUR16.5 million, in particular the sales of accessories decreased by 21.9% to EUR3.7 million, while we had an increase for the sale of polyurethane foam of 7.3% and a 4% increase of raw materials, sofa raw materials.

In this quarter, the third quarter 2006, gross profit increased to 5.1% at EUR51.1 million from EUR48.6 million reported in the previous year comparable period. But the gross margin slightly decreased at 32.2% from 33% reported for the third quarter 2005, mainly due to the currency impact effect that impacted on the commercial upholstery net sales.

Selling, general and administrative expenses, if we look at all of them together, they were EUR42.9 million. This increased by 9.2 over fourth quarter 2005 and as a percentage of sales, increased to 27.1% on 26.7 reported in the third quarter 2005. So we had a slight increase in terms of incidence on the sales.

Operating income as a consequence of the aforesaid, the operating income actually, I am sorry, we did not report an operating income. Actually, we reported an operating loss of EUR1.1 million, while in the same period of last year we had breakeven.

The ForEx impact, we have reported on the income statement, talks about a ForEx loss of EUR0.4 million, while we had a net ForEx loss of EUR0.9 million in the prior year's same quarter. In this period, the company reported for the third quarter 2006 an income tax credit of EUR200,000 as compared to income taxes paid of -- reported, accounted for of EUR0.5 million in third quarter 2005.

In third quarter 2006, also the company reported a net earnings of EUR0.8 million as compared to net losses of EUR2.1 million one year earlier. On a per ADR basis, an ADR is equal to one share, net earnings were EUR0.01 or $0.01 of dollar versus EUR0.04 or $0.05 of dollar of losses reported in last year third quarter.

In this quarter, we have continued to produce cash. In fact, during the first nine months of 2006, the operations generated a cash flow of EUR53.6 million, that increased from EUR16.9 million [sic -see press release] reported the same period of last year. On a per ADR basis, this means an operating cash flow of almost EUR1, Eur0.98 per ADR, while in the first nine months of 2005, we reported EUR0.31 per ADR. In the first nine months, we spent, just looking at the net CapEx, about EUR12 million.

The financial position, the net financial position shows a company that is solid, a very sound company. As a matter of fact, at September 30, 2006, we had EUR116.2 million. That increased from EUR78 million that instead we reported as of September 30, 2005.

Okay, thank you. So these are the introductory comments and as usual, now we open the Q&A session. Please Pat, go ahead.

Yes sir, very good. [OPERATOR INSTRUCTIONS] Yes, we have our first question from the line of [Pierre Van Woodrow] of [IMC]. Please go ahead. Please go ahead, your line is open.

Thank you very much. First of all, congratulations with, in my view, the results weren't all that bad, were pretty good actually on the top line. I have a few questions about the plans for the future. You mentioned the need for the adjustments on the manufacturing side and the reengineering. I was wondering whether you could go into a bit more detail there and explain what your plans are? I assume this is for the manufacturing plant in Italy and if there will be any charges required for this reengineering?

And also, if you could indicate the investment needed in the IT system? If you have a ball park figure for the amount of money that is going to be required there? And then I have some follow up questions as well.

Okay, actually -- okay actually, you are right. We are thinking to make some investments, both at the factories level as well as in the central structure. Let's start from the manufacturing activities. The ideas that we want to implement are related to the manufacturing efficiencies, which means that we want to reduce the manufacturing cost using less material, trying to decrease the labor incidence on the total cost. On the other way, we want to improve also the quality, which again will result on a reduction in rework activities. The tools which will be used are several. For example, we are implementing right in this week a very massive training activities, especially in the factories abroad. Actually, all these activities will be conducted not only in the Italian factories, but also in the Brazilian, Romanian or Chinese factories that we have.

At the moment, we do not have a mind to make a massive restructuring manufacturing activity, which means that we are not having in mind any amount to be put in the profit and loss for non-recurrent restructuring activity cost. At the same top level, probably the major investment will be related to the virtually all process, all the company's process reengineering, which means that we want to redesign the process we use in the company in order to [inaudible - background noise] from one side much more time efficient. In other words, we aim at reducing the time to market, which is we understand a very important item in our days.

On the other side, we want to better exploit the value chain, increasing the efficiency of the supply chain, which should result in a better activity in the purchasing department as well as in the whole logistic pipeline. In order to get there, we need certainly to implement a software platform which will treat all the activities in the company as a unique entity. The investment we know by experience, it will be material. I am afraid I am not right now in the position to give you precise figures, but as I am sure you know, these investments are certainly double-digits million euros investments. But I believe that the return coming out from these activities will be very, very important.

If you have additional questions?

Yes, I do. I would like to know what the status is of the expansion of the retail network, especially in the US? And also the higher-end product line, you mentioned that it was going to be at the Cologne fair. Can you give some more background into the price point that you will be looking at for this line and can [inaudible - background noise]?

As far as the distribution, I would say that in 2007, our main focus will be on the re-qualification on the upgrade rather than on the expansion of the distribution network. So probably, and this is an activity which we are carry on in these weeks preparing the new operational plan, we could close some stores and of course, we want to replace them with other point of sales, but in a better, more appropriate location. So as a total number of point of sales, I do not expect a very big increase during 2007.

As far as the new products, I believe that Mr. Pasquale Natuzzi, with his team, is making a very great job in creating and prototyping new products. I believe that the best way to understand what I mean is to come in Cologne, to visit the fair and maybe to create his own idea. But certainly the expectations we have are quite positive.

Okay, thank you very much.

Thank you to you. Bye.

Yes, we have at least one additional question. [OPERATOR INSTRUCTIONS] Now we will go to the line of Matthias Eifert with MainFirst. Please go ahead.

Hi and good afternoon to you. I have a question on the returns you previously mentioned of your investments. Can you give an idea if you think that you might come back one day to the operating margins you had a couple of years ago of double-digit percentage rates in terms of sales? And if you think so, how long does it take to get there and what will be the steps to that?

Okay. I will divide your question into two portions. What I was mentioning before is if you want to relate it to the operations, Natuzzi has the commitment to become more efficient in terms of manufacturing, in terms of distribution, in terms of commercial activities and this is certainly a very important stream in order to increase the profitability of the company.

Another portion and probably even more important in order to arrive to a quite high return on sales should come from value-added in the products themselves. I mean, we should increase our production margin because thanks to the quality we have in our products, thanks to the style, thanks to the tradition, to the care to serve our customers, we should be able to regain some premium price. If you want, our job should differentiate Natuzzi's products from other products which do not have all the intangible values that Natuzzi offer has.

Of course, today I am not in a position to give you the assurance that in a couple of years, Natuzzi's group will back again on the return on sales that we had in 2003, 2004. But certainly, you have our commitment in upgrading the performance and in going back to a much higher profitability. But as I said, from one time, it will be required efficiencies in the operations. On the second -- on the other side, we need to get extra premium on our sales. All that will be realized in a certain time frame.

Could you give us a rough idea how long this time frame is? Are we talking about one or two years or more like four or five years and how far are we in this process? Are you just getting started now or did you pass already quarter of the way to that?

As far as the operational activities, I would say that we are starting now and probably at this time, our projects will require a couple of years time horizon.

On the other aspects, the intangible, the premium price we want to get from our products, clearly is something related to the brand project and as you know, when you want to build a brand, you must first of all invest in some activities like the point of sales, like the product innovation and quite very, very important, in communication. Which means that from Natuzzi, you could expect in the coming months a strong pressure on communication on these items. Of course, we want to become more sophisticated in communicating the values of the brand then we did in the past.

You know, it is a really a total brand project that we want to implement. You are asking if we start from scratch. The answer is certainly no, but certainly today the company is more focused, also because the company now wants that probably then in the past to address the portfolio brand strategy. You know that we handle not only Natuzzi brand, but also Italsofa. Probably Italsofa in the incoming months will be addressed, if you want, much more as a brand than as a product -- a product vendor. So it means that even with Italsofa, we could expect some increase. All these activities will require, of course, from one side investment and on the other side, even some time.

Okay. To sum it up, is the bulk of investment just ahead of us and a strong recovery in margins should be not expected for the next, let's say two to four quarters, right?

Clearly, what I said to you in the last three minutes is not related to a short time, but is much more a program, a strategy that the company is ready to implement. And as I said, it will require years, much more than quarters.

Okay. Very helpful. Thank you very much.

Thank you to you.

We have at least two additional questions in queue. First, we will go to the line of [Vani Vicchini] with [Gart Loree]. Please go ahead.

Buona sera, Ingegnere. I wanted to ask two questions and then I have a colleague here with me who may ask one additional one. The first question is, could you say what the capacity utilization is in your Italian factories at the moment and in the overseas factories so that we have a feel for operational leverage and potential sales growth?

And two, is something that was discussed in the second quarter conference call. It is to do with selling expenses. If one analyzes long term data, your cost data over the last sort of five years, it is evident that the line as a percentage of revenues, which has increased quite a lot, is selling expenses. Everything else has been quite flat with some fluctuation. So is there a specific plan to address this line of the profit and loss account and could you say something along those lines please?

Okay. Let's start from the second question. Actually, you mentioned a period of five years. I would say that the numbers actually are not comparable because while at the beginning of the year 2000, Natuzzi was only an wholesaler and of course the selling expenses in this kind of -- usually this kind of distribution means it is very, very limited. But now, Natuzzi has an important portion of its business generated also in a retailing way and of course, the selling expenses in these distribution channels are much higher. I believe that this is the price, if you want, that we have to pay in order to reinforce the brand project I was referring to.

But very, in an open way, I have to say that traditionally Natuzzi was much more, focused on the wholesale business, the experience in the retailing business was quite limited. Maybe you know that the company, a couple of years ago, acquired a chain of point of sales in the UK, Kingdom of Leather. Actually, the results were quite disappointing us. Since that time, I believe that the group has made a lot of improvements in understanding the retailing business. Of course, a lot of room of improvement is still is in place.

But in summary, the US activity should be balanced with the wholesale activity, if you are want. The new business model, financial and business model of Natuzzi will be a good balance between a certain portion of the US business, which will reinforce the brand visibility, the awareness of Natuzzi brand, and the second portion in size larger, will be the wholesale business. So galleries, franchised operations, we are sure will help us to improve the profitability of Natuzzi, the market penetration and so on.

As far as the production capability, probably Nicola could give you some numbers.

Yes, sure. I am sorry, I missed your name?

Vani Vicchini from Gart Loree.

Okay, Vani, thank you. Regarding the production capacity, I can give you the more updated number. Totally, we have a daily production capacity of 12,500 seats worldwide. As you probably know, it is split between production made in Italy, production bought in Italy and production made abroad. As of that date, which is some weeks ago, most of the production was abroad more than 50%. The remaining is in Italy and in Italy, more or less we are 35% of total production capacity that is made in our factories and the other, the remaining is both from some other producers that are nearby.

Okay. So just a quick follow-up question. So selling expenses, as a percentage of revenues, is it fair to assume that it will remain more or less at the current level? Since I think you mentioned earlier, there is no big increases in terms of point of sales going forward?

This is a fair assumption. Yes.

All right. I have one supplementary question. You mentioned the process reengineering costs are sort of tens of millions earlier on. What is the ultimate payback from this? Is this reduction of net working capital reducing time to market of products or is this the first step with a bigger restructuring in terms of manufacturing to follow?

I would say that it is a combination of all the results you are mentioning. On the logistics, certainly we will have lower production cost, lower scheduling cost and reduced time to market. On the efficiencies and the cost of goods sold, of course the intensification of automatization in our plants could reduce the labor cost incidence as well as the consumption of the raw materials. So it is really a lot of things, that each one will contribute probably for a limited amount, but the sum of all these items will be very, very important. If you want in Natuzzi, we are just trying to repeat what in other industries in the past, even after the 2000, the 9/11 2001 crisis, many industries have done. Efficiency is really a very important point. But as I said, we are working twofold. One, efficiencies at manufacturing level; another one is to get the extra premium price from these sales to our customers.

How quickly would you look if you combine all of those elements to get a payback on your expenditure in this area?

You know better than me that these activities require time. Typically, these projects have a time horizon of at least a couple of years, which of course means also that over 9 to 12 months, you could see some results. So we shouldn't wait two years just to wait the initial improvement. We are much more aggressive. We have the intention to get results after a few months, within the first year of implementation.

Excellent. Thank you. Thank you very much.

Bye-bye Vani.

We have one additional question at this time. [OPERATOR INSTRUCTIONS] Now we will go the line of [Tomas Sur] of Concorde Asset Management. Please go ahead.

Thank you very much. My question would be that you have written in your report that your positive net sales performance has not been accompanied by a similar order flow. So can you give us a little bit deeper look at your order flow and your order backlog?

Yes. You are right. Unfortunately, the revenues performance, which of course was quite good, is not in line with the order performance. Even if I am not in a position, this is a very sensible data, to give you precise numbers, I could say that in the qualitative trend, the nine-month 2006 shows more or less the same amount of orders that we have seen year before, same period of 2005. What of course preoccupies us is the trend, because as I was saying during the introduction, probably the recent, the most recent months' performance show a slowdown. We know that this is something very general, so it is not specific to Natuzzi. Rather, it is a common problem to all the other players, we know because we exchanged some information. Other players, especially in the medium low segment, probably are suffering quite a lot.

The High Point market, which of course gives much more the US mood, but still an important portion of the business is realized in the US, clearly had found all the players with a mood not really very hot. I would say that everyone was quite prudent, a little bit conservative. That is why I said that, at the least, for the incoming months, so in the short time, we want to be really flexible. We want to be ready if necessary and of course, we hope no, if necessary to implement some corrective plans.

Okay, thank you very much.

Thank you to you.

At this time, Mr. Greco, we have no additional questions. Please continue. I'm sorry, we do have an additional question, pardon me, from the line of [Franco Ripa] with Kepler. Please go ahead.

Hi, it's [indiscernible]. Good morning. I wanted to have -- I was just wondering whether you could give any [strategic bounce] out or starting to progress say in Q4, considering that you did very well.

Hello? Yes, we cannot hear very well. So maybe if you can slow a little bit, because the line is very -- it is not clear. Do you mind repeat the question, going a little bit slowly? Thank you.

Sure. I was wondering whether you can't give some indication on how Q4 sales are going to be, considering for H1, also nine months have been quite strong, whether there is any chance to see further advances? And I was also curious to know whether inventory is likely to rise, inventory as a percentage of sales is like to rise going into the end of the year?

Okay. Let's start from the indication, the outlook for the full 2006. As we commented in the press release, we believe that something around a high single-digit growth for revenues goal could be achieved.

For the year?

For the full year, yes. For the full year. Also because you know that even if the remaining portion of the year will see a strong acceleration or deceleration, slowdown in terms of incoming orders, the revenues cannot reflect in a fully way, this change because we have before to manufacture the products and then deliver them, which means that the orders at even in December will be shipped only in January. So they will contribute to the revenues only for the new year.

Okay. And when it comes to the various aspects of the CapEx plan you have been discussing briefly in the conference, can you tell me when you are going to disclose some more details? And give to the market more information about the business plan or more details about this CapEx program?

Certainly, these numbers will be available with the finalization of the operating plan 2007, which means that probably when we will have the next conference call, I will be much more open in giving to you the numbers and details.

Okay. Thank you.

Thank you to you.

We have our last question at this time from the line of Mario Mantovani with Bank Bayer. Please go ahead.

Yes, hello everyone. Just a question for you, Ernesto, on your outlook for Q4. You mentioned high single-digit growth in Q4, foreseen for Natuzzi. Could you elaborate on like for like growth you are expecting for the quarter? The second question I have for you is if you could elaborate on the sell out you see currently in your markets, especially wholesale? And thirdly, could you elaborate on the price pressure that you are experiencing in the US? I am sorry, I jumped a little bit late your conference call, probably you answered already to this question. But I am interested to know about the pricing pressure you are experiencing in the US. Is that something structural you see in the market? Do you see any rebound in this market? Thanks.

Okay. Let's start from the first question. The double-digit revenue growth I was referring before actually is related to the full year, so not only to the fourth quarter but for the full year. The second question, if I have understood correctly the rationale behind that equation, the answer is in this business, the inventory buildup at the wholesale level is really minimal. In other words, our galleries actually, the far and away majority do not maintain inventory. They have just display material, room sets which are used just for display purposes. So it doesn't work as in other industry. Am I catching the rationale of your question?

Sure, okay. Perfect.

Okay. The price pressure, yes, you are right. In the US, everyone is experiencing the price pressure. Of course, this is a combination of two factors. One is the exchange rate, the weakness of the US dollar is especially for the euro-denominated producer, an important issue, a big problem. On the other hand, the Chinese competitive pressure is quite strong, became very, very aggressive. And you know that the US market is quite sensible to the price issue. That is why everyone is suffering in the US market.

I believe that Natuzzi, to some extent, could be in a better position of other players. I try to explain why I say that. Because Natuzzi can play probably tomorrow better than yesterday in the past the portfolio of brand activity. In other words, we have not only the expensive offer, but also the promotional offer and also the middle market offer. What probably we should apply is sort of a fine tuning in order to better differentiate the different offers in order to have a segmentation in our offer.

Of course, if there is something in which the company is starting, as I said, Mr. Natuzzi in this month is very busy because he has the responsibility to design, to first of all, to address this strategy but also to design the different product lines. And as you can imagine, this is really a critical issue.

Sure. Ernesto, probably one final question for you, if I may. Could you remind us your corporate target for Natuzzi, if any, in the mid long term top line EBIT margin EPS growth, if you have any which is disclosed or communicated to the analysts? That would be the first question.

The second one, the second part I would like to elaborate with you is Natuzzi Italsofa profitability level is not disclosed, at least doesn't seems to me you disclosed margin level for your two brands. But from what you say, if what I am reading for on your company, seems to me that your biggest issues are faced on the Natuzzi brand. Now, what would be -- you mentioned competition. We had an IPO a couple of days ago. What would be sustainable profitability you are looking at in your company that will be sustainable in your industry? Could you elaborate on that?

Okay. Let's start from the medium term guidelines. I believe that actually the company didn't give to the market any guidelines and I believe that right now, I am not in a position to give you any indications.

Sure.

As far as the second question, yes, I tend to agree with you. Today the most, if you want, the critical profitability problem I would say is much more on the Natuzzi brand of products than on the other offer of the company. Also because the Natuzzi products are the products appropriated for the brand I was mentioned, brand project I was mentioning before. Clearly, I follow quite carefully the IPO you are referring to, as you can imagine. I believe that this is something very, very interesting because at the end of the day, while in other industries you have a clearly brand and we know if a brand is a strong one, the market or the financial community, the customers are prepared to pay premium prices. In the furniture business, actually you don't have a similar scenario.

As you can imagine, also because I have this typology of the ground, we are carefully analyzing into the company the possibility to exploit, at least to exploit this possibility, also for Natuzzi. What we have seen in the recent Italian IPO is something encouraging for us. But of course, before to drill on this matter, we have to address all the problems we have and I believe that the management commitment for the time being is a total absolved from this type of issue.

On Natuzzi, you mentioned there is a gap in terms of profitability compared to Italsofa. Could you be a little bit more specific on that issue? Is that because on the production that is carried out in Italy and that you have a higher input cost? Is that about commodity marketing, distribution? Where do you see at most -- or what do you see room scope for, cost cutting or restructuring in this unit? Thanks, Ernesto.

Clearly, Natuzzi brand products are the products with a strong sophistication, very carefully manufactured. All of them are manufactured in Italy by very specialized artisans. So the labor cost, as you can imagine, is very, very high. Also the leather quality is really exceptional, which means that the production costs are very high. They will continue despite all our efforts in the restructuring, in improving the production cycle, they will remain very high.

So we have the only possibility, but it is very important, the possibility we have is on the premium price. Which means that probably, we should work maybe in a more efficient way than we did in the past on these aspects, try to better communicate the values, the quality of our products to the customers. I believe that there is room for improvement. As I said, the company culture clearly was much more wholesale-oriented, which means production-oriented. Today, as Mr. Natuzzi said some years ago, we have to implement a change. Customers should be our main focus, which means that we should better understand that the customer desire and then to communicate to them in a very appropriate way our values.

You know, we have a strong position. If you analyze, I am sure you already did, the furniture market, you do not find many strong or sophisticated organization. Actually, Natuzzi has a long tradition, history, expertise. What probably we need today is the create and sophistication in the repeating business.

So shareholders structure--?

Excuse me? This is Nicola Dell'Edera speaking. Can I add a couple of things to what Mr. Greco said? Of course, on the profitability of Natuzzi has been the big important impact of the currency which over the past few years has been affecting our profitability. And we said several times in the previous quarters that the strong appreciation of the euro against the US dollar in particular has been at a [strong pace] and we have tried to make some increasing prices in the United States over the last couple of years, if I remember properly, I believe since 2004, 2005. But it has been very difficult to implement this increase because of the strong price competition, just to- -

Could you quantify the impact that you had on your P&L in Q3 on these currency movements?

The currency movement on the top line represented 2.5% and if you look at the US dollar, 3.4%. But you should look at the fact that some years ago, there was a gap of 40% in the currency before the arrival of the euro. We were 40% more competitive than today, producing from Italy. This is one of the reasons for which also we decided to move abroad, where the currency was almost stable, like in China, like it was before more [tagging] between the renminbi and US dollar, or in the countries like Brazil or Romania, in which the currency was deflating against -- was inflating against the US dollar. So --

You have any hedging policy in place for--?

Yes, absolutely. But you know, as I like to say, in a currency scenario like this, to make hedging is really [inaudible - background noise]. Actually, first of all, is the case to make hedging in a situation like this, or we can make hedging in order to try to bring [term] more stability in our pricing. But if you are looking at the competitiveness, the increasing competitiveness that can come from the currency -- or the hedging, I am sorry, the currency hedging, of course it is not the same that we had in the past. It is just more attuned that we use to guarantee to the market more stable price. But we do not have, from this activity of course, the same competitive advantages that we had in the past.

Interesting. Great. In terms of shareholder structure or market cap, you are listed in US. Are you going to -- probably you already answered to that question, but is there something or are you planning to shift your listings elsewhere to become more, let's say, investment-friendly in the future as you are with securing this company?

To be honest, this is not today in the agenda. I believe that we are really busy on other matters.

Okay. Thanks a lot for your answer. Have a good day.

The same to you. Bye.

At this time, we have no additional questions sir. Please continue.

Which means that we thank all of the participants and the appointment is for the next earnings call of course in March 2007. As usually, our Investor Relations department will be more than happy to receive questions or to provide you with all the necessary information. Thank you again. Bye-bye.

And thank you very much, Mr. Greco. 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.