Natuzzi SpA (NTZ) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Natuzzi S.p.A. second quarter and first-half 2007 consolidated financial results and conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer period. Instructions will be given at that time.

(OPERATOR INSTRUCTIONS). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Financial Director, Nicola Dell'Edera. Please go ahead.

Thank you. And good morning and good afternoon, depending if you are in U.S. or in Europe. This is Natuzzi's second quarter 2007 earnings call. Today, with me are Pasquale Natuzzi, Chairman of the Board, Ernesto Greco, Chief Executive Officer of the Group and Filippo Simonetti, Chief Financial Officer.

You should have received by now a copy of the earnings release yesterday. If not, please go on our website, Natuzzi.com, or just call our Investor Relations Department at 00 39 080 8820 812. We will be very pleased to send you a copy. Any questions, we are available. Just call us or send an email to investor_relations@natuzzi.com.

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

Such risks and uncertainties are discussed in our Annual Report and Form 20-F for the fiscal year ended December, 31 2006. (Technical difficulty) available on our website, Natuzzi.com, or from us upon request. Otherwise, you can also have a copy of our Form 20-F filing from the United States Securities and Exchange Commission.

Regarding the currency conversion, the average of the euro exchange rate against the U.S. dollar during the second quarter 2007 was at $1.3484 per euro, thus, representing a further 6.7% strengthening of the euro versus the same period of last year.

Looking at the revenues for the second quarter 2007 consolidated financial results, during the second quarter, total net sales were at EUR162.4m, down 17%, as compared to EUR195.6m reported for the same quarter 2006. In terms of seats sold, the Group reported a 20.6% decrease with respect to last year's comparable period.

Upholstery net sales were at EUR144.9m, decreasing 18% from EUR176.7m reported in the second quarter of 2006.

The decrease -- the 18% decrease in Upholstery net sales can be segregated in the following items; a 2% decrease deriving from the appreciation on average of the euro against major currencies, a 20.6% decrease because of lower volume sold, a 4.6% increase attributable to the price mix effect.

As already stated, the decrease in total net sales reflects the industry-wide negative condition, difficult condition, that have been reported over the last few months, especially in the U.S. market, a market which is still characterized by aggressive price competition and a lower level of consumer confidence.

In addition to that, second quarter 2007 had an overall performance, on a quarterly basis, was affected by a challenging period on a period comparison basis, due to the higher (technical difficulty) 2006 of the backlog, not a campaign, as we know, but another great order flow over 2006 through the first half of 2007.

By breaking down second quarter 2007 Upholstery net sales under geographical areas, the Group reported, on a quarterly basis, a 21.6% decrease in The Americas, a 16.4% decrease in Europe and a 12.7% decrease in the Rest of the World.

The analysis of second quarter 2007 Upholstery sales, based on the performance of the two basic coverings which we offer our products, which are leather and fabric, reveals that leather-upholstered products decreased by 17.7% in terms of sales, and by 19% in terms of units sold, at EUR126.6m. And fabric-upholstered products decreased by 20.1% in terms of sales, 29.5% in terms of units sold at EUR18.3m.

If we consider the quarterly Upholstery sales according to the two brands, Natuzzi and Italsofa, we have that the Natuzzi branded products that currently addresses the medium-high segment of the furniture market, represented a 66.3% of total Upholstery sales and 51.2% of production. One year ago they were 64.7% and 50.4% respectively. While the promotional brand Italsofa, which is manufactured at our plants abroad in China, Brazil and Romania, represented 33.7% of Upholstery sales and 48.8% of production, as compared in this case to 35.3% and 49.6% respectively reported one year ago.

Looking at our retail activities, we can say that during the three months ended on June 30, 2007, total net sales from our chain of Divani & Divani by Natuzzi, and the Natuzzi Stores decreased by 14% at EUR33.2m.

At the end of June 2007, the total number of Divani & Divani by Natuzzi and the Natuzzi Stores was 125 in Italy and 155 abroad. While one year before, there were 127 Divani & Divani by Natuzzi Stores in Italy and 152 outside of Italy. At the same date, we had 484 Natuzzi Galleries, which are some kind of shop [in some] corner, especially in department stores, dedicated only to Natuzzi production.

During the second quarter of 2007, other sales in which we include the poly (inaudible) foam, raw material, accessories and fees from (technical difficulty), decreased by 7.4% at EUR17.5m.

For the quarter ended on June 30, 2007 the Group's gross profit was at EUR45.2m, down [30.7%] as compared to the second quarter 2006 gross profit. As a percentage of sales, the gross margin decreased to 27.8% from 36.1%, mainly because of fixed costs, not entirely (inaudible) by production volume, raw material price increases and the persisting [uncomfortable] currency conditions.

Sales and general and administrative expenses were at EUR42.3m, down from EUR47.9m reported for the second quarter of 2006. But as a percentage of sales, we reported a 27% [incidence] on sales from 24.5% reported in the same period of last year. As a consequence of this, in the three months ended June 30, 2007, the Group reported an operating loss of EUR9.2m versus an operating income of EUR12.1m in the same period of 2006.

And as far as ForEx and extraordinary items are concerned, in the second quarter the Group reported a net foreign exchange gain of EUR600,000 versus a net foreign exchange loss of EUR1.1m seen in the same quarter of last year.

And in this period, because of the loss, we had a tax asset of EUR2.2m as compared with income taxes of EUR2.3m paid -- that had been paid during 2006. In the three month period ended of June 2007, so the Group reported net losses of EUR4.2m or losses, about EUR0.08 per ADR, where an ADR is equal to a Company -- one Company share. As compared to net earnings of EUR9.9m, or earnings per Company share of EUR0.18.

And in terms of cash, for the first six months of the year the Group's operations used EUR11.7m, mainly as a consequence of the increase of the inventory.

Net CapEx during the first six months of the year was [EUR12.6m], while in the same period of 2006 it was EUR6.7m.

And the net financial position as of June 30, 2007 was EUR98.5m from EUR129.6m at the end of 2006.

Okay. Thank you. Now, [as you know], we open the session -- the Q&A session please, Anne.

(OPERATOR INSTRUCTIONS). And our first question comes from Marc Heilweil from Spectrum Advisory. Please go ahead.

Nicola, I did not see the balance sheet, but based on your inference, the Company continues to have a lot of cash on its balance sheet with the (inaudible) the entire period of time in which I've been an investor, and for time now.

And obviously it helps to have a little cash when you're using cash in operations, but can you detail for us what the Company's plans are for the use of cash, keeping in mind that the Company is owned by shareholders, besides Pasquale, and that this does not seem to be the wisest return on assets that we could get. Perhaps it could be returned to us in some way? Would you comment please?

Good morning. This is Pasquale Natuzzi. The cash that we have, you should know that we are investing on our brands with big -- huge investment on advertising of the products. On the brand in general, there are huge investments and obviously we are facing a difficult period of time. That's because in U.S. dollars exchange rate is killing us. The Chinese and Eastern Europe competition is making our job very difficult. That's the reality.

They create a new price benchmark and we should deal with that [whole marketplace], all the [common] marketplace. So -- and we think, I believe, a little bit strong and confident that we can resist (inaudible) to go over this difficult period of time and in this time continue to invest in our brand strategy. That's why we would like to keep the cash in -- [available] there.

Okay. Thank you.

You're welcome.

We have a question from Matthew Haynes from Lazard. Please go ahead.

Good afternoon.

Good afternoon.

Just following on from the question that was previously asked, given the cash burn that occurred in this quarter, which at the present rate you will burn through your entire cash balance in less than the next five quarters. I wonder, given the sales trends that we're seeing globally, and especially in the important U.S. market, whether this is the right time to invest in the brand as a use of the cash that you have on the balance sheet?

I have a follow-up question to that as well. Will you address that one first?

Hello? This is Nicola. Regarding the burning of cash, let me tell you that what you see in the this first six months regarding the cash flow from operation represents mostly a consequence of a specific and external redistribution of inventories we had, especially in the first quarter of the year, when our purchasing department had some opportunity to buy some stock of leather, and so we made an (technical difficulty).

Hello?

So, do not consider this situation as an ongoing situation. It represents just a specific and special situation. Just to give you this (technical difficulty).

So, I think that five quarters, at least, is a very conservative projection for our capacity of our burning. But, [again, this] will not happen because I'm sure that when Mr. Natuzzi, before, was talking about the brand investment, he was not talking about putting money in something that will not bring a result back.

And investments are not made especially in the United States. Investment in brands which, just to give you an idea, represented about [EUR50m] in the first six months (technical difficulty) especially in supporting our retail activities, our brand activities and are located, especially, in the Europe. And so the focus on the United States is not very appropriate.

Second question related to the CEO position. I was very disappointed to hear that Mr. Greco is planning on leaving the Company as CEO. I just wonder if you could comment about your plans for hiring a new CEO, or whether Mr. Natuzzi is going to retain that position going forward.

This is Pasquale Natuzzi. Good morning. I'm planning to keep that position at least for the next two or three years. There are no questions that in this period of time the -- our Company is facing various difficulties in the operation side, in Italy, but even in Brazil, for example. And that's number one because we have, even the very high (inaudible) in the local Brazilian currency against the dollars, (technical difficulty) that situation.

But anyway, we have on the operation side of the Company, a lot of restructuring activity to be made. And I have several years of experience. I know very, very well this Company and the only decision I can make hour-by-hour or day-by-day I know that [work]. I know what I'm doing.

The same situation is on the commercial side. Commercial side, I have been on the American market for 25 years. I know the market. I know the competition. I know the key customer. And I know the consumer needs.

On the other hand, we have the brand strategy. I know where the brand position is in today's (inaudible). And consequently, I know the mistake we have made in opening the store, probably, in the wrong location. And I know where we have done better.

I know all the management structure in each country, in each nation. And so, for me, for making a profit in the future and the shareholders' interest, it's a much easier than for Mr. Greco with -- which, with all due respect, I never met a manager like [that level].

But for somebody who doesn't know the Natuzzi Group, which manufactures in Italy, which is involved in the leather business; we have our tannery. I should remind you, we have a tannery where we process 8,000 cow hides every day. We have a [foam] company. We have a manufacturing plant in China, in Brazil, in Romania. We have a store owned by the Company in Spain, in England, in Scandinavia.

We have done a lot, just to go over the unbelievable difficult period of time we are facing since five years. But I know the Company. I know the difficulties. I know the opportunity. And so, I'm sorry that Mr. Greco is leaving, but I will keep this position because I believe that anyone in Mr. Greco's position would be very difficult for him to run the Company.

Hello? Are you there?

Yes. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). We have a question from Edwin Flick from Citadel Value Fund. Please go ahead.

Good afternoon, gentlemen. Can you hear me?

Yes. Yes. Yes.

Thanks, because the sound is very bad from your side. I'm not sure what the problem is. But anyway, I just wondered if you could give some flavor on cost measures that you're going to take.

I presume that -- you mentioned something about personnel and personnel costs were down slightly in the first half compared to last year. But given the severity of the volume declines, could you be more specific what cost measures you're going to take?

Okay. We have done, already, some big change in the [Italian] operation. We changed the production system. Before, we used to have a space for temporary (inaudible) three, four, five days, one week, let's say, the leather cutting, the sewing element and we had some six different manufacturing plants.

So we reduced those six in four, we centralized the leather warehouse and leather cut where we can allow to assign to each cutter, each person, the same kind of leather, the same model, the same color (technical difficulty) standardized in the activity. That will allow us to reduce the waste that we have on leather which is big money and will also improve quality and productivity.

We also changed the way to assign production in each factory. Before, we used to assign all kinds of models to each factory and that was a complicated job for each workers, with a negative effect on quality and productivity.

Today, we have -- we assigned a limited number of models to each factory. We have a dedicated supplier and they supply the same materials -- material every two hours. We call in Italian (spoken in Italian). I don't how to say in English. But it's just like the automotive industry does, where the supplier brings the material in the place where the workers are assembling.

And that again, we expect to improve productivity and quality, but at the same time, reducing, also, the cost of functionality of each factory. Because to keep a factory in place you need [a] factory manager, you have lines, all of the costs. By reducing the number of facilities we will obtain advantage -- financial advantage.

At the same time, we are going to reduce the [indirect] people. Today, we have around 40% of indirect people that you [sustain] the production. It will be not easy to do that, but we are very much [determinated] to do talk with the union and (technical difficulty) to reduce the number of indirect people. And then doing the business plan where we must, absolutely, [obtain] a cost reduction will allow us to become more competitive and, consequently, we should expect to grow.

And the people that we will send home temporarily, we will retrain them with some government help (inaudible) in that direction. And then we will take them back, but already trained where we can use them in production. A lot of initiatives [that is not working since] several years. It is not something you can (technical difficulty) done yesterday.

But to give you number, obviously, we absolutely must reduce costs, otherwise [we'll be] -- will be the next quarter, the second one, this is something we should --

I have a meeting to see [some of the people] in 30 minutes from now. And I have big one with the [3,800] end of June. I'm talking with my people here in Italy, telling them that I'm very much committed, and I love this Company. I love this Company.

And I see opportunity to go over to make Natuzzi a brand with opportunity for deploying workers, the community here and for shareholders, for everyone. But I wanted them to understand that they shouldn't get demoralized. They need to be [determinated] as I am. That's the reality.

Okay. Thank you for the answer. But is it possible to put some numbers, maybe, on the measures that you've just discussed, both in terms of what percentage costs you're going to save and what timeframe you're thinking?

I recognize your voice. You must be a very -- a long-term shareholder. And why you don't come and see us? You will see what we are doing for you and for your investment and for the [other] shareholder investors. Spend one day with us. Come here. We will be very pleased to show you we are a working on the medium-long term situation.

Yes.

The situation is not easy. But, again, I cannot give you number. I cannot give you number.

Okay. And concerning volume declines, what assumptions are you working with for the next few quarters? Do you budget further declines in sales?

No. No. No. Please, no. No. We will see a small improvement, but absolutely we should see a small improvement for --

And you're talking about quarter on quarter, I guess?

Absolutely. Yes, sir. Yes.

Okay. Okay. Well, thank you very much for the answer.

You're very welcome. You're very welcome. Once again, you are invited.

There are no further questions in queue. Please continue.

Okay. Thanks for your attention. And we (technical difficulty) for the third quarter conference call. Thanks again from myself, Mr. Natuzzi, Mr. Greco and Mr. Simonetti.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.