Natuzzi SpA (NTZ) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Natuzzi consolidated first quarter 2007 financial results conference call. At this time all telephone participants are in a listen-only mode. We will conduct a question and answer session and the instructions will be given at that time. [OPERATOR INSTRUCTIONS]. As a reminder, this conference call is being recorded. I will now turn the meeting over to Finance Director, Mr. Nicola Dell'Edera. Please go ahead.

Okay. Thank you, Marie, and of course thank you to the listeners connected from the United States. Good afternoon to our listeners that are located in Europe. Today is the Natuzzi's first quarter 2007 earnings call. Today we will review the financial results and soon after, as usual, we will open the call to your questions.

By now you should have already received copy by email of the earnings results. But if you have not, please go on our website at www.natuzzi.com or please call our Investor Relations department at 0039 080 8820 812 and we will be very pleased to send you a copy of it. Any questions, any requests, please let me give you our email address so you can address to this email address, which is investor_relations@natuzzi.com.

Before proceeding, let me advise all of you that the discussion today could contain certain statements that are classed as forward-looking statements under the U.S. Securities laws. Obviously, 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. We have discussed such risks and uncertainties which have in the past affected and may continue to affect our results of operations and financial condition in our annual report and Form 20-F for the fiscal year ended December 31, 2005. The 20-F form, just to let you know, as of December 31, 2006 is forthcoming and will be still filed with the SEC in June.

These reports are freely available on our website or just ask us and -- or otherwise you can have a copy also going on the website of the U.S. Securities and Exchange Commission.

As usual, let's give a look at the U.S. dollar conversion rate against the euro. And we see that in the first quarter of 2007 the euro appreciated with respect to the U.S. dollar by 8.2%, from an average of $1.2033 in first quarter 2006 to an average of $1.3109 in the first quarter 2007.

The revenues in the first three months of 2007, so Group's total net sales, decreased by 18.3% at EUR153.8m. And upholstery net sales decreased by 18.8% at EUR136m over the first quarter 2006. In terms of seats sold the Company, the Group reported a decrease of 17% with respect to the same quarter of 2006.

The 18.8% decrease quarter over quarter in the total net sales was due to the following. We reported a 2.7% decrease that was determined by the average strengthening on a quarter-over-quarter basis of the euro against major currencies. We had a positive 0.9% price mix effect and at the 17.0% decrease of seats sold we already talked about above.

As already stated, the Group quarterly turnover suffered generalized weak business conditions in all major markets, but particularly evidenced in the United States, as well as the unfavorable currency scenario still characterized by an unsatisfactory level of euro against major currencies. Furthermore, the sales performance was further penalized by a decreasing trend in the order flow we have been experiencing since the second half of 2006. As a matter of fact, year-to-date order flow is down high single digit as compared to the same period of last year.

Looking at the geographic breakdown of the upholstery sales, we see that during the first quarter of 2007 net sales in the Americas decreased by 27.3% at EUR46.4m. In Europe the decrease was of 14.4% at EUR79.5m. In the rest of the world the decrease was 5.6%, and so we have sales of about EUR10.1m. The breakdown of revenues by covering says that in the quarter leather upholstery net sales decreased by 16.3% at EUR120m. Fabric upholstery net sales decreased by 33.3% at EUR16m.

We have also, as usual, here the numbers, the figures regarding the two brands, Italsofa and Natuzzi. Italsofa, the brand that addresses the most competitive part of the market, so more price oriented, while Natuzzi is our brand positioned at the medium high end of the market.

So during the first three months of 2007, Italsofa represented 54% of total seats sold and 40.4% sales of total upholstery sales, as compared to 48.2% and 38.8% [sic - see press release] respectively we had in the previous year comparable period. The Natuzzi brand accounted for 46% of total seats sold and 59.6% of total upholstery sales, versus 51.8% and the 65.2% respectively reported for the first quarter of 2006.

The total number of the Divani & Divani by Natuzzi and Natuzzi stores at the end of March 2007 was 125 in Italy and 158 abroad, while one year before we had 132 in Italy and 148 outside of Italy. At the same date, the Company had 547 Natuzzi Galleries.

In the first quarter 2007, other sales in which we include polyurethane foam, raw materials, accessories and fees from services decreased by 14.4% at EUR17.8m.

Going down into the income statement and looking at the gross profit level, in the first quarter 2007 the Group reported a gross profit of EUR46.9m, decreasing by 27.3% from a gross profit of EUR64.5m in last-year comparable period. In terms of percentage of sales, gross margin during the same period was 30.5%, which was down from 34.3% we reported in the first quarter of 2006, this due mainly the lower production volume as well as an increase in price of raw materials generally speaking, but in particular leather, an increase that we have been experiencing since the second half of 2006.

The SG&A expenses were EUR54.8m, so a little bit down from EUR55.7m we reported in the first quarter 2006, but as a percentage of sales an increased at 35.6% from 29.6% we had in the same period of last year.

The operating result for the period show a loss of EUR7.9m that must be compared to an operating income of EUR8.8m reported in the first quarter 2006. And in terms of foreign exchange, in this quarter we had a gain of EUR500,000 while in the same period of 2006 we had a loss of EUR500,000. Because of the loss we have reported in this first quarter 2007, the Company reported a deferred tax asset of EUR1.1m while in the same period in 2006 we had income taxes of EUR4m.

As a result of the above, in the three-month period ending March 31, 2007 the Group reported net losses of EUR4.7m, which represents in terms of company's share or ADR EUR0.09, while we had EUR0.12 of earnings per company share in the same period of 2006 that represented in total EUR6.8m.

Net CapEx during the first three months of the year were EUR5.8m, a little bit higher than EUR3.6m that we spent in the same period of last year. The net financial position still solid and we are talking about EUR110m [inaudible], EUR11m less than the same period of 2006.

Okay. Thanks for your patience, as usual, for this introduction, just to give you a refresher of the numbers that we published yesterday on the press release. And now we can open to the Q&A session. We'll be very pleased to answer to your questions. So please, Marie, you can open. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is from the line of Chad Bolen with Raymond James. Please go ahead.

Good morning, gentlemen. Can you hear me okay?

Yes, please go ahead.

Okay. In the release you mentioned price pressure in raw materials, specifically leather. Is that Italian leather? Are you seeing that in China? Could you give us a little bit more flavor for that, please?

There is not the Italian one because we buy leather from several markets and usually we buy first quality leathers. What happened was a very high demand on leather, especially due to the automotive industry. That's why the leather in the period Q1 '06/Q1 '07 went up by almost 7%, 8% and of course we were penalized. In addition to the leather increased cost we had also the foam increase. As you know, foam is produced starting from oil and unfortunately also the oil price went up in the period we are analyzing quite a lot. We estimate that the most important raw materials we use, and actually they are leather and foam, went up by 57% in one year.

As a result of this price increase, the gross profit went down. In the reported figures we had in '06 almost 34.3% while in Q1 '07 we report 31 -- sorry, 30.5%. Even if we adjust these figures, taking into account the Forex impact, just to recall to you, we book the Forex impact below the operating results, the spread between the two periods is still 250 basis points. So actually the gross profit was under pressure.

Thank you. That's very helpful.

[OPERATOR INSTRUCTIONS]. We go next to the line of Edwin [Flick] with Citadel Value Fund. Please go ahead.

Good afternoon, gentlemen. Can you hear me okay?

Yes. Good afternoon.

Okay. Well, obviously I am not extremely pleased with the numbers, although you gave already some warnings at the end of last year. If I try to summarize what is happening, on the top of my list, volumes are obviously down dramatically. You are also suffering from price pressure, especially in the U.S. due to competitive pressures. You have rising raw material costs. And on top of that you have the U.S. dollar as a problem.

What I would like to hear from you is a clear story about your approach to these problems. I would like to hear what your plan is for the next nine months to tackle these problems and maybe quantify a little bit how much costs you think you can take out in the short run, what your targets are for the next two to three years given the current circumstances. Could you give some more clarity in that?

Okay. A quite difficult question. First of all, I want to give you a better understanding on the business trend. You are correct, the major slowdown happened in the U.S. As you know, this is not special to Natuzzi but is a problem common to all the industry players, not only in the furniture but also in other business.

[Said that], and this is certainly a positive new, this situation is not so negative in other markets, because when we say that the U.S. market in terms of orders, not in terms of revenues in terms of orders, were down -- was down double digit, I have also to recall that the European market as well as the rest of the world was either a bit positive or was in balance, in line with the previous year. So the real problem is once again related to the American market.

The second problem, and probably this is a very important problem, is the price pressure. Especially again in the U.S., it was impossible to reflect the raw material increase in the retail price, in the customer price at least, which means that we are suffering in terms of profitability. This is again common to all the players. Probably, unless the parity between euro and U.S. dollar will change, this situation will continue for a certain period of time.

Now your question - what are Natuzzi doing in order to face these problems? First of all, we are trying to reduce our production costs and we do that in two different ways. One is trying to adjust the production capacity to the new demand level.

The second tool is reorganization and we believe that a certain initial contribution of this restructuring process is already in place. In other words, the slowdown, the reduction in gross profit, would have been much wider without the implementation of these activities. Of course, we believe that it is a learning curve and we need some other times before to reflect wholly the impact of these activities.

So, a reduction in production capability and major improvements in production efficiencies.

On the other side, we know that the only way to show good profitability is to increase the sales volume. We are very hardly working on the new models and certainly the models presented, not only in Germany at Cologne Fair but also at the international Milan fair, were very well received. As you know, it takes some times before the models displayed in the stores will generate sales. We believe that if the impression, the positive impression, we had during the first will be correct we will see results in terms of sales probably starting from September on.

Of course, a key point in our strategy is the upgrade of the Natuzzi brand. Of course, it takes time and financial resources. Just to give you an example, while the top line went down in this quarter by almost 18%, 19%, our investment in advertising, in participation in fairs, so in promoting the business, went up by almost 13%, 14%, which shows clearly the commitment of the Company in pushing towards this direction.

As far as the future, it's really difficult. It's really difficult to give you some indications. If we analyze again the order flow, so not again revenues but order flow, I can say that in comparison with the '06 year we saw a very big negative variance in February and also in March, a certain reduction, still negative variance but a certain reduction with the April and also May results. It's difficult to forecast what will arrive in -- from June on. But, also talking with other players, probably, I say probably, we could recover a certain portion of this negative variance.

Okay. To come back on the last thing you said, recovery, you mean recovery in the second half or you're talking about longer term?

Certainly, second half on because the revenues needs sometimes to be generated after we receive the orders.

Okay.

I want to be very clear with you. This scenario is rather uncertain and I believe that all the players are in the same situation. We see daily on newspapers critical situation, especially in the U.S. but also in Europe. In some countries the situation is not very good. When I said Europe overall, it's a bit positive in terms of order flow. Plus I should also add that in countries like U.K. and Germany the situation is rather bad, which means that Natuzzi but all the industry, the upholstery industry, is down.

Okay. Because you were previously saying you were still relatively positive about Europe. I didn't understand that. But Europe is thus a mix of two developments. Germany and U.K. is bad and the rest of Europe is doing okay, if I understand you correctly.

Europe is an entity composed by 15 major countries and of course the business trend is rather different going from one to another one. As you said, U.K. and Germany now are certainly very bad markets, while Italy and certainly Spain is much better.

Okay.

Holland, I believe that will give us some good opportunities.

Okay.

Overall in Europe, as far as other countries by this I mean, is much, much better than the U.S. market.

Yes. Okay. Maybe a follow-up question on something you said on reducing capacity. Could you give some more details about the specific measures that you're taking to reduce capacity? Where are you doing it and how are you doing it? Will this involve closing factories? How are you implementing this?

As you can imagine, these are very sensitive information and we are not allowed to talk about these issues in a conference call and you will be informed in due time. But, as you can imagine, the major problem is related to the regular products. So, you know where these products are produced, in the U.K., and guess in which country the reduction will arise.

In strategic terms, I would say that we, instead to close a plant, we prefer to change the production process, which means that probably these actions will be much more sophisticated then just a closing of a certain plant.

If I recall correctly, you have some nine plants in the south of Italy and you have opened new plants in Romania, China, I believe there are two of them, and in Brazil. Am I correct to assume that you're going to change the processes mainly in Italy?

Okay. Your memory actually is good, but it is not really updated. It is correct that we have two factories in China, as well as in Brazil, and then one in Romania. But in Italy we used to have nine, even more than that, plants. Starting from last year, we restructured our production process, having in mind the concentration and the specialization of the production in a more limited number of outlets. This restructuring process is, let's say, 60% already done. In the remaining three, four months we will accomplish 100% this process, which means that as a result of [technical difficulty] in Italy, we will have probably four different plants, having each one of these plants as sort of a specialization.

Okay. And would you be able to quantify with, of course, a certain degree of uncertainty, how much costs you have taken out by going through this restructuring process in especially Italy? How much on a consolidated basis would that be, on an annual basis?

Unfortunately, these figures cannot be released, at least for the time.

Okay. Well, thank you very much for your answer. I'll [-- you'll keep] the floor open for somebody else.

And our next question is from the line of Matt Haynes with Lazard Asset Management. Please go ahead.

My questions have already been asked. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. And our next question from the line of Mario Montagnani with Baer. Please go ahead.

Yes. Good afternoon, gentlemen. A couple of questions for you. The first one is, on the wake of the disappointing development we had in Q1, you released a couple of targets for the full year 2007. Will you consider a revision? You talk about same revenues level for 2007 and net profit at breakeven for the current fiscal year. Will you consider a revision of your targets?

The second point is something we already discussed about last time and is about your net cash position, EUR110m. I think you mentioned that in the conference earlier. Would you consider to do something for shareholder, a share buyback, return the unused cash to shareholder?

The second point is relating to your listing, which is currently in the U.S. It's rather difficult to cover your stock for European investors or analysts in the U.S. Will you consider -- have you discussed internally for a shift of your listing in Europe?

And the last question I had is on Q1. You've mentioned in the press release you've opened new stores in several countries. I was wondering if there was any additional costs you had to support for the opening and if you could quantify that and how much it impacted your operating profit for the first quarter? Thank you.

Okay. Let's start from the guidelines. I believe that, certainly, the indications we gave some months ago now will become much more tough to be achieved. The breakeven in terms of profitability and certain results in revenues, now, in the light of the initial period of 2007, are much more challenging. Still, still, we believe that there is room in order to be very close to the breakeven. But, as I said to your colleague before, it will depend on the evolution of the business.

Then you asked about the listing. Of course, the -- to be listed is not a choice of the Company; rather it's a decision of the shareholders. So, I don't have any additional comment to what I said in the last couple of occasions.

In terms of openings, yes, Natuzzi, in line with our strategy to relocate some locations, some stores we feel not in line with our positioning, is investing in this direction. I don't have the numbers invested in Q1 in those opening. I can guess something like two or three million. But it is not only hard investment, that you can be reminded. It is all the organization.

I want to make an example for you. If we want to be successful in transforming Natuzzi from a pure wholesaler player to a brand, we believe that we should invest in advertising. And I said that, despite the shortage in the revenues, we increased our media investment by 14% in this quarter. But also we have to relocate, as we are doing, stores. And we have to create a more creative product. We have to continue to invest. Just for your reference, we have something like 160 people dedicated in our R&D and prototyping department, which is probably really our big investment.

Of course, it will take time before you see some results. But we are convinced that this is the right, proper strategy we have to follow. Thank you for you questions.

Thank you.

[OPERATOR INSTRUCTIONS]. We have no further questions. Please continue. Excuse me. We do have an additional question. We go to the line of Edwin Flick with Citadel Value Funds. Please go ahead.

Yes. A small follow-up question. I saw that there was one new store opening in the U.S. and I wondered whether this was one of these new stores that are used to support the high-end Natuzzi brand, or it's just a regular store that you opened.

As far as of today, we didn't open stores regarding the Natuzzi high-end brand. [Technical difficulty]. So, the store you are mentioning certainly is related to the regular Natuzzi activity.

Okay. Do I get a correct impression that the whole logistics behind this high-end positioning in the U.S. has been slowed down, or is it still according to original planning?

Honestly, we are concentrating or focusing on existing markets where we already have a store. So, we are giving priority to a country like Spain, or like Russia for example, or [to the], let's say, India or China. We are giving priority to open a store in those countries where we can increase brand awareness and can increase volume and consequently even the advertising investment, which is very, very important. So, we are -- as you said, yes, we are giving priority to other countries.

And not to the U.S., due to the competitive and difficult situation there?

Well, in other words, if you open a store in Russia today, it's much easy. And then it's easy. We make volume, we make profit. While, going in the United States, it's [a difficult] time, because the exchange rate, because the business clime became much more difficult. So, we prefer to dedicate the entire [proposition] in developing business in a country where we can make a profit and we can optimize advertising investment.

Okay. Okay. One small follow-up financial question. I saw that your purchases were up quite significantly year over year. Part of it is explained due to the rising prices, of course. But I believe it's up a little more than can be accounted for by the price increases. Does it indicate that you've been increasing your inventories, for example, of leather or other raw material? Or is that not a correct conclusion?

Actually, you are right. The leather inventory went up. But this is just a timing action because we, as I said, are restructuring some plants. And for a certain period, very close to March, we closed temporarily one plant. And in order to avoid a shortage of leather, we bought in advance some amount of leather. We expect, during the summer period, to go back to the standard inventory levels.

Okay. You bought that in advance because you believe prices will increase further?

No, no, no, no. It was just an operational problem because --

Okay.

In China we had to stop a factory and you know [inaudible] in China is not really like flesh. And in order to avoid problems, we bought in advance.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. We have no questions. Please continue.

Okay. Thank you, everybody. Thanks for participating to this conference call. And good morning to the U.S. and good afternoon, good evening to Europe. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.