Natuzzi SpA (NTZ) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome and to the Natuzzi First Quarter 2010 Earnings Conference Call. One note, that today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Silvia Di Rosa. Please, go ahead, ma'am.

Good day, and welcome to Natuzzi First Quarter 2010 Conference Call. Today, in our call is Pasquale Natuzzi, Chairman and COO, who is connected with us from abroad, [Vittorio Notarpietro], CFO, Umberto Bedini, Chief Operation Officer, and Cosimo Cavallo, Chief Commercial Officer.

This CFO will provide the first quarter 2010 consolidated financial results. Then, we will open the conference call to your questions. You should have received an email copy of Natuzzi's earnings results. If not, you can find information at the Natuzzi website, at the address at www.natuzzi.com. You can also email information requests or questions with the investor.relations@natuzzi.com. We will respond to you as soon as possible.

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

We have the risk and uncertainty which have in the past affected and might continue to affect our result of operation and financial condition on our reports 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 Form 20-F, actually from the United States Securities and Exchange Commission. So, then I will pass the call to Vittorio Notarpietro, our CFO, to go indicating the numbers.

Good morning to everyone, and thank you for joining us today. At the end of this speech, I'll be happy, together with Umberto Bedini, Chief Operation Officer, Cosimo Cavallo, Chief Commercial Officer, and with our CEO, Mr. Natuzzi, who is connected with us by phone, to answer your questions.

Before seeing in details the first quarter 2010 figures, I want to say that in that last month of 2009 we assisted at an encouraging improvement in consumer demand, followed by an increase of order flows that allowed us to close with a positive result in terms of revenues versus the same quarter of 2009. However, we consider this improvement just the very first sign of recovery.

As a matter of fact, we are conscious of the difficulties of the current year. But we continue to be very focused to reach the 2010 targets in terms of EBIT, EBITDA and cash generation. Analyzing more in details, the main thrust of those figures versus 2009 first quarter -- total net sales, we performed a positive 13.6% increase versus the first quarter 2009, in spite of a negative light impact of the exchange rate.

Upholstery net sales went up by 14.9%, mainly driven by volume increases of 12.9%. Product mix improved too. In fact, Natuzzi brand as a percentage on total sales was 47.2% versus 45.2% in the same quarter of 2009. From a geographical point of view, the Americas represent 32.3% of the upholstery net sales has a recovery of 22.4% with respect to the first quarter 2009, mainly drived by the Italsofa brand, up 24%, and followed by Natuzzi brand with plus 10%.

In Europe, that represents, 42.4% of the upholstery -- things were stable versus 2009. In the rest of the world, mainly in Australia, Japan, Korea, and China, that represents the 11.2% of the upholstery net sales, we had a huge increase of around 49%, pulled by both brands, brands from Natuzzi up 56% and Italsofa with a plus 38.2%.

Finally, in Italy, we had a good demand of the Natuzzi brand that showed an increase of 26.8% versus the same period of 2009. As far as other sales are concerned, it's important to say that Natuzzi accessories produced a remarkable increase of 38.2%.

Cost of goods sold recorded an improvement of 13% passing from a percentage on net sales of 74.5% in 2009 to 61.5% in 2010. As you know, last year, we started a complex and structural process in the operations side that consists in many activities, such as the reduction of lead time, reduction of complexity and a reduction of waste of raw material. Thanks to this rationalizing process, we have already achieved important results that allowed us to achieve such important results in cost of goods sold.

Innovation of the process is the key to understand our improvement. The improvement in cost of goods sold will also have the bids by favorable exchange rate Euro-US dollar with respect to the first quarter 2009. We are also still factoring a positive impact of raw material prices, in particular, leather, which prices declined in 2009. In recent months, we had an increase in prices that will be more visible in the next quarters. To face it we are exploring new suppliers, new sourcing from a geographic point of view, a different buying strategy between semi-finished and finished product that will partially offset the increased cost per square foot.

As a result, we achieved an industrial margin of 38.5% versus 25.5% of the first quarter 2009. Total SG&A passed from 40.4% to 38.1% on net sales. But let's go now in more detail in order to appreciate the results of the efforts made by the group to keep costs under control.

Transportation costs -- the increased from EUR9.1 million to EUR11.6 million. The incidence on net sales passed from 8.2% in 2009 to 9.1% in the first quarter of 2010. This increase was mainly due to the well-known rise of the shipping costs from China to the USA, after 2009 lower prices. Today, we assist with increasing costs per shipping from China to USA and some shortage in available containers.

Commissions paid to agents were stable, representing 1.9% of total net sales. Advertising costs increased by EUR0.6 million, passing from EUR5.7 million to EUR6.3 million, but decreased from 5.1% in Q1 2009 to 5% in Q1 2010 as a percentage on net sales of cost.

Other selling costs, I mean, [retributions], depreciations, lease costs and other costs, passed from 15.4% of total net sales in 2009 to 13.9% in the first quarter of 2010. G&A cost in absolute terms decreased by EUR0.5 million from EUR10.9 million to EUR10.4 million, lowering as a percentage on net sales from 9.8% to 8.2%.

As we doing the operations, we are working in a reshaping of our worldwide distribution and administrative organization. We expect that results will be even more visible in the next quarters. EBITDA passed from a negative EUR9.4 million in Q1 2009, so, minus 8.4% on sales, to EUR6.8 million positive in 2010, representing 5.3% positive on sales. As a result of the previous information, the operating income improved from a loss of [EUR16.6 million] to an income of EUR0.5 million in 2010.

I want to highlight that we reached a positive EBIT for four consecutive quarters, passing to [commend] the balance sheets. Cash and cash equivalents decreased by EUR2.1 million, passing from EUR66.3 million at the end of 2009 to EUR64.2 million at the end of March 2010. Net cash used in operating activities amounts to a minus EUR4.4 million. This negative performance was mainly generated by negative working capital for EUR10 million, partially offset by non-monetary costs of EUR6.6 million.

The performance in working capital was largely due to an increase of leather inventories as a [concept] went of two combined effects, the increasing leather stocks to supply the North American project finalized to reduce the lead time from China to USA and the increase in stock inventories to face the forecasted prices rise. Cash used in investment activities is substantially in line with our budget.

We conferred that the yearly investment for China factories' relocation, such as SAP implementation in a retail rollout plant will be mainly made in the second part of 2010. Debt financial position passed from positive EUR58.5 million at the end of 2009 to EUR55.9 million in 2010.

Before we begin the q-and-a section, let me recall the initial statement. We are still experienced against an unstable moment. But, at the same time, we see the very first signs of the Company's activities to react to -- and we remain focused on the main goal for 2010, which is the positive EBIT. Why? Because, considering upholstery sales up to last week, last Friday, we are feeling like with Q1 results. So, April and May confirm 2010 Q1 results.

Just let me remind you that net sales of the first quarter 2010 were up 13.6% thanks to a strong progressive increase in order flow recorded in the last months of 2009. During the first quarter 2010, order flow trend was not so positive with respect to the last months of 2010. Then, in the latest weeks, we see again an improvement even if -- with diversified trends among the [buyers'] brand and geographic areas.

Let's elaborate on that. The Italsofa and [additional] brands are confirming the good results achieving during the [core, Milan and 9.6] and the great potential of this new offer. Indeed, order flow from such brands are still in the area of a double-digit increase. And, in particular, it's great news that the Americas order flow is showing today a double-digit increase after a very long period of decline.

[That touched] the order flow in the first months is likely positive in the USA, suffering in Europe and positive in the rest of the world. A portion of this reduction comes from the closing of roughly 30 point of sales under a restructuring plan. I mean shut down and relocation of some of the stores. We promptly reacted, introducing in the Natuzzi brand new so-called entry-price force [sore traffic] products that could stimulate consumer demand coherently with the brand position.

And these days started the so-called home phase here in [Sertenemo] where we are meeting all our existing partners and new potential ones. This is a very important step in our sales planning. First reactions from clients are positive. And it will continue up to mid-July, giving us even more visibility on sales for the second half of the year. All in all, we continue to be concentrated on the cost-saving plan, recovery of competitiveness and motivated in achieving a positive EBIT for the full year. Thanks to everybody. Now, Mr. Natuzzi, Umberto, Cosimo and myself will be delighted to answer your questions.

Would you like to take questions at this time?

(Operator Instructions)

And we'll go to Charles Elliott.

Hello. Charles Elliott from Inflection Point. First, congratulations on this upturn. Could you just repeat what you were saying about order trends recently? I got US orders are up over 10% year over year, suffering in Europe and up in the rest of the world. Can you go through that bit again, please?

Good morning. It is Cosimo Cavallo speaking. Just to recap, it was as Vittorio already said. We are up and registering some sign of recovery in the American market, mainly on the branded (inaudible) Italsofa, that our recovering of market share versus last year thanks to a very peak activity that we have been doing in the last six months, even more, thanks to, I would say, two main reasons. One is a strong activity on the product management, trying to review the product offer, according some specific indicators of the market, and, also, to a reorganization in the North American market structure that we have been doing in the last six months.

This is for us giving us positive results, considering that the two key points during the [halfway] in October at the last effort was encouraging in terms of results and the October before. That's probably the fruit of this activity is now giving us these kind of results.

Did I understand correctly that the US orders April, May are up 10% year over year, more than 10% year over year?

The percentage of growth that we have in order flow is exactly in the range of 18% overall. It is overall between the three brands that we run in the North American market. I'm talking of America in this case, where in North America -- I mean USA and Canada -- we present most of the big portion of the size of the business. But Editions is doing well and, also, Italsofa, that this is a sign of recovery that we have at this point in market performance, thanks to the two major actions that we have been doing in the last, I would say, two exhibitions.

That's great. Is that in a context of a flat market, do you think, for furniture, or do you think the furniture market is up, that you're gaining share?

Again, please. We didn't get your question.

Sorry. Do you think the US furniture market is flat or up?

Okay. That is much easier. No, we don't think that the furniture market in the North American market, the US specifically, is growing at the same digit. It's probably our [shareholder] market that is coming back. Okay. The (inaudible) in our information are stable and not [resistant to gaining] significant increase.

Great. I'm sorry. Can I just ask about Europe and the rest of the world? If the US is up 18%, what are comparable figures for Europe and the rest of the world? Just a rough feel is fine.

Yes. So, if we can, please, let's say the world in three major area, we say America, Europe and Asia. I would say that Europe is a -- a single digit is stable. And another, let's say, double-digit growth is on Asian market where we have an emerging area that are giving us some good results. Again, in Europe it's a more mature market than (inaudible).

But Europe is still growing.

We see those digits slightly decrease -- sorry -- Europe.

A single digit slight decrease.

Yes.

I've got it. That's very good. Thank you.

You're welcome.

(Operator Instructions)

From Merrill Lynch, we'll move onto Flavio Cereda.

Hello. Good afternoon. Two quick questions. Firstly, I was wondering if you could elaborate a little on -- in greater detail on the inventory effect that we saw in the P&L. I don't know if you can actually give us a little bit more detail in terms of the increased inventories of leather as opposed to the increased inventories of units in order to reduce the lead time. And, also, with a stronger dollar, obviously, it's a benefit for your revenues in the US. But how does that impact your raw material purchases? And can you give us a sense of your hedging levels at this time? Thank you.

Hi, Flavio. I think we have to change our profit or loss display in order to let you appreciate consumptions instead of the delta in inventories. Anyway, the improvement in net inventory, which had a positive impact on the cost of sales compared to the first quarter of 2009, was mainly due to the increase in stock of raw materials we said before. The line net inventories calculated as the variation between the stock inventory as of March 2010 versus the stock as of December of the previous year.

In particular, the increase, close to EUR8 million roughly, is mainly attributable to the increasing stock of raw material, as we said. This increase was the effect of three different combined effects, one, increase in stock inventories to [fade] before (inaudible) prices rise. Two is the increase in the leather stock to supply the North American project finalized to reduce the lead time for the US market -- and, three, the increasing stock inventory as an effect of the positive trend of sales and order flows compared to the previous year.

In the first quarter 2009, the contribution to the cost of sales of the net inventory was[EUR7.2 million negative as a result of a decrease in the level of inventory compared to stock inventory as of December 2008. This decrease was mainly attributable to the decrease in net sales close to 36%, if I remember well, and to the negative scenario coming from the lower order flows. But having a look to the consumption and comparing the consumption in Q1 2010 versus 2009, we passed from 45.2% to 37.1%. That's the number that we accounted in terms of real consumptions of total net sales.

As far as the stronger dollar is concerned, first of all, I would say that this stronger dollar started very few weeks ago, because in the comparison between Q1 2009 the net effect for us is negative. But, anyway, generally speaking, obviously for an Italian and European exporter in the US dollar there is a positive impact generally speaking. But in our -- profit and loss account in our mix -- in our foreign exchange mix, we have to consider that only roughly $150 million are denominated exactly in dollars.

And then we have the most part of our purchasing, particularly in leather, but, also, transportation and commission and some labor and some other services are expressed in US dollar, denominated in US dollar. So the net balance is not so huge for Natuzzi S.p.A. today. And, in fact, under constant exchange rate, the effect on our profit-and-loss account at the EBIT level would have been better by EUR0.5 million, so, close to nothing. Was I clear, Flavio?

Yes, indeed. And looking forward, if we therefore to assume the current exchange rate and project it for the year, therefore you -- what kind of a sight do you expect to see?

I see. At the EBIT level, it will be easy to say [EUR0.5 million] multiplied by four, yes, because in our calculation we have a budget exchange rate. So, I would say $2 million at the -- $1.5 million to $2 million under constant exchange rate and under constant purchasing mix from a foreign exchange point of view.

Thank you very much.

Thank you.

(Operator Instructions)

And, gentlemen, there are no further questions at this time. We'll turn the conference back over to you for any closing or additional comments. Ms. Di Rosa, there are no further questions, I'll turn the conference back over to you.

Okay. Thank you to everyone. So, if there are not any other questions, we -- thanks to everyone. And we close the conference call -- the Natuzzi conference call on the first quarter results. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.