Natuzzi SpA (NTZ) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi SpA Second Quarter and First Half 2008 Consolidated Financial Results Conference Call. At this time, all lines are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference may be recorded.

I would now like to turn the conference over to Mr. Nicola Dell'Edera, Finance Director. Please go ahead.

Okay, thank you. Good morning to the listeners from the US. Good afternoon to the European listeners. Welcome to the Natuzzi Second Quarter 2008 Earnings Call. Let me say immediately that we apologize for today probably the quality of the call will not be the best because we have a problem with our telephone system, conference call system, so we are really arranging something here in the boardroom, but we will do our best to make this conference call as smooth as possible from a technological point of view.

Today, we will give you Natuzzi's second quarter 2008 consolidated financial results and then, as usual, we will open the call to your questions. By now, you should have received a copy of our earnings result. If not, please call our Investor Relations department at 0039-0808-8820-812, or you can find a copy on our website, Natuzzi.com. If you have questions, you want information or what else regarding this event but other of Natuzzi's activities, please write an e-mail to investor_relations@natuzzi.com. We will respond to you as soon as possible.

Before proceeding, we would like to advise our 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 the risks and uncertainties that can affect our results of operations and financial conditions.

We have discussed such risks and uncertainties, which have in the past affected and could continue to affect our results of operations and financial condition in our Form 20-F for the fiscal year ended December 31st, 2007. This report is readily available on our website, Natuzzi.com or from us upon request, but you can find a copy of that, of our filing, also from the United States Securities and Exchange Commission.

Regarding currency conventions, during 2008 second quarter, the average of the euro/US dollar exchange rate was 1.5625 versus an average of 1.3484, so quite a further weakening of the US dollar against the euro. This means that the euro strengthened by almost 14% against the US dollar on a quarterly basis.

Now, here with me there is Pasquale Natuzzi, the Chairman of the Board, Aldo Uva, Chief Executive Officer, Salvatore Gaipa, Chief Financial Officer. All of us will be available for your questions soon after. First, introductory speech from Aldo Uva and a quick recap of the most important financial information regarding the second quarter 2008 from our CFO, Salvatore Gaipa.

Now with pleasure, I'm turning the line to Aldo Uva.

Thank you, Nicola. Good morning and good afternoon to everybody. This is Aldo speaking. Thanks for participating in this teleconference. The quality of the line will probably not be the best, but I can assure you that the quality of our product is improving moment by moment, so we'll have this.

Before starting to analyze the results of the group with Salvatore, let me just make a general comment on the first six months and what is happening here at Natuzzi and the losses happening here at Natuzzi. As you have seen, we have seen a gain in the second quarter, an improvement of our top line, and this is particularly positive and we are extremely glad of it. And the reason is the European market has performed better than last year and also our Asia-Pacific operations have been really performing very, very well.

This is also showing that our dual-brand strategy and the price increase that we passed in the past month of April is generating the right results. The top-line increase that we have averaged at the end of the first six months is also telling in that we can be reasonably optimistic in closing the 2008 with an increase in terms of sales in the region of 10%. So, we should be closing at around EUR700 million. And this is a good achievement if we consider the slowdown of the economy and all the factors that have impacted our result in the first month in key markets like, for example, United States.

It's also important to notice that if we analyze the second quarter of this year, also there are some good signs from the cost side. Our gross margin on a quarterly basis has improved slightly, 0.8%, but this is a very good sign, as well as our general cost in certain areas have been starting to go down, so this is a very good sign. A lot of encouraging signs.

However, let me tell you that we are not happy of the overall results, and there are different reasons of this. First of all, we have not yet achieved the expected results in terms of cost reduction. Of course, we have been -- already started working on the cost side, trying to achieve the right balancing of our production capacity worldwide and we are trying to make our supply chain more efficient and much more fast responding to the needs of the market. But we have not yet received all the right and good signs that we were expecting, but a lot is happening ,so things are moving much faster.

In terms of level of service, the reason why we are not extremely happy, that our backlog is still at very high levels. In terms of sales, we have a backlog that is 12% higher than last year and in terms of seats, our backlog is 15% higher than last year. Good, because this means that we have more orders coming in, but we need to improve the efficiency and the effectiveness of shipping them to the market as quick as possible.

On another note, also, our transportation costs have gone up and this because of the energy costs and the fuel costs, but also this because of some internal processes that, as we speak, have been reshaped. Clearly, a persisting generalized weak level of the US dollar throughout the semester has also reduced our result. The management, by the way, is already working in order to fix all the key problems that w have at the moment and in order to bring the Company to different heights.

In July, as you know, we introduced a new organizational model that reduced internal levels and is basically designed to be closer to the market and customers, and, as you have seen from the press release that we have released yesterday night, the Board has yesterday approved the target of our new business plan 2009-2011 that will lead the Company to become in 2011 a EUR1 billion company, with 15% of profitability, 15% of EBIT. I know that we will have probably time to discuss this in the second part of our teleconference, during the Q&A.

I would like to close now my brief introduction and pass on to Salvatore Gaipa, our CFO, that will comment on the first half of the first six months.

Thank you, Aldo. This is Salvatore speaking. During the second quarter 2008, the group reported an increase in both net sales and units sold by 3.9% and 2.7%, respectively. In particular, we reported good sales performance in Europe, plus 4.4% in terms of value and 1.4% in terms of units sold.

Most of all, the rest of the world is improving, has improved, which means 28% in amount and 36% in terms of seats sold thanks to the important contribution, especially of countries like Australia, China, Japan, United Arab Emirates, Korea, Israel, just to name a few of them. This is already pointed out by Mr. Uva a clear evidence that our strategy is starting to bring good results.

On the other hand, net sales during the quarter from US markets were basically flat in terms of units sold, but negative in terms of sales value. As a matter of fact, our products in US markets suffered by the weak economic conditions that have in particular depressed the demand for discretionary items. In addition, currency exchange rate during the quarter continued to be penalizing our exports throughout the US market, since the US dollar reached new heights against the euro and kept weakening against the Chinese yuan and Brazilian reais, thus making our exports towards America less and less competitive.

Our operating results during the quarter ended 30 of June. Operations generated negative results of EUR5.1 million, whereas one year ago the results were EUR9.2 million at operational level. Regarding our Forex on extraordinary items, during the quarter, the Company had a net foreign exchange gain of EUR5.1 million, which can be explained according to the following breakdown.

EUR0.3 million from the forward contracts and EUR0.9 million was the difference between the invoice exchange -- exchange rate in invoicing and exchange rate in the collection, when payment became due. Another EUR2.3 million related to the mark-to-market receivables on payables and EUR1.6 million related to the mark-to-market on forward contracts for foreign exchange rate hedging. Regarding net results, the group reported net losses of EUR2.4 million, which means EUR0.04 per share.

Regarding the retail activities, as already mentioned during the previous teleconference, we introduced the new classification of the Natuzzi point of sales to better represent our distribution network. In addition to the traditional Natuzzi stores by Divani -- and Divani & Divani by Natuzzi stores, there are also Italsofa stores and concessions. Concessions is a store-in-store concept, operated by our group.

During the second quarter of 2008, 16 new Natuzzi points of sales were opened, out of which one in Portugal, two in UK, four in Holland, one in Lithuania, one in Russia, one Romania, three in China, one in Thailand and two in Taiwan. On the other hand, we have closed four stores in Italy and two in Spain in the same period. Therefore, the total number of Natuzzi points of sales was 314 at the end of June, out of which 145 represented Divani & Divani by Natuzzi stores and the remaining 169 by Natuzzi stores.

Furthermore, we have during the same quarter six new Italsofa stores were opened in China, thus bringing the total number of Italsofa stores to 10. As of the same date, the total number of concessions operated by the group remained unchanged, which means 15, out of which are 14 in the United Kingdom and one in Thailand. The total number of Natuzzi galleries worldwide at the end of the June was 4-2-3, 423, which means 15 less with respect to three months ago.

Cash flow from operations. Operations during the first six months of 2008 used EUR13.4 million in cash, cash flow, principally because of the net losses reported in the semester. In the same period, the group made investments mainly in marketing and opening of new Natuzzi stores and galleries worldwide. Therefore, the net CapEx for the first semester were EUR6.8 million. The net financial position, to conclude, cash plus marketable securities and debt, as of the end of June was EUR59.6 million, from EUR77.5 million at the end of 2007.

And this is the end of my brief comments on the figures.

We can open directly to the Q&A, Brita.

Thank you. (OPERATOR INSTRUCTIONS).

Our first question is from Seth Hamot with RRH. Go ahead, please.

Good morning. How are you?

Fine, good morning.

Do we have any announced asset sales going on? Weren't we trying to get rid of some assets or make the balance sheet a little more liquid? Anything to update on that?

I do not have this information. I don't believe we have some assets in sale unless we are talking about --

Yes, we have one small building in Apulia, in the region where we operate, that yesterday, during the Board meeting -- this is Natuzzi. Good morning.

Good morning.

And so yesterday during the Board meeting, we agreed that we should go ahead with the sale of this small building which is 30,000 square feet and was used before as our training school. So, that's the only asset that probably in the next few weeks we are going to -- no?

This is -- yes, and this is Aldo speaking, and we are also considering all the other assets that we have around the world and the ones that will not any longer be important for our -- after the definition of our business plan 2009-2011, so we will have time to look at them and decide then which one will be put on sale.

Super. Thank you very much.

You're welcome, sir.

Thank you. (OPERATOR INSTRUCTIONS)

Our next question is from Budd Bugatch with Raymond James. Go ahead, please.

Good morning. It's Budd Bugatch from Raymond James in Florida. Can you give us a little color on maybe the amount of retail sales included in your EUR168.8 million? What's the amount of retail in that number?

Yes. So, the amount of the -- do you want to comment?

Yes, just a moment --

Thank you, Nicola.

EUR20 million is the amount of sales to the shops, to our shops.

And how did that compare with prior year?

The second quarter.

Yes, I understand, Nicola. That was the second quarter this year. What was the second quarter last year?

Just a moment. It was EUR21.1 million.

I see, okay. And any comment about the profitability or lack of profitability at the operating line of those sales?

We don't have at this moment on hand the profitability data by shops in the second quarter. We have the profitability of the first half, if this can satisfy your question.

That'd be fine.

So, the total Natuzzi stores generated an EBIT in the loss of EUR12 million in the first quarter and -- just a moment. The first half, including first and second quarter, the loss became at the EBIT level became EUR14 million. So, it means that our performance in the second quarter improved a lot because only first quarter we have lost EUR12 million, but in the second quarter our total loss became EUR14 million, so only two were added in the second quarter.

That's encouraging. Can you talk a little bit? I don't remember your disclosing the size of the backlog, either in seats or in dollars or both. Can you either describe it in weeks or give the actual amount?

Yes, this is Aldo, and just let me make a comment on the stores. The signs are extremely encouraging, the ones that we are getting from our stores around the world, basically because we have dramatically improved the profitability of some of those stores through a better product portfolio, but also through a focus on our store managers.

I'd like to also tell you that we have started a pilot to have a global training for all of our store managers that will use modern techniques in order to make sure that we always get the best results from them. At the same time, in order to show the -- in order really to focus on the retail stores and on their strategic role in the future, we have also in the new organization taken onboard a person that is an extremely capable person that will be leading the retail worldwide business.

It's a lady. She comes from -- she has been working for Ikea, she has been a General Director of Ikea in markets such as Switzerland and the Netherlands, and her last position was CEO of Coin. That is a very upscale Italian department store. So, there are a lot of good signs, a lot of good things happening into the retail.

Now, if you would like to talk about the backlog, today our 15.84% of backlog is equal to 516,000 seats and in terms of dollars it's 12.2%, as I told you, and is basically under the EUR8 million that we have as a backlog.

So, EUR108 million, so the backlog is essentially -- it looks to me like something on the order of six to eight weeks. Is that right?

Eight weeks, exactly.

Okay, all right. Well, that's actually an improvement over what I recall. Let's just talk a little bit about some of the strategic stuff going on. I had hoped at this call maybe to get a little bit more clarity other than juts the goals of the [11/1/15] for you. I think you were saying you were going to be ready to talk more about that in October?

Yes, exactly. We -- the team is -- as we speak, the new team is working on the new plan. The team, the new A team, that is a new team that we have put in place starting on July 23rd, concluded its first global meeting in Milan last Friday, so we'll be ready to present to the Board the new business plan 2009-2011 on October 9th. That is the day in which there is a Board meeting already scheduled to it and we will be going -- after that, we will disclose all of the details.

But it's very clear from what we have been saying so far that the key directions of the growth, top line wise, are going to be the push on the entry strategy on some key emerging markets like Brazil, where, as you know, we have an important industrial presence, but we do not have commercial operations so far and we are targeting Brazil as one of our top markets.

The second market is Russia, where today we have a very small business, all in all a EUR6 million business, 50% Natuzzi, 50% Italsofa, and that market is in our market where we will grow dramatically. And India, where we have been -- as we speak, we are working to understand which is the entry strategy the most correct, and we have already some advance speech with one partner that will help us to enter the market already in the first quarter of 2009.

It looks to me like your growth plans are somewhere between 15% to 20% per year after this year, which is pretty heady, pretty aggressive compared to where you've been able to do for the last couple of years. Is all of that growth essentially going to come from the BRIC and the Middle East?

No, the growth is going to come from the Middle East and the three BRI markets, or Brazil, Russia and India, as I said. The growth is also going to come by working much better -- so, by making more efficient our route to market, so by reducing the backlog dramatically. That one should have an impact on our top line and then the growth is going to come from a recovery in the US.

If I look at the numbers that I have for US at week 35, it is the current week. In US, we are selling -- in terms of seats, we have a 6% growth versus last year and that dollar-wise it's even higher. So, US is going to recover volumes versus the past two years and the third area where we'll be growing is Italsofa. Italsofa today has been considered a brand, a tactical brand and not a strategic one.

We are rebuilding a new team that is going to push the Italsofa new concept around the world and Italsofa will be an important pillar of growth for the next year or so. If you look at the number, all in all it looks very challenging, very big, but if you start to split the number among the different activities that we are putting together, it's a result -- it's a number that should be, can be achieved and will be achieved.

Okay, just a couple of other quick questions, if I might. The euro was $1.5625, I think, for this translation, which is -- obviously shows a weakening of the dollar versus the euro for the second quarter, but now that's starting to reverse, is it not? So, we should start to see maybe some different results in that going forward for the rest of this year and maybe at least into the first half of next? Is that right, Nicola?

If the question is what is going to the dollar now and if it can help in this kind of situation, of course it can help. Any time the dollar gets stronger against the euro, the Company gets benefits, both in terms of selling capacity, because we can be more competitive with our customers in the US market and both in terms of income statements because we can translate our sales at the more affordable exchange rate.

As a matter of fact, it's the other side of the coin, because so far we have been suffering as you know, as you said, by a very high level of the US dollar that has been really -- how can I say? Dramatically declining our top line. So, we have this hope that the dollar can get stronger and, other than this, that the economy in the US as well can get stronger, together with the US dollar.

Okay. I think that's -- and there's two sides of that. Obviously, the currency side is one, but it gets stronger versus the euro if the European economy starts to weaken, so that may be the other side, or the negative side, of that equation because that's been a better performing area for you.

My final question has to do with the manufacturing operations in South America. They've been something that you've called out in the past as being disappointed with, Pasquale for sure. Are they operating any better, and what's your outlook for that operation going forward?

In -- as far as our Latin American plants, the disappointment that clearly Pasquale and everybody in the group is still suffering will be re-addressed quickly. As you know, we have closed one of the two plants, the [Miniwano] plant, where we just produced a small amount of components, while the other plant is still operating.

Those two plants will be then -- by the way, they are an important vehicle for us to enter the Brazilian and the Latin American market. Because, as you know, in Brazil for example, the import duty for products coming from abroad, coming from Europe, for our type of -- in our type of business, is very high. So, having a footprint over there, it's going to be extremely important to do it. At the same time, we are streamlining the operations there. We are reducing -- we are working only one shift in the plant. We are trying to make that plant as efficient as possible.

If we think at the future of all this, we have -- we will be also starting a Latin American project at the some time, so we'll be starting also to understand which are the other countries in Latin America that can be benefited from our footprint and our presence over there, and this project is going to start around January. So, that area of the world is going to be covered by the plants in the US.

Our new direction is that we will have plants geographically located in order to service, in order to supply, the region. We will not any longer have plants on one side of the ocean serving on the other side of the ocean, because this is only a short-term strategy that we are turning now into a competitive advantage by having our plants in China servicing the Asian market. Our plants in Brazil will be the common way to go into the Brazil/Latin American markets, and our European plants, or Italy and Romania, will be for Europe.

Yes?

I'm sorry.

For Europe. So in this way, we are also going to reshape our overall strategy on where we produce and for which market and of course, this is going to generate a lot of -- much more efficiency in the overall structure, and I'm not thinking just about covering the overhead in the plants. I'm thinking about supply chain. I'm thinking about the overall logistics. I'm thinking about supply. It will all be much more simplified, working with this new concept.

Aldo, if understood you right, and maybe I heard you say this, you think there will be plants in the North American or US and Mexican markets to serve the US and Mexican markets? Is that what I understood you to say?

The new strategy is calling exactly for this. It's calling also to have a footprint in North America to produce for US, so at that point we will be covering all of the major areas where we are with plants there. That is going to help us to speed our time to market, to simplify our route to market and to rationalize all the costs that we have today.

I could not agree more. I would be very interested in the details of the plan as you're ready to disclose them.

Thank you. We'll -- after the approval of the business plan from the Board, we'll be very glad and happy to share it with you.

Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS).

I'm showing no additional questions at this time. Sir, you may proceed.

Okay, if there are no other questions, just we want to thank you and let's have an update. I believe next financial results will be released in November, but before that we will have a road show in which we will explain -- or a conference call, whatever is needed to share with you our projects, the way we want to grow in the next three years, and I'm sure you will agree that there are great opportunities in this Company that all together we can achieve. Thanks, everybody.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.