Natuzzi SpA (NTZ) 2008 Q4 法說會逐字稿

Please stand by, we're about to begin. Good day everyone, and welcome to the Natuzzi fourth quarter earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Miss Silvia Di Rosa, Investor Relations for Natuzzi. Please go ahead, ma'am.

Okay, perfect. Good day and welcome to Natuzzi fourth quarter and 2008 conference call. With us our call -- in our call today is Pasquale Natuzzi, Chairman and CEO, and Mariano Domingo, the CFO who will revise the fourth quarter and full year 2008 consolidated financial results. We will then open the call to your questions.

By now, you should receive an e-mailed copy of Natuzzi earning results. If not, you can find that information at the Natuzzi website, www.natuzzi.com, or please call our Investor Relation department at 39 02 36 5779800 to receive the results by e-mail. You can also e-mail information requests or questions to investor.relation@natuzzi.com. We will respond to you as soon as possible.

Before proceeding, please be advised that the discussions today could contain certain statements that constitute forward-looking statement under the United States Security Law. Obviously, actual results may differ materially from those in the forward-looking statement, because of risks and uncertainties that can affect our result of operations and financial conditions.

We have discussed such risks and uncertainties which have in the past affected and might continue to affect our results of operational and financial condition in our Annual Report on Form 20F for the fiscal year ended in December 31, 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 20F filing from the United States Securities and Exchange Commission.

So I will pass the call on to Pasquale Natuzzi. Please?

Good day, everyone. Thank you for joining us to discuss our fourth quarter and 2008 earnings result. I will provide the highlights from our fourth quarter and an overview of 2009. Mariano, our [CFO], will then give you our fourth quarter financial results in more detail.

Let me just start by saying I'm pleased to be here. I'm familiar with this Company, and I love this Company. Today, to have assumed the role of Chief Executive of Natuzzi, I'm very proud of our team, and of the progress we have made in our business plan, and look forward to continue execution.

We have achieved our financial goals for 2008, maintaining a strong balance sheet, and we are well underway with the execution of our business plan, with an excellent and dedicated management team in place.

I believe that our Company has a tremendous opportunity to strengthen our market position within the furniture industry. We are leaders in design and production of beautiful furniture. That's what people tells us around world. With excellent craftsmanship, we have long history and we are focused on improving our infrastructure to make us an even better Company.

Our business plan is very structured, came just from the market, from our regional people. They analyze customer by customer, and market by market, and that's where our business plan comes from. Through -- and it's achievable, despite the adverse economic condition we are now facing obviously.

We have already begun to see the benefit of our efforts as we look at our fourth quarter results, as well as to achieve long-term sales and profitability growth. In fourth quarter, we increased net sales by 3%, and improved our operating result having reduced our operating loss to EUR5.5 million from EUR20.9 million the previous year -- for the year.

We delivered EBIT of minus EUR35 million, at the top end of our guidance range of minus EUR35 million to minus EUR40 million. We remained the strong balance sheet with cash of EUR47 million, and no long-term debt.

Turning to some of the highlights from the quarter, we increased our gross profit by 35.2% (sic - see press release) through several operational initiatives. First, we improved processes in our factories that led to reduced shrinkage.

Second, we rebalanced our production, regionalizing our manufacturing to increase efficiency. Just an example, goods for the China market are manufactured in China. This enables us to better allocate our labor and production cost.

Third, we began renegotiating the raw material contracts to lower the procurement costs.

And fourth, we improved our supply chain management to increase distribution efficiency, which contributed to our 14.2% reduction in inventory.

And at the end of the fourth quarter we are still very much in the early stage of this process, and expect to achieve a further cost saving from the efforts we initiated in the fourth quarter in 2009 and beyond.

Looking ahead, we will continue to execute on our cost reduction plans that we have embarked upon, additional initiatives in place. First, we are developing an internationalized sourcing model, changing our procurement process to reduce costs and tender goods more efficiently.

Second, we will employ our leaner program for all facilities. This will include the strict controls of our general and administrative expense. We also invested in ERP, enterprise resource planning system, SAP, in order to standardize the processes, and there will be increased efficiency and lower expenses in various areas of our organization, including finance, production, and etc.

Third, we are also strengthening our regional teams. We recently hired a Senior Executive to head our Brazil, Russia, and India division, which we call BRI. We hired a General Manager for Brazil. We are currently in the process of hiring a General Manager for India and Russia.

We feel very good about the progress we have made thus far. We are on track with our plans, but realize we are still in the early stage of this turnaround, and we will have much work to do to achieve our goals.

While we are moving ahead with initiatives to drive long-term growth, we also realize the importance of maintaining a strong balance sheet, and we will continue to do so with careful inventory controls, cost reduction, and conservative capital spending.

That said, we will also continue to invest wisely in our Company, so that we are well-positioned to achieve accelerated sales and profitability growth once the economic environment obviously will recover, and consumer sentiment will improve. So, that's our commitment for the Company I'm in.

And now it's our CFO's turn, Mariano Domingo, which will explain you in detail the --

The P&L.

Exactly, the P&L.

Okay, good morning, everyone, there. Let's now turn on our 2008 consolidated financial results.

During the fourth quarter, net sales grew at 3%, to EUR182 million, as compared to almost EUR177 million for the fourth quarter in 2008. Natuzzi declined 4%. And finally sales decline in Europe and rest of the world were partially offset by sales in the US market.

Italsofa sales rose 12.4%, primarily due to increasing sales in the Americas and the rest of the world, with a slight decline in the European markets. Units sold declined 1.1% in total, with an 8.2% decline in Natuzzi and 4% in Italsofa. The unit difference in total sales growth, in the sales growth and unit growth, is primarily due to changes in the exchange rate.

Our gross profit for the fourth quarter totaled EUR58.4 million, and increased 35.1% over prior year fourth quarter. On a constant dollar basis, gross profit grew 49%, which for us is significant. The gross margin rate in fourth quarter was 32.0%, as compared to 24.4% in the fourth quarter of 2007.

Factors that contributed to the gross profit improvement include 12.8[%] reduction in product cost related to increased productivity and reduced raw material cost; and a 26.8% decline in labor expenses, associated primarily with a temporary work reduction and re-balancing of our production according to needs, and the different geographies that we have worldwide.

Selling expenses declined 2.1% to EUR48.9 million in the fourth quarter, as compared to EUR50 million last year fourth quarter. Even if it's not relevant, it's a sign of the intention we have introducing controlling our costs.

The decline was attributable to a reduction in marketing cost, fundamentally, and not in the spending in the market, but really in limiting production cost and new communication. General and administrative cost rose to EUR14.9 million -- to EUR14.2 million in the fourth quarter of 2007.

As a result, operating loss in the fourth quarter was EUR5.5 million as compared to EUR20.9 million in the same period last year, representing a 73.9[%] improvement in operating results.

Other costs totaled EUR15.5 million as compared to EUR2.4 million in the last year fourth quarter. We can elaborate on those at later stage through the Q&A.

We reported tax benefit of EUR0.7 million in the fourth quarter as compared to tax spend of EUR16.6 million in the fourth quarter in 2007. The net loss totaled EUR19.8 million, or EUR0.76 per share, as compared to a loss of EUR39.6 million, EUR0.72 per share in the fourth quarter of last year.

The Natuzzi Group ended fiscal 2008 with cash of EUR47.3 million and no long-term debt. Inventory year-end was EUR92.0 million, with a reduction of 14.4% (sic - see press release). And shareholder equity was EUR345.2 million.

Turning to full year. For fiscal 2008, net sales were EUR666 million, an increase of 5% from EUR634 million in 2007. Sales of Natuzzi brand declined 1.1%, while sales of Italsofa rose 12.3%. In terms of unit growth, we had 5% increase in units sold in 2008 as compared to 2007.

Gross profit rose 7.7% to EUR187.3 million for 2008. Gross margin was 28.1% in 2008, as compared to 27.4% in 2007. This again is proving the effort, particularly done in the last quarter of the year, in improving our cost and performance.

In fiscal year 2008, operating loss was EUR35 million, as compared to a loss of EUR49 million in 2007. For fiscal year 2008, the net loss was EUR61.9 million, as compared to EUR62.6 million (sic - see press release) for fiscal year '07. The net loss for the full year reflected an impairment charge of EUR5 million and accrued costs of approximately EUR4.5 million for redundancy and other actions that the Company is taking forward.

As at the end of December 2008, the total number of Natuzzi stores worldwide was 325, including Italsofa stores and Divani & Divani stores worldwide.

I think that's all about the information referred to the wrap up on financial information. I turn back the word to Silvia Di Rosa, and from there, we can address the Q&A at your convenience. Thanks very much.

So, if anyone has a question to put to Mr. Natuzzi or Mr. Domingo, we are ready for your questions.

(Operator Instructions). We'll take our first question from Seth Hamot with RRH.

Hello gentlemen and ladies. How are you?

Good, good thank you. How are you?

Good, good. We met in our office in Boston a few months ago.

Yes I remember that.

Super. I had a great meeting and I just -- it's a pity that we've lost some executives, so I just want to understand the direction we're going in, in terms of near-term. What are the fundamental financial metrics we should be looking at? For instance, I noticed that the margin -- net margin -- I guess the gross margin for this quarter is just about one of the highest it's been in the past three or four years. Can that be maintained throughout the rest of 2009 at least?

Well, that's the beginning, of course. Whatever has been done so far in the fourth quarter of 2008, it's going to be maintained for the full year 2009 and onwards.

I don't know if you recall the presentation we made, but we go down to 61% in terms of cost of goods. There, the only element that it's not full in our hands is the development in the market, in terms of sales and consequently the limits on the flexibility we may have in our manufacturing facilities.

Said that, we have already taken some actions to control with certain flexibility our manufacturing operations and cost, and if the market performs in the line of what we have been expecting, we expect to over perform these numbers quoted in the planning of 2009, but definitely better than what it's been the last quarter of 2008.

Okay. So, we're expecting gross margins to stabilize or be higher than they are now?

Absolutely, provided that the sales develop as expected. That's the only pre-condition that we have. You all know what's the mood in terms of sales performance worldwide in most of the sectors. And we are also affected by that, in a limited way, but anyway affected by that. And we expect that when the consumer expectations, the consumer trust gets back, that we will start recovering also in our level of sales.

In terms of sales, where are you guys finding the most challenges? What geographic region and -- or any -- can you define -- what geographic region? Let's start there.

Well fundamentally, and this is I think, shouldn't tell you anything new, because you live in the US, the market that is affecting us more, it's the American market, where we see that the tendency is to complete -- clear tendency of stopping on the household consuming at all levels, not only on simple things but also on expensive things. And this it's really what we are seeing developing there.

We, though, are planning some specific action plans to develop the US market and to help in this low mood of expense really to facilitate having some more competitive articles in the market that may help to recover the tone in sales. But this is still something to be proven, given the current actual mood of the market.

Okay. Regarding -- so the United States, you're seeing -- I understand that the rest of the world is difficult too. Are there any other interesting opportunities in the rest of the world or places where we're doing turnaround on the rest of the world?

Well, fundamentally, if you recall also our growth plan for 2011, which we still stick to, fundamentally we wanted to grow in the BRI, the market that the President has just announced; we have a new Senior Executive and the GM at least for Brazil. This market, really it's something where we're paying a lot of attention.

This year is just the start of that activity, so we don't have big expectations on that. We notice though the pressure. But again, we are doing specific actions to develop that market.

But what refers the other markets of expectation, it's clear that one of the areas we expected to have some substantial growth, it's Asia Pacific and Oceania. And there, we're also noticing that the speed of development, it's lower than the one we had expected in our plans.

Though, and that's the good news, when we hear the feedback from our markets, they see some lights at the end of the tunnel that are starting to talk about some expected recovery, potentially from the end of the second quarter, and being forward to third quarter and onwards. But this is again, it's the expectation of our people there and we really expect that to develop that way.

Okay. Finally, SG&A. What kind of -- well, let's talk about inventory before that. Inventory is lower than it's been in a while.

Yes.

Where -- do we have plans to keep inventory at these levels or can it still go down?

Well, I wouldn't bet for them going further down, though we will do our best to do so, and I explain to you why.

The first thing is that we have, through the implementation of SAP across the Company, which is completing its rollout by the end of this fiscal year, starting first quarter of coming year, we are implementing in parallel some supply chain actions and we have hired executives that have appropriate experience in supply chain tooling.

This is helping us in better planning, in better managing, in better procurement, in better resourcing of the full Company. So, this is a noticeable first step on how we can improve inventories and paying much more attention to the turnover of the different items in the inventory.

The second one, though, is that in order to facilitate the development of sales in the different markets, one of the actions we're taking, it's trying to shorten our lead time to market. This, historically in our sector of activity, has been a long, long, long period and we're trying to shorten that down to three to four weeks minimum. This means that we are developing a policy of [no] specific articles are on stock -- for stock sale and trying to create some buffers into different markets that can help in predetermined articles full and fastest delivery.

This consequently will consume some of the additional generated working capital, but we want to do that in balance with the reduction of inventory. So, one thing will compensate the other, with the intention of trying to go a little bit further down, but not much, as we want to see how it works in the different markets.

Okay. Then finally SG&A. Is there any substantial savings to be -- from SG&A in the future? Or should we be using this as a level run rate?

I think you should use this as a running level, though again, we're going to be very critical with ourselves. In most organizations, this is not understood as the most value generating area and consequently, we have to watch the mirror and face ourselves with the things that are not bringing added value to the Company; going to start being more in the line of optimizing cost instead of cost cutting and preparing the Company for the newer stage.

So, our expectation is that we want to keep that low level and the intention, and I think that was expressed also in our long-term plan, is probably to keep the same level of expense, which means reducing its repercussion in terms of percentage to total sales, if we develop sales as planned. So, really trying to smooth down the development in cost in the SG&A.

Okay. Final question. I noticed that Pasquale, of course, has taken the CEO role and title. Are we trying to replace Aldo? Or are we just going to have Pasquale in there? Is there a search on for a new CEO? Or just Pasquale will be the new CEO?

Pasquale will be at the helm for -- at least for the next three years until we end up the business plan, with a good management base. It's almost fun to run the Company, even in this bad business environment.

Thanks.

I have energy. I know this Company. I love this Company and I care this Company as I do with my family, no difference. So the shareholders, they can be sure that I put my entire life for the shareholders -- stakeholders of the Company.

Thanks a lot for your time guys.

Take care, thank you.

Thank you sir.

(Operator Instructions). We'll go next to Nigel Waller of Oldfield Partners.

Hello, thank you very much for taking my question. Just following on, an infill question from that really. We went through the inventory position. I understand that receivables there's been no improvement, but payables seems to have collapsed somewhat. And I wonder whether that is because your suppliers are becoming more cautious, given that your cash is draining away. Is that why your payables have shrunk so quickly?

No. I think that the first explanation is that the closing of the previous year had some EUR10 million to EUR15 million delay in terms of payment, because of the going live of SAP that resulted in some procurement payment delays.

For the rest, we know that it's an issue. That's been already shared with you in the past; we did that in the roadshow. That is one of our high targets in the activities of the Company. We have a complete unbalanced situation in terms of payables and receivables.

The average in the way we have calculated them on payables is that we are at a level of 49 days of payables, being a minor part of our total cost and expenses, given the high level of labor that we have. But the area of receivables is still at a level of 59 to 60. So, really there is a complete imbalance between collections and payments.

And the action plan that we are working on and trying to implement is that at least we want to achieve, by the end of the year, which in the current environment, would result not easy at all, a more balanced situation of the same level of payables and receivables in terms of days, which is around 55 days on both.

Moreover, from there, we want to really unbalance the situation on the other direction, which is having longer payment terms and shorter collection terms. This is something that we are collaborating -- have started a project collaborating with financial institutions that would intermediate in both cases, payments and collections, with our vendors and clients to have a more balanced situation and at the same time, not criticize them in terms of collection terms or payment terms.

Okay. Sorry, the -- your calculation of days payables and receivables, that's on easing sales numbers is it, as the divisor?

Well, it's not an easy calculation. So, if you send me an email, I could be specific back to you on how we calculate that.

Okay.

The ingredients in the formula are not good. And I have to recognize that this is something that needs further improvement in the organization. It's really kind of a tailor made calculation; consistent, but tailor made, and we want to start applying the standards that are generally accepted in market.

Okay. You, both in the statement and in all the statements made so far -- it's a small point, but you keep saying that there's no long-term debt. And, of course, there is long-term debt on the balance sheet, as you presented it to us. It's small, but it's -- there is debt there. And I just wonder what availability you have of credit lines, going forward.

You don't appear to have -- you perhaps have one year of cash flow left at the loss run rates you're running at. I wondered what you have arranged, in terms of credit facilities?

Okay, two things there. First of all, we have ended in a far better position than we had planned, in terms of available net cash. We were quoting to be at the range of EUR35 million to EUR37 million, which was about the level we had in the closing of the third quarter. Though we knew that there were some actions going on and that we wanted to generate additional cash, we were not sure to attain that in the short period of time actions were put in place.

But said that, really it's our intention to self-finance as much as we can all of Company activities. In the current banking mood, it's basically not impossible, but quite difficult to get financing lines, and when you get them they're not at any reasonable cost. So, we will try to do our best to keep this situation of self-financing.

[But what refers] having a facility, of course, through the tools that we have already implemented long ago in the Company, like an Italian cash pool and an international cash pool, we have an overall facility that would cover the gaps in one account to the other, when having a netting in the cash pool.

This is a generic facility and for the time being, it's being under-used. And for that reason, even if we make the statement that we don't have long-term debt, you have well noticed that we have a smaller amount, that it's below EUR1 million. And so, we don't mention that because of [not] reality. And we would intend to be at that level of very, very, very low use of any potential facility when we have self -- to complement self-financing.

We'll take our next question from Edwin Flick with Citadel Value Fund.

Yes good afternoon gentlemen. Can you hear me?

Yes sir, we hear you.

Okay, good afternoon. What I've noticed in the fourth quarter is that you made progress on your operating costs, which is quite good. On the other hand, the volumes, it was one of the weakest quarters in the year. Similarly, the first two quarters in 2008 were relatively strong quarters in terms of volumes.

I wonder if you could list already a tip of the view and tell us a little bit about how volumes are developing in '09? Because I'm a little bit afraid that volumes could be disappointing again.

Well, this only the market will tell at the end what's going on. When I see the developments, definitely we had a quarter that was not one of the highest quarters in terms of seat sales. But I don't think it was that different from previous years. So, it's below last year, but we have already given notice of the reduction in volumes that we had as a Company in total.

But the performance of the quarter, as such, is not that different from the different quarter's performance -- fourth quarter performance in previous years. So, it doesn't give us any sign of additional concern, the performance of the fourth quarter; so, no major comment there.

And the fact that in the first quarter of '08, seats were up by I guess it was almost 60% in total. It was a relatively good quarter, the first quarter of '08 in terms of seat volume. It gives some reason for me to be a little bit worried about the first quarter of '09.

Well, I don't -- we cannot predict the future, as you can imagine. But what we have noticed, and I think that's part of the problem that Pasquale Natuzzi has been talking about generally speaking, and I specifically have addressed that. It was noticeable in the Company that we had the development in terms of cost that was not helping the Company to perform as expected in the market.

So, that was the main reason for us moving towards a reorganization, understanding how was the performance of our factories and trying to have a better control on our cost development that would help the performance in sales as well.

The meaning in terms of specific action is that the plans for 2009, even before noticing the level of crisis that we are facing now, it was decided strategically not to increase prices. So, we would have to deal in recovering cost in the organization just to close the gaps in terms of losses, instead of thinking, like it has been the case in the past, that through price increases, we could recover all the extra cost -- operational cost that the Company had.

This is something that consciously we have done and we expect that this should help us in the development in the market, whenever the consumer trust, confidence, recovers that we will be in a competitive position for selling our brands.

Yes. We all know that consumer confidence hasn't really recovered in the beginning of '09 and it still looks rather bad. But let me rephrase the question. Given the way costs are under control right now and the remarks you made on the previous questions on costs, what kind of volumes are you internally calculating with for 2009? What are your own budget assumptions concerning volumes in '09?

The initial budget we had was a very modest increase. We were thinking about increases around 5% to 6%, which was not on the ordinary business. It was really through the expansion of new areas, like I said before, Asia and Oceania, and also the starting development of Latin America and the market of Brazil, Russia and India. But we were quite flat in our expectations in our ordinary markets.

The tendency that we see now, and this was already one of the scenarios eventually as a potential risk scenario that we did, is that we could be at the same level of volume that we had in 2008, or even in a scenario that could be even lower.

For the time being, according to the projections we see from our areas, we're having some volume pressure in this first quarter, this first month of the year. And we expect, as I said before, that the recovery would start somehow in the second half of the year, and we have enough manufacturing flexibility just to tend to that level of expectations, would that be the case.

Okay. A totally unrelated question. I've talked in the past on surplus assets in the Company, being real estate in Italy and I believe in [airplay]. This is not really the best of times to think about selling those types of assets in terms of pricing. But could you update a little bit on that area?

I would say that this is clearly in our list of targets to handle all of them; everything that is an asset, that it's not utilized by the Company 100% it's in the list of sale. But we have to be sound and wise. So at this very moment, trying to sell assets of the Company in making loss on selling those assets, just for the good purpose of making cash, doesn't make any sense.

And definitely in our list of activities, we will start paying attention back and forth to these elements, as soon as we see also a note of recovery in the market expectations and that the reactivation of the market would help us in selling those assets. But definitely, this is something that we're going to do over time.

And a previous question was on the liquidity in the Company. One of the guys asked about the EUR33 million net cash, and that would be maybe enough for one year. If '09 turns out to be really a bad year, especially also in the second half, so there's no upturn in consumer confidence, etc., etc., that looks -- the liquidity starts to look a little bit tight. And you already mentioned yourself that financing is -- commercial financing is really very hard to obtain right now.

What's the contingency planning here? Because that's really a scenario I hope won't become reality, but it's still something you have to take into account, I guess.

Okay, definitely I don't want to go through this scenario, okay. I'm going to give you an answer, but I don't want even to consider this is a potential scenario. The action plan there, it's to continue to our shaping of the inventories, as I said before. And put in place our program of improvement on payment terms and collection terms, which, even if it's not going to be a big, big, big thing for this year, would help by bits and pieces to the generation of additional liquidity.

And if it happens, what you have announced, two quarters from now or three quarters from now, we will discuss that subject again, and think about how we should sort it out.

Definitely at that point, we might force selling in emergency, some of the items -- the [list] I mentioned before. But we have room to maneuver, even if making sales we could sell some of the assets. We simply want to behave wisely and don't do that 'til the moment we might have need for that cash.

We'll take our next question from [Doug Biden] of BCM.

Hi. This is kind of dovetailing a little bit on some of the questions from before. But can you just speak broadly on how you plan to enhance shareholder value and speak to the share lack of performance?

Well, I think we should ask Geitner to give us some of the supply that he is providing in terms of cash to the automobile sector, and give it to the upholstery section as well. I cannot respond to that. At this very moment, it's like a dream scenario; you watch what's going on in the market. We have had a chain of good days of recovery in the stocks, and suddenly yesterday you've got a drop of another 3.5%. So it's totally unpredictable.

We are considering some actions that we will be putting in place according to a program that we are developing now, but at this very moment, it's pure guessing to see how we would recover that value on the share.

(Operator Instructions). It appears we have no additional questions. I'd like to turn the call back to you Mr. Natuzzi for any additional or closing remarks.

Okay, thank you. Thank you very much for joining us today and we look forward to update you on our next call.

Thank you. Thank you, have a good day everyone.

This concludes today's conference. We thank everyone for their participation. Have a great day.

Thank you.