Natuzzi SpA (NTZ) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Natuzzi third-quarter nine-month earnings conference call. One note that today's call is being recorded. We will go live in just a few minutes.

Good day and welcome to the Natuzzi conference call. With us in our call today is Pasquale Natuzzi, Chairman and CEO; Vittorio Notarpietro, CFO; Umberto Bedini, Chief Operation Officer; Cosimo Cavallo, Chief Commercial Officer. The CFO will revise third quarter and nine months 2010. We will then open the call to your questions.

You should have received a M&A copy of Natuzzi's earnings results. If not, you can find the information at the Natuzzi website, www.natuzzi.com in the IR section.

Before proceeding, please be advised that the discussion today could contain certain statements that constitute forward-looking statements under the United States security laws. Obviously actual results may differ materially from those in these forward-looking statements because of risks and uncertainties that can affect our result of operation and financial conditions. We have the risks and the uncertainties which have in the past affected (inaudible) affect our results of operation and financial condition in annual reports on Form 20-F For the fiscal year ended in December 2009. This record is visibly 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 Vittorio Notarpietro.

Good morning to everyone, and thank you for joining us today to comment on Natuzzi's 2010 third-quarter results. In analyzing the main figures for the third quarter of 2010, it is absolutely important to note that this quarter was dramatically affected by two important negative external events, the large increase of shipping costs and the boost of raw material prices. Then it is evident the Company's saving cost process announced at the beginning of this year whose effects are more evident. Then we will try to elaborate on lower sales.

Let's now analyze the 2010 third-quarter consolidated figures. Total net sales, the third-quarter 2010 recorded a 2.8% decrease versus the third-quarter 2009. Upholstery net sales for the third quarter were almost flat minus 0.3% compared to the same period of last year. Natuzzi brands suffered a negative performance of minus 18.3%, while the other brands, mainly Italsofa, Editions and our branded business still recorded an encouraging performance of plus 14.8% versus 2009.

From a geographic point of view, in the Americas we continued to display strong improvements, plus 26.9%. In particular, we would highlight a double-digit growing in Canada up 81% for Natuzzi brands and up 53% on all other brands, and the result in USA minus 15% for Natuzzi brands and plus 25.8% on all other brands.

The total improvement of 26.9% has already started in the first and second quarter of 2010 respectively up 30.3% and up 48.2%.

As to the following specific actions recently implemented, the first, in addition of the North American subsidiaries organization, we have improved customer service. And the North American project, NAP, which consists in a dedicated program with the aim to reduce lead times to 10 weeks.

As a result of such steps, the percentage of the Americas on upholstery net sales went up to 41.4% from 32.6% of the third quarter of 2009. The rest of the world recorded a slightly positive performance of plus 0.7% in the quarter versus the third quarter of 2009. Evidence in this quarter we had slowed down with respect to the first and second quarters of 2010.

In particular, in Australia, minus 23% Natuzzi brand and plus 3% on all other brands, and in China where we had again a double-digit growth plus 72% for Natuzzi brands and plus 179% on all other brands. The share of the rest of the world upholstery sales remained around 13% like in the third-quarter 2009.

On the contrary, in Europe upholstery sales for the third quarter of 2010 versus 2009 reduced a gain -- a big slowdown of 16.8%. The same negative trend was recorded in Italy with a minus 16.8%. Only three countries among the most important ones recorded a positive performance on all other brands -- UK, up 9.9%; Spain, up 8.2%; Belgium, up 21% respectively. All the other countries had negative performances. In particular, Germany minus 14% for Natuzzi brands and minus 30% on all other brands and France minus 30% for Natuzzi and minus 13.9% on all other brands. We are among the worst ones. We are very focused to reverse this negative trend in Europe, putting in place the same positive actions already tested in the United States of America and North America in general.

So bring forth the management structure, build out the core collection in order to reduce lead times, and propose the IKEA model to some important key accounts, which means focused programs with limited SKUs in order to serve clients in a few weeks instead of months.

Cost of goods sold for the third quarter of 2010 increased from 59.8% of 2009 to 63%. This worsening was due to the increase by 8.4% of the consumption, 40.4% (sic - see press release) versus 36.2% on sales deriving from the huge rise in raw material prices, in particular leather.

Let me say something about leather. In 2010 raw leather price on the market increased by 50% versus 2009 on average, while finished leather prices increased by 27% on average.

For the Natuzzi Group instead, the rise versus 2009 of raw and finished leather prices were on average 42% and 12% respectively. The group was able to reduce significantly the impact on its figures as to a different geographic mix in purchasing.

On the contrary, the labor costs recorded a decrease that partially balances the previous negative event, hence also to the beginning of the temporary layout for headquarter operations people. Actual costs had an improvement as well both in absolute terms and as a percentage of net sales thanks to furtherly improved efficiency.

We are constantly working on our Italian, Chinese and Romanian factories in order to reduce inefficiencies, rationalize processes and improve customer service. In China we are currently building new factories of 88,000 square meters that will be ready by the end of the year where we will concentrate the three existing factories we have today. In the Italian factory, we started a pilot process to improve manufacturing efficiency. (inaudible) project, but first we start in terms of potential time and cost savings of (inaudible).

In terms of industrial margin, we went down from 40.2% in the third-quarter 2009 to 37% as a consequence of the events above mentioned. Selling expenses on net sales went from 28.4% of the third quarter of 2009 to 30.9% of the third quarter of 2010. This increase was only due to a boost of shipping costs from China to USA, already started at the beginning of 2010. This drove the incidents from 7.6% to 10.7% in 2010. Also, in this case the group was able to mitigate the effects of price increases, diversifying supplier bases that reduced the negative impact that otherwise would have been higher.

Selling commissions had a little reduction, and advertising costs remained substantially flat. Commercial retribution and other commercial expenses the cost actually managed internally had a significant improvement, allowing a reduction of EUR1.5 million, almost [4%] of net sales. Thanks to the effects of a saving plan we announced months ago, all those factors partially balanced the rate of transportation costs. Even better results, we are achieving G&A expenses that improved also in absolute terms, decreasing by EUR1.5 million thanks to the saving cost plan already mentioned, which includes for the first time a temporary layoff for a quarter.

EBITDA posted strong EUR9.5 million in the third quarter of 2009 to EUR3.4 million in 2010. As a result of the increase of transportation costs and raw material costs, partially balanced by the saving cost process, the operating income EBIT went from a positive EUR2.5 million in the third quarter of 2009 to a negative EUR2.8 million in the third quarter of 2010. Foreign exchange, the negative performance on foreign exchange is mainly due to an unrealized expenses on trade receivables, partially offset by a positive performance on our edging instruments. This basically comes from the devaluation of the US dollar against euro in the three months period.

Short, very short highlights on nine months consolidated figures of 2010, total net sales were EUR386.7 million, up 6.5% as compared to nine months 2009. Upholstery net sales were EUR344.8 million, still up 8.9% compared to the same period of last year. As well as in third-quarter 2010, the Tutsi brands suffered a negative performance of minus 2.5%, while the other brands recorded an encouraging performance of plus 18.6% versus 2009.

From a geographic point of view, Americas had the best performance with an increase of 32.7%, followed by the rest of the world with an increase of 27.2% turned by Italy with an increase of 1.3%. The last one was Europe with a negative performance of minus 8.6%.

And that the margin recorded a remarkable improvement, reaching 37.7% on sales as compared to 34.8% in 2009, even if the third-quarter consumption was strongly affected by use increase in raw material prices. EBIT and EBITDA were positively influenced by the cost savings plan targeted at the beginning of July on both commercial and administrative level, but negatively affected by big increase in transportation costs. EBITDA went from EUR8 million to EUR18.3 million in the nine months 2010, and EBIT went from negative EUR12.5 million in 2009 to a positive EUR0.2 million for the first nine months of 2010.

Let's now comment on the balance sheet figures. Cash and cash equivalents decreased by EUR16.4 million, going from EUR66.3 million at the end of 2009 to EUR49.9 million at the end of September 2010. Net cash used in operating activities amounted to EUR11.7 million. This negative performance was mainly generated by negative working capital of EUR18.9 million, partially offset by non monetary costs of EUR16.8 million. The performance in working capital was largely due to a decrease of trades payable; an increase in inventories, partially offset by an improvement in trade receivables that has decreased by EUR11 million. Cash used in investment activities was EUR10 million. As a result, net financial position went from EUR58.5 million at the end of 2009 to EUR38.6 million deposited of costs at the end of September 2010.

By the end of 2009, we had a higher net financial position, mainly due to a double-digit decrease in sales in 2009 which generated less working capital and is more investments.

On the contrary, in 2010 we have been financing increasing net sales, along with the starting investment in the Chinese new factories. Today's net financial position has already improved from September and is in the area of EUR50 billion. (multiple speakers). EUR50 million, sorry.

In a nutshell, the issue of this quarter has been sales, mostly in Europe and concentrated on Natuzzi brands. In the third-quarter 2010, our Natuzzi sales in Europe suffered in particular for programs in the supply chain, delays in delivering us leather, other components and accessories for the total living display of Natuzzi brands, which is, in fact, the brand with the lowest sales in the quarter. As a consequence, our orders backlog increased, we have already recovered the most of those problems, and at the moment we start recovering also in shipping. Then we had the 100% impact on profit and loss of the increase in raw material and shipping costs all at the same time.

As far as costs are concerned, we have some good news. Transportation and raw material prices are lowering a bit, which is very important looking at next quarters.

Let me say that, in spite of the today's numbers, in the meantime some important results were achieved. Let me mention the most important ones -- recovery of sales in North America and Asia; Indian and Brazilian markets have been positively approached; improved business with IKEA; positive reaction from the market for the Italsofa project; [hard line] improvement of the transportation portion of the cost of goods sold; and successful G&A reduction planned. Those achievements confirm the Company is on the right path. All-in-all for 2010 year-end, we expect total sales a bit higher than the 12 months of 2009, and we continue trying to breakeven at the EBIT level.

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

(Operator Instructions). Flavio Cereda, Bank of America/Merrill Lynch.

Could you on two specific items, the leather costs trends which you highlighted are slowing down, although I was wondering if you could give us a little bit more detail on raw versus finished leather? And also are you seeing an improving effect because of shifting the geographic mix in terms of sourcing or whether this is actually something that you are seeing on the market?

And on transportation also, if you can give us a sense, a little bit more detail of what is going on here because these are the two key cost items that I see are to some extent beyond your control and which can hurt your profitability. Thank you very much.

First of all, market prices. Market prices for leather starting -- started increasing by the end of 2009. We had the peak of those prices in, let's say, three or for months ago. Then prices became stable. Today we are still seeing the very first decrease on the marketplace. Obviously due to the lead times, the impact on Q3 2010 was the 100% of the total increase.

How we managed to reduce -- partially reduce, you know, the impact on our profit and loss, we found new suppliers. We found new regions. We are buying more finished leather. We are buying more from Brazil. We are buying more finished leather instead of raw material, and that is it. To be completely fair with you, the new sourcing from Brazil created some of the problems we had in the supply chain. So we paid the cost for that in order to be completely fair. But now we are continuing to invest in that supplier because it is strategic for Brazil; it is strategic for us. The supplier is one of the most important ones, and we continue to invest in it in order to let him improve the efficiency in deliveries.

As far as shipping costs are concerned, by the end of 2009, our scheme was to buy 100% of our shipments through a broker. This means that we lost control of, [dire] control, of prices as we did in the past. At the beginning of this year, we started again reaching directly the most important companies worldwide, and historically we are in touch with the most important players worldwide, and we were able to lower a bit the impact of that kind of cost compared with the market increased for anybody.

Dmitri Duffeleer, Quaeroq.

Maybe three questions. The first one, is there any news on the compensation from the Chinese government? The second one is the current order flow situation I would say by main geographies. And the third one would be to discuss a little more in detail the success that you are booking with IKEA, and what do you plan to do with it to approach other clients?

Let's move on the success of the flow, main geographics. In other words, we are experiencing more or less the same performance, and it has been more challenging in the last weeks in terms of [Brent] in the geographic Italy. In the US we continue to perform nicely. Okay? We are quite positive thanks to [deep] protection that we took at the beginning of the year in terms of the organization of our organization, of our structure, and displaying the results to us in this way, especially on a specific Brent that we are pushing in the North American market that we, as Vittorio said, did service and that we prodded with the Brent Natuzzi Editions and Italsofa. The same we experienced in Asia-Pacific in terms of (inaudible) region where we are recording in a journal a still, a nice order flow, even if at the last weeks, as we knew, the markets are not really double-digit growth as it used to be in the first half of the year, and Europe is the market where we are more focused, even if we have also to consider that we have also a good performance in (inaudible) take the opportunity, for instance, to explain, to underline the performance on the India market that is giving us a good result. There is a lot of action that, of course, has been taken months ago and that will bring us results in the near future with the reopenings of stores and galleries for the Natuzzi brand and Italsofa, for instance, while separating the Italsofa concepts all over the world, especially in India and Brazil. But we have already sourced, for instance, New Delhi has been opened for the Natuzzi brand a few weeks ago, and we are going to announce in the next months Bangalore, Chennai and the Calcutta in India. So give you just some snapshots of what is happening.

While going on the IKEA model where we have, let's say, a quite successful model, the model that we have in terms of success, we are going to export the same kind of idea with some of the much more key accounts in the world. Because through an analysis, we notice that the bigger share that we have in terms of opportunities is in the mass merchant world. And this is a specific project that we want to bring forth, in other words, taking the extent of experience we got with IKEA.

I hope that this is trying -- (multiple speakers) goes in your direction a little bit.

As far as China relocation, negotiations and compensation is concerned, negotiations are going ahead very well. We will make our Chinese colleagues in the next few days you know that we receive for the first time an engagement from local authorities. We are still discussing, but things are going on. We are finalizing contracts, agreements, recent agreements. So we are discussing about taxes and so on. But going things are going ahead positively.

Everything is in time with what we announced months ago, so we think to be able to conclude in a few weeks to receive a small portion of the compensation between the first maybe in January, and the most of the compensation will be paid at the end of the process. So I mean May 2011 roughly.

Andrea Bonfa, Banca Aletti.

I would like to ask you if you can elaborate a little bit more on the, let's say, restructuring potential, restructuring initiative that you want to undertake in the European continent. It is quite clear now there is an issue there in terms of a demand; there's less volumes. And I'm wondering if you believe that this quarter's performance in particular is by far below that other market, or does this also reflect a market trend? Thank you very much.

Regarding the restructuring in Europe, we are focusing primarily on Natuzzi brands where we have been reviewing the retail collection in order to simplify the complexity and improve the time-to-market of delivery time to the consumer house.

So the main focus of the measurement will be Natuzzi brands for the European markets, for the retail channel. That is because Natuzzi has been suffering more than the other brands, Europe has been suffering more than the other markets, and the retailer channels are still -- they are improving compared with the previous quarter or compared with the last year certainly. But still there is a lot to do on the retail (inaudible) model. So that will be the measurement focus.

We already made some change on the [Europe one], which is based in Brussels, and that division controls Belgium, Holland, Germany, Austria, Switzerland, Scandinavia, all Eastern Europe countries, including the Baltics, Russia and Ukraine. It is a huge territory where we have a huge opportunity, but we needed to have people in the marketplace, and the restructuring has to do by having for each brand we need to have a brand management people in the marketplace. We have done a good job comfortably where today we have a brand manager for Natuzzi, a brand manager for Editions, and brand manager and management obviously, brand management for Natuzzi, for Italsofa and Editions. But we need now to have the same kind of organization in each market where people should wake up in the morning and have the responsibility to go on the marketplace and develop and manage the business.

The last was November 11, just you know for the focusing on the European market, we organized the three days workshop in America where in our building it is a four floors storage building where we put all the brands altogether. Again, cooperatively we have done a very satisfactory job so far by dealing to each brand very clear identity. Natuzzi has its own clear positioning, the same addition and very same also Italsofa.

So because we achieved good goal in giving identity to each brand, we decided to organize a workshop with 80 people from North Africa, Middle East, all Eastern Europe, Russia, all Europe, all (inaudible) people from those territories, and three days workshop just showing the people the opportunity that they have on the marketplace by addressing business -- individual business for each brand to each different distribution channel.

We have done already a good job. We are in our worldwide marketing asset manager. Cosimo Cavallo is traveling almost every week going all the marketplaces, talked with the regionals, talked with the county managers, and reviewing and reenforcing the sales organization. Today our issue is sales, and we are ready to go.

(Operator Instructions). There are no questions at this time. I will turn the conference back over to management for any additional or closing comments.

Yes, the comment is that we -- the management team, it is I'm very, very much confident about the management. We have been working on a total corporate strategy around for the world, and management very much shall think about strategy, but we are working now how to execute the strategy. And we will start from Europe market, which has been the one that is suffering so far, while, as it has been said before, for the American market already a change in terms of organization, and a deal in Asia has been made, and we have got already a positive result.

So all-in-all we are very much confident for next year and the following year, too, despite what will be the economy.

Thank you very much, everyone, obviously for the confidence.

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