Natuzzi SpA (NTZ) 2009 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. And welcome to the Natuzzi First Quarter 2009 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Silvia Di Rosa. Please go ahead, ma'am.

Good day. And welcome to Natuzzi first quarter 2009 conference call. With us our call -- in our call is today is Pasquale Natuzzi, the Chairman and CEO, and Mariano Domingo, the CFO, that will revise the first quarter 2009 consolidated financial results. We will then open the call to your questions.

By now, you should receive an emailed 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 email. You can also email 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 the risks and uncertainties which have in the past affected -- might continue to affect our results of operational financial condition in our report on Form 20-F for the fiscal year ended in December 2008. This report would be available on our website at www.natuzzi.com from the end of June. So I will pass the call to the CFO, Mariano Domingo.

Okay. Hello. Good morning, everyone. I will begin with a brief, but at the same time (inaudible) review of first quarter 2009 earning results. Following prepared remarks, it will my pleasure together with Mr. Natuzzi, Natuzzi CEO and Chairman, to answer your questions during the Q&A session at the end of this presentation.

While the furniture industry continues to be under pressure due to a challenging economic environment, we are making minimal progress in our initiatives to increase efficiencies (inaudible - background noise) in our business, which should reach a significant operating margin expansion and stronger cash position. However, our efforts to improve productivity in order flow will allow us to enhance our competitive position and enable us to gain market share in the future.

We are obviously disappointed with the first quarter results as we were unable to achieve an increase in our gross margin, although we were ready to reduce proportionally the consumption cost, which contributed to the considerable problem in our available net cash.

But let's see details of financials. The first quarter 2009, net sales declined at 35.6%, EUR111.3 million as compared to EUR172.8 million of the first quarter in 2008. Sales of the Natuzzi brand declined 38% from EUR86 million to EUR53 million. And Natuzzi sales decline in Europe was 33%, decreased 45% in Americas, and we were down 47% in rest of the world. Sales of the Italsofa brand declined 35% from EUR67.5 million, EUR43.8 million. Geographically, the Italsofa sales declined 35% in Europe and in the Americas and rest of the world were down [29%].

Our gross profit for the first quarter fell EUR28.4 million with a decrease of 35% over the previous year first quarter. The gross margin rate in each of the first quarters of 2009 and 2008 was 25.5%. The gross profit deleveraging was offset by lower purchasing and labor costs. Purchasing costs declined EUR43.1 million the first quarter of 2009 from EUR81.2 million first quarter of 2008, while labor costs were EUR19.9 million the first quarter as compared to EUR38.9 million the first quarter of last year. All figures, of course are in euros.

Selling expenses declined 24% to EUR34.1 million the first quarter as compared to EUR44.9 million the last year first quarter due to 37% decrease in transportation cost to EUR9 million the first quarter 2009 from EUR14.3 million the first quarter of 2008 and to commission by 37% as well from EUR3.4 million to EUR2.1 million 2009. While we were unable to fully offset the net sales decreases, it demonstrated our progress in controlling our costs.

G&A expenses for the first quarter declined almost 4%, 3.8%, to EUR10.9 million. As a result, operating loss in the first quarter was EUR16.6 million as compared to a loss of EUR12.1 million in the same period last year, representing a decrease in operating results.

We recorded other income of EUR7.8 million in the first quarter as compared to a cost of EUR10.4 million the first quarter of last year. Difference of EUR18.4 million reflects income of EUR2.8 million from exchange rate realized in the first quarter of 2009 compared to a loss of EUR2.6 million to an income and to an income of nonrealized market-to-market on financing of EUR3.4 million 2009 and a loss of not-realized mark-to-market on financing for EUR7.4 million, plus a gain from extraordinary items of EUR1.8 million the first quarter 2009 as compared to a cost from extraordinary items of EUR0.3 million the first quarter of 2008.

The Natuzzi Group ended the first quarter with a net available cash of EUR66 million, an increase of EUR17.7 million over the EUR47.3 million at the end of 2008 and no longer [set] nearly the realized to zero about EUR4 million plus a short-term borrowing of EUR9.4 million.

(inaudible) was EUR84.8 million with a reduction of 7.8% respect of the EUR92 million of last year. This reduction is mainly due to a higher consumption of raw material inventories purchased in the previous year compared to a lower level of raw materials purchased as on base of a group [strategy].

Our shareholder equity was EUR334.1 million. At the end of the first quarter, the total number of Natuzzi stores worldwide was 323, including Italsofa stores and Divani stores worldwide. With that, I will turn over to the operator to begin the Q&A session.

(Operator Instructions). We'll take our first question from Budd Bugatch with Raymond James.

Morning, Domingo. Good morning, Pasquale --

Yes.

-- and Silvia. Obviously, business is very difficult. Do you see any signs of improvement or deterioration in the quarter that you can talk about? And how has it looked so far in the second quarter?

Good morning, everyone. Honestly, we had in April the fair in Milano. And again, the traffic was much slower than the previous year. I was in [High Point] in the same week for the spring exhibition. And I never saw the account empty without people around there. But we had -- I mean, based -- but we had moderately good traffic in our showroom. And we load some good order. So basic on business clime, I should say that our fair in April in United States went much better than I was and the management was expecting.

We are attending this week the congress in (inaudible). The congress is where we meet all the store -- Natuzzi store owner. They come over here in Italy. And they purchase the new product for the new collection. And they plan even the marketing plan for the after-sale period in September.

Sign are positive through the meeting, to the meeting that we have with our customer. But basic on figures that we see from other industry or even through the order flow, I mean, seems that there is no improvement. That's I mean what I can say about it.

Just if I look at the balance sheet, and I know you generated some cash from receivables and inventories in this quarter. But if I look at the metric that we look at is trade receivables days outstanding, using the latest quarter to annualize the latest quarter rate, it looks to me like there's been a serious deterioration in the days outstanding for receivables, up to like 79 days versus about 61 last year.

But you are right. I had the number 75, 79. But definitely, there's an evidence of deterioration on our collection terms. There as to ingredient there, one of them is we had some delays in billing. And this is also affecting part of our billings reported in this period. And these billings have resulted in some customers delaying payments to us.

Well, moreover, this is a clear sign of action, first action that we need to take that hasn't started as deterioration the collection terms of some customers. So there's already given a challenging target to the people in the accounts receivable really to be on top and following very closely the collection terms from our customers. It's an area of attention. We have noticed of this deterioration. And definitely, we are taking the adequate action to keep a grip or control on that.

How did you have a delay in billing customers? You were late in getting their invoices?

No, it's fundamentally -- that's one -- that's a good sequence, of course. But as you all know, we have been implementing SAP. And it's been quite an intense period the first quarter of this year, where we have [uncalled] a number of orders that have been delayed in delivery to customers. So the kind of the action from the customer side, they also have delayed payment terms of those invoices.

Thank God this has been discussed, been closed. So we now suffer the same pressure in order flows that we suffer in sales flow, which is different at the closing of this quarter. The first quarter was slightly better than the figures reported just because of this delay in sales reported. We will catch up, see this catch up in the closing of the second quarter.

Just my last question for the moment is -- can you give us any progress on 11-1-15, the -- ?

Well, the management has been discussing on the specific. And it's been initiated in the last weeks, an action leaded by the President and CEO Mr. Natuzzi. We will enter in a deep review of our sales journey. But basically, the journey in principle, we still believe that the targets will fix of that three years long-term plan should be untouched. The bottom-up approach that we're willing to use to reconstruct that business plan and the journey in how to get there is going to tell us the intensity of the efforts we have to make to get there or the inability to at least achieve 100%.

There's some elements that we will not give up. And one of them is the margin of contribution of the Company. So we are really committed to make that happen in those terms. We will redefine in the next months to come and before delivering the budget for 2010 a complete rebuild of the business plan 2011.

But I would -- I take it from that comment that the '11 is more like '12 or '13.

I wouldn't [veer] to answer to that. But whether no, the circumstances of the market are so radically changing, a number of our competitors running out of business, the consumers have not disappeared. They do not spend. But they have not disappeared. So as soon as there is a recovery of the consumer confidence and the economic system, the financial system, there is enough saving in the world at this very moment to allow an additional increase of the spend capacity from the consumers. And this should be the moment of opportunity from the Natuzzi Group in catching up in the level of sales. So I wouldn't react any way in giving, of course, to 2012, 2013 because we don't have an element that would tell us so.

Okay. Thank you.

Thank you.

(Operator Instructions). And we do have follow-up question from Budd Bugatch with Raymond James. Please go ahead, sir.

Well, if nobody else is going to ask a question, let me just ask a question about the difference in the other income and expense line, which is notable and was responsible for the improvement this year in terms of the lower loss of pretax level. Can you kind of go into that and tell us what that --?

Well, fundamentally, but you see how the market of different currencies has been evolving. So it's shaky enough not to be sure what's going to happen in the rest of the year. We see the Brazilian reals coming better in comparison to exchange rate to the US. But this is shaky going up and down. The euro and the dollar are also ups and downs. So at this very moment, it's very difficult to define.

And what we know of this is that simply confirming what we have already released in previous periods. We have a number of contract forward in different currencies. And it's the one that ties us up in terms of these financial exceptional results. So we will have a very close follow up of those contracts and any opportunity of canceling them at a lower loss that looks to be at this very moment according for the projections that we did at budget level. And we will try to take advantage of the positive income so far and keep it ongoing.

So the -- most of that money is basically the foreign exchange loss or gain.

Yes.

Okay. All right. Thank you. Again, thank you very much.

Okay. Thank you.

(Operator Instructions). And we do have an additional question from [Dimitri Dofalero] with [Clear Rock]. Please go ahead.

Hello. Good afternoon, Mr. Natuzzi, Mariano.

How are you?

Fine. Thank you. First of all, how are you looking to protect the balance sheet if the current sales trend will continue for a longer period of time?

Well, in fact, we are working on different scenarios according to the expectations of evolution of the market. And in fact, we have not every month, every two months an updated request forecast from our salespeople worldwide, which would indicate what the tendency that we could expect in that front. At this very moment, we don't have any signs of alarm at the country. It looks that we could be able to close part of the recorded gap in this first quarter of the year into being a lower gap by the end of the year, still to be seen. In terms of reporting, we still have nine months in front of us. But this is something that we cannot guarantee.

(inaudible) and I think that's the emphasis we want to do is that the Company is still independent, still has plenty of free cash really finance its company activities. And if you look back, we have proven to be very effective [the effects] of and producing our level of inventories in a moment of declining sales. So this means that the people in the supply chain group are doing not only a great job in getting buying -- better buying prices on the -- we are acquiring, which is noticeable in the evolution of our P&L. But at the same time, we're doing some active and clear cleaning of our inventories, generating cash that was idle from that stand viewpoint.

So we don't foresee if nothing worsens dramatically -- and we don't have either any signs in that direction -- we don't see any reason to (inaudible) in our balance sheet protection.

Have you taken any other I would say more radical measures to adopt the cost structure to the current sales terms?

Absolutely. In the first place, we are reconsidering all our factories' capacities and considering what should be the long-term strategy in our capacity from the different factories we have worldwide. And this is going to be ongoing this same way, but not only in our total capacity but also just much more important from our stand viewpoint in becoming much more effective at really managing the drivers of reducing our total operating cost at factory level.

But what we first selling and administrative expenses that are the ones that to some extent could be considered as a clear burden of fixed cost in the Company, already at the beginning of the year, we sent very straight instructions to all our regionals all over the place. Be very careful in spending. And do tight up in hiring people or spending other than actual fundamental needs for developing sales in that region. This has proven to work.

The only thing is that we need to sustain that tendency and keep our low costs low and try to -- it's evident when you read the results of this first quarter that we were able (inaudible) at the same level more or less the efforts with a period of decline of almost 36%. So the proportional level of effort has been preserved. And I think this is a clear sign of the actions of [cross contention] that the Company is holding at this very moment.

Looking at the -- well, one of the supply chain elements we discussed in the past, how far are we moving or how fast are we moving forward on the reducing the lead times?

At this very moment, the first thing we have done -- and I think we're very, very satisfied of our achievement -- we have closed the gap of the dark period we have in going live with the SAP manufacturing that almost consciously I have to say get out in the complete dark for the month of January where we stopped operations and manufacturing worldwide. After that, we had a period of difficulties and visibility. Planning for us is a [constantly] ability to deliver according to (inaudible) customer expectations.

But thank God the [MRP] with SAP is already full steam or stabilizing but is already working full steam. And at this very moment, we have full visibility of any order that we have in house but is the status in terms of planning of production. This was not the case, not only with our period but for our planning capacity was much more limited and had the limited visibility. Now we have a much longer visibility, which allows us also a proper planning and procurement or, as I said before, use of available inventories, different materials, which is resulting in effective management on that side of the house.

At the same time, we have initiated a number of programs for stock, different reasons with selected qualitative articles of our most sold products and different kind of leathers, which is really starting to go now into the market on which our commercials have a high level of expectations as well at corporate level. So we are doing all kind of things that the new tools allow us to do. And that was not the case.

Then maybe a question on the competitive field. You just made the comment that you see some competitors running out of business. What is happening over there? What is happening with the Chinese competitors?

This is Pasquale. I mean, already, some big Chinese factory or company, they went out of business. And that was in the first quarter of this year. But honestly, more than [following] people that goes out of business, what -- there are today the main attention that we pay is to the consumer that's in the store. I mean, the reality, whoever I talk with in America, in Europe, in Asia, everywhere, the main issue where retailer are focusing are the fact that consumer, they don't get in the store.

I mean, novelty about competition going out of business, big guy, no one, just one, again, was at the core of $250 million per year was in the beginning of the year. But then all small guy, which really -- but we see a big decrease in sales from our competitors. And they are -- they have a big exposure to the bank. So I mean, really, I don't know how long they will last in this kind of a situation.

Okay. And what are you seeing with the retailers? Are you seeing rising credit risk over there?

Say again, please?

Looking at your customers at the retailers, is there any -- do you see rising credit risks over there?

Okay. Mariano will answer to you.

In this front, it's not different than the rest of our customers. We have noticed, though, something that is evident that also opens a door of opportunity in the immediate future. Because of their stress in cash, an important part of the retailers we work with have been introducing floor stocks. And this means that they have been maintaining some level of sales in order to get some additional cash in. But they also have been emptying their warehouses, emptying their stores.

So this gives us the opportunity of replenishment, even if not the same as speed because they would not hold inventories probably in the future same level as they did in the past, and at the same time gives us an opportunity of cash in hand, the level of whatever delayed income or delayed collection we have from them. But it's not different than the (inaudible) close follow up that we do in the rest of our customers.

In fact, I would even say that it's more close because we have people dedicated to retail that have a more daily contact with those guys than we do with the rest of our sellers, so don't see any special sign. We work also with our insurance company to protect [ourselves], so not at this point, no additional elements of concern.

And could you give us an update on the progress you're making in the performance of the retail chain?

Well, in that sense, nothing has changed. And I think that's the worst momentum to do such an assessment. If we have our struggling at a level [of purpose] levels, you can imagine that this decline on the same way in the retail field, so don't have any reason to give an important update there, other than being close to them, following the business with them, and trying to get the upper bid support to go on in their business, so no special news to give at that front.

Okay. Thank you very much.

Thanks, Dmitri.

And we have no additional questions. I'd like to turn the conference back to Ms. Di Rosa for any closing comments.

So if there are no other questions, we thank you to everyone. And we can close the conference call.

This concludes today's conference. We thank everyone for their participation.