Natuzzi SpA (NTZ) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Natuzzi third-quarter 2011 earnings conference call. Today's call is being recorded. For opening remarks and introductions I'd like to turn the call over to Silvia Di Rosa, Investor Relations. Please go ahead.

Good day. Welcome to Natuzzi conference call. In our call today are present Pasquale Natuzzi, Chairman and CEO; Guiseppe Clemente, Chief Operations Officer; Cosimo Cavallo, Chief Editions Brand Officer. While are not present for business reasons, Simon Hughes, Chief Natuzzi & Italsofa Brand Officer, which is Southern China; and Vittorio Notarpietro, CFO, that is flying back from China as well. [Angelo Riva], Director of Corporate Controlling will revise, in place of Vittorio Notarpietro, the third-quarter and nine-month 2011 results. Then will follow the speech of the CEO, Pasquale Natuzzi, to illustrate Group strategy and actions for near future. And at the end we will be happy to answer to your questions.

Anyway, if any of you would need some more details about specific topics and about numbers, I will be happy to arrange a conference call with Vittorio Notarpietro in the next days and, as usual, I remain at your disposal for further explanation. You should have received an email copy of Natuzzi earnings results. If not, you can find the information in the Natuzzi website, www.natuzzi.com.

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, our full-year results may differ materially from those in the forward-looking statement because of risk and uncertainties that can affect our results of operation and financial conditions. We have the risks and the uncertainties which have in the past affected and might continue to affect our results of operational and financial conditions in the annual report on Form 20-F for the fiscal-year ended on December 31, 2010. 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 United States Security and Exchange Commission.

So, now, thank you very much. I will pass this call to Angelo Riva.

Good morning, everyone, and thanks for being here with us today. Before beginning and explaining the most important data of the third quarter of 2011 and highlight some numbers of the first nine months for 2011, I would like to give a macro picture of the most significant events that have influenced this third quarter and that will impact the next future.

The positive net financial position at the end of September 2011, despite the slight decrease of EUR2.3m from the end of June 2011, in the following weeks after the end of September recorded an upward trend, thanks to an improvement of net working capital. The trend of the euro/dollar ratio in the third quarter of 2011 compared to the same period of 2010 recorded a depreciation of the dollar by 9 percentage points. This depreciation has obviously had a negative impact on sales in North America. But looking at the euro/dollar ratio in the weeks after September there has been a significant appreciation of the dollar that will reflect positively on sales in the fourth quarter of 2011.

The orders flow at week 46 continues to have an overall negative trend. We notice in this trend an improvement in Northern American market, partially influenced by the appreciation of the dollar and, on the contrary, the slowdown in European market, strongly influenced by macroeconomic negative conditions. Both trends are reflected in the sales reclassified by brand, where we find a greater decrease in the Natuzzi brand sold mainly in Europe and an improvement of the Editions brand mostly sold in North America.

The sales mix by brand performance in the third-quarter 2011 compared to the first six months of the year highlights the market change, with a significant increase of the Editions and Softaly brands versus the Natuzzi brand, mostly penalized by a concept of seasonality. Starting from next quarter the situation will return in line with the first-semester 2011, with an increase of the Natuzzi brand.

The performance of Q3 2011 has been affected by a significant increase of raw material prices, in particular for leather, around 7.5% as compared to the previous six months of 2011. Indeed, the increase of leather market price has been much higher, of approximately 25%. We must highlight that thanks to several actions put in place, the Natuzzi Group [will lead] such negative impact. However, we expect again for next quarter a small increase in raw material prices. And to face this, starting from July 1, 2011, we approved an increase in the Natuzzi brand prices list equal to 5% that will bring the full benefit in Q4.

Let's now analyze in detail the economic data of the third quarter of 2011.

Total net sales had a slight decline of 0.5% versus the third quarter of 2010. Upholstery net sales fall by 2.8% have combined effects of the increase in volume, plus 3.3%; the negative impact of the euro/dollar ratio, minus 3.4%; and the product mix, minus 2.7%.

From a geographical point of view the Rest of the World has achieved a positive performance, with an overall plus 17.9%, of which plus 19.7% on Natuzzi brand, plus 16.2% on all other brands. The main countries within this region which had positive performance are China, Korea, India and Indonesia, where there have been excellent performances thanks to the marketing strategy undertaken by the Group to expand in emerging markets.

In Europe, with an overall decrease from 2010 to 2011 of minus 6.8%, the countries with a positive performance were UK and Germany, while historical countries for the Group, such as Spain and France, continue to under-perform. The good performance of UK has been done scrutinizing our business partners to ensure that everything we do truly qualifies our brands on the high end of the market. For instance, UK Italsofa brand will be available in five new countries by year end and is off to a good start.

In Spain, unemployment is nearly 23%, double the average of 9% in Europe and new-building construction is low but stabilized. There is no store traffic and discretionary durable goods have experienced a 20% decline. This economic environment has clearly affected us. Nevertheless, we are renegotiating store rents, we have closed a few store and we are starting to see results.

In the Americas, though still with an overall negative performance of 2.6%, during the quarter we had a recovery trend. In fact, the Natuzzi brand in the US, although still immaterial in terms of volumes, marked a plus 11%. As well as the other brands in Canada recorded a plus 23%.

On the contrary, for Editions brand the results in the US region have been still the consequence of slow delivery times that resulted from the China factory reorganization. This caused substantial orders reduction from major customer. The factory issues are now solved and, as we mentioned in our last earnings release, the High Point Market in October was a turning point for Natuzzi Americas. The focus was on brand value inherent in Italian design, craftsmanship and production, instead of simply price.

Customers appreciated an astute business, which is not ubiquitous in the furnishings category, where we believe it is still ready to see a single company with a highly-differentiated brand portfolio. Finally, it's important to note that the work done in Latin America begins to contribute with positive performance although still with a minimum impact in terms of volume.

The Other sales, which includes sales of raw materials and furnishings, registered an improvement of 18.5%, equal to EUR2.3m compared to the third quarter of 2010. COGS, cost of goods sold on net sale, passed from 63% in the third quarter of 2010 to 70% -- 70.4% in the third quarter of 2011.

The reasons for this worsening are mainly due to the following points; the sharp increase in raw material prices, as already described before; and the increase of a percentage weight of labor cost due to structural reasons, such as the factory relocation in China from our side, from the other side, to the increase of workers' salaries mainly in China and Romania for the renewal of the national labor agreement.

In the operation we are carrying on the process of rationalization and the re-industrialization of all Group factories to improve efficiency. The project Moving Line has been implemented in Romania and soon to be brought in the new Chinese factory. And we are continuing to improve lead times and going on towards for better customer service.

Selling expenses. Transportation costs continue to record, as well as in the second quarter of 2001, a favorable decline trend, both in absolute terms, minus EUR0.7m, and from 10.7% in 2010 to 10.1% in 2011, due to a reduction of the transportation prices for some trade routes and an improvement of the management of delivery.

Commissions and advertising cost have decreased by approximately EUR0.5m and 0.5%. SG&A expenses, I mean overhead expenses, have improved in absolute terms by EUR1m and in terms of incidence of sales from 22% to 21.1% respectively in 2010 and 2011. The main improvement is related to other expenses decreased by a reduction of consultancy cost and travel expenses.

EBITDA amounted to minus EUR4.2m in the third quarter of 2011, versus a positive EUR3.4m in the third quarter of previous year. Consequently, the EBIT reported a loss of EUR9m in the third quarter of 2011 compared to a loss of EUR2.5m in the same period of last year. Finally, the net result of the third quarter of 2011 recorded a loss of EUR10.3m versus a loss of EUR5.5m in the third quarter of 2010.

Now briefly let's comment the most significant items in the first nine months of 2011. Total net sales were down by 7.7% compared to 2010. From a geographical point of view, such as in the third quarter of 2011, the only geographic region that showed a positive performance has been the Rest of the World, with an overall plus 8.7%.

The EBIT result recorded a loss of EUR17m in the first nine months of 2011 as compared to a positive EUR0.2m in the first nine months of 2010, as a result of the combination of different economic aspects, including, from a negative point of view; slowdown of volume trend, worsening dollar versus euro exchange rate; and, furthermore, increasing raw material prices, relocation of the Chinese plant. On the contrary, from a positive point of view; favorable decrease on the transportation costs, positive decrease of the Other SG&A.

Finally, the net Group result of nine months of 2011 recorded the loss of EUR3.6m versus a loss of EUR9.6m for the first nine months of 2010, thanks to extraordinary income related to the relocation of the Chinese factory.

Let's now comment the balance sheet figures. The Group registered a significant improvement on cash and cash equivalent, which totaled EUR98.6m as at September 2011 versus EUR61.1m as at December 2010. Positive net financial position boosted, from EUR45.6m as at December 2010 to EUR58.8m as at September 2011.

And, finally, the outlook. The Q4 2011 remains a difficult quarter, even if there are some positive events that can positively influence it, such as improvement in orders flow in some regions and better euro/dollar ratio, as mentioned before. We have forecasted total net sales for the full year to EUR500m. We see during this last part of the year just some opportunities in order to recover profitability on EBIT level, but, however, we are making great efforts to implement the actions that can help to restore profitability starting from next year.

Thanks to all and now I pass the speech to the CEO, Mr. Pasquale Natuzzi.

Good morning and good afternoon for the UK listener. I will confirm what has been said by Angelo Riva.

We have good reason to be confident, despite the negative result and the market crisis, from which we cannot see an immediate exit. Consumer purchases [now] seems strongly affected in mature markets. While price of raw material and service grow, price competition on the finished product is very, very high, especially for companies that respect the rules like the human rights, just to mention some.

Nevertheless, we continue to engage in long-term vision. In fact, during 2011 we have been committed to invest on our brand portfolio. For each of our brands we clearly defined the position, targets, products, price, market and distribution channels, to which I'll refer.

For each brand and market there is a dedicated factory and an organization structure. We are strongly convinced that through product innovation, industrial process and service management we can get more competitive and create value for shareholders. Let me give you an example.

The Natuzzi Italy is very clearly defined today. Natuzzi Italy brand has high-end positioning, with a total living offering product that is produced in Italy, sold in Europe, in the Americas and Asia Pacific, and distributed through mono-brand shops (inaudible) in qualified location with a dedicated communication. The Leather Edition brand specialized in the production of leather sofa with high craftsmanship, with a medium positioning. It is produced in Romania for the European market, in China for the Asia Pacific and North America, and in Brazil for the Brazilian market, serving the wholesale channel distribution.

For the Italsofa brand and Softaly has been following the same method.

With the brand portfolio of the Group, the global market presence with our factories and proper organization, we can see great opportunities, but the growth must be planned giving priority to strategic market, such as Brazil, Russia, India or China, where we are already present. In 2011 we opened 11 store in China and three in India, with a total of 56 opening worldwide. We have completed implementation of SAP, our new IT system, by networking all factories and sales offices.

The Group has started the project of product and process innovation which should reduce the industrial cost at least as double digits. The human resource and information technology department are working on process redesign service in order to make them lean, fast and less expensive. The effect of this activity will be seen already from 2012, next year.

The management is aligned on strategy development and cost reduction, with close monitoring of budget and updating through target KPIs. We are confident to implement our program and fulfill this commitment with the market and the shareholder.

Thanks to everyone and now we give the call for question and answer section. Thank you.

Thank you. (Operator Instructions). And we'll take our first question from Bart van den Wijngaard with Ratio Capital.

Bart van den Wijngaard. Hi, gentlemen. Could you explain how unexpected the additional margin pressure was during the third quarter? Did this build during the quarter? And also because you previously said that the second half in 2011 would be at least better than the first half.

Bart, hold on just a second, okay? Just five seconds and we will answer you back.

Okay.

Okay. Just -- I mean the top line -- because the sales -- the top line the sales has decreased, consequently, all the [cost] is up. For example, we have a factory in China. If the factory has production at full production capacity we achieve our industrial cost which has been budgeted. But if we -- if the sales are going down and the factory might produce at 70% of the production capacity, consequently, the industrial cost gets up. It's just simple.

And even the sales of the mixed product. For example, if we sell more private label where our margin contribution are lower, and we sell -- it depends from the mix -- the product mix and the brand mix that we sell. Is this clear?

Okay.

(Multiple speakers). Sorry, can I add something? Angelo Riva speaking.

Of course.

One of the main reason, as I mentioned before, is related to the increase of the raw materials, of course, because there is an impact of 3% on revenue related to the fact that during this year there has been a big jump in raw material prices.

Yes.

Again, there is an increase of labor costs, as I mentioned again before, due to the renewal of the national agreement, in particular in China and in Romania, if we are comparing with that with last year. That's the two main reason.

Okay.

And going forwards we have increased prices for the Natuzzi brands by 5%, if I understand correctly. Is this enough to fully recover the raw material cost increases?

You are completely right. But because of the lead time we receive orders starting from July 2011 because of the delivery of the price list increase was made July 1. But due to lead time we will see the complete impact to balance the increase of raw material just in Q4.

(Multiple speakers) will it be enough to say -- to return to a normal industrial margin, as we have seen in the past, or --?

Not at all, just because we have increased the price list just for Natuzzi brand and not for all the other brands.

And why are we not able to increase prices for the other brands?

Because in America there is huge (technical difficulty). With Natuzzi Italia we target the high-end consumer, where a 5% price increase is not really visible, not very important. While, when we talk about the Leather Edition or Italsofa or Softaly that we sell to the mass merchant or to wholesalers, where the consumer targets are the middle class, there the prices became much, much more sensitive. In a market where the consumer confidence is very low, if we increase the price the situation will get worse. That's why.

Okay, I understand it. Thanks.

At this time we have no further questions in the question queue. It looks like we do have a couple of people that have queued up. It looks like we'll go next to Dmitri Duffeleer with QuaeroQ.

Good afternoon. Maybe two questions just to start with, could you discuss the situation with the wholesale, the Editions brand. Are we taking any new contracts in that field? And the other one would be the situation in the Brazil markets.

Hello, Dmitri. [Cosimo] speaking. Good afternoon to all of you. Buongiorno. Well, I can give you the very last update about Editions, Editions with all the despite the American market is struggling, as Angelo said before we have a positive, would be called a positive result in Europe where we expect overall to grow at the end of the year 3.7% in terms of order flow, and Asia Pacific as well.

With the action that has been held is we participated for Europe to the Brussels Fair with a good feedback. All those orders, of course, will have a good impact starting January because of course order taken October will be delivered in January, so we will have a good setup for 2012.

Plus we have a home fair called Congress where we invite all the European, I am talking Europe, Middle East, Africa customers who participated to renew the collection, see the last development of the market itself.

In France we have also a very good feedback from customers talking about Editions, of groups like UCEM that have 105 stores where we display two models in all the chain. And I would say that is -- the feedback is good, positive. And we expect also to have a very good setup in 2012.

Along with the models, Editions is also linked to a very intensive gallery program where we expect to end up the whole year all over the world at 213 galleries. And the sale -- sorry 267 galleries, and for next year we plan a little bit less gallery in terms of openings.

Gallery means to come to the space with the benefits in terms of, let's say, a sort of shopping experience for the end user, and plus benefits to communicate better the value of the brands.

Dmitri, this is Pasquale Natuzzi, I'd like to answer about -- to update you about the Brazilian market. I was in Brazil last week, I came back Saturday morning. The first words, Brazilian market I am very confident about the opportunity that we can get in Brazil.

Brazil certainly is one of the most growing markets in the world together with China. In fact in 2011 we will do five times, almost six times more what we did in 2010. But we work also in the small business, so when you do small business it's easy to grow six, 10 times. But it's the future that is -- I mean I am very confident.

In October we organized a congress in our factory and we set up galleries for Italsofa, for Leather Editions and for Softaly and we invited about 150 customers. They all came and they all placed the orders. And many of them they committed to open a new Italsofa store, a new Italsofa gallery.

In fact, today we have nine between stores and galleries, but we have commitment to open another 23 until next February. As you know, because I told that last conference call we opened even eight/nine galleries at the Magazine Luiza. Magazine Luiza is a huge company with 600 stores, and with $6b turnover, big, big company. So but the most important news is that -- so the commitment was to open 13 galleries, but we opened nine because they are huge, they are big and they are a little bit slow to implement things.

But even with the nine galleries, the consumers are starting to purchase our products and they are very much enthusiastic and obviously -- and we are very much confident about the fact that we can do some very significant volume in Brazil.

Last week I finalized with another group very, very big one. The name is Maquina de Vendas which means sales machine, something like that. That's a holding that owns Insinuante and Ricardo Eletro. They have 900 stores in all Brazil, and they do $8b turnover, a big one. So I -- we committed that we should open six galleries in Salvador. It's a very -- two kilometers, three kilometers from our factory where we should test six galleries.

I invited, despite the agreement with the President and CEO, I even invited the -- because I visited all the six stores where we are going to open the galleries, and I invited the sales people, the store managers to visit our factory. When they saw our product they went -- they were so happy. I mean, yes, we are confident that we have a wonderful future in Brazil.

Okay, thank you.

And it looks like we'll go next -- we'll take a follow-up question now from Bart van den Wijngaard with Ratio Capital.

Yes, hi. I was also wondering whether we already started discussions with the government and the unions to find the solution for the potential layoff of the employees by the end of 2013. Could you give any feedback on that?

We are finalizing the budget 2012 and you know as even a forecast for '13 and '14. When we -- and we are doing a very detailed job, from the bottom up and from our company we are reviewing whatever the regional and the country managers they forecast regarding the growth. We want to make also our, let's say, forecast based on our, let's say, know-how and view. So I believe that within next 30 days, 40 days at the latest we should have a forecast until 2014 and then we will talk again with the new union, with the government.

Obviously now we are a little bit more confident because of the new government with Mr. Monti. We hope that the situation will change in Italy. But obviously we need to make a finally and strong decision regarding the people that we have, but we don't have a job for them that's the reality. And we cannot replace the government or whatever.

And though you also published this, say, budget forecast or how you look at 2012-2014 in the next 30, 40 days.

Can you repeat please?

Could you repeat the question please?

Would you also be publishing this new budget for 2012, '13, '14?

We have published our budget so -- but we gave obviously our operating numbers what we expect to do. That's the way it's been managed always.

But we should expect those numbers say in the next 30, 40 days then?

Yes, absolutely.

Okay, thanks.

And at this time we have no further questions from the phone lines. It looks like we've actually had somebody else queue up. We'll go ahead and take a follow up now from Dmitri Duffeleer.

You have been very briefly discussing the product and process innovation during the call. Could you please explain a little further what you are seeing on the product innovation front?

Okay. For product innovation cover different issues, obviously we talk about style, we talk about function. We just recently create a model, very new. We patent it. There isn't anything like that on the marketplace. And that's part of the innovation which makes the product very attractive in the stores.

But in addition to that, we are reviewing -- we are reengineering the products. Starting from the materials, from the design, the projects where we need to make the product lighter in order to make it easy the delivery. We needed to reengineer the product in order to reduce the volume, make the knock-down back or arm in order to reduce the volume, consequently the transportation costs and even the storage in the warehouse. And finally, even the delivery in the consumer house because today the apartments are becoming smaller and smaller. And sometimes a product doesn't fit or fit from the door just to give you an idea.

And while we are doing that we are reviewing the entire process, and we have already some good numbers, because we engaged a consulting company that's (inaudible) always very famous in Italy. They know very well how to make a process lean. They specialize in that.

We did some experiment with a few products and the results were very, very I mean positive very, very positive. Now we have made a contract with them, they should work with us for one year time. We have dedicated space -- building with a dedicated Natuzzi team just working on product innovation with the goal that you -- the goal we want to achieve is to reduce enough. This is product innovation.

Talking about production process innovation, also in the production process innovation we realized and discovered that we have another huge benefit or cost reduction. In fact, we expect that between product innovation and industrial process innovation we expect to save double digits. And those double digits will allow the company to be more competitive and to create a profit for our shareholders.

Obviously we have also with the IT SAP system in place today every -- in all the factories, in everywhere, in all our trade offices everywhere in the world and now the management, the human resource management and IT management they are working in re-analyzing all the process in order to make them lean, short and accelerate and improve time to market, nevertheless reduce the cost. That's what we are doing. And we have a huge opportunity.

From a product point of view I -- do I understand it correctly because we have been discussing this before that you are really starting to work on, I would say, a more urban product line which is more fit to the smaller apartments and things like that.

Yes, absolutely. Again we work on the dimension, we work on style, we work on function but we are also committed and working to reduce the material and engineering the product and to review the production process in the factory in order to save double-digit numbers that will allow us to be more competitive, and improve margin and profit for our shareholder.

Okay. And maybe just a small follow-up question on another market, the Indian market. What is happening over there? Or how fast is the rollout process?

Asia market is -- it's still a new market for us, but you know we have already opened, as far as I remember, three Natuzzi Italia stores. The fourth one should be opening sometime before the end of the year. We have Leather Editions and Italsofa gallery, we opened already several one. I recently met our country manager, he is a very optimistic very enthusiastic. And this is set up in the new -- the budget 2012.

Okay, thank you.

And at this time we have no further questions in the question queue. And it looks as if Dmitri has queued back up. We'll go ahead and take a follow up again from him.

I've got just a small one, a very small financial question. Looking at the balance sheet we've seen that the, I would say the cash position has gotten close to EUR100m. On the other hand you've been taking up some short-term debt EUR24m, and I was just wondering what the reason is for that.

Yes, you are right there are short-term borrowings of about EUR24m and I have facilities through bank, short-term facilities of course and they were used at all at the end of September but during the week after the end of September 2011 we have improved such situation as I explain also during my speech.

And what was the reason for those short-term funds or --?

Because of, as probably you know, all our cash is not in Italy. There is one part important in China due to also to the [reform] coming from the Chinese government. And we are using such facilities mainly in Italy.

Okay. But are you able to transfer the money from China over time or --?

Of course, we are able -- I mean we can transfer the money whenever we want. But the reality is that we are planning to have huge growth in China, because that's the market where we can grow the next three years. And so we prefer to leave the money there to be used for investment.

Okay.

And, Dmitri, you still there?

I'm still here, yes.

Yes. And in addition to that even the exchange rate and the interest rate is favorable to keep the money there in China.

Okay, grazie mille.

And at this time we have no further questions in the queue. And once again at this time we have no further questions in the queue, I'd like to turn it back to your speakers on today's call for any additional or closing remarks.

So if there are no further questions thank you very much for being with us today. And as usual I remain at your disposal for further information and requests from you. Thank you very much.

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