Good day ladies and gentlemen and welcome to the Natuzzi First Quarter 2010 Earnings conference call. One note that today s call is being recorded.

Transcription

1 Natuzzi First Quarter 2010 Earnings June 1, 2010 Good day ladies and gentlemen and welcome to the Natuzzi First Quarter 2010 Earnings conference call. One note that today s call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Silvia Di Rosa. Please go ahead, ma am. Silvia Di Rosa: Good day and welcome to Natuzzi First Quarter 2010 conference call. Today in our call is Pasquale Natuzzi, Chairman and CEO, which connected with us from abroad; Vittorio Notarpietro, CFO; Umberto Bedini, Chief Operation Officer; and Cosimo Cavallo, Chief Commercial Officer. The CFO will provide the first quarter 2010 consolidated financial results, then we will open the conference call to your questions. You should have received an ed copy of Natuzzi earning results. If not, you can find the information at the Natuzzi website at the address You can also information request or questions to investor.relations@natuzzi.com. We will respond to you as soon as possible. Before proceeding, please be advised the discussion today could contain certain statements that constitute forward-looking statements under the United States securities 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 risks and uncertainties which have in the past affected and might continue to affect our results of operations and financial conditions in our reports on Form 20-F for the fiscal year ended in December This report is readily available on our website at or from us upon request. You may also obtain a copy of our Form 20-F from the United States Securities and Exchange Commission. So then I will pass the call to Vittorio Notarpietro, our CFO, to go in details in the numbers. Vittorio Notarpietro: Good morning to everyone and thank you for joining us today. At the end of this speech, I ll be happy together with Umberto Bedini, Chief Operation Officer, and Cosimo Cavallo, Chief Commercial Officer, and with our CEO Mr. Natuzzi who is connected with us by phone, to answer your questions.

2 Before seeing in detail the first quarter 2010 figures, I want to say that in the last month of 2009, we assisted at an encouraging improvement in consumer demand followed by an increase of order flows that allowed us to close with a positive result in terms of revenues versus the same quarter of However, we consider this improvement just a very first sign of recovery. As a matter of fact, we are conscious of the difficulties occurring here as we continue to be very focused to reach the 2010 targets in terms of EBIT, EBITDA, and cash generation. Analyzing more in detail the main 1Q 2010 figures versus 2009 first quarter. Total net sales, we performed a positive 13.6% increase versus the first quarter 2009 in spite of a negative slight impact of the exchange rate. Upholstery net sales went up by 14.9% mainly driven by volume increase of 12.9%. Product mix improved too. In fact, Natuzzi brand as a percentage on total sales was 47.2% versus 45.2% in same quarter of From a geographical point of view, the Americas that represented 32.3% of the upholstery net sales has a recovery of 22.4% with respect to the first quarter 2009, mainly derived by the Italsofa brand up 24% and followed by Natuzzi brand with a large 10%. In Europe, that represents 42.4% of the upholstery sales were stable versus In the rest of the world, mainly in Australia, Japan, Korea and China, that represents the 11.2% of the upholstery net sales, we had a huge increase of around 49% pulled by both brands brands Natuzzi up 56% and Italsofa with a plus 38.2%. Finally, in Italy we had a good demand of the Natuzzi brand that showed an increase of 26.8% versus the same period of As far as other sales are concerned, it s important to say that Natuzzi accessories realized a remarkable increase of 38.2%. Cost of goods sold recorded an improvement of 13%, passing from a percentage of net sales of 74.5% in 2009 to 61.5% in As you know, last year we started a complex restructuring process in the operations side that continues in many activities such as the reduction of lead time, reduction of complexity, and reduction of waste of raw materials. Thanks to this rationalizing process, we have already achieved important results that allowed us to achieve such important results in cost of goods sold. Innovation of the process is the key to understand our improvement. Improvement in cost of goods sold also was helped by favorable exchange rate euro U.S. dollar with respect to the first quarter We are also still factoring the positive impact of raw material prices, in particular leather which prices declined in In recent months, we had an increase in prices that will be more visible in the next quarters. The fact is we are exploring new suppliers, new sourcing from a geographic point of view, a different buying strategy between semi-finished and finished product that will partially offset the increased cost per square foot. As a result, we achieved an industrial margin of 38.5% versus 25.5% of the first quarter 2009.

3 Total SG&A passed from 40.4% to 38.1% of net sales, but let s go now in more details in order to appreciate the results of the efforts made by Group to keep costs under control. Transportation costs they increased from 9.1 million to 11.6 million as incidental net sales passed from 8.2 in 2009 to 9.1% in the first quarter of This increase was mainly due to the well-known rise of the shipping costs from China to the U.S.A. After 2009 lower prices, today we are faced with increasing costs for shipping from China to U.S.A. and some shortage in available containers. Commissions paid to agents were stable, representing 1.9% of total net sales. Advertising costs increased by 0.6 million, up from 5.7 million to 6.3 million but decreased from 5.1% in Q to 5% in Q as a percentage on net sales of costs. Other selling costs, I mean retribution, depreciation, lease costs and other costs passed from 15.4% of total net sales in 2009 to 13.9% in the first quarter of G&A costs in absolute terms decreased by 0.5 million from 10.9 to 10.4 million, lowering as a percentage on net sales from 9.8% to 8.2%. As we are doing the operations, we are working in reshaping of our worldwide distribution and administrative organization. We expect that results will be even more visible in the next quarters. EBITDA passed from a negative 9.4 million in Q1 2009, so minus 8.4% of sales, to 6.8 million positive in 2010, representing 5.3% positive on sales. As a result of the previous information, the operating income improved from a loss of 16.6 million to an income of 0.5 million in I want to highlight that we reached positive EBIT for four consecutive quarters. Now to commence the balance sheet. Cash and cash equivalents decreased by 2.1 million, passing from 66.3 million at the end of 2009 to 64.2 million at the end of March Net cash used in operating activities amounts to a minus 4.4 million. This negative performance was mainly generated by negative working capital for 10 million partially offset by nonmonetary costs of 6.6 million. The performance in working capital was largely due to an increase of leather inventories as a consequence of two combined effects: the increase in leather stocks to supply the North America project to reduce the lead time from China to U.S.A. and the increase in stock inventories to face the forecasted prices rise. Cash used in investment activities is substantially in line with our budget. We confirm that yearly investment for China factories relocation, such as staff implementation and retail rollout plan, will be mainly made in the second half of Net financial position passed from a positive of 58.5 million at the end of 2009 to 55.9 million in 2010.

4 Before we begin the Q&A section, let me recall the initial statements. We are still experiencing an unstable moment. At the same time, we see the very first signs of the Company s activities to react to and we remain focused on the main goal for 2010, which is the positive EBIT. Why? Because considering upholstery sales up to last week, last Friday, we are still in line with Q1 results, so efforts in May confirm 2010 Q1 results. Just let me remind that you net sales of the first quarter 2010 were up 13.6% thanks to a strong progressive increase in order flow recorded in the last month of During the first quarter of 2010, order flow strength was not so positive with respect to last month of Then, in latest weeks, we see again an improvement even if with diversified brands among the wide spread in geographic areas. Let s elaborate on that. The Italsofa and Editions brands are confirming the good result achieved during the Koln, Milan and Highpoint and the great potential of this new offer. Indeed, order flows from such brands are still in the area of a double digit increase, and in particular, it s great news that the Americas order flow is showing today double this increase after a very long period of decline. Natuzzi order flow in the first month is slightly positive in the U.S.A., suffering in Europe, and positive in the rest of the world. A portion of this reduction comes from the closing of roughly 30 point of sales under our restructuring plan I mean shut down and relocation of several stores. We promptly reacted, introducing in the Natuzzi brand new so-called entry price for store traffic products, that could stimulate consumer demand coherently with the brand position. Indeed, they started the so-called Home Fair here in Santeramo where we are meeting with all our existing partners and new potential ones. This is a very important step in our sales plan. First reactions from clients are positive and it will continue up to mid-july, giving us even more visibility on sales for the second half of the year. All in all, we continue to be concentrated on the cost saving plan, recovering our competitiveness, and motivated in achieving a positive EBIT for the full year. Thanks to everybody. Now Mr. Natuzzi, Umberto, Cosimo and myself will be delighted to answer your questions. Would you like to take questions? Would you like to take questions at this time? If you would like to ask a question at this time, please press star, one. And we ll go to Charles Elliott Charles Elliott: Hello, Charles Elliot from Inflection Point. First, congratulations on this upturn. Could you just repeat what you were saying about order trends recently? I got U.S. orders are up over 10% year-over-year,

5 suffering in Europe, and up in the rest of the world. Can you go through that bit again please? Cosimo Cavallo: Good morning, this is Cosimo Cavallo speaking. Just returning with to what Vittorio already said, we are registering some sign of recovery in the American market, mainly on the brand Editions Italsofa that are recovering market share versus last year thanks to a very strong activity that we have been doing the last six months, even more, thanks to, I would say, to two main reasons. One is strong activity on the product management, trying to review the product offer according some specific indicators of the market, and also to a reorganization in the North American market structure that we have been doing in the last six months. This is for us giving us positive results considering that the two key points halfway in October at the last half, it was encouraging in terms of results and the October before. That s probably the fruit of this activity is now giving us these kind of results. Charles Elliott: Did I understand correctly that the U.S. orders, April, May, are up 10% year-over-year? More than 10%, year-over-year? Cosimo Cavallo: The the percentage of growth that we have in order flow is exactly in the range of 18%, okay? Overall. It is overall between the three brands that we run in the North American market. I m talking North America in this case, where in North America I mean U.S.A. and Canada represent most of the big portion of the side of the business, but Editions is doing well and also Italsofa. But this is a sign of recovery that we have at this point of market performance thanks to the two major actions that we have been doing in the last, I would say, two exhibitions. Charles Elliott: That (audio interference). Is that in the context of a flat market, do you think, for furniture; or do you think the furniture market is up but you re gaining share? Cosimo Cavallo: Charles Elliott: up? Again, please? We didn t get your question. Sorry. Do you think the U.S. furniture market is flat or Cosimo Cavallo: Okay, that s much easier. No, we don t think that the furniture market in the North American market, the U.S. specifically, is growing at the same digit. And it s probably our share of the market that is coming back, okay? North American market according to our information is stable and not reduced but gaining a significant increase. Charles Elliott: Great. I m sorry, can I just ask about Europe and the rest of the world? If the U.S. is up 18%, what are comparable figures for Europe and the rest of the world? Just a rough feel is fine.

6 Cosimo Cavallo: Yes, so if we can split, let s say, in 3 regions America, Europe and Asia, I would say that Europe is a single digit is, let s say, stable; and another let s say double-digit growth is on the Asian market where we have an emerging audience that are giving us some good results. Again, in Europe, it s more mature market than in there. Charles Elliott: Cosimo Cavallo: Charles Elliott: Cosimo Cavallo: Charles Elliott: Cosimo Cavallo: But Europe is still growing? Single digit, slightly decreased. Sorry. Europe. A single-digit slight decrease. Yes. I ve got it. That s very good. Thank you. You re welcome. Once again, if you would like to ask a question, please press star, one on your telephone. From Merrill Lynch, we ll move on to Flavio Cereda. Flavio Cereda: Hi, good afternoon. Just two questions. Firstly, I was wondering if you could elaborate a little on in greater detail on the inventory effect that we saw in the P&L? I was wondering if you can actually give us a little bit more detail in terms of the increased inventories of leather as opposed to the increased inventories of units in order to reduce the lead time. And also with a stronger dollar, obviously it s a benefit for your revenues in the U.S. but how does that impact your raw material purchases, and can you give us a sense of your hedging levels at this time? Thank you. Vittorio Notarpietro: Hi Flavio. I think we have to change our, you know, profit and loss display in order to let you appreciate contractions instead of, you know, the delta in inventories. Anyway, the improvement in net inventory which had a positive impact on the cost of sales compared to first quarter 2009 was mainly due to increasing stock of raw materials, as we said before. The light net inventories calculated as the variation between the stock inventory as of March 2010 versus the stock as of December of the previous year. In particular, the increase grows to 8 million roughly, is mainly attributable to the increasing stock of raw material, as we said. This increase was the effect of three different combined effects: one, increase in the stock inventories to face the forecasted prices rise; two is the increase in the leather stock to supply the North American project, finalized to reduce the lead time for the U.S. market; and three, the increasing stock inventory as an effect of the positive trend of sales and order flows compared to the previous year. In the first quarter of 2009, the contribution

7 to the cost of sales of the net inventory was 7.2 million negative as a result of a decrease in the level of inventory compared to stock inventory as of December This decrease was mainly attributable to the decrease in net sales, close to 36% if I remember well, and to the negative scenario coming from the lower order flows. But having a look to the contraction and comparing the contraction in Q versus 2009, we passed from 45.2% to 37.1%. That s the number that we, you know, accounted in terms of real consumptions of total net sales. As far as stronger dollar is concerned, first of all I would say that, you know, this stronger dollar started very few weeks ago because in the comparison between Q1 2009, the net effect for us is negative. But anyway, generally speaking, obviously for an Italian and European export in U.S. dollar, there is a positive impact general speaking. But in our you know, in profit and loss account, in our mix, in our foreign exchange mix, we have to consider that only roughly $150 million are denominated in exactly in dollars, and then we have the most part of our (inaudible), particularly in leather but also transportation and commission and some labor and some other services, are expressed in U.S. dollars denominated in U.S. dollars. So the net balance is not so huge for Natuzzi S.p.A. today. And in fact, under constant exchange rate, the effect on our profit and loss account at the EBIT level would have been better by 0.5 million, so close to nothing. Was I clear, Flavio? Flavio Cereda: Yes, yes. Indeed. And looking forward, if we therefore are to assume the current exchange rate and protect it for the year, therefore you what kind of effect do you expect to see? Vittorio Notarpietro: Oh, I see. You know, at the EBIT level it would be easy to say 0.5 multiplied by 4. Yes, because in our calculation we have, you know, a budget exchange rate so I would say $2 million U.S. at the 1.5 to $2 million U.S. under, you know, constant exchange rate is at under constant percentage mix from, you know, a foreign exchange point of view. Flavio Cereda: Vittorio Notarpietro: Okay. Thank you very much. Thank you. And as a final reminder, star, one please. And gentlemen, there are no further questions at this time. I ll turn the conference back over to you for any closing or additional comments. Ms. Di Rosa, there are no further questions. I ll turn the conference back over to you.

8 Silvia Di Rosa: Okay. Thank you to everyone. So if there are not any other questions, we thank to everyone and we close the conference call the Natuzzi conference call on the first quarter results. Thank you. Ladies and gentlemen, that does conclude today s conference. We thank you for your participation.