Natuzzi SpA (NTZ) 2009 Q4 法說會逐字稿

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

So, good day and welcome to Natuzzi Last Quarter 2009 Conference Call. With us in our today -- conference call today is Pasquale Natuzzi, Chairman and CEO, Vittorio Notarpietro, the CFO, Umberto Bedini, Operation, Cosimo Cavallo, Global Sales. Now, after a brief introduction of Mr. Natuzzi, the CFO Notarpietro will revise the last quarter and full year 2009 consolidated financial results. And then, we will open the call to your questions.

So, you should receive -- have received a made copy of Natuzzi earnings results. If not, you can find this information at the Natuzzi website -- www.natuzzi.com. You can also email informational request -- any questions to the investor.relations@natuzzi.com and 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, actually, results may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results, operation, and financial conditions.

We have the risks and uncertainties which have in the past affected and might continue to affect our results of operation and financial condition in the annual report on Form 20-F for the fiscal year ended in December 2008. 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 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 today. We will discuss last quarter 2009 earnings result. I am very pleased today to announce that for the third consecutive quarter, we reached a positive EBIT margin. Although the furniture industry remains under pressure, we have seen some encouraging sign in our sector over the last two months, 2009.

Last February, we announced to return to a positive EBIT margin for 2010 full year. This target is very ambitious, I must admit, especially if we consider the persistent challenging economic environment. The Natuzzi management team is extremely committed to reach it, putting in places some initiative and processes that will reinforce our position into the market and will help to regain market share.

Additional project will be one of the engines of our future growth. At the same time, we will persist to keep under strict control all the Company costs. Also, to place the increase of raw material prices that will register -- we registered in the last few months.

Now, I will pass the call over to our CFO, Vittorio Notarpietro, to explain in detail our result for last quarter and full year 2009. Thank you.

Good morning to everyone. Thank you for joining us today. At the end of this speech, together with Mr. Umberto Bedini, Head of Operations, Cosimo Cavallo, Head of Global Sales, and our CEO, Mr. Natuzzi, I'll be happy to answer your questions.

Let me first highlight some important circumstances which affected the Group's performance last year. 2009 results were helped by a couple of exogenous factors. The first is the positive impact from foreign exchange. In fact, the average level in the euro-US dollar cross has been $1.39 in 2009 versus $1.47 in 2008. And the second is the worldwide decrease in price in raw materials.

But there have been also several positive internal factors among which one, some efficiency improvements in our transformation plans, in particular for foam plant. Two, the ability to reduce more than proportionally the variable costs included in the transformation through a redesign of the supply chain. Three, the attitude to control SG&A in a negative macroeconomic environment. Worth being noted, the positive trend in the last quarters; as a matter of fact, in Q4 2009, we achieved the third consecutive positive quarter at EBIT level.

Analyzing more in detail, the principal, the main profit and loss figures, total net sales we performed at a minus 22.6% on a full-year basis, passing from a minus 35.6% in Q1 to minus 28.3% in the first six months and to a minus 24.9% for the nine months. So, it was a constant improvement quarter by quarter.

During 2009 year, although the difficult environment, we continue to develop the retail plan worldwide. In 2009, we have been opening [60] Natuzzi mono brand stores. Among them, we'd like to highlight the following -- Barcelona, which is a DOS -- a directly operated store -- of 600 square meters, Beirut of 600 square meters in franchising, Khobar in Saudi Arabia of 900 square meters franchising, Nanjing in China, and Antibes in France of 450 square meters, both franchising.

In 2010, we opened a franchise store in Seoul of 600 square meters. At the end of 2009, for the Italsofa brand, we had 18 stores and six galleries, mainly in Asia. Cost of goods sold for the entire year recorded an improvement of 7.9%, passing from an incidence on net sales of 71.9% in 2008 to 64% in 2009. The same progress has been made considering the last quarter 2009 where the incidence was 61% versus 68% on last period -- last quarter of 2008.

Comparing gross margin in the fourth quarter of 2009 versus third quarter 2009, we see a reduction from 40.1% on sales to 39%. I am comparing fourth quarter 2009 with third quarter 2009. That reduction was due to three main factors -- a different production mix, we sold the last Natuzzi brand product in Q4 versus Q3, then some increase in raw material prices and a production shift from Chinese plant to Italian plant of some production in order to respect the service level to some important USA customers.

A lot has been done in the operation area during the 2009 year, but we are still working very hard in order to boost efficiency, client services, and product quality. Among all the initiatives in progress, I underline a program to reduce the lead time from 16 weeks to 10 weeks, named NAP -- North American Projects. Currently, the average lead time is in the area of 11 weeks. Then, reduction of complexity. Scaled down numbers of combination of models, versions, coverings in order to shorten productivity cycle, enforcement of a quality process to shrink the imperfections and damages on sofas.

Just to give you an example, we have done a test on one of the Italian factories and the damages passed in that test from something in the area of 8% to quite 0%. As a result of trend figures, for the industrial margin we achieved a 36.0% in 2009 versus a 28.1% in 2008, with a yearly improvement of 7.9%. Passing through 25.5% in Q1, strongly influenced by the dramatic drop on sales, 37.8% in Q2, 40.1% in Q3, and again, finishing with 39% in Q4.

SG&A were dramatically reduced by EUR26 million, part of which naturally related to the drop in sales, for example, transportation and commission costs. But there are also significant reduction in [operations], around EUR10 million, driven by the initiative of the Group to partially offset the negative trend in sales.

More in detail, let me remember everybody that our budget in 2009 was approved with a total net sales of more than EUR700 million and a total SG&A of EUR240 million. Comparing this last figure with the actual SG&A real spending in 2009, that's equal to EUR196.2 million. I must underline the reduction in spending of EUR45 million. Such information puts finally in evidence the capability of the Group to evaluate the macroeconomic situation during the year and to place a recorded action to protect the profit and loss.

As a result of the previous information, the operating income improved from minus EUR35 million in 2008 to minus EUR10.6 million in 2009. The better performance in the profit and loss has contributed to achieve some significant results in the balance sheet side. In fact, net cash improved by EUR19 million last year, passing from EUR47.3 million at the end of 2008 to EUR66.3 million at the end of 2009. In particular, such increase was mainly driven by improvement in working capital to a stable base of DSO and a positive DPO. So, time -- DSO is the time we get money from clients. DPO is time we use to pay suppliers.

Before we begin the Q&A section, let me briefly remind you that the main 2010 goal for the Group is to return to a positive EBIT. There are a few milestones supporting this target. The first -- it is a strategic redefinition of the Group's brand strategy. The second is the introduction that Mr. Natuzzi announced at the beginning of this call of the new brand Editions worldwide, a new trademark B-to-B already successfully presented in -- at the general 2010 international call-on sale in Germany.

The Editions project has been created to regain market share through the development of products with innovative design in order to serve the needs of the wholesale market that has been, in the past, the core business of the Group. Third, it's an aggressive cost control plan on board, cost of goods sold and SG&A.

Thanks to everybody. Now, Mr. Natuzzi, Umberto, and Cosimo will be happy to answer your question. Thank you.

(Operator Instructions).

And we have our first response, [Demitri Duclair] with [Karok].

Hi. Good afternoon to all of you. Could you comment a little on the current sales trends that you're witnessing in the different -- in the different regions and the different markets?

Yes. Good morning. My name is Cosimo Cavallo. I am Chief Commercial Officer in charge of all the sales and marketing activity all over the world. I would say that we are experiencing a recovery in the trend of the sales in the last, I would say, 15 weeks. The recovery started at the end of 2009 with a progressive recovery that has been even confirmed in the first 11 weeks of 2010. So, this is almost on line with our expectation, thanks to all the activities that have been, let's say, highlighted during -- from Vittorio Notarpietro and Mr. Natuzzi.

In terms of regions, let's say, the States is coming back. It's coming back thanks to a lot of initiatives and activities in the marketing and commercial that has been helped for the business and trying to recover market share in key accounts of the size like Rooms To Go, Value City or Slumberland, that are part of the top 100 furniture retailers in the North American market. That, for us, is a strategic market itself. Or a customer like in UK, Homestead Group, part of Steinhoff Group that are a global worldwide key account.

There is also a stable recovery in the more mature market like Europe and in the emerging -- in AOA, one of the regions that runs in the region that is Africa, Oceania, and Australia, also is recovering share and sales nicely.

And looking at the different brands?

In different brands, I would say Natuzzi is in line with our expectation. It is the more mature brand. That we said before, Natuzzi's link to an expansion plan of new openings give you an example that India market where we have been investing a lot in our, let's say, strategic tactic plan of 2010, we are opening two partners in franchisee for the two area of Mumbai and Delhi.

Those openings are planned in the second half of 2010 as operation will be announced officially -- announced to the world at the month of June, July, more or less. And Italsofa is in line with the expectation, Editions is a little bit better. I would say they are nicely performing well of the brands.

And looking at the recovery, would you today say it's already partly due to improving quality and improving the lead times or is it just economic recovery?

Well, I would say there is a combination of different factors. For sure service is a key. It's an issue that has been paced heavily last year, thanks to a very strong program that we are launching. We launched already in the North American market with a net project. Actually, it is also thanks to the economy, but even so in some markets, we are doing a better than economy because probably all the activities. And all the marketing activities helped to sustain a few months ago to try to push a recovery that has given to us results.

Just a question for Vittorio. On the current exchange rate trends, what does it mean for the Company right now and what is the kind of hedging policy that you have in place right now?

Yes, the policy is still the same, so we hedged six months in advance our net cash flow. The situation between euro and US dollar is better than six months ago and I would hope that the foreign exchange will be stable in the future.

Okay. And then, maybe just one last question. On the cost reduction programs that you're working on for 2010, what would be the major -- what would be the major items also on SG&A?

Yes, SG&A, but not only. We have room to improve some efficiency and some cost in the industrial portion of our business. We have room there. We are analyzing, process by process, in order to find efficiencies. And then, we are really aggressive on the side of SG&A. We are cutting costs wherever in our -- in worldwide, not only the production side, but also in the sales region and countries.

Okay. Thank you very much.

Thank you.

(Operator Instructions). And we have no questions in the queue at this time. I will turn the conference over to our hosts for any closing or additional remarks. And we'll turn the conference over to our hosts for any closing or additional remarks at this time.

Okay. So, thank you for -- to listen to us, for your time. And for other questions, of course, you can ask directly -- send me an email to the investor.relations@natuzzi.com or directly to the Investor Relations. Thank you very much to everyone.

And that does conclude our conference call. Thank you for your participation.