Natuzzi SpA (NTZ) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Natuzzi Second Quarter 2009 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Silvia Di Rosa. Please go ahead.

Good day, and welcome to the Natuzzi Second Quarter 2009 Earnings Conference Call. With us in our call today is Pasquale Natuzzi, Chairman and CEO, and Mariano Domingo, Chief Financial Officer. Mariano will update you on the business in the second quarter 2009 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 the information at the Natuzzi website, www.natuzzi.com, or please call our Investor Relations department at 3902365779800 to receive the results by e-mail. You can also e-mail information requests or questions to Investor Relations at 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 law. Obviously, actual results may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial conditions.

We have the risks and the uncertainties, which have in the past affected and might continue to affect our results of operations and financial condition in annual reports or Form 20-F for the fiscal year ended in December 2008. This report is easily available on our website at www.natuzzi.com, or from us upon request. You may also obtain a copy of our Form 20-F [actually] from the United States Securities and Exchange Commission.

So now, I will pass the call to Mr. Pasquale Natuzzi, our CEO.

Good day, everyone. Thank you for joining us to discuss the second quarter and the first six months 2009 earnings results. Just a few words to describe that we have done -- what we have done in this first six months and forecast for the year end, and then give to Mariano to review over the second quarter and six months result in more detail.

Let me just start by saying I am very pleased to have met a breakeven in terms of three months operating income despite the unfavorable economic environment. We started this restructuring and the rationalization process almost eight, seven months ago, and we are taking the first positive results. We work, and continue to work, very hard in order to make the Company again profitable.

My effort, my goal, is to lead the company through this change that will bring back credibility and competitiveness. In one word, to regain a market share in the medium term and to obtain breakeven for the year end in terms of EBIT. I thank the Natuzzi management that is making this effort and is still very committed to achieve our goal of 15% operating margin in 2011.

Now, I will pass it to the CFO, Mariano Domingo, the duty to explain in details our results.

Thanks very much, Pasquale. Again, good morning to everyone. I will begin with a review of the second quarter and six months 2009 earning results. Following my prepared remarks, I will be -- it would be our pleasure, together with Mr. Natuzzi, the Chairman and CEO of Natuzzi, to answer the questions you may raise after this conference call.

While the furniture industry to be under pressure due to a challenging environment -- economic environment, we are making meaningful progress in carrying out our initiatives and processes that will strengthen our company and position us for sustained long-term sales and earnings growth. We are beginning to see some of the benefit from the increased efficiencies and cost reductions that we began to employ at the end of last year.

We expect these initiatives to lead to a breakeven operating margin and to a stronger cash position for the end of the year 2009.

During this first six months of the year we put in place many initiatives that will help the Company to be profitable again, including product standardization and innovation to reduce development cost and to improve the production process in, for example, visual prototyping technologies where we are progressing at high speed; improvement of the raw material acquisition process to reduce cost of products and to improve manufacturing efficiency, particularly in leather waste; moving towards reducing lead times in a range of 20% to 30% in each market, with the objective of increasing the client service level that today is under important pressure.

Despite the market conditions which negatively impacted net sales, we were very pleased to have delivered breakeven operating income in the second quarter, mainly due to the reduction in consumption costs that also contributed to the considerable improvement in our available net cash.

Turning to the details in our financials, for the second quarter of 2009 net sales declined 20.8% to EUR133.6 million, as compared to EUR168.8 million for the second quarter 2008. We did see an increase of sales on a sequential basis, with second quarter net sales up 20.1% compared to the first quarter 2009. Sales of the Natuzzi brand declined 37.9% from EUR93.3 million to EUR67.6 million. Natuzzi sales declined 23 --

Please stand by. We're experiencing an interruption in today's conference. Please remain on the line while we resolve this issue. The conference will resume momentarily. Thank you for your patience.

Again, please stand by. We're experiencing an interruption in today's conference. Please remain on the line while we resolve this issue. The conference will resume momentarily. Thank you for your patience.

I think I'm going to catch up from the point of selling expenses in the first half of the year, the full semester, and then if by any chance we missed anything, you let me know during the session of Q&A.

Selling expenses declined 17.8% to EUR71.3 million, as of June 30, 2009, as compared to EUR86.7 million last year. In particular, the variable part of the cost decreased by 33% in transportation cost to EUR19.7 million in the first six months 2009 from EUR29.3 million in the first six months 2008, and by 40% in commission cost, from EUR6.7 million to EUR4.1 million in 2009.

While we were unable to fully offset the net sales decrease, it's demonstrated our progress in controlling our costs. G&A expenses as of June 30, 2009, increased by 1.1% to EUR23 million. As a result, operating loss in the first six months of 2009 rose 10.4% to EUR15.5 million, as compared to a loss of EUR17.3 million in the same period last year.

Other income cost net went from loss of EUR6.4 million in the first six months of 2008 to net income of EUR5.2 million in the first six months of 2009. This increase is mainly due to a positive realized and unrealized ForEx of six months of 2009 of EUR5.6 million, while in the first quarter of 2009 it was EUR6.2 million, respect to a loss of EUR4.8 million in the six months 2008, which in the first quarter 2008 was a net loss of EUR10 million.

The Natuzzi Group entered the second quarter with net available cash of EUR72.9 million, an increase of EUR25.6 million over the EUR47.3 million that we had at the closing of 2008. I lump that nearly to zero, about EUR6 million plus a short-term borrowing of EUR7.7 million. Inventories totaled EUR77 million, declining 16% from EUR92 million last year. This reduction, it's mainly due to an optimization of the raw materials and inventories consumption.

Our shareholder equity was EUR329 million at the end of the second quarter of 2009. At the end of the second quarter, the total number of Natuzzi stores worldwide were 311, including Italsofa stores and Divani & Divani stores worldwide.

Now, we will turn this call to the operator to begin the Q&A sessions. Thanks very much. Hello?

Yes, thank you. (Operator Instructions)

Our first question would be from Budd Bugatch with Raymond James. Please go ahead.

Good morning, Pasquale. Good morning, Mariano.

Good morning.

Hi. Good morning.

It looks like the most improvement came from the purchases line of the cost of goods sold. Can you describe what was happening there? I want to talk about the revenue per seat, as well.

Okay. Fundamentally, and I think that was part of the program we already had initiated, we didn't give any room for any space of no action. By means that in every single caption of the cost of goods, we took action, we did take action and we have been working towards making reduction on the cost and expenses there.

To make it very simple, in the caption of the main materials consumed, in leather we have an improvement of EUR4.5 million, in chemicals of almost EUR2 million, in goods EUR250,000, in foam EUR100,000 and in others [203], totaling an improvement of EUR7 million in the caption of materials consumed.

But moreover, in the terms of efficiency, we have been working also, as I have mentioned during the speech in talking about the results, our major focus was to improve all the waste in different captions in the production process and in there one of the most important ones was the leather one. In leather, you may recall that last year we were talking about a level of inefficiency in waste above 7.3%, 7.4%. At this very moment, not on a cumulative basis, but at this very punctual moment we have already reached a level of 2.7%.

So, this means that we have reduced by almost 66% to 70% the waste in consumption of leather that we had. But this also applies to other materials, so the improvements on efficiency convert to the improvements on materials consumptions I have quoted meant another additional EUR4 million of efficiency improvement.

So, really, what we have identified in the action plan last year of focusing in improvements of the cost of goods management, some of them, as we said at the time, low-hanging fruit, has been proven to be effectively handled. And most of it we definitely are convinced that it's going to be the structural savings and not controlled savings.

Does this respond to your query?

Not exactly. A little bit, I guess. But when I look at the purchases year-over-year, it's EUR46.9 million this year in the three months ended June versus EUR74.3 million in the three months ended June of '08 last year. That's nearly EUR28 million. I think you identified EUR11 million, and I don't know whether all of that actually flows through the purchases line on the cost of goods sold.

Well, remember that in the way they are presented the results -- we're targeting one side purchases and the other side net inventories. So probably we need to make a very specific detailed analysis to respond to that question that I cannot give you an answer now, but you know ready to prepare that and put that in writing to you.

Right. It looks like the inventories went down EUR8 million, so that would leave EUR20 million of purchases net that would affect cost of goods. Okay. I mean, I'm trying to understand what you've done structurally to fix that, and was that centered in South America, was it in China, was it in Eastern Europe, was it in Italy? Where were the savings found?

The savings were fundamentally worldwide. The inefficiency I was telling you of about 7.3% was the average of the corporation. This means that in some countries we were slightly better. In some other countries, we were slightly worse, but all in all today on the one-to-one comparison, 7.4% to 2.7% now, it's also the combination of the weighted savings that we have worldwide.

So, really, this action plan has not been on a spot basis, specifically in one factory. It's been the full meaning of the purchasing processes, the consumption processes, the efficiency processes at the full manufacturing level of the corporation.

Okay, and two other questions if I may. South America, how did that perform this quarter versus last year's quarter?

South America, in terms of what, sales or what?

No, in terms of profit, in terms of how did that factory perform versus the two I think --?

The factory -- you mean the factory in Brazil?

Correct.

Okay, in Brazil we shut down one factory and we reduced dramatically the production of the other one, the one in Salvador de Bahia. The reason of that is because the exchange rate didn't allow us to keep doing business in America which was the purpose, the reason why we built those factories there. So, we -- based on our calculation, the result was that it would be much convenient for us to shut down temporarily until we are developing the business in all of Latin America, Brazil including.

In fact, while I am talking about that, I would take the opportunity to inform all of you that today in this conference are online Cary Benson, our Regional Manager for North America, Oliver Heil -- are you there, Cary?

They cannot speak (inaudible).

Oh, I see. So, they cannot speak?

They cannot speak.

Oh, I am sorry. All right, but they are listening at least, okay. Next time we will try to let them even to speak so that will allow all of you to ask any question about each market. They know more than anyone else what's going on in their own market.

So, but again, online we have Cary Benson from America, Oliver Heil, which is the regional from Asia-Pacific; Christian Schwab, he follows Brazil, Russia and India; Cosimo Cavallo, Europe one; Giacomo Ventolone, Latin America; and Jan Mentens Europe two. So, again, regarding the production in Brazil, I gave the answer to you already about it.

Okay, and Pasquale or Mariano, it looks like to me if my numbers are right -- and that's always a risk -- that the average revenue per seat of Italsofa in the Americas improved to about EUR150 per seat versus EUR125 per seat last year, and that should be responsible for a lot of the improvement in gross profit. Is that -- am I right on that?

No, but now we don't have the exact analysis, but I assume that we are selling product with a product mix. It's more high end than the medium low, because on the medium low end we don't want to compete with our other competitors, so we have been -- even with Italsofa -- specializing on modern style. We are trading up even the line of Italsofa. I believe that's the main reason.

Okay, but that would be very helpful for profits. And that will continue, Pasquale?

Of course, we define very clearly what would be the positioning of Italsofa. We created the brand plan with a clear understanding from everyone in our Company in order to understand what's the brand positioning of Italsofa and what's the brand positioning for Natuzzi.

Yes, I mean, in Europe, it looks like the overall brand was about EUR281 this year versus EUR284 last year, and in the Americas the overall brand, both Natuzzi and Italsofa, did EUR181 versus EUR159 last year.

Unlikely we don't have the operation director here with us, but you went in small detail better than anyone else. Compliment. But if you really need those information, we will be pleased to supply to you.

Well, the only information really would be helpful is what the future looks like and when we'll see the operating margin or operating profit percentage move towards that 15% goal that you've got, and what it looks like in the next quarter or two. And that would be helpful to see.

Well, we know that it's a challenge because with a decline of almost 30% on sales, trying to make our target this year of making breakeven seems a little bit away. But despite everything -- this is something that we can really talk very briefly about it -- we have made a forecast that still shows a little loss, a little loss at the level of EBIT, so making the breakeven we have targeted for this year. And we are committed as management to do all what is at our hand in possible actions to reduce costs and improve efficiencies, to try to close the gap.

Of course, if we come with the help of additional sales that would help it a lot, but the idea -- and at least that's the internal target -- we still want to make breakeven this year. Should that happen, but -- and still waiting for a recovery of the sales for next year, the path for making that 15% happen in the frame of our 2011 long-term plan, it's really there. So, we don't see a major risk if we can sustain the situation like it is today and improve our sales and our performance in sales to make that happen.

And are you seeing any improvement in sales now, Mariano?

Very slightly, but week by week positive. I don't mean by that that we see a dramatic turnaround on our tendency in sales, but as we report sales every week we are very closely watching the developments. Not so much compared to budget that we do as well, but fundamentally compared to last year. And every week we see a further closing of the gap, not big percentages, but we see it closing.

So, what we have done is assuming an extrapolation of that tendency in closing the gap that we see today, and that's what we have assumed with the commitment. It's not mathematics, as I call them, but with the commitment of our regional officers in a way that we could extrapolate that percentage on gap on sales and that's what gives us this small gap to EBIT as I was quoting before. So, we don't have any major reason not to think that we will not make it.

Okay, I do have more questions, but I will let others ask theirs. Thank you.

Thank you.

And for our next question, it's from Marc Heilweil with Spectrum. Please go ahead.

I have two questions. The first relates to market share. Can you give us any figures as to whether you're continuing to lose market share or have begun to stabilize the loss in market share? And secondly, in regard to the operations of the retail stores, do you anticipate some benefits from renegotiating leases and the like as a result of the weakness in retail leasing?

Okay, a couple of responses, before talking about market share. Already, part of the questions that you have raised about cost reduction, this is an exercise that we have already initiated worldwide in terms of reducing and revising all the contracts of lease that we have in our different directly operated stores.

So, this is becoming an obsessive target by our regionals in terms of reducing structurally the performance costs. But what refers to market share, you perfectly know that this is not something that is easily measured in that market. We have rough ideas about markets, and it's not so easy to have a concrete number on the development of the market.

But all in all, I would say that we are having a reasonable, stable market share participation in Europe and in the rest of the world, where we have been suffering a lot in declining our market share and our position in the Americas. That's fundamentally, if I can summarize in a few words, the conclusion of market shares.

Thank you.

And for our next question, it's from Maggie Gilliam with Gilliam & Company. Please go ahead.

Yes. I was wondering how you were planning your business to manage around the fluctuations in currency these days. You've had a 180-degree turn in the last -- well, since the beginning of the year.

Do you mind repeating your question? I didn't get it very well.

I'm sorry. I was wondering how you were managing your business to cope with the fluctuations in foreign exchange rates.

Well, fundamentally, one of the things we have learned -- and this is something that we suffered a lot last year -- we had an important impact in our total P&L in terms of exchange rate fluctuations that you have well pointed.

We did change our hedging policy. Instead of being basically working in terms of forwards for whatever was the coverage of currency, we are working on a more accurate forecast in terms of the flows we expect in the different currency from the different places in the world. That's one. And second, we have a dynamic evolution of our hedging coverage.

Still, though, and I think that was mentioned in part of the conferences we had last year, we had a number of forward contracts that were valid to the end of this fiscal year. So, we have not yet got much maneuver, but I have to say that, given the tendency on the dollar, that it's probably one of the major impacts that we might have in the P&L. At this very moment, we are about to be covered in the dollar.

For of course the other currencies the only thing you can do, and that's what we do, be very careful in the way you project your weighted average forward assumption on exchange rates and try to cover to the utmost the flows of income and outcome in terms of cash and payments for refers ordinary transactions of the Company. Really, it's an area where we are very keen on being on top of every single flow that doesn't really escape from being in the span of control.

Thank you.

(Operator Instructions)

Your next question is from Andy Lynch with Schroder's. Please go ahead.

Good afternoon, gentlemen. My question really is a question for 2010, maybe for 2011. Sort of if we grant that your targets to become profitable again will be achieved, it's very clear that your balance sheet will be very, very overcapitalized for a profitable business. And so, my question is when you become profitable, how are you intending to address the balance sheet?

The balance sheet?

Yes.

Well, I think in terms of cash, we have proven a good management. Despite the unfavorable market conditions, we only have been growing and growing our cash flow management. So I think one of the clear tendencies that we have proven is that despite the unfavorable economical situation, we did not worsen that much in terms of DSO, in terms of collections.

But we have improved a lot in our payables day, by means of closing the gap between the one and the other that if people reminds in the previous conference call, and particularly in the closing of 2008 and 2007, the gap was between 17 and 20 days favorable for payables and unfavorable for collections. This tendency is now close to the gap of five, so the improvement that we have made is extending the payment condition, has made closing the gap despite the worsening of accounts receivable, which is not that much and it's under control, to closing that gap in five days.

So, the tendency, and that's the intention, and so we presented in the long-term plan is to turn that around and really become longer in payment terms than in collection terms. This is I think one of the fundamental elements. For what refers the remaining working capital elements, we are very keen, as I have said, in vendors and customers.

We do not invest anything that we don't need, so the Company has a very tight control procedure in terms of any major or medium investment. And for the rest, we are playing a very smart approach in respect to inventories and raw materials generation.

In fact, one of the things that we are doing, because that's part of the changing strategy of the Company, that is being more selective in the portfolio we have and having a stock for a stock and changing some of our policies towards favoring the market for better service, is that all the savings that we are having today in terms of optimizing the inventories are going to be used eventually to finance the stocks that we might need for this new program of portfolio.

And I think we want to do that without making a major investment in working capital, so we in that sense also are very keen in not letting any driver in the working capital be out of hand.

Yes and so actually you've done a great job with working capital, but you say you have lots of cash on the balance sheet. When you become profitable, my question is what do you intend to do with that cash? Because I can't imagine you want to have it sitting on the balance sheet earning you 0.5% with interest rates where they are.

So, will you do a share buyback? Will you do a special dividend to shareholders? When you become profitable and you don't need that security blanket, what will you do with it?

That's an important element. Of course, at a point in time, the Board may decide to make a dividend payment to the shareholders. This is not something that has been decided so in due time, but the priority is to return to profitability, return to compete, return to sales, return to anything that would make the Company be back on the path of growth. That's the first.

The second one, we have approved already a few months ago and that was validated by the Board and so initiated the action. We have approved management compensation, an MBO, by a purchase buyback of a number of shares of the Company, which, again, not only wants to facilitate this employment of that cash, but also get a hook on the executives that the Company has that get committed for the long-term run of the Company and getting that program of profitability.

Moreover, this is not idle cash, okay. We are smartly investing in certain tools in the different currencies. That's one. But most of the cash that we have worldwide is put together in a cash-pulling system in which we have an arrangement with the banks with whom we have this cash sitting and this is compensated at a reasonable rate.

The Company, and this is also another principle that, particularly given the impact we saw last year on the effect of the different currencies, the Company has prohibited, capital letters, any kind of risky investment that might mean just even at the interpretation level speculation. So, we rather prefer to have this comfortable cash position, manage it in the cash pool, try to get the best out of it but not run any risk in depositing or making investments in nonsense or risky tools.

Perfect. Very good. Thank you for that.

Welcome.

(Operator Instructions). We do not appear to have any additional questions at this time. I would like to turn the call back over to Mariano Domingo. Please go ahead.

Okay, thanks very much for everyone attending the call. Again, as per the indications of Silvia, you know where to reach us if you have any further questions.

For those that have raised that question in respect to the reconciliation of the P&L, as expressed and reported in the analysis of savings, I'll take care of preparing that. And I'll also prepare a kind of brief summary on the pricing evolution by region and year so that we can have this information available upon request. Thanks very much indeed, and look forward to seeing you next session.

This does conclude today's conference call. Thank you for your participation.