Natuzzi SpA (NTZ) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Natuzzi SpA third quarter 2007 consolidated financial results conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder, today's call is being recorded. At this time then, I would like to turn the conference Nicola Dell'Edera. Please go ahead, sir.

Thank you, Ken. Good morning to everybody. Good morning to the listeners in the United States, and good afternoon from those connected from Europe.

This is the conference call of Natuzzi SpA for the third quarter 2007 results, financial results. And as usual, I will make some introductory comments, explanation, and soon after, we will open the call to your questions.

You should have a copy of our release. But if you have not yet received this copy or you don't have, just go on our website at natuzzi.com, or you could kindly call our Investor Relations department, 00 39 080 8820 812. We will send copy immediately. Any questions, of course, also after this call, you can also write to investor_relations@natuzzi.com. It will be our pleasure to respond to you as soon as possible.

Before proceeding, as usual, we would like to advise listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States 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.

Such risks and uncertainties have been discussed in our 20-F for the fiscal year ended December, 31 2006, which is really available on our website -- again, Natuzzi.com -- or you can ask to us, and we will send you a copy by email. Otherwise, you can have a copy of the Form 20-F just connecting to the United States Securities and Exchange Commission website.

Regarding the currency conversion, the euro exchange rate against the U.S. dollar during the third quarter 2007 was at $1.3746 per euro, which means a 7.3% strengthening of the European currency with respect to the same period of last year.

Regarding revenues, let's start from the top. During the third quarter 2007, total net revenues were at EUR141.3 million, down 10.9% from EUR158.5 million of last year same quarter. In terms of units sold, the group reported a 13.5% decrease on a quarterly basis.

Third quarter 2007 upholstery net sales were at EUR125.3 million, which means decreased by 11.8% from EUR142 million we had in the same quarter of 2006.

The 11.8% decrease in the upholstery net sales can be split among the following -- a 2.6% determined by the further appreciation of the euro against the major currencies, a 13.5% decrease deriving from lower volumes sold and a 4.3% increase attributable to a price/mix effect. By breaking down third quarter 2007 upholstery net sales under geographical areas, sales in the Americas decreased on a quarterly basis by 19% at EUR48.7 million, by 6.1% in Europe at EUR64.6 million and by 8.4% in the rest of the world at EUR12 million.

According to the quarterly revenue breakdown by covering, leather upholstery net sales were down 8.2% at EUR113.3 million, which means down 8.4% decrease in terms of seats sold. And fabric upholstery, the net sales went down by 35.5% at EUR12 million, 41.8% in terms of unit sold.

Looking at the splitting of the upholstery sales in the two brands of the group, we have the Natuzzi branded products that currently addresses the medium-high segment of the furniture market, represented a 54.9% of total upholstery sales and 40.7% of production. One year ago, we had 59% as a percentage on total upholstery sales and 41.6% on the total production.

While the promotional brand Italsofa represented 45.1% of upholstery sales and 59.3% of production, as compared to 41% and 53.9%, respectively, reported one year ago.

Turning to our retail activities, during the three months ended on September 30, 2007, total net sales from our chain of Divani & Divani by Natuzzi, and Natuzzi Stores decreased by 17.9% at EUR23 million. At the end of September 2007, the total number of Divani & Divani by Natuzzi and the Natuzzi Stores was 125 in Italy and 165 abroad. So, a total of 290. While one year before, there were 126 in Italy and 152 outside of Italy. As of the same date, the Company had 484 Natuzzi Galleries.

During the second quarter of 2007, other sales, which include the polyurethane foam, raw material, accessories and fees from services decreased by 3% at EUR16 million.

Going down into the income statement, so let's stop at the gross profit line. For the quarter ended on September 30, 2007, group's gross profit was at EUR38.6 million. So down 24.5%, as compared to EUR51.1 million we reported last year.

As a percentage of sales, gross margin was 27.3% from 32.2% in the year-ago period, mainly because of increased price of raw materials, some manufacturing efficiencies in Italy consequent to an extensive restructuring of the Italian plants and other more significant inefficiencies in operations over a foreign country.

Selling, general and administrative expenses were at EUR49.6 million. So down from EUR52.2 million reported for third quarter of 2006. But as a percentage of sales, they were at 35.1% from 32.9% reported in the same period of last year. To be underlined in this case, the impact of transportation cost because of the increase of oil prices.

In the three months ended September 30, 2007, the group reported an operating loss of EUR11 million versus an operating loss of EUR1.1 million one year ago. And always talking about the quarter, 2007, about in this case looking at the foreign exchange, the Company, the group reported a net foreign exchange loss in the period of EUR5.9 million. While one year before, the Company reported EUR400,000 of net foreign exchange losses.

In the first nine months of 2007, the loss was EUR4.8 million of which EUR3.1 million of realized gains. While the Company reported EUR8 million of unrealized losses related to the mark-to-market of our forward contracts and receivables. Forward contracts that we put in place so to guarantee the stability of our price lease for the foreign countries.

During the same quarter, the group reported a deferred tax asset for EUR1.9 million as compared with a deferred tax asset of EUR200,000 for the same period of 2006. In the three-month period ended September 2007, the group reported so a net loss of EUR14.1 million or a loss per share, or ADR, of EUR0.26 as compared to a net earnings of EUR800,000 or earnings per Company share of EUR0.01.

In the first nine months of the year, group's operation used EUR11.1 million of cash flow. And net CapEx were about EUR18.8 million. As a consequence, our net financial position, which is cash plus marketable securities minus debt, as of September 30, 2007, was EUR90.7 million from EUR121.6 million at the end of 2006.

So these are our first introductory comments, and now let's open the call to the questions from our guests.

Thank you very much. (OPERATOR INSTRUCTIONS).

And our first question this morning comes from the line of Bud Bugatch with Raymond James. Please go ahead.

Yes, good morning, gentlemen. This is actually Chad Bolen filling in for Bud this morning. I do have a couple of questions. I see that for the three-month period, sales in the Americas were down 19% in euros. Can you give us what that change would be in dollars?

Should be approximately 12%, something like that.

Okay --

We don't have the exact figures with us, but should be approximately 12% in U.S. dollars.

So down about 12%. And then --

Yes, sir. Which is in line with what's going on with all other furniture industry in America and all the retailer, furniture retailer.

Okay. And when we look at the breakdown by covering between leather and fabric, fabric, although it's a much smaller part of the business, has been pretty significantly under-performing leather. Could you give us some color as to why that's the case?

You mean the leather was less performing than the fabric?

No, the fabric sales for the three months were down 35%.

Yes, yes, yes. In reality, we have been strong in the past with microfiber, which is a technical fabric. Which in the last -- because the Chinese competition, they destroyed this fabric, this cover category. Because they just are selling for free. And consequently, that kind of fabric is not attractive anymore for consumer.

I understand. I understand. And then my last question and I'll defer to others, in terms of the breakdown by brand, it looks like the Natuzzi brand has been under-performing the lower-priced Italsofa. Could you give us any color on what you're seeing at the high end of the market?

Because we manufacture Natuzzi brand in Italy, because the exchange rate is penalized against the U.S. dollars, consequently we are losing -- I mean cents with the Natuzzi brand in Italy. Why, with Chinese facility, we still are in the position to offer the marketplace product that they require in terms of price point.

Thank you very much.

Oh, you're very welcome, sir.

Thanks. (OPERATOR INSTRUCTION).

And we're going to go to a question then from the line of Nigel Waller with Oldfield Partners. Please go ahead.

Thank you. I just have a question about the Italian operations and the restructuring that's going on. I wonder if you could just briefly describe where we are now in terms of restructuring the Italian operations?

Yes, yes, yes. So we are reengineering. So, restructuring. So we are increasing competence and [expertise] levels at the factories, especially abroad. I mean, even in Italy, we are working on automation in the factories. We are concentrating the number of facilities that there were ten to six, and now we are going even to reduce more the number of factories. Reducing the overhead cost, obviously.

We are centralizing the leather cutting. While before, we used to cut the leather everywhere in all the ten different facilities, and that will allow each worker or person to specialize in cutting always the same leather, always the same color and possibly always the same model. So we expect to get benefit from this kind of change.

That's primarily. Then we have -- so that's regarding the restructuring of the manufacturing. Then we have also headquarter operation, where we are reengineering all the process for our headquarter operation, even on the transportation costs we are doing some change. We are implementing the new SAP DRP system, and a lot of things we are doing just to make change and reduce the costs.

Okay. And you said you were down from ten to six factories, and you said you were going to reduce further. Where do you think the business could run, from how small an operation could you get away with in Italy?

You mean get away what? To leave Italy? No, with the Natuzzi --

I know. Mr. Natuzzi, that you're very reluctant, very passionate about the base of the business in Italy. But clearly, the environment is perhaps not the best place to manufacture even your high-end product. And I just sort of wonder whether or not you might be moving to a model where you could have your design and HQ operations there and then perhaps move some of that higher end manufacturing out to other countries, leaving the sort of heritage, if you like, in the design of the product while not necessarily manufacturing?

The positioning that we gave to our brand, which is high-end positioning, requires to manufacture the product in Italy. We don't see really any alternative to create that network of people and overseas in short period of time.

Honestly, I mean it's not that I'm passionate about Italy. I'm passionate about the Natuzzi brand, yes. And we create the people with the strong know-how and knowledge in terms of high-end product at least in 20 years, and we still have about 2,500 people that are still 36, 37 years old. But with 20 years' experience in manufacturing high Italian end product.

I don't know if you have -- I mean, where do you live, sir? You live in London?

In the UK, yes.

So why you don't -- I don't know if you have been in our store in Finchley Road?

Not recently, no. I've been there years ago.

I invite you to go there. We have our -- we opened last May our store, our Natuzzi store in Finchley Road in London. If you go there and you see the store and you see the product, you will understand the why and how -- why we don't move the production overseas, at least for Natuzzi brand. We have done that for Italsofa, because when we talk about product you can manufacture anywhere today and obviously we chose to manufacture wherever is more convenient for our shareholders. But for Natuzzi brand, again, you need to visit that store. You need to go there and you will understand what I mean.

Sure, can I just ask you about the -- your -- the written statement you talk about the order flow in the third quarter being encouraging and reducing the negative gap year-on-year, year-to-date basis, to a low-digit decrease, is that low single digit, double-digit?

Yes, on a euro basis we are close to -- it's a low single-digit decrease for the order..

Okay, thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS). We do have a question then from [Dimitri Dofolear] with [Quirock]. Please go ahead.

Good afternoon, I've got two questions actually. The first one is the trend in the order flow, if we make a quick recalculation this means that the Q4 should be up significantly and should probably help the company to return to profitability or at least to positive free cash flow, on the one hand?

And the second question is how far are you evolving with the repositioning of the retail chain and what kind of effects do you see already on the market?

Mr. Dimitri, this is Filippo Simonetti speaking. Regarding the order flow is sure that we got a better order flow during the third quarter there should give us an increase in the fourth quarter. If this will be enough to bring us to a positive cash flow, as of the moment we cannot, to be honest foresee with certainty this event. For sure it will be better than the third quarter. The third quarter has been really a very negative quarter because of many actions that happened during this quarter including a strong devaluation of the U.S. dollar and revaluation of many other currencies that didn't help us in our books. But it's, as we discussed last time, our strategy is still there and the intention is to go on, on that strategy. The fourth quarter should be in terms of revenues, better than the third one.

Okay.

Regarding the retail chain, we have a plan for -- to open a new store in many, many countries. As far as I know we should have at least commitments to open around 15 stores now, are already under the process. There are some stores that we need to relocate for example, especially here in Italy. So I mean, it's a ongoing job that we have in our company.

What is the kind of effect you already see from the repositioning of the stores?

You mean effect, in terms of what, profitability?

I would say reaction of customers, things like that, customer satisfaction?

Reaction of the customer are very positive especially on, let's say, last store generation. Last store generation are really unique store, I mean, very attractive, offer really good shopping experience. Product is really good one in terms of style, in terms of material, finishing, detail, product presentation, we're very much satisfied. It's just matter that to open a store around the world takes time to make a profit on the store requires even time, it's process, it's process.

Okay. Can I just add a little other question. How is the repositioning of Italsofa going. I somewhere picked up in the press that you are still expanding in Romania?

We still what, expand? All right. No, so far there is no expansion. We have still production capacity. In Romania, we are struggling with employees in that country because you know Romanian -- we have high turnover. Romanian people, we hire them, we train them, they stay six months, they stay one year and as soon as they have opportunity to move in Italy or in France or in the UK they leave the company. We are now working on incentive plan in order to keep them for a long time because high turnover penalize the quality, productivity. So that's why we have a production capacity there because we are struggling to hire and keep employee in the company, strange enough but that's the reality.

What are the results that you currently see from repositioning Italsofa from, I would say, a non-branded product to a distribution branded product?

Italsofa product, first of all we are not repositioning Italsofa. Italsofa targets a different consumer. We never said that we are repositioning Italsofa. We have been repositioning Natuzzi, that's correct, but Italsofa targets a different consumer that's why we manufacture in China, in Brazil and in Romania.

But I understand that there is a little more, I would say, brand -- that you're putting some more effort on the Italsofa brand than in the past.

That's correct because in China we have a requirement from several customers to distribute the product in China. In fact, we opened the first Natuzzi store, I believe was middle of September, in Shanghai. The store has been well accepted from the retailer, furniture retailer community and we have a plan also to expand on Italsofa brand now. In China and even in Brazil, we have in mind to organize the Italsofa distribution in Brazil while now we sell all Italsofa products, the Brazilian production, in the United States. But we are very much penalized even in Brazil with the exchange rate. When we opened the factories there in Brazil, the exchange rate was $1 for R$4, today the exchange rate is $1.85, it's just unbelievable. While China creates a new benchmark with the upholstery, leather upholstery so we are struggling and even with our Brazilian factories. In fact, if you look the number -- a major loss came from Brazilian factories and that's why we are going now to organize the distribution while we manufacture there. The economy is going very well. We are going to organize the distribution in Brazil. And obviously that requires even investment.

Okay. Thank you very much, I'll clear the line and I might just come back afterwards with another question.

All right, anytime.

Thank you. (OPERATOR INSTRUCTIONS). And we have a question now from the line of [Evan Flick] with Citadel Value Fund. Please go ahead.

I wondered if I could just get your thoughts on the following. At the end of 2006 you reported that you had something in the order of 8,100 employees in the company. In the year you produced seats of a little more than 3 million. Now, if I look back a number of years, specifically to 2001 at that time you had employees of 3,700 and you produced just less than 3 million couches, seats. My question is would it be fair to conclude from this that you've got roughly 4,000 employees too many?

Excuse me, your question is that at the end of 2006 we had 801 employee here in Italy?

No, just for the entire group.

The entire group, 8,000.

8,133 is the figure that I have here.

Oh, I see, all right so that is correct. Then -- what is the other question?

With 8,133 employees you produced 3.0167 million seats in 2006. And my question is, now if I look back a couple of years to the year 2001 to be specific, in 2001 you had 3,700 employees when you entered the year and in the year 2001 you produced 2.876 million seats. Now, given the fact that the number of seats sold this year will be less than 3 million, roughly -- you're selling roughly the same number of seats or you'll actually be selling less seats than you were in 2001 but yet you've got 4,000 employees more, or actually more than 4,000 employees more. My question is, aren't you a little bit overstaffed?

That's a good question. All right, the answer that I see now is that number one with the brand repositioning we make a much, more high-end product and consequently it takes more time to manufacture a high-end product. Then, in 2001 the outsourcing manufacturing, we were using outsourcing manufacturing for our entire group, while now it has been reduced dramatically because we are keeping the employee. You cannot fire people here in Italy, it's not easy, no not easy, it's impossible. So that's why we reduce the outsourcing manufacturing and we improve the -- that's the answer. And we improved the quality of the product. In fact, if you look the dollars or euro per seat you will realize that the dollar --.

And another issue, that you know the productivity overseas is not the same one that we use to have here in Italy. Because you should hire people, train them, Brazilian are a little bit slow than the Romanian and Romanian are slower than the Chinese and we should -- and as I said to another gentleman a few minutes ago, that unlikely we have a high turnover in Brazil, we have a high turnover in Romania, you should deal with a different country. Which is true, the labor cost is lower but productivity and attitude are very much different one to the other.

Well I guess, the problem I have a bit is I just can't understand how today in 2006 you can produce 350 seats per employee and five, six years ago you produced 700 hundred seats per employee. While at the same time if you look at the different brands you see that Natuzzi has lost, well once 2007 is over it will be more than EUR1 million, but --

I'm sure that we will have a precise answer to your question but then give us a little bit time we will send to you the answer, the numbers, everything. Certainly we will --

All right, I guess maybe I'd just like to connect to one of the other questions that was asked in terms of restructuring. You mentioned a number of things that you were doing. What does that mean in terms of personnel, obviously there will be some personnel reductions I would assume?

Okay, the goal is to reduce the indirect people. We have let's say 100 people dedicated to the production and we have about 40% which means 40 people to assist the productive people. With the new production system in the factories the goal is to reduce the indirect people by 25% which means they should represent 27%, 28% on the total direct people in production instead of 40%. That's the goal.

May I add one question, I have the impression looking at the wide spread between the two numbers that probably you have a number which includes also workers that are currently, or more than one year, that are in temporary suspension of work.

Yes, I -- that's the complete workforce of the company, yes.

So it's 1,000 people that is -- oh no, that's why I was surprised by the number. The situation would have been more dramatic if we had some kind of inefficiencies. So please consider in your number that as of September 30th, about 1,000 people in Italy, all of this in Italy, were, unfortunately we are sorry for that, but unfortunately were in what we call a cassa integrazione, which means temporary layoff.

Okay, and that's as of September, the end of September, the beginning of September.

End of September, September 30.

In other words we haven't seen at all in the third quarter figures, but that should hopefully then result in the fairly substantial fall in personnel costs in the fourth quarter then?

Yes.

I just had another question then, to move from the cost side more to the revenue side. It seems to me that one of the problems you have in the United States at least, or I guess, well particularly in the United States is simply keeping your competitiveness up given the fact that you are trying to keep here and basically not lose money on the seats that you sell. So you keep having to go into higher and higher price segments priced in U.S. dollars because otherwise you lose money in euros. And the consequence of moving up in the market in terms of pricing is that you lose volume, and it's not an easy thing to get out of that dilemma. One thing to do is to cut costs so your cost price goes down so you can compete at lower U.S. dollar price points. But I mean is there anything else you can do to get around that problem of simply losing volumes in the U.S. market because you're simply being priced out of all the individual price points because of the currency?

I'm sorry, I lost you little bit. Could you repeat the question again, be patient?

Well, basically I'm wondering about your competitiveness in the U.S. market because one of the things that you're running into problems with is that you can't compete at certain price points in the U.S. otherwise you make a loss selling a couch. And so you're sort of being pushed upwards in the market in terms of the price points that you can sell at if you don't want to sell at a loss at least. And if you get pushed up in price points you're getting pushed out of certain volume segments and you're loosing volume. And of course we've seen that over a number of years and that's a process which is ongoing. What else can you do to re-establish your competitiveness in the United States? I mean you can pray for a fall in the euro but if that doesn't happen it would be nice to know if there are some other steps that you could take to counter that problem.

The challenge is always to offer on the market innovative products, new style, a better service than the Chinese competition or Mexican one. And the repositioning, even the brand, in order to get away from the price competition because there is no bottom line, likely, with the price competition today. And that's what we do every hour.

Would it not be an idea to simply say, well, we're willing to sacrifice half our volumes in the U.S. and we'll put the price point up significantly and we'll put some more extra money into marketing and simply take your pain now in terms of volumes?

Well, I mean, we need the volume, if -- I mean the major reason why regarding the quarter, the last quarter loss, because you know we -- all the first nine months of the year it's because we lost 15% of volume.

Yes.

When you have a 15% less volume, you cannot reduce the cost with the same speediness that you lose the business. And so I mean you keep the cost, you have less volume and then you increase the loss. I don't -- that's not really the answer, honestly, based on my experience.

So it seems to me the only answer then in that situation is to make sure that your costs are cut enough to see profitable volume.

Pardon me?

I guess the only alternative then is to basically cut your costs fast enough to keep pace with the volume decline.

We need to increase the volume and cut the costs down and then pray every day about the currency.

Yes, although the last doesn't seemed to have worked too well the last little while, but --

Because there is nothing by us to do, you know, regarding the currency.

No, no exactly. I mean that's the point I guess, is the fact that currency is the currency and you have to sort of live with it. and it seems really one of the only levers that you have in your hand to do anything about it is the repositioning which is long and slow and expensive, and the other thing is to cut costs like a crazy man and see if you can make money and be more competitive.

Listen, I must tell you that we are exporting 90% of our total sales in our production, overseas since 25 years. United States and North America has been representing always 50% of our total sales. There was a time I remember in 1990 that North America was representing 80%, 85% of our total sales so we have been able to survive with up and down exchange rate, but never, never like the last three or four years happened what is happening today because we move overseas the production, in Brazil. But who would ever imagine that the Brazilian currency would be revaluated against the dollar, as happened, this is just unbelievable. Do you follow me, I mean five years ago --

I understand completely the external circumstances and they're not easy.

Now talking about China, the renminbi, the Chinese currency is getting strong now, it's getting strong. Just in the last few months 6% up against the dollars and then the raw material increase, and then the transportation cost increase. The Romanian currency is evaluating against the dollars, and again, less with the Romanian currency. I mean it's not really easy time to do business, that's the other thing. Thanks God we are strong company, with a strong value, determination and precise goal to go forward. But otherwise today, I mean there are many, many reasons to give up, surrender and say "Oh, Jesus" and get discouraged, but we are not anyway.

Okay, well thank you for your answers and good luck in the coming quarter.

Thanks. Thank you.

(OPERATOR INSTRUCTIONS). At this time I am showing no further questions in queue.

Okay, so thanks everybody I think it was quite an exciting conference call, the numbers discussed together and so we will meet again in March for the conference call for the full year 2007. Thanks everybody again.

Thank you. And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference, you may now disconnect.