Natuzzi SpA (NTZ) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi fourth-quarter 2011 earnings conference call. At this time, the participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions.

Joining us on today's call from New York are Natuzzi's Chief Executive Officer, Pasquale Natuzzi, and Chief Financial Officer, Vittorio Notarpietro; and from Italy Angelo Riva, Controller, and Silvia Di Rosa, Investor Relations. As a reminder, today's call is being recorded. I would now like to turn the conference over to Silvia. Please go ahead.

Good morning, everyone, and welcome to the Natuzzi conference call. Today from New York, Pasquale Natuzzi, the CEO, and Vittorio Notarpietro, the CFO, who are there for an important meeting with the USA space, will present the data of the fourth quarter and the full year 2011. After disclosure of the data, Mr. Natuzzi, Mr. Notarpietro and Angelo Riva, Director of Corporate Controlling that is here in the headquarters in Santeramo will be happy to answer at your questions.

You should have received an email copy of the Natuzzi earnings results and of the analyst presentation. If not, you can find the information at 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 laws. Obviously, actual results may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial conditions. We have the risk and the uncertainties which have in the past affected and might continue to affect our results of operations and financial conditions in the annual report on Form 20F 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 20F actually from the United States Securities and Exchange Commission.

So now I will pass the call to the CFO, Vittorio Notarpietro, from New York. And after his speech we will be happy to answer to your questions. Thank you very much.

Good morning, everyone, and thanks for being with us today to analyze the data for the fourth quarter and full year 2011 of the Natuzzi Group.

I apologize for having anticipated the conference call. We are here in your city to meet our American colleagues for a business review. We did the same for European region weeks ago and planned the next two meetings for Asia Pacific and Brazil areas by the end of April. So please forgive us for having moved the conference call.

To simplify the analysis and explanation of the events that characterize the 2011, this time we have prepared a brief presentation to which we'll give you a brief overview highlighting the main items of the financial statements for the full year 2011. Afterwards, I will give you a more bridge -- a bridge analysis that isolates the events that led to the most important variances between the EBIT of 2011 and the one in 2010.

On page two of the presentation, there are highlighted the key events that had a significant impact on results. First, the negative exchange rate impact across euro/US dollar had passed from an average of 1.326 in 2010 to an average of 1.391 in 2011, but also Chinese renminbi appreciated versus US dollar.

Then a decrease of net revenues of 6.2%. Third, an increase for both consumption from 41.2% in 2010 to 44.3% in 2011, and transformation costs from 20.8% in 2010 to 22.7% in 2011, mostly driven by the increase of raw material prices, increase in labor costs and, of course, by decreasing production volumes.

On the contrary there has been an improvement on transportation costs, commissions and advertising in absolute terms and as a percentage of sales. And, finally, the overheads have declined by EUR0.3m but they grew from 20.7% in 2010 to 22.2% in 2011 as a percentage of net sales. As final result of the above the EBIT has passed from plus EUR0.4m in 2010 to minus EUR27.3m in 2011.

In the slide three, number three, you can see the full detailed profit and loss 2011 compared with the previous year.

With regard to the exchange rate impact in slide number four, you can see a graph showing the evolution of the euro/US dollar cross quarter by quarter in 2011, red line, and 2010, blue line. As you can see, there has been an appreciation of euro versus US dollar average of minus 4.9% for the full year from 1.326 in 2010 to 1.3910 in 2011.

In the last quarter of 2011, on the contrary, there has been a large depreciation from 1.359 to 1.348. The exchange rate's full year impact has been negative for EUR5.9m, at revenues level, and negative for EUR2.3m at EBIT level.

Slide five, total revenues with a decrease of 6.2% versus 2010 stood at EUR486.4m. The Upholstery sales show a decrease of 7.7%, a reduction that arises from the combined effect of lower volumes, negative exchange rate impact, as has been before, partially offset by some selected increase on prices made during the year.

Geographically the only positive performance to highlight is the Rest of the World, with a plus 5.7%, but the increase of BRIC area, Brazil, Russia, India and China, has been much higher, 64%. The most significant results came from Brazil, from almost zero we built EUR3.5m business which will triplicate in 2012.

Why? Because the new organization there, the great coordination with Corporate Office, a good implementation of the clear corporate brand strategy convinced the most important distribution players in Brazil to start a new era with a furniture global leader which Natuzzi still is. Brazil is just starting falling in love with the vision and the quality of Natuzzi. In the next Milan fair this month, we'll host many of them who will fly from Brazil to better appreciate the huge potential Natuzzi can offer to them in their own country.

Slide number six. Consumption, as already mentioned in the highlights, has increased as a percentage of sales, rising from 41.2% in 2010 to 44.3% in 2011. This negative trend is mainly explained by higher raw material prices in 2011. The negative macroeconomic environment hasn't given us the opportunity to reverse such impact on selling price. It would have been a mistake, the right way is to increase efficiency and reduce costs.

Labor costs and industrial costs have been affected by two main reasons. On one side the increase of basic salaries, the renewal of labor general agreements in all the plants of the Group, on the other side to the extraordinary production shifts, mainly from China to Italy, due to the relocation of the existing Chinese plant to the new and bigger one, 88,000 square meters, made in April 2011.

We had to face strikes, we had to pay extra money to convince a portion of workers to relocate themselves, we had to hire non-skilled people, etc., etc., but now it's finally done and the productivity is rapidly improving in China as well as in other plants.

The trend of raw materials rising prices is clearly shown in slide number seven. It is possible to see that in 2011 there has been an increase of 9.3% versus 2010 on purchases prices and, as a result of lead times, the increasing consumption prices is slightly lower at 6.3%. This means that we will suffer even in Q1 2012, the raw materials price increase. But then we'll start getting advantage of lower prices we are experiencing starting from December.

As you can see in slide number eight, labor costs grew from 14.9% in 2010 to 16.3% in 2011. We experienced a different labor costs growth rate and different timing in the four plants; in Italy by 4% from January 2011, in Brazil by 9% from October 2011, in Romania by 8% from July and, finally, in China by 14% from April. Really interesting is to know that Chinese workers' costs for salaries is now in line with the Romanian one.

Going forward, as a result of the above mentioned facts, there is slide number nine with the bridge analysis of EBIT result from the positive EUR0.4m to the negative EUR27.3m in 2011. Let me highlight again the total of volume, mix, advertising effect for minus EUR6.1m, the lower profitability impact for EUR14.4, again mainly driven by the incremental raw material prices and labor costs only partially offset by some increase of selling prices and recovery of efficiency in the plan.

And, finally, the extraordinary one-off effect of the relocation of the Chinese plant, which generated extraordinary costs due to strike, lower efficiency of the plant and shift of production during that period in other Company plans.

Let me briefly pass, with slide number 10, the Q4 2011 highlights. A slight positive impact of exchange rate as mentioned before with the US dollar/euro ratio passing from 1.359 in 2010 to 1.348 in 2011; a decrease in total revenues of minus 1.8%, improving from previous nine-month trend; an increase of consumption and transformation costs as well as a reduction of transportation and advertising costs; commissions are quite flat; and, finally, an increase of overheads.

As a result of that, the EBIT result passed from positive EUR0.2m in 2010 to a negative EUR10.3m.

In slide number 11 you can find the complete profit and loss for Q4.

In slide 12 you can find net financial position evolution during 2011. At the end of 2011, net financial positions stood at EUR55.4m, with an improvement of EUR9.8m compared to December 2010. As it is shown there has been being one positive blip during Q1 2011, because of the refund received from China; a reduction in Q2 2011, driven by both profit and loss negative results and working capital; and in Q3 and Q4 again a reduction driven by negative impact of profit and loss result, partially offset by a recovery on working capital.

You then find in slide 13 the net financial position variations from the profit and loss negative contribution on net result of EUR19.6m, partially offset by non-monetary operating costs of EUR4.6m; from working capital a negative contribution of EUR4.7m; from net investments a positive contribution of EUR28.9m; and finally from others, mainly exchange rate and cash in foreign exchange -- in foreign currencies, a positive impact of EUR1.6m.

In slide number 14 you can see the cash flow evolution for both full year and Q4 2011. During Q4 there has been a negative impact coming from profit and loss resulting for EUR5.1m, partially offset by a recovering working capital of EUR2.8m.

You can see that in cash flow we would like, with slide 15, to mark the influence in the result coming from the extraordinary facts of 2011, the relocation of Chinese plants and the lower level of profitability driven by the incremental raw material and labor cost.

Due to that we have isolated in slide 12 (sic) such two main effects. The first is the effect of Chinese relocation, which had a net positive contribution of EUR26.3m. Why? EUR46.7m, which is the gross refunds from China, minus EUR4.2m related to layoff costs paid to employees for the moving, minus EUR10.2m related to investments made for the construction of the new building and minus, again, EUR6m due to extraordinary one-off costs for production shift and inefficiency for the -- on the Chinese plant.

This second is the effect of the lower profitability due to the incremental costs, raw material and labor not completely recharged into the market selling price for an amount of EUR14.4m. We have already put in place several actions to offset such increases, mainly through innovation and simplification of products, Lean production and increase of efficiency of the plant. This is the main action we have taken for 2012 budget, with the aim to recover the most of such negative impact. Today's lower raw material prices will also help a lot.

Having said that, we can understand that the, let's say, normalized cash flow result would have been instead of the reported positive EUR8.9m, negative for an amount of EUR17.4m. I mean excluding the relocation compensation impact and would have been negative for EUR3m not considering the lower profitability effect, whose recovery is the main goal of the 2012 budget.

And, finally, let's pass to slide 16 for the 2012 overview. We all know about the persistence of a weak economic situation where consumptions are still in trouble in many countries, but we understand there are, anyway, room to go for our Company. There are opportunities in major markets and growing markets. We are the only global player with production capacity and sales organization in any part of the world ready to be leveraged..

We are the ideal partner for mass merchants and we have the leading premium brand in the industry to leverage. The name of the game is reduce complexity and optimize processes. What does it mean? Just to give you a small example we have 50% of our SKUs producing the 90% of sales.

We are now implementing a 360-degree approach through a complete reengineering of the business in order to consolidate the existing product portfolio, introducing newly engineered products; reduce the number of components, leather, fabrics, foam, wood, everything; reengineering the production processes in all the plants thanks to the Lean production approach, whose very first results are just unbelievable.

Whilst doing this we are also analyzing any other process inside the Group with the aim to rationalize the internal steps of any process. Now that we have in place the SAP integrated system in any Company belonging to the Group, we are able to simplify processes and save time and resources and execute faster and better than before the same processes.

So, on the basis of reasons for 2011 results, we are working on a recovery action plan in order to improve quality of sales, I mean discount policy, selective price increase, introduction of new products, improve efficiency through simplification and innovation for both products and processes and, finally, a structural approach for a significant reduction of the overhead costs.

We understand there is a huge potential to improve sales efficiency and results. We were able to change the trend in Brazilian market, which was considered an impossible mission. Thanks to our skills and our passion we'll do the same in major markets that we've served since 1959, becoming the industry leader.

Thank you all for your attention and I will be happy to answer your questions.

Thank you. (Operator Instructions). We'll go first to Bud Bugatch with Raymond James.

Good morning, I just have really one question. Did I hear you correctly say that you were not instituting or had not instituted major price increases and that you thought raw material costs were actually coming down into 2012?

Yes, raw material prices are coming down in 2012, starting from the higher prices in 2011, and we are doing just some very selective increase of prices. What we are finding is more efficiency.

If I read the results correctly and do a little bit of analysis on a per seat basis, it looks like raw material costs in the fourth quarter were up about 14% per unit, year over year, while the selling price was up about 3% per unit, year over year. And that really doesn't bode well. And I've heard also that foam costs are going up now because of a shortage of TDI and polyol that the foam producers were instituting price increases. I don't know if you're seeing that in other parts of the world.

Honestly, we are not updating about this issue. But we will find out just today.

You know that the percentage of TDI on final cost is much lower than leather and labor. And for sure, leather is going down, starting from December 2011.

I'm sorry. Where have you got this information, because again, overall, we are monitoring the raw material costs that are going down as expected? But regarding the TDI and polyol, honestly, first time I'm hearing that.

Pasquale, if you look, I think there was an article in Furniture Today, about a week or maybe a week and a half ago, talking about the fact that the foamers were putting through price increases that I think went from -- anywhere from 14% to 22%.

But again, as Vittorio said, the foam incidence on the -- our price -- selling price -- the incidence foam, it's around -- the foam itself, it's probably 3%. Now the TDI and polyol will be just a small incidence. And likely, the way we manage the business, the way the price structure in our industry -- you cannot raise prices by 1%, by 2% because everything is based on price point.

So in other words, the customer, they are retailing a sofa, a coffee table, whatever, for EUR2,000. And they are struggling to get their margin on EUR2,000 or $2,000 retailer. If you raise the price by 3%, there are two alternatives, one, reducing the margin of the retailer. And they get very disappointed because everyone is looking for margin today. Or then you should jump from EUR2,000 retail price, to EUR2,100. And today, the consumer are paying so much attention to the price that it's really unbelievable. So that's why many -- like last year, the raw material price went up. The business was horrible because the consumer confidence was very low. How can you raise price in a business climate like that? That's the story.

I understand the predicament. I'm just looking at the numbers and commenting on the fact that I think per seat, last year, raw materials as a percentage of per seat, at least on an overall basis, was about 46%. And this year it's like 51% per seat. So you've had a 5% unfavorable --

Okay. But let's say that because we are improving the sales of Softaly. Softaly is a program for mass merchant. Obviously the cost of goods of Softaly, it's much higher than Natuzzi Italia or Leather Editions for example. We've got BUT in France, B-U-T. It's a chain of store with 220 stores, I believe. So we got in there. We got Harveys in England. We are performing moderately well with Softaly, where the raw material incident, it's much higher. And that's why. It's not just because of the raw material price increase. But it's because the mix, that we are selling more product with a low -- with higher cost of raw material and lower margin. That's the business situation today around the world.

Fair enough. I understand. Okay. Thank you very much. Good luck on 2012.

Thank you. We need that.

(Operator Instructions). We'll go next to Bart van den Wijngaard with Ratio Capital.

Hello, guys. First question, on the overhead in the fourth quarter, could you explain why they increased by EUR4m year on year, since I saw that over the first nine months they were actually lower than last year?

Yes. The main reason is in the line of labor costs. Due to the increased activities, we -- in the comparison between Q4 2010 and 2011, we used for a smaller portion, the cassa integrazione -- the layoffs. So we had to spend more money for the existing people because we asked them to work more. But then, we have also the impact of more traveling expenses, due to the sales activities that we did in the quarter, compared the previous quarter. And lastly, there is a provision for bad debt, due to on credit -- on receivables, due to the difference in economic conditions in the two quarters. These are the three main issues.

And could you (multiple speakers) on the provision for the bad debt?

The provision for the bad debt is that we -- you know the amount? You want to know the amount or the reason?

The amount first please and both the reason.

Angelo, it should be EUR1.2m, if I remember well.

It's EUR1.7m, the total impact because there was a release during Q4 2010. And now there is an accrual for EUR1.2m. You are right. But the total impact on the difference is EUR1.7m.

Okay. Thanks. And what was the reason of this?

The reason of?

The reason of why you had to increase the debt for this year.

Every quarter, but especially at the end of the year, we do an evaluation of a single position of our trade receivables. And because of the deteriorating conditions in 2011 versus 2010, in some specific cases, we had to take some debt provision, considering the possibility to lose money with some clients somewhere in the world. It's just an evaluation.

I understand. Then on the balance sheet, the other long-term liabilities, they increased by EUR7m from the last quarter. Why is that?

Angelo, do you have the numbers there?

Yes, sorry. Angelo Riva speaking. There is around EUR6m related to restructuring costs. The big amount is related to that.

Restructuring costs. And was it also included in the EBIT in the fourth quarter then?

No, the restructuring costs, under Italian GAAP are below the EBIT -- are accounted in the extraordinary line.

Okay. But the extraordinary line in Q4 was --

Was positive.

Was positive.

Because we received -- we had the positive impact of the Chinese refund. And then we accounted a number of negative impacts, some of them coming from China, for EUR4.2m. And this provision for restructuring costs of EUR6m, for example.

But the EUR6m was just included in the balance sheet in the fourth quarter, while you already took the benefit of the Chinese in the second quarter.

Yes.

Okay. And could you explain the time difference or --

We had to account, in Q2, the Chinese relocation as soon as we had the possibility to do that because we left the production plant in May. And we had to account also from -- in the profit and loss the positive effect. The restructuring cost comes from an agreement done between the Company and local Italian authorities in October 2010, where we met authorities and we explained the situation. And we got the renewal of the layoff agreement for additional two years, from October 2011 to October 2013.

In this period, we will get benefits from our local authorities in order to spend those two years to reorganize the Company. But we announced that we -- at that time and still today, we have some -- I don't know the name of -- some redundancy of about 1,000 people. And according to the Italian law, we had to account some extraordinary costs to that.

Yes, okay. I understand.

So the timing is May for China and October for the restructuring costs. That's why the different timing.

I understand the timing. But then I still don't understand why, in the fourth quarter, the extraordinaries are still positive in the P&L because what is then the positive in the fourth quarter still, if the Chinese were in the second quarter?

It's different. We have some extraordinary costs coming from the Chinese relocation that were accounted during the year. And then, in October, we reached an agreement with Italian authorities, for Italian plants for Italian workers. And we stated in a document, we have 1,060 workers more than we need. And then we stated that we have to build up a plan, in order to reorganize the plant, reducing costs in the next two years. So before that agreement, I would not -- I cannot account any provision for that.

There are two different issues. We have operation issues in China, during the year, coming from the relocation. Then we have an agreement with Italian authorities, in order to reorganize the Company for the future.

Yes, okay. I understand, of course, this is two different issues. But let's continue with another question. On the balance sheet, we now have a short-term debt position and we have a cash position. Is it currently impossible to net those two items?

Yes, it is. If we will -- the money -- the cash we have in the -- in China, coming from the relocation in May, in Italy, we could offset the short-term borrowings that we do in Italy to finance some working capital needs. Of course we could, paying a 10% withholding tax in China in order to move money from our company in China to Italy. Of course we can.

So it's only a 10% withholding tax.

Yes, they introduced in 2008.

And what are the conditions of these short-term borrowings? Are there any covenants or --

No, no, at all. The short -- we have just short-term borrowings for cash needs. We don't have any covenants with anyone.

Okay. And then a final question, more from a Group level point of view. You're of course struggling for a number of years to improve our profitability. And now in the last slide, I saw that you mentioned you want a structural approach for a strong reduction on the overhead. Could you elaborate a little bit of that, what you mean with the structural approach?

Yes.

So as Vittorio said before, the SAP has been, I must say, implemented, almost in all our factories around the world. In Italy, our tannery, our foam company, our factory in Romania, in China, in Brazil, all our trade office, everywhere, we are all connected now. And obviously today, we are now -- in fact, the reason why we are here in America, Vittorio and I, with another three colleagues from Italy, it's just because we need to do the business review.

But also, this evening, three of our colleagues, they will go to High Point, in our North Carolina office, to analyze all the process because today, with SAP, we believe that we can reduce the number of employee and also make a process much leaner, and shorter and inexpensive. So the IT information, this SAP, certainly will help us to reduce the number of employee. And that's the way we are restructuring the -- that's the meaning.

Okay. Thank you.

You're welcome.

And there are no further questions at this time.

Okay. If there are no additional questions, we can stop here. I thank you very much for calling.

And that concludes today's conference. We do appreciate your participation.