Natuzzi SpA (NTZ) 2010 Q2 法說會逐字稿

Good day everyone, and welcome to the Natuzzi Second Quarter 2010 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Silvia Di Rosa. Please go ahead, ma'am.

Good day and welcome to Natuzzi Conference Call. With us today in our call today is Pasquale Natuzzi, Chairman and CEO, Vittorio Notarpietro, CFO, Umberto Bedini, Chief of Operations, Cosimo Cavallo, Chief Commercial Officer.

The CFO will speak and will discuss the second quarter and first six months of 2010. Then, he will open the call to your questions. You should have received an emailed copy of Natuzzi earning results. If not, you can find the information at the Natuzzi website at natuzzi.com.

Before proceeding, please be advised that the discussion today could contain certain statements that constitute forward-looking statements under the United States securities law. Obviously, actual result 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 risk and uncertainties which have in the past affected, might continue to affect our results of operation and financial conditions in our report on Form 20-F for the fiscal year ended in December 31st, 2009. This report is readily available on our website at natuzzi.com or from us upon request. You may also obtain a copy of our Form 20-F actually from United States Securities and Exchange Commission. So, now I will pass the call to Vittorio Notarpietro, our CFO.

Good morning to everyone and thank you for joining us today. At the end of this speech, I'll be happy together with Umberto, Cosimo and our CEO, Mr. Natuzzi to answer your questions. Let's now analyze more in detail the main figures for the second quarter and first six months of 2010 as compared to 2009 results.

Total net sales. The second quarter 2010 recorded an plus 8.7% increase versus the second quarter 2009. In the first quarter 2010, sales growth was plus 13.6%. So, growth is lower today versus first quarter of 2010. As a consequence, total net sales for the first half of 2010 recorded a plus 10.9% compared to first half of 2009. Upholstery net sales for the second quarter went up by 12% compared to the same period of last year.

Natuzzi brand suffered a negative performance of 7.3%, while the other branches of Sofa, Editions and Unbranded business recorded an encouraging performance of almost 30% versus 2009. Upholstery net sales in the first half of 2010 went up 13.3%. Natuzzi brand sales increased 4.8% versus same period of 2009, thanks to the good performance of the first quarter 2010, while the other brands closed with a performance of up 20%.

From a geographical point of view, in Americas we recorded a strong improvement of 48.2%, and 36.1% respectively in second quarter and first half of 2010. In particular, we highlight that in Canada we doubled business, and in the USA we reached a plus 37.5% and plus 22.8% respectively in second quarter and first half of 2010, thanks to some specific actions recently implemented in United States, such as the restructuring of USA subsidiaries management organization and some important steps in the supply chain.

In a nutshell, we focused on service to customers. Americas represented 37.4% and 35.1% of sales in second quarter and first half 2010 respectively. The rest of the world recorded a very positive performance of 41.4% and plus 44.5% for the second quarter and first half of 2010. In particular, we underlined a double digit growth in Australia, China, Korea and Taiwan, both in second quarter and first half of 2010.

The incidence of the rest of the world in Upholstery sales for the second quarter and first half 2010 was 12.5% and 11.9%. In Europe, Italy included [instead], sales for second quarter and first half registered a minus 8% and minus 5% respectively. In particular, we recorded a considerable difference in terms of net sales between what we call Europe One, our region called Europe One, mainly Germany, Belgium, Poland and Scandinavia. It was minus 23.5% and minus 18% respectively in second quarter and first half of 2010, and Europe Two, mainly France, Great Britain and Spain plus 11.1% and plus 14.4% respectively in second quarter and first half of 2010.

In the first six months of 2010, Germany for example performed at a negative 32%, but the management is already taking the appropriate steps to recover sales as soon as possible. On the contrary, in Europe Two mainly again France, Great Britain and Spain, the performance was much better than Europe One.

As a matter of fact, in Europe Two, we recorded respectively a 9.2% increase and up 14.4% again increase in second quarter and first half of 2010. In particular, sales in UK went up by 32% and 41%, in Spain plus 14% and 13.7% respectively in second quarter and first half of 2010.

Finally, in terms of sales, we achieved good results with IKEA that performed more than expected, thanks to the improvement made to stock programming. At the end of 2009, the group had 675 Natuzzi point of sales, and 25 Italsofa point of sales, same number by the end of 2000 -- today is a bit below.

Cost of goods sold for second quarter 2010 was substantially inline with the second quarter 2009, while in the first six months 2010, we highlighted a great improvement from 67.8% last year to 62%, thanks to some important measures and new processes in terms of consumption and transformation.

The lower performance of the second quarter was mainly due to the increase of raw material costs, principally leather and due to the different mix in terms of the brand sales, Natuzzi brand passed from 47.7% to 39.5%. Today we're working on our Italian, Chinese and Romanian factories in order to further rationalize processes and improve customer service.

In Romania, for example, we are rationalizing the layout of the factory, and in China we are currently building a new factory to consolidate operations. In terms of industrial margin, we achieved a 37.6% and 38% respectively on second quarter and first half of 2010.

Total selling general and administrative expenses passed from 38.5% to 37% of net sales respectively in the first six months -- in first quarter and six months of 2010. And -- sorry, passed from 38.5% to 37% of net sales in the first six months 2010, from 36.9% to 36.1% in the second quarter of this year.

But let's go now more in detail with the most important figures. Transportation cost increased on second quarter as already occurred in the first quarter 2010 and consequently for the first six months. This was mainly due to an increase of the shipping cost from China to USA.

Commissions increased from 1.7% to 2.1% in the first six months, and from 1.4% to 2.3% in second quarter, mainly due to the improved sales in the Americas where the sales structure is mainly managed by agents versus our reduction in Europe where the group operates mainly without agents.

Advertising costs decreased both for the second quarter and six months of 2010. G&A costs, in absolute terms, decreased by EUR0.10 million from EUR12.2 million to EUR11.4 million in the second quarter, and by EUR1.2 million from EUR23 million to EUR21.8 million in the first six months 2010. We are very focused in order to continue the rationalization process in administration and commercial areas.

EBITDA passed from EUR7.9 million in second quarter 2009 to EUR8.3 million in 2010. Such improvement is much more evident for the first six months where EBITDA passed from a negative EUR1.5 million in 2009 to a positive EUR14.8 million in 2010. As a result of the previous information, the operating income EBIT for the second quarter improved from EUR1.1 million to EUR2.3 million.

Also, for EBIT, the improvement is much more evident in the first six months where we passed from a negative EUR15.4 million in 2009 to a positive EUR2.7 million in 2010. I'd like to highlight that we've reached the positive EBIT the fifth consecutive quarter. Foreign exchange positive performance on ForEx is mainly due to realized and unrealized profits on trade receivables partially offset by negative results deriving from hedging activities.

Other income costs, the item includes a EUR2.4 billion for accrual on receivables for capital grants related to the investment program signed with the Italian ministry of industrial activities in 1996. In relation to this program and upon conclusion in December 2009 of the inspection carried out by ministry, we expect to receive in the next few months approximately EUR7 million cash.

For second quarter and first half 2010, the group incurred a major and increased tax rate, which was due to the following reasons; expiration of tax benefits in Romania, now 16%, the full tax rate, together with the increase in pre-tax reserves from some group subsidiaries and specifically those outside Italy.

Let's now comment on the balance sheet figures. Cash and cash equivalents decreased by EUR7.3 million passing from EUR66.3 million at the end of 2009 to EUR59 million at the end of June 2010. Net cash used in operating activities was EUR11.8 million. This was generated mainly by negative working capital for EUR21.6 million, partially offset by no monetary cost, mainly amortization and depreciation of EUR13.9 million. The performance in working capital was largely due to an increase of stock inventories, EUR6 million, and increase of trade receivables, almost EUR6 million.

So far, we confirmed that yearly investment for China factory's relocation and the [SAT], the information technology system implementation will be mainly realized in second part of 2010. Net financial position passed from EUR58.5 million at the end of 2009 to EUR49 million by the end of June. Last year, we had an higher net financial position at the end of December 2009, mainly due to a decrease in sales coming from the previous year, which consequently generated less working capital and a lower level of investment.

On the contrary, in 2010, we have been financing increasing net sales with our working capital, in particular inventories and trade receivables financed by a positive EBITDA. Finally, analyzing the progressive reduction of the order flow considering the increase in raw material cost and transportation costs and the restructuring actions that the group has been implemented and is implementing, we expect a total increase in sales for the end of this year in the area of 7%, and a slightly positive EBIT approximately in the region of 1% on sales.

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

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). And we'll go to the first question from Andrea Bonfa from Aletti Bank.

Hello. Good afternoon to everybody. I hope you can hear me. Very quickly, I would like to know, given that you just released a guidance for the sales of 2010, the plus 7%, does it imply that the, let's say, third quarter of this year is basically going to flat growth, given the outlook you just gave?

And secondly, how much of this 1% EBIT margin target for the full-year discount, let's say, the restructuring that you announced, that we saw in some also newspaper concerning the Cassa Integrazione Guadagni. Thank you very much indeed. Hello?

Just a second Andrea, I'm --

(multiple speakers).

Andrea, this is Vittorio.

Hi.

Yes, that guidance we gave, consider the fact that the order flow today is lower than the beginning of this year. So, the area of 7%, consider this slowdown in orders. And yes, for the second question, we already factored the positive impact of Cassa Integrazione in the second half of the year. Starting from July 1st, we have here in Italy, also in the headquarter, let's say almost 100% of people in Cassa Integrazione Guadagni.

For one person at a time. (multiple speakers).

For sure -- with a reduction of 30% in terms of available people.

Okay, thank you. As I will come back later on. Thank you.

Yes.

(Operator Instructions). And appears there are no further questions at this time. Actually, we did just have a question come in from Dmitri Duffeleer from Quaeroq.

Hello. Good morning or good afternoon to everyone. My first question, what is the situation actually in Brazil? Because I understand that we are -- that the company is still investing in this country, and could you give us an indication of, I would say, the kind of investment and the size of the investment we're making there, and the current business situation?

Good afternoon, this is Pasquale Natuzzi. In Brazil, we are investing primarily on sales management. The region, the commercial region that is managing all the Latin America business including Brazil obviously, where we have some big expectation has been just recently introduced. So, we opened the first store, Italsofa store in Sao Paulo. We have commitments already for some other customer.

Just today here in Santeramo, we have 18 architect and designers to visit the factory and better understand our brand and our potential in Brazil, because primarily the business in Latin America is developed in conjunction with the architect and designer cooperation. We are (technical difficulty) investing money in Brazil, and in Latin America again primarily with organization. So, the expectation are that next year would be absolutely a better year in terms of sales, and we will reduce the investment.

And could you give us an idea of what the impact is on the consolidated balance sheet of Brazil currently?

Just hold on a second please.

It's roughly EUR3 million for the industrial plant and roughly EUR1 million for the commercial area.

Okay, thank you.

And there are no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

So, if there are any other questions -- we don't have other further remarks for this conference call, and so we can close and say thank you to everyone for -- to listening the conference.

We actually did have the gentleman who queued up earlier, both queued up for follow-ups, if you would like to take those.

Yes, of course.

Okay, we'll go first to Mr. Bonfa.

Yes, I would like to know, in your guidance for the EBIT margin, what are your assumptions as far as freight rates are concerned, given that there are some indication that they are a little bit abating, if I'm right. Is that the case?

Sorry Andrea, again the question, it's for freight cost?

No, the freight cost, the container freight cost, transportation cost. We saw this back in the first half, but I'm reading some indication that the second half might be better on that point. Is that something you can confirm? Is that already in your 81% EBIT margin guidance or is it a potential upside?

Okay, I understood. Freight cost went up dramatically in the first quarter, okay, of this year. Today, prices are stable at the maximum level, so are not increasing again, but they are stable. So, we are forecasting EBIT for the full-year the same prices we have today, because we don't have any element in order to foresee great reduction. We don't have elements to foresee any reduction or increase in price, so stable high price, let's say, the same price we are experiencing today.

Okay, and if I may add, assuming that 2010 will close with the indication you just provided for -- and assuming that 2011 will have a growth rate, more or less, in the region of 2010, in the 4% to 6% top line growth expansion. What's the commitment you can take in order to further compress costs in order to expand your, let's say, depressed profitability, if you allow me this expression? Is that a clear question?

Yes, yes, the question is clear, but first of all, we are not ready with 2011 budget. We are doing the budget in these weeks, and we hope to be able to display -- to meet you, and to talk about the budget for the next year. I think you -- having a look to development of gross margin and EBIT margin this year, you can calculate by yourself, which could be the leverage on the today's cost structure.

And that said, so I think we have to leverage the today's cost structure, and 5% is something that you can calculate by yourself. In the meantime, we are continuing to rationalize the SG&A cost in terms of structure, but it is too early to speak about details. Please consider the today's cost structure.

Thank you very much.

You're welcome.

And we'll take the next follow up from Mr. Duffeleer.

Okay, I've got a few additional questions. There is actually four of them. The first one would be what is the situation with the relocation of the factory of China and the possible compensation from the government? Two would be what -- how is evolving the launch of Natuzzi Editions? The third one would be the situation of the store openings, new franchises, new concessions this year, and the fourth would be the retail performance in our own network, Spain and Italy.

So, the first question (technical difficulty) relocation. The relocation in China in the new building, we expect to move within April, May next year. Regarding the sales of our property, we receive an offer from the government. We'll be negotiating, because obviously they've been trying to give us less money possible, and we've been trying to exact to the contrary. And so far, we succeed to get promise at least so far of RMB430 million, which should be roughly EUR43 million. I believe we are very close to -- to define the deal for the sales of our property. Second question was?

Launch of Edition.

Launch of Edition. Launch of Edition is giving us some moderately good result. To be honest not the one we were expecting, because the reality is that the business primarily in Europe, because the launch of Edition was only for European market and for Asia Pacific. The presentation, as we told you before, was made in Cologne in January, Milano in April.

We are moderately satisfied, but it takes time to recycle the product, manufacture, delivery, get on the floor and start to sell. We are moderately optimistic, despite the economic situation, which I believe everybody knows what's going on in America and in Europe primarily.

Were you able to sign up some larger customers for the program?

This is a special program, that's a good question. This is a program that we are just working now. Mr. Cavallo and myself, we were last week in Germany and Holland meeting a big customer, [Begros] to tell the name, a huge customer that really can generate big volume. They are very much interested in the program. Now, we are working on a model on the collection, which we expect to introduce within January for the next exhibition.

Okay.

There was one fourth question I believe.

Yes, there was the opening (multiple speakers).

Opening.

The opening of the store. Let Mr. Cavallo to inform you about the opening of the store.

Good morning everyone. So, regarding the store opening, we split the two major brands, that is Natuzzi and Italsofa. For Natuzzi, we have had so far 25 store open and here-to-date last week, let's say, and the plan is to open additional 10 stores that establish the target of roughly in 67% -- 75% of the annual budget. For the gallery, we have 19 gallery already open across the world.

For Italsofa, we have 11 stores and eight gallery. Of course, this is a good achievement, not inline with the target because of the market conditions, and those are stores that's been open all over the world, mainly Europe and Middle East area has been -- as part of Eastern Europe. So, (multiple speakers) second question. Sorry?

That's mainly through external partners, franchisee concessions?

Yes, mainly its franchise store, except the one store that is going to opened in the near future, by the end of the year in London in Tottenham Court Road. Okay, that is part of the program expansion, but I would say that 90% is through franchise partner. So, right forth in the partnership with the existing account of new openings of a franchise partner. Then the second question is about our network in Spain, correct?

And Italy.

Spain and Italy, yes.

Spain and Italy, okay. In terms of performance, we have for sure in terms of top line, still, we have the second place in the market -- for the Italian market, and despite a good first half in Spain where the top line was above last year, there was a difficult sales period July-August, and so the expectation is to go in breakeven this year in terms of top line. In terms of EBITDA, we are recording some moderate improvement, thanks to the rationalization of cost, relocation, renegotiation of lease, rent all over the countries.

Okay, grazie mille.

Prego, Prego.

And again, there are no further questions.

Further questions?

And there are no further questions at this time.

Okay.

Okay.

Thank you so much.

So, thank you very much for being with us and for any further education, question, information you can contact us. Thank you very much.

That does conclude today's presentation. Thank you for your participation.