Natuzzi SpA (NTZ) 2008 Q3 法說會逐字稿

Hello. This is [Sharon Silvers] from Gavin Anderson in New York. Good morning to our listeners in the U.S. And good afternoon to those of you connected from Europe. Welcome to Natuzzi's third quarter 2008 conference call.

Today, management will review Natuzzi's third quarter and first nine months of 2008 consolidated financial results and then as usual will open the call to your questions. By now, you should've received an emailed copy of Natuzzi's earnings results. If not, you can find this information on the Natuzzi website at www.natuzzi.com. Or please call our Investor Relations Department at 39 080 8820 812 to receive the results by email. You can also email information requests or questions to investor_relations@natuzzi.com. We will respond to you as soon as possible.

Before proceeding, please be advised that the discussion today could contain certain statements that constitute forward-looking statements under the United States security 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 on Form 20-F for the fiscal year ended December 31st, 2007. This report is readily available on our website at www.natuzzi.com or from us upon request. You may also obtain a copy of our Form 20-F filing from the United States Securities and Exchange Commission.

Please note that there is a small typo on page nine of the press release as some tables mistakenly show 2008 in both columns. The right-hand column refers to 2007. Regarding currency conversions, during the third quarter 2008, the average of the euro-U.S. dollar exchange rate was $1.5030 versus an average of $1.3746 in the previous year's third quarter. This means that the euro strengthened by 8.5% against the U.S. dollar on a quarterly basis. As we consider the nine-month period, the appreciation of the euro versus the U.S. dollar was 11.7%.

I will now pass the call onto Aldo Uva, CEO of Natuzzi.

Good morning or good afternoon, depending where you're listening. This is Aldo. And I'm very pleased to go ahead with the discussion and with the presentation of the Q3 results of the Natuzzi group.

Clearly, we cannot be happier of the results of Q3, seeing the final EBIT and how it's been generated. We do not really consider this something that can be of satisfaction for all of us. But if we look into the numbers, probably we can also see that our first strong sign of recovery and the first strong sign that the situation is really getting much better.

If we start with the top line, the overall top line has still a steady trend up. The evolution is very positive in Q3. We have had plus 3.8% in terms of seats, only 0.7% in terms of sales. But despite the very difficult period, we consider this as a big achievement. Year to date, still we have a strong plus 7.5% in terms of seat growth and plus 5.8% in terms of sales.

If we look from a brand point of view, the Natuzzi brand is the brand that has suffered the most in Q3 with a minus 8.5% versus the previous year. And all the problems have been in Europe and U.S. While we still continue to grow strongly with Italsofa, the Q3 is showing a plus 12.2% growth.

But if we consider the year-to-date period nine in terms of seats, we have a very good result with Italsofa still up 15.1%. And Natuzzi is minus 1.5%. If we look at the Natuzzi business year to date, the areas where we are really suffering the most are Italy and Spain. So it's Europe, while in the rest of the world, seats-wise, we are going up. We have already started to take some strong measures in Italy, where we are reconsidering a different strategy to approach the market, and in Spain, where we have recently changed also our leadership group.

In terms of stores, we are still continuing to build our store network. In the period, we have added five new Natuzzi stores. And we have closed three of them, underperforming stores, so with a plus two. Italsofa, we are still growing in Asia with a plus two. And we have also increased the number of our concessions.

What is positive to notice is that if we look at the results of the 2007 period nine, year-to-date period nine on our stores, we have had more than a 15% improvement in the profitability of our stores. That is a very good sign.

In terms of gross profit, our gross profit is down in Q3 versus last year EUR1.9 million. But if we consider the same exchange rate, we would have been up 1.9%. And there are some other things that are explaining this. The first nine months, we are down 1.7%. But at the same exchange rate, it would have been up 17.2%.

In terms of what are the reasons why our year-to-date gross profit is performing this way, as a negative, we should say that there is the exchange rate that has impacted highly on our performances. And there are some extra costs that are being generated in the supporting group that is supporting that production. This has been addressed as we speak. And we are putting together a plan to drastically reduce these costs.

As in a good note, we should say that our raw material consumption is starting to trend down. We are averaging wonderful results in our Italian factories in reducing the number of shrinkage. And this is a very good sign that we are going and heading in the right direction, so gaining better productivity in all our plants. So overall, from the operation point of view, things are really moving up very well.

In terms of EBIT, our Q3, as you have seen, it's at EUR12.2 million negative versus an EUR11 million of last year, so meaning minus EUR1.2 million. But if we look at -- if we factor in also the exchange rate, it's at EUR9.8 million versus the EUR11 million. So it's still an improvement. And as in EBIT, EUR29.5 million versus EUR28.2 million is minus EUR1.3 million, that should be also -- if we consider it at a constant exchange rate, we would have averaged a very much better result so far with an improvement of EUR11.9 million versus last year.

So all in all, we have some very good signs. Top line is still growing. And this is very positive. The cost of goods seems finally to trend downward on key components, like productivity and shrinkage that is reducing. We have still a lot to do and a long way to go. But the dedication and the commitment that everybody's putting behind us, it's really generating in our opinion the right pressure and in our opinion is generating the right results.

As you know, we have also recently announced the two new appointments in the Company. Mr. Mariano Domingo that is with me today is the new CFO of the Company. And Mr. Umberto Bedini will lead the operation team starting from January 2009. These two individuals that are playing a key role within the new organization together with the strong management that was put in place on July 23rd are really the best guarantee that we are going to make it happen at the 11*1*15 plan that we have recently announced and will have the pleasure with our Chairman and President Mr. Pasquale Natuzzi to introduce to the financial community in a road show that is going to start on December 8 in New York. And it will continue in London and in Milan.

We have, for the first time, also decided to disclose our forecast for the end of the year. We have put together a forecasting system starting from last quarter that we are now starting to track. And we have put together some important key KPIs that are telling us where we are going to head in the last quarter. We think we will be averaging a much better result of Q3, considering, of course, the current exchange rate -- without the exchange rate impact. So we think we're going to close in a range between minus 35 and minus 40 from an EBIT point of view. That is a significant improvement versus last year, where as you know we closed at minus 49.

At this point, I believe I would love to understand if there are questions that can -- and I would like to open the floor to questions because more than me talking and explaining, I assume that you will be very interested in understanding a few more things on our results and our forecast.

Okay. And you're ready for questions? Okay. (Operator Instructions) And we do have a question from the line of Budd Bugatch of Raymond James. Please go ahead.

Good morning, Aldo.

Hey, Budd.

A couple of things -- first, thank you very much for some of the new disclosures, including the breakdown of the brand by geography -- that's very helpful -- and also the backlog and the constant currency. So thank you for that. Couple of questions -- one, on the balance sheet, looks like receivables have actually extended to like 70 days by my calculation. And that's up significantly from certainly the second quarter, but over from last year as well. Can you kind of address what you're seeing there?

Yes, so if we look at clearly the numbers that we have calculated -- and I'm asking here also Mr. Mariano to confirm it. But the numbers are showing that we are averaging a decrease in our receivable days. So we are, I believe, at a level of 60 days at the end of the period starting from 67 days that were on December 31st.

The real issue, Budd, is not the receivables because we are getting really down. And if you've seen also the trend of that, the backlog that we have, you have seen that in the end of September, we had 10 million smaller backlog versus last year. This is because we started to really become much tougher in our production and in invoicing product.

The real point is if you look, if we can consider also is our days of payables that are still at 47 days. So we have receivables at 60 and payables at 47. That is really creating an imbalance. And this is something that we are addressing strongly. But this is a lot -- this has a lot to do not only with our contract that we have currently with suppliers. It's also related to our overall procurement strategy that has unbalanced several suppliers in areas of the world where we can -- we should really pay COD. So we are revisiting completely our procurement strategy.

And as another piece of information starting from November 24th -- that is, next Monday -- we have also changed our organization. And we have also reshuffled our procurement team and there's a new strong manager that is going to lead the team and [Mr. Petrera], and he's going to report directly to Mr. Bedini. He's our VP, Operations.

So from a receivables point of view, I believe we're doing a pretty good job, mainly trying to force customers to respect their commitments. And otherwise, we don't ship. From a DPO point of view is where we are suffering. And we have just started a kind of activity that will help us to reduce this unbalance.

Okay. That's good to hear. I'd like to make sure -- my numbers then don't match those. I'll have to just make sure we're looking at the same kind of calculation.

Budd, what I can do, I'm asking Mariano, who's here with me, to be in touch with you afterwards and really to exchange the calculations so you can make sure that our numbers are --

That'd be great.

Exactly. Yes.

Secondly, I see that Italsofa had good results in the Americas in the quarter with units being up 32%, which is pretty heady. It looks like, at least if I'm reading that right -- and we don't have the first and second quarter -- that kind of you're getting a little bit of an acceleration of Italsofa in the States. And yet in the rest of the world, although it's on a smaller base, it looks like that growth is decelerating a bit, maybe towards a more normal level, even though it was up 30-some percent or 20%, I think, in the -- 35% in the quarter.

Are you seeing a significant amount of trade down? That's kind of what I was -- where I was trying to go in the States that's accounting for Italsofa. Or is it just because the product is better?

No, what we have done in U.S. is we have clarified our brand strategy very clearly, giving the right target Italsofa, to Additions, and to Natuzzi Italy. And by reshuffling the strategies, clearly, we have started to put the right focus on the potential Italsofa customers versus the Additions versus the place where we sell Natuzzi Italy.

I mean, it's clear that Italsofa today that is basically talking to a wider range of consumers. It's really getting traction. In a moment like this, clearly, the fact that the brand can speak to different consumers and that are more than the ones to whom Natuzzi can speak is that it's helping a lot. In specifically in U.S., the growth is coming from a different brand strategy that we have been introducing. And that is now generating its results, so 12 and 18, 11.8% growth year to date in the U.S. on Italsofa. Really, it is a big achievement we believe.

We are really pushing a lot today in making sure that we can grow much faster in those segments of markets, where some of our key lines, like Italsofa, they can really get traction and eat market share from competitors that are kind of leaving a bit of space because of their financial situation, while our financial situation, it's still very strong. So we can still and we can continue to invest in R&D, in products, and in our trade activities to make sure that we gain as many market share as possible in these tough times.

And the Natuzzi seats includes Natuzzi and the Additions brand. Is that the way I should read that line?

Yes, exactly.

Okay. And finally, on the gross margin issue, with the growth in Italsofa and some of the diminution in units of the Natuzzi and Additions brands, is that partially responsible for the gross margin? In other words, is the gross margin in Italsofa less than the gross margin in Natuzzi?

No, the gross margin -- from a mix point of view, we have even had a better result of this year if this year-to-date versus last year. If we look at the bridge that we have, there is an impact of almost EUR4 million positive mix-wise versus last year.

The Italsofa margins are absolutely in line with the Natuzzi margins if we consider the total P&L because what really changes is not the gross -- I mean, changes is the way in which we today we are advertising and pushing Italsofa on the market. We are really considering -- starting to consider Italsofa a consumer brand, even if today we do not invest a lot of advertising.

So the margins are the same. The productions are made in different places. And this is also play a different role in the gross profit. So what I would like to say is that the next step goes towards Italsofa more than towards Natuzzi is not -- has not an impact on our gross margin.

Okay. Very interesting. All right, thank you. And I'll let some others ask questions.

Thank you, Budd.

Thank you. (Operator Instructions) And we have a question from the line of [Dmitri Dosleer] of [Core Rock]. Please go ahead.

Good afternoon. I just have a question on the restructuring costs because, while you're not publishing them separately, and I'm wondering what has been done last quarter. What has been done this quarter in the restructuring of the production assets and the retail assets, somewhere that you closed one factory in Brazil, that you probably reduced some headcount in the U.S.? Could you comment some more?

In terms of restructuring cost, we will -- the closure of the factory in Brazil, the [one] factory, the cost of layoffs of personnel are already part of our cost, and these are EUR400,000 today. It has been already in our balance sheet and our profit and loss. We are putting together a plan to understand what will be the impact of some of our other restructuring costs that we will be having in the last quarter as we speak, we are starting the impact on the full shutdown of one of our Brazilian plants. And as far as the U.S., we have not yet started the project. And we believe we will start in the second half of 2009 in investing on our U.S. plant.

As far as the stores, the stores that we have closed are stores that belonged to our partners. So there was no goodwill involved, no assets involved, no write off. We know the line today, as you have seen below the EBIT line, all the impact that we have is given by the exchange rate, nettings, and mark to market and of the revolution of the intercompany loans and receivables that we have. And we are also starting with Mariano and with the team how to solve this problem in a definitive way. I will bring a proposal to Mr. Natuzzi in the next three weeks.

Okay. Maybe another question just on the financial situation of the Company. I understand that the Company does have roughly EUR60 million in a net cash position. Probably going forward, should see some effect of working capital improvements and might have some room through sale of non-operating assets or things like that. Could you comment on your cash position going forward?

If you have seen the evolution of our cash today, we closed the first nine months at EUR57.1 million. What is worrying us is the working capital that is negative. But what we are doing, we are doing several things with the team to make sure that we stop the bleeding and we generate more cash.

As far as stop bleeding, as I said, that next quarter is going to be from a result point of view much better. So this is helping. And the budget that we are discussing as we speak with our regions is showing that there will be an important uplift in the first six months of 2009.

We are also working on understanding which are all the assets that we have today that are unused assets, idle assets that we can really sell and so this can create liquidity. We are renegotiating several costs, financial costs, with the major banks with whom we have relationships. And today, Mr. Domingo has met the bank where we have almost 53% of our cash. And we have obtained some good and strong reduction of the fees or at least not increase of the fees, as they were asking.

And we are also working on the rebalancing of the DPO and DSO that will generate some more cash. So we are working in different directions to make sure that our working capital is basically starts to become again positive. And again, the key areas, the unbalance between DPO and DSO, if you read in the balance sheet, this is basically the major issue that we have today. But we are also starting to understand how to generate more cash that will help us to finance our expansion and above all our strong marketing plans that we are putting together.

Mr. Natuzzi, as you know, is our Chief Stylist Officer and is working with the team on wonderful new product and collections for the next key event, like the Cologne exhibition in January and the Milan exhibition. So we will really -- if we don't really promote these products in the right way, we can basically not generate all of the potentiality that this can give. So we are also starting to make sure that we reserve the right amount of money that needs to be invested and pushed in the market to make our models even more appealing for the consumers.

Dmitri, we are really working deeply now in understanding all what were the small corners of optimization that -- we challenge more corners optimization that we can find in order to improve our cash situation. And I'm very confident Mariano, with the team with [Mr. Clemente] and the team, they really will be working in the next few weeks to have an extreme aggressive plan to reverse our negative working capital.

Okay. Well, I've got two quick other questions. The first one would be the impact of the commodity costs, which are going down, and the impact of the currencies, which seem to be evolving favorably, taking into account the euro-dollar from the one side and the dollar-Brazilian real from the other side. And then the last question -- what are you seeing with the retailers themselves on the competition level? What are you seeing with small competitors? Are they going out of business? Is it giving you an advantage in developing new sales channels?

All right, so in terms of the first question on commodities, clearly, commodities are going down. And we are trying to get as much as we can from this decrease. We have a very aggressive plan that, by the way, had for next year in order to grow -- in order to reduce our costs on the key components, like wood frame, foam, and above all leather, we have already obtained in the last month versus last year an important reduction on our leather cost. We are down minus 2.1% versus last year. So this means that we are really starting to get some benefit of it.

So if your question is are you -- will you have some important and positive impact on the gross profit because of the commodity price going down, I'm telling you yes, we will. We are taking it.

And by the way, we will try to retain as much as we can the price increase that we are passing in 2009 that was accounting for more than EUR10 million of positive impact. So this means that basically, if we retain the price increase and we renegotiate and go down with the cost of raw materials, this will generate a very good impact on our P&L.

In terms of exchange rate, the Company had taken this year -- at the beginning of this year -- a different position that basically was to try to cover itself long. So today, we have already several months of 2009 that have been already covered. So from nettings point of view, we will suffer. If the exchange rate stays as it is today or goes down, we'll suffer because we have, let's say, an average coverage at 1.45 that clearly will impact our below-the-line clear results.

At the same time, we should say that all this from a top line point of view, from a sales point of view, is going to have an impact. So we hope that we can offset the two effects, so a better top line because of the exchange rate and compared with worst results below the line because of these contracts that we have already. Also, in this area, Mariano is working with banks to understand if we can start to work and make sure that we get out from some of the contracts much quicker.

In terms of -- so I'm sorry if the first question, Dmitri, was -- I could give you a very good positive answer to the second one. Unfortunately, I should say that we are working on that today. We are not really in a position to say that we are happy that the currency is evolving in this way.

As far as the competition and the competitors, the answer is yes. We see competitors starting to have difficulties. We see competitors starting to have problems. And this is when I say -- this is when we will really jump in very strongly because we have two brands. We have a worldwide company that is basically able to supply very fast in different regions of the world our new and renewed strategy on regionalizing the production, so having our European plants producing for Europe, our Asian plants for Asia, Latin American plants for Latin America. And building a plant in U.S. will also help us to be not only global but very close to the consumer and to the customer.

So as we know, one of the issues that this industry has -- not only us, this industry has -- lead time. Lead time is very long. So if we can cut the lead times two weeks as we are planning now in the next six months, it is going to help us dramatically to be quicker to preempt the channels and, of course, to take all the space that the small plants are leaving.

Don't forget that we are in a highly fragmented industry here. We do not have strong leadership. And we strongly believe that we are really on the right track to build a strong leadership. And the results of next year will prove this.

Okay. Thank you very much.

Thank you, Dmitri.

Okay. Thank you. (Operator Instructions) You have a follow-up question from the line of Budd Bugatch of Raymond James. Please go ahead.

Yes, Aldo, I just want to clarify your outlook and guidance, if you would. You talk about achieving total sales roughly in line with the level achieved for the first nine months. Are you talking about the 5.8% as reported or the 11.1% in constant exchange?

We are talking about -- no, we are talking about the 5.8% that we have been achieving so far.

So the guidance is as reported. And to get to the EUR35 million to EUR40 million, then you're talking about something in the operating loss of a fourth quarter of a EUR5.5 million to maybe EUR10 million. Is that the way I -- ?

Yes, exactly.

Okay. And how are you thinking about foreign exchange for the fourth quarter, for the year? What do you think that will likely come in at today's rate?

Yes, we are -- what we have done basically, we have been calculating our - today, our top line growth, as we said, taking the trend that we have today seats-wise and value-wise, considering also the different markets that are performing clearly in a different way. We should say that U.S. is today, let's say, starting to a bit slow down. But there are other markets that are sending some strong signs of growth, like for example, Italy. In Italy, we have been working in the last month. And we are really starting to see a huge sign of recovery. As you know, in Italy also, we have a new management team in place.

As far as our top line, what we have seen, what we have considered as the dollar on our dollar sales basically, it is basically the exchange rate that we have today. And we have seen it in the next [month]. We talk about an average of 1.26. This is what we are considering.

Of course, if this is going to help our top line, this is going to impact also the cost of goods because, as you know, we have some of our raw materials that are in U.S. dollars. And in terms of bottom line, so below the EBIT, in terms of basically financial charges, we believe that if we offset the nettings and the forward, we will probably be a couple of million euros better than the first nine months.

Okay. And finally, when you talk about the inefficiencies or the issues with cost of goods sold, are you talking primarily at the purchases line as we see it in the income statement, where that was nearly EUR7 million higher than last year?

Yes.

Okay.

And this is why we are changing sharply and drastically also our procurement strategy and the team because really that one is an area where we can really generate a lot of positive impact on our product and loss.

Understood. Thank you very much.

Thank you, Budd.

Okay. Thank you. (Operator Instructions) And there are no further questions from the phone lines. Please continue.

Okay. So if there are no further questions, I would like to thank you very much, all the people that were listening to this conference call. We are determined to deliver what we have promised to the Chairman and to the Board. We are on the right track. The team is highly motivated. And in this very shaky environment, I believe that a company like us will really show the value that has generated in the past 50 years and create even more values in the next year. So thank you very much. Keep watching us. And we'll surprise you in a very, very positive way. Good afternoon and good morning to everybody.

Okay. Thank you. And that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.