Natuzzi SpA (NTZ) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi first quarter 2012 earnings conference call. At this time all 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, Angela River, Controller, and Silvia Di Rosa, Investor Relations. As a reminder today's call is being recorded and I now turn the conference over to Silvia. Please go ahead ma'am.

So good day and welcome to Natuzzi conference call. In our call today, like the girl said, are present Pasquale Natuzzi, Chairman and CEO, Vittorio Notarpietro, CFO. Mr. Notarpietro will advise the first quarter 2012 results and then, at the end, he will be very happy to answer to your questions. You should have received an e-mail copy of the Natuzzi earnings results. 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 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 that we 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, 2011. 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.

Good morning, everyone, and thanks for being with us today to analyze the data for the first quarter 2012 of the Natuzzi Group. As we did for the last conference call, we've prepared a presentation that you should have receive via email, or can find within our website under the Investor Relations section, through which I will provide you with a brief overview highlighting the main items of the income statement for the first quarter of 2012. After my presentation, Mr. Natuzzi and myself will be happy to leave space for the Q&A session.

During the first quarter of 2012 Group's net result was mainly affected by the following items. First of all, the positive impact from foreign exchange since the euro/US dollar cross passed on average from $1.37 last year to $1.31 reported for first quarter 2012. Then an 8.8% decrease in net revenues. Total Upholstery decreased by 9.1% in terms of sales, or 7.5% in terms of seats sold.

A worsening both in consumption ratio of net sales from 42.2% to 44.4% and in transformation costs, labor and industrial costs ratio passed from 22.5% to 23.6%. And transportation costs ratio slightly worsening from 9.3% to 9.7%.

Overhead costs made of other selling and G&A costs decreased in absolute terms during the first quarter this year, but increased as a percentage of net sales, passing from 21.4% to 22.9%. So, as a consequence of the factors mentioned above, EBIT was negative at minus EUR7.4m as compared to a negative EBIT of 2.5m reported for the last year's comparable quarter.

In slide number four you can see the full detail of profit and loss for the quarters ended March 31, '12 and '11. We are just considering the quarter as a whole. Group sales performance during the second part of this quarter was characterized by an increasing trend. Indeed, sales in March were almost doubled with respect to sales in January and up by 23% over February.

That was mainly due to a recovery, especially in March, in invoicing of the overflow from the two previous months. In fact, during January and February we experienced some negative events that delayed the production, namely the strike in transport in Italy and some snow, and the closure of the Chinese plants one week more than the previous year.

Year-to-date order flow is basically in line as last year. Furthermore, we reported a more favorable incidence of the higher price brand, the Natuzzi Italia, versus the other brands, Italsofa, Editions and Softaly, especially in March 2012. Consequently the incidence in March of the cost of goods sold were back to almost 64% on net sales and so EBIT for the month of March turned out to be positive.

Lastly, it is worth being noted the fact that the Group has (background noise) in March 2012 grew sales volume at least in a range around EUR45m is able to reach a breakeven at the operating level.

As for the exchange rate impact, in slide number six, you will see the development of the euro/dollar cross rate during the first quarters of '11 in red and '12 in blue. As you can see from the graph, during the quarter, US dollar on average appreciated 4.4% versus the European currency with respect to last year's first quarter, thus positively affecting sales denominated in US dollars. The positive contribution from the appreciation of US dollar versus euro was EUR1.9m on sales and EUR0.3m on EBIT.

Upholstery net sales decreased by EUR9.7m, minus 9.2% versus Q1 '11 as a combined effect of different factors; a decrease in volume of 7.5%, a positive contribution from foreign exchange plus 1.5%, a positive contribution from price increase plus 1.8%, a negative contribution from sales mix minus 5%, due to increased sales of low and medium-end products versus higher priced Natuzzi branded sofas.

From a geographical point of view, the incidence of sales from the Americas on total Upholstery net sales increased by almost 10% from 26% last year to 36.3% this year. Whereas the percentage weight of sales from Europe, including Italy, decreased from 59.9% to 49.5% in the first quarter of this year. In the rest of the world region the percentage of sales remained substantially flat.

As anticipated in the press release, the Natuzzi Group continues to strengthen its presence in the BRIC countries Brazil, Russia, India and China, where we reported encouraging results. In particular, sales from Brazil over the brands increased 228% to EUR1.7m from EUR0.5m reported in the last year first quarter. In Russia, sales of Natuzzi Italia branded products increased 121% to EUR0.5m.

Consumption, as already mentioned in the highlights, increased by 2.2% from 44.4% to 42.2% mainly due to sales mix and increase in raw material prices as set forth in the following slide. Transformation costs of net sales increased by 1.1%, mainly due to a higher percentage incidence in labor costs from 16.2% to 16.8%, mainly because of wage increase in China, Romania and Italy.

A worsening in percentage incidence of fixed industrial costs, 6.8% versus 6.3%, following a decrease in turnover; in absolute terms industrial costs were substantially unchanged. We already mentioned increasing sales during March 2012 had a positive impact on the productivity side, with particular reference to the Brazilian and Chinese plants.

In the slide on page nine you can see the growing trend in raw hide price from January 2009 through March 2012.

During the first quarter 2012, transportation cost as a percentage of total revenues, slightly worsened due to a different sales mix and geographic mix, namely more sales towards United States of America.

Net financial position at EUR43.7m as of March 31, 2012, decreasing by EUR11.6m as compared to EUR55.3m as of December 31, 2011. Such decrease is a result of the following. EUR4.9m reduction attributable for working capital needs and investments carried out in quarter principally in the new Chinese plant and for implementation of SAP project, and EUR4.5m due to income-generating dynamics and, finally, a EUR2.2m negative effect of translation adjustment of cash.

It's important to underline that the cash position has been stable over the quarter after a drop at the beginning of the year. We are particularly focused on working capital, cash absorption and investment as well.

The economic environment is what it is so far, difficulties still persist in Italy and Europe. The worldwide growth rate is less exciting than time ago but even in this difficult period we continue to concentrate our efforts on internal improvement margin in different periods.

The main goal is to reduce the complexity, what does it mean? During decades, we have transformed the Company from a mono-brand company to a multi-brand one. We had just to serve office business and then we started with retail. We produced just sofa while today we offer a full range of furniture within a retail concept of total living.

We were used to produce 100% in one place in Italy and now we have a global industrial platform. We basically managed sales from Santeramo, whilst today we have sales people worldwide. We have been creating new models to differentiate product offering, we adapted products for the specific needs of every single client.

Albeit we created the today complexity that we accepted in order to reach sales, we realized that we have to manage differently each of those elements, how rationalization of product platform for each plant which are different and cover different market segments. Leverage on existing models and capitalize the investments made on them. Selective introduction of just innovative products, industrialization of the existing new models with the goal to reduce the number of components we use in production and implementing the lean production logic. Those last two actions are really crucial for us.

We built a think-tank unit which is analyzing, testing and implementing the product industrialization on both new products and existing top seller items and the production system. We are cooperating with a top brand consultant specialized in this field and the first results are just exciting.

We understand there is a potential saving in cost of product which is very different by each model, but the fact is it's a double-digit reduction if we calculate saving in materials, component, production time and quality improvement. Thanks to those first achievements, we were recently able to achieve new business with big buyers in Europe and the United States of America.

The lead production system is already in place in Romania and in progress in China and Brazil. Innovation is crucial for services as well. The reduction of complexity along with the full implementation of IT system SAP worldwide will facilitate also the rationalization of overhead costs.

Thanks to SAP IT system we have just started the analysis of selling, general and administrative processes. Very first results are promising. By doing less we can improve control quality and reduce reaction time and people involved in each process.

Today, growth is not possible in Europe at all, but in Europe Natuzzi has a lot to improve with big clients like Gucci, or Ferrari and others, which we are stressing with our Key-Account program that we built up with the same logic that made us successful with IKEA. Our (inaudible) in the field are focusing on growing markets, mainly BRIC, Brazil, Russia, India and China. In each of those countries we have focused sales people in order to take advantage of the economy.

The recent launch of Italsofa brand, which has been definitely successful, will give us the possibility to explore a new market segment mostly characterized by fabric upholstery for the young target of clients. In the USA, we have the good High Point distribution [assets]. Sales force there is leveraging the increasing brand and product portfolio, which allows the Company to cover the entire range of opportunities which the USA offers. Key-Accounts are crucial, but there are areas where the high-end brand of Natuzzi Italia can be developed properly as well. In the meantime, Natuzzi Editions continue to serve the core of US market.

China will be soon the biggest market, followed by North America. In China and Far East we have a well-established organization that we built in order to leverage on those economies. China's close to being the most important market worldwide and we are working to improve our operations over there, where we have production facility -- facilities and sales force. So we are analyzing different opportunities in order to maximize our presence in such markets, even with the made in Italy product, which is already performing quite well.

Europe is having contractual difficulties but the Chinese competitors here in Europe are experiencing higher labor costs, an appreciation of renminbi versus euro. Labor costs in China is more or less the same we experience in some countries in Eastern Europe, like Romania for example, but from Romania delivery time and service level for European retail players is much better with significant impact also working capital.

So the game is changing in favor of companies like Natuzzi, which invested also on European production platform. In USA we insist to the same trend we mentioned before for Europe, delivery time, working capital needs, service, quality. Stronger renminbi versus US dollar are giving to North American manufacturers new competitive opportunities they lost in last decade.

Obviously we cannot ignore those important changes worldwide. Although the today's situation it is not easy at all, there are many, many new opportunities coming.

And I would like to conclude with the same words Mr. Natuzzi wrote in the press release. Today the growth opportunities are in very specific geographic areas of the world. The Natuzzi Group is the only player with manufacturing and distributive assets that can be considered really global. This brings Natuzzi in the best position to play a leading role in the industry. The Natuzzi brand is associated worldwide to the excellence in design and Italian manufacture that, together with a unique knowhow, allows me to look ahead beyond the current difficulties with renewed confidence in our capabilities.

Thank you for your time, now we are available for your questions.

Thank you. (Operator Instructions). We will pause for just a moment. And we'll take our first question from Bart with Ratio Capital.

Hi, gentlemen, first question on the net sales performance in March, how does the March net sales performance compare to the last year?

Hello, sir, we'll check this number and we'll come back later. Okay?

Okay, perfect, thank you. Another question on the net sales development in the rest of the world, which is lower than last year, could you comment on that, why that's the case given that I would expect we would be able to grow in the rest of the world?

Okay, in order to answer your question we have to understand which is the distribution we have today in the rest of the world, mainly in China. We have big distributors, partners over there and they come in Italy to put orders once or twice per year. Last year we came and, during the first quarter -- within the first quarter of the year and they placed orders. This year, due to a different calendar, they decided -- and some more stock maybe in their warehouse, they decided to come later. So the flow is not comparable because of a different calendar of purchasing made by them.

And the situation in India where we have been opening a couple of stores, how is that developing?

India is low (background noise). So India is doing well, but it is still, considering the size of the market, the numbers compared with our total turnover are really few, but we are very much confident and optimistic about the growth of India.

Thank you. And the final question regarding the measures to improve efficiency and recovering market share. Could you comment on your feelings regarding the progress Natuzzi has made so far and how much time we still need to further improve steady profitability of the Company?

Let's say we are very much satisfied so far with the method that we put in place and obviously we are, let's say, attacking brand by brand, market by market and factory by factory, so in other words we should start from somewhere, we should have a priority. But anyway the method is solid in place. The organization is in place. We will see a sound result certainly next year. Let's say all this year we've been dedicated to the organization, but we will see already the good result starting from next year.

And why shouldn't we see more results already this year, given that I would say the slide of the outlook of 2012, and the measures we are taking, well, the slide (multiple speakers) is very familiar here.  I'd say the slide taken then for the, I would say, last year say 2011.

Okay, then let's say we already took three models. The top seller models okay that they generate a very high volume. Let's say about 70%, 80% of our total sales.

So we took three models that they represent 70%, 80% of our total sales. We re-engineer it from -- with innovative material, innovative way of building the product, and innovating way of manufacturing the product even in the plants.

So we have a plant here in Italy that we use it just as, let's say, a test, an example. We call the moving line, it's a very different way of manufacturing the product. We implemented even the moving line production in Romania in our factory. And we started also in China. The result of those three models together in terms of saving costs, or cost saving has been between the material, between the new engineering way and between the production -- new way of manufacturing. We save about 10%. It's a really huge, huge opportunity.

But because we have something like 500 models in our collection between all the brands, all the factories and all the market we are working in reducing the complexity, the existing complexity by dropping the models or versions or coverings that are not performing. But it is not easy to drop the model and version because we should go, model by model but market by market and customer by customer, because we don't want to disappoint the customer.

Because probably looking on all the numbers if we took a model that would probably generate only EUR100,000, it's not productive for the company to keep in production EUR100,000 models. But for some customers in America or in China it's a real popular model. And before we drop that we need to talk to the customer and give them an option, an alternative.

So it's a very, very [intricate] way of managing the business. But the opportunity is huge. Through the reducing of complexity and through the product innovation and through the process, industrial process innovation we experimented that we can save 10% which is huge, and so that's the updating that I can give to you.

Okay. Thank you.

(Operator Instructions). It looks like we have no further questions at this time. I'm sorry it looks like we just had somebody queue up. Dimitri with QuaeroQ.

Hello, good afternoon, buon pomeriggio. Just two small follow-up questions, the first one would be to get a more granular overview of the current sales trends in the different European markets a bit country by country. And the other one would be the breakeven level of the Brazilian operations.

Okay, do we have the numbers of market by market?

(Spoken in Italian)

(Spoken in Italian). Okay, let me start from Brazil first okay, and then Vittorio, our CFO, will answer regarding the sales performance in Europe country by country.

Of -- I mean breakeven, we don't have now -- Vittorio do we have the breakeven point for the Brazilian factory now?

The company is operating at, let's say, 20% of its capacity. And so the full capacity is crucial for the breakeven.

Okay. Let's say we don't have the breakeven point yet, but I can tell you that we are very much confident about the potentiality that we have in Brazil.

I was in Brazil two weeks ago or three weeks ago, and talking about Natuzzi Italia, we must go brand by brand okay. Talking about Natuzzi Italia in January, early February when I was in Brazil because we had an exhibition there, ABIMAD in Sao Paulo. There was -- I met a lot of Brazilian customers that are interested in opening a Natuzzi Italia store. So I met several customers, several people.

Then during the Milano Fair in April, 13 customers from Brazil that are very much interested in opening a Natuzzi Italia store, they came to Milano. They visited our stand in the fair. And then they came in Via Durini in Milano in our flagship store, where the management, the Natuzzi management did the brand strategy presentation at worldwide level and also our brand strategy regarding Brazil. We are ready now to go there and implement the development of Natuzzi Italia business.

So then I went there again three weeks ago, and meet the customer. Because you know I met them in the fair and then they came to Milano, then the next step would be for me to go and visit their store and understand who they are because, especially for Natuzzi Italia store the partner selection is crucial. We need the partner that they understand the high end brand, they know how to manage, so again a very wonderful result.

Now we are at the stage where we are evaluating the value of the market for Natuzzi Italia in Brazil. Starting from our price range, what is the value market and we are negotiating with the customer because we needed to -- I mean we are targeting Brasilia, we are targeting Belo Horizonte, Rio de Janeiro, Sao Paulo, Porto Alegre. There are seven cities that we already identified and we have the customer there waiting for us to make a proposal how much business we expect to do based on the market value and based on the market share that we want to achieve. So we are at this stage. And that's why it's a new business development for Natuzzi Italia.

Regarding the Softaly, again we have Magazine Luiza. Magazine Luiza is a company with 650 stores, and they are listed at the Sao Paulo Stock Exchange. We started with this company last year in July and we opened the 13 galleries with three models.

Magazine Luiza operated primarily with TV and electronics, while for the furniture upholstery very, very low. So with us they experimented a medium, medium high product price level, and the test with the 13 galleries went very, very, very well. And Mr. Luiza, the President of the company, gave us another 57 stores that we are going to implement the galleries within the next months in July. So we are receiving already new orders. All the new galleries that we are opening we are getting very, very good brand name response, a very, very good response.

Then there is another company, a huge company called Maquina de Vendas that owns Insinuante, they've got Eletro and another two brands. In total they have more than 100 stores -- 1,000 stores I'm sorry, 1,000 stores in all Brazil. We will open within the next month a six gallery test in the state of Bahia where we have our factory. And we have been talking almost now for one whole year time with the president and the CEO of the company. They are very much interested in cooperating with our Group. So that's another very good achievement.

There is the third and largest group in Brazil called Casas Bahia. Casas Bahia came to us and they said we want the same concept that -- as Magazine Luiza. We will meet. We met with them several times; we will meet with them again next week. We are going to open this customer and another two large customers in Sao Paulo and Porto Alegre area, Colombo with 400 stores and CEM another huge company with 190 stores. We are -- let's say developing relationship, developing the business. But there is a really huge potential for the Natuzzi Group there with Italsofa, and that has to do with private label, with the Softaly.).

Regarding Italsofa we are performing very well, opening a gallery almost every two weeks. New gallery, new gallery, new gallery, the customer are very much satisfied.

We are getting a place, a product placement in the movie in Brazil, in TV. And then we are again now is the time of developing here. But I am very much confident that next year we will do a breakeven and then the following year is the '14 and the '15 we will really start making money and gaining market share of the Brazilian market. So that's the scenario of Brazil.

Dimitri, coming back to on -- the point (multiple speakers).

Dimitri, are you there?

Si, si, yes.

Oh okay. All right coming back to some numbers on Brazil. Obviously the Brazilian point depends on contribution margin that we have there. The higher will be the quality of sales that Mr. Natuzzi is focusing on, and the sales force, the closer will be the breakeven point.

This year will be in the area sales in Brazil will be in the area of EUR9m, EUR10m. At the today's conditions we have a breakeven point in the area of EUR30m at the today's conditions before the improving of margins on which we are focusing on.

Then I would like to answer to the other gentlemen. But if I may I need to have something else. 2010 we did EUR700,000 business, 2011 we did EUR3.7m or EUR3.6m, EUR3.7m. This year the goal is EUR9.5m. But even if we do EUR8.5m I will be very happy considering that we are still in the, let's say, we are developing the business. We are opening the door, gaining floor sample. In other words more doors we open, more space we occupy with our product and that's the potential business that we will get in the years to come.

So coming back to a question we received from another gentlemen regarding Asia Pacific, why sales in Q1 were negative. Today order flow is plus 10% and this confirms what I was saying before about the different calendar.

And then there was another question regarding March 2011 sales. We did EUR45m, so EUR2m less than this year. And we reached a breakeven. But please consider that the raw material prices were completely different from today. But anyway the sales were EUR45m versus EUR47m this March.

Can we come to the sales trends in the different European countries?

Oh sorry, Dimitri, okay European let's start from divide Natuzzi from other brands. I will mention the top ones and then I am available as usual to send you all the additional information.

Okay.

In the United Kingdom, Natuzzi was minus 20% but was up 32% with other brands. In Belgium, Natuzzi was minus [34%] and the same percentage for other brands. In Germany Natuzzi was down 22%, and minus 10% with other brands. Those are the main areas. And then we have a number of countries that we'll be happy to send you in detail by email if you want.

Okay.

Thank you.

We have no further questions at this time. And actually it looks like Dimitri has re-queued for a question. Please go ahead, sir.

Yes. Vittorio, just on the cost cutting or on the overhead reduction exercise, could you give me an indication of I would say the timing of the implementation?

Dimitri, we are already focused on that. We, as I said before, we have a strong sales force and organization worldwide and production as well. Obviously we had some -- because of volumes, of decreasing volumes we have the issue to reduce those overheads okay. But before doing some [decisions] we have to analyze deeper all the processes in each of the countries where we have people.

Have in mind that we cannot disclose the sales force, thanks to the IT system SAP we are now just in these days ready to go deeper. We started with the USA, let's say, organization and we analyzed the process between headquarters and local organization. And we found some overlapping that we have already understood and we have already a plan in order to reduce by a double digit the people over there doing bad -- doing less, doing better, doing faster.

This is for -- but in terms of sales force maybe we have to invest over the countries, because the problem we have is to have people enough in each of the countries we are addressing selling more sofas than we are selling today.

The same analysis we did in United of America will be repeated, and done in the countries -- in the other European countries. Because in the Far East we have a good organization I don't see particular room to reduce overhead over there. Brazil is Brazil and we just build up the new organization, so with another story what is giving us a triple digit increase overall.

Let's -- I am sorry, Vittorio, let's say that because we have SAP everywhere in our system we are -- our goal is to analyze process by process that get involved from the customer, which promotes the business and then go through the factory and then back through the customer. And all the people that are involved in this process we are analyzing in order to shorten the process and to even analyze if there are some overlapping.

And there are overlap -- there are opportunities to reduce the number of people that are within the process, but that doesn't do more with back office, with -- all the management. So while we see absolutely there are improvements in terms of lowering the cost in the service, because SAP will help us absolutely, we needed to increase the cost on the marketplace in terms of sales people.

Because having the three brands and plus the private label we are [not] improving even the organization of the marketplace, because while we used to have one single person wearing the Natuzzi hat, today the same person cannot wear the Natuzzi hat and then Leather Edition and then Italsofa. So it's our intention to separate the sales organization having dedicated people for Natuzzi Italia that require different skills. And they must be strictly dedicated to Natuzzi Italia.

Regarding Leather Edition our -- we need different people; they must be just sales people. They shouldn't be brand promoter and brand manager people. So, we are working the organization on the place while at corporate level we create already, let's say, a brand portfolio and giving a clear identity to each brand, Natuzzi Italia, Leather Edition and Italsofa, but with huge potential, despite the crisis around the world with huge potential.

But we need to have the appropriate people with [training] on the marketplace. And that's our daily challenge, how to improve that. And when we do that, certainly we will start to grow again, that's our goal. Are you still there?

Okay, thank you very much.

(Operator Instructions). So it looks like we have no further questions. I'll turn the conference back over to Mr. Vittorio for any additional or closing remarks.

Okay, thank you very much for your time, we appreciate it. Thank you. Bye-bye.

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