Natuzzi S.p.A. (NTZ) Q3 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] Joining us on today's call from Italy are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi; then, the Chief Financial Officer, Mr. Vittorio Notarpietro; Mr. Marco Saltalamacchiai, Chief Commercial Officer; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. I would now like to turn the conference over to Piero. Please go ahead.

Good morning to our listeners in the United States, and good afternoon to those of you connected from Europe. Welcome to the Natuzzi's Third Quarter 2014 Results Conference Call. After a brief introduction, we will give room for a Q&A session. Mr. Pasquale Natuzzi, together with the management team, will be glad to answer your questions. By now, you should have received an e-mail copy of the Natuzzi's earnings results. If not, you can find this information within our website at www.natuzzi.com or please call our Investor Relations Department at +00-3-9080-882-0812 to receive the results by e-mail. You can also e-mail information requests or questions to our e-mail address, investor_relations@natuzzi.com. We will respond to you as soon as possible. Before proceeding, we would like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States security laws. Obviously, actual results might differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial condition. We have discussed such risks and uncertainties, which have, in the past, affected and may continue to affect our results of operations and financial condition in our annual report on Form 20-F for the fiscal year ended December 31, 2013. These reports are available within our website, www.natuzzi.com, or from us upon request. You may also obtain a copy of our Form 20-F filings from the United States Securities and Exchange Commission. And now I would like to turn the call over to the Chief Executive Officer, Mr. Vittorio Notarpietro. Please, Vittorio.

Thank you very much, Piero. Welcome, everybody. As anticipated in the press release, we are finally getting some first benefits from the initiatives included in the business plan and implemented during this year aimed at: one, developing our business through the brand and distribution strategy recently announced; and two, recovering industrial efficiency. Let's start from the first point. For those who are not familiar with it, a quick recap would be useful. One of the cornerstone upon which our business plan is built is the brand and distribution strategy. One year ago, when we began to plan the reorganization of our group, we started from the fact that the group has built up over the years a very strong intangible asset, that is the Natuzzi name. Natuzzi is recognized among high-end consumers globally for size, quality and functions. Therefore, we decided to rationalize our products offering within just one name, Natuzzi, 3 lines of product targeting different consumer segments and that has replaced the brand's portfolio we used to have in the past. Having just one brand will allow us to capitalize on investments in the Natuzzi name, from which all the 3 lines of product will take benefits in terms of advertisement and announced awareness. But in addition to it, we have also reinforced our commercial organization worldwide for a closer monitoring of the markets, especially those with high potential in terms of growth. Lastly, we are strengthening the division dedicated to the private-label products to big customers. All of the just-mentioned actions and the good response of our new collections recently presented at Milan and High Point fairs and during the group's Spring Retail Congress have started producing first positive results. First of all, we are pleased with the overall quarterly sales figures, plus 8.2%, and in particular, from the Americas region, which is up 12.4%. The Americas region is a historical market for us and represents 43.4% of group's total quarterly net sales. In the Americas, not only we increased net sales of our private-label products, up 13.7%, but we also received a good market response for our Natuzzi-branded products, up 11.6%. As for our other 2 main regions, EMEA and Asia Pacific, we reported an overall quarterly sales increase, plus 4.8% in EMEA and plus 6% in Asia Pacific, due to our Natuzzi-branded products performance in particular, plus 20.3% and 12.6%, respectively, although our sales reduction in private label mostly driven by lower sales in Europe with IKEA. On this regard, IKEA is in the process of revising its supply chain and supplies portfolio. We are recovering our relation with them, especially in the Americas business. In addition to it, we have also acquired some further big customers such as Furniture Village and Sofaworks in U.K., Conforama in Switzerland. I'm sure Marco and Mr. Natuzzi will elaborate on that. And in fact, year-to-date, order flow for private label is increasing versus the same period of last year. As for the current market trend, overall, year-to-date, order flow keeps on remaining positive, medium single digit versus same period of last year. Such trend is quite positive, particularly in North America and Asia Pacific regions. Furthermore, this positive market response is even more significant if we consider that the increase in price list we passed to the market last July did not affect the trend in the order flow in the second half of this year. Therefore, we are reasonably confident to disclose an increase in total net sales also for the last and fourth quarter of 2014. And so in line with the recovering progression in our turnover, I would underline minus 11.2% in the first quarter, minus 1.2% in the second quarter, up 8.2% in third quarter 2014. Such progression in turnover has been and is still possible, thanks to the improvements we have been getting on the industrial side. In fact, starting from the third quarter, we have been experiencing a gradual and physiologic improvement in the learning curve within our plants and this phenomenon still continues in the current quarter. These improvements have slightly started to be displayed also in our income statement slightly, although we are well aware that we are not at the end of such process and there is still room for further improvements. But as a matter of fact, cost of goods sold, as incidence of net sales, improved, passing from 74.2% in the second quarter this year to 72.1% in the third quarter this year as consequence of the gradual progresses in terms of productivity following the abovementioned measures we have implemented so far. But at the same time, we are also focused on reducing the SG&A costs. Indeed, as you have already noticed in the press release, fixed SG&A costs were reduced by EUR 2.8 million in the third quarter of 2014 or a 4.2% reduction as a percentage on net sales. Thanks in particular to the rationalization measures to streamline our commercial and headquarter operations. For the reasons just explained that are, again, the gradual and still ongoing improvements in manufacturing efficiency and cost-controlling rationalization measures in SG&A, we have further reduced the quarterly operating loss and we expect this trend still in place also in the current quarter improving from the third quarter performance. Today, the management commitment is focused on working on 3 priorities: the reduction of the overall complexities; two, an integrated production system to exploit the full potential of the lean production and lean enterprise methodology; and three, rightsizing of the overall structural costs. Those actions are not yet in our today's numbers and we strongly believe they will start giving contribution by the second half of next year. The abovementioned actions continue to lead the management plan for 2015 with the ultimate goal to drive the company toward a significant recovery in operating cash flow. Thank you so much. Now it's time for our CEO and Marco to elaborate and your questions will be greatly appreciated. Thank you.

[Operator Instructions] We'll take our first question from Budd Bugatch with Raymond James.

Sorry, I got on the call a bit late so I may have missed -- I missed the early comments. But you talked about, I think, a recovery in cash flow by the second half of next year. Is that 2015? Or -- make sure I understand that. Is that...

We are -- good morning, first of all. Thank you for question. We are already implementing many actions in order to improve our cash flow. I was mentioning before additional initiatives in order to strengthen the cash flow. And these new initiatives, I mean the complexity, first of all, we'll need time in order to reach the profit and loss and the cash flow.

And what do you see the numbers being for the second half of next year? And will you have positive cash flow next year? And how do you -- how are you defining that? Tell me what you mean by that. Is that free cash flow? Is it cash flow from operations? How should we think about that?

First of all -- yes, cash flow from operations. First of all, the EBITDA is our first goal we had in mind to achieve a breakeven in EBITDA during this year. We were not successful for the reasons already explained in previous conference call. Now we have a positive trend in Q3 and we have build up additional initiatives, again the reduction of complexity, for example, and the new initiatives in the integrated production system and the rightsizing of the overall SG&A costs, of which you find already a portion in Q3 numbers. But we have additional initiatives to achieve the new savings in 2015, which are under analysis. And as soon as the budget will be ready, we'll be in the position to mention exactly the amount and the correct timing. So this is an estimation.

So help me understand. How far off your budget for this year did you come in?

I'm sorry, sir. We didn't get your question. Could you repeat, please?

Yes, sir. This year, you had a certain budget and you expected certain results by the third quarter so far this year and you've posted different results. How much below your budget are you this year? Refresh my memory because I don't recall.

Yes, yes. Now it's clear. What we can say is that we had in mind, first of all, an increase in full year sales. This was not possible because the production problems we experienced in China and in Italy. And the second goal was to achieve an EBITDA in region of breakeven for the full year again. But as you know from the analysis of the first 9 months, we were not successful with that and you can easily calculate which is the delta. We have in mind to be not so far from a breakeven in EBITDA in the fourth quarter of this year. And for sure, we are planning in 2015 with some positive EBITDA, first of all.

So 2015, you expect to make a profit at the pretax pre-depreciation line?

It's not time to speak about details of 2015 budget. Let us build up. But these are the main goals we had in mind as we stated in the press release. EBITDA.

Okay. All right. Help me understand. I see Señor Bedini has resigned. Help me understand the organization now and what changes there are in the organization, I think that would be helpful.

Yes. This is Pasquale Natuzzi. Because the -- let's say, the long implementation of the lean production that was -- which Mr. Bedini was supposed to implement because it was his responsibility and because of the first quarter and the second one was just a disaster, I personally asked him to resign. So I took the position as the Chief Operating Officer. I'm working very deeper with all of the second line with the plant directors in China, in Brazil, in Romania, in Italy with the supply chain and discovering very good people at the second line and we are working as a team. And we are very, very, very much confident that, as Vittorio said before, that with the improvement that we can get with the operation are huge, but we will see the result at second half of 2015. Then, Marco Saltalamacchiai is the Chief Commercial Officer, and Vittorio, we have the Human Resource Manager. I mean, the organization is in place and very efficient.

Do you expect to replace Mr. Bedini anytime soon? And will it come from inside or outside of the organization?

No. Of course, of course. I'm not planning to be forever the Chief Operating Officer. Not -- no, no. But I'm just working deeply with all the management and make sure that all the process, which is quite complicated, because when we talk about lean production, effect has impact on the lean enterprise. The entire system must be lean. Otherwise, the lean production doesn't work. If the lean supply -- if the supply chain is not lean, if all the service are not lean, so I mean, we are doing great job, honestly. And actually, we already are looking to hire a new operation officer, but there is no rush. I want to make sure that I want to give the key to the new operation officer with a very clear goal to achieve and the direction.

[Operator Instructions] We'll take our next question from Edgar Azaryev.

Mr. Natuzzi, it's Edgar Azaryev, and I do believe we have an ongoing communication back and forth. So my question for you is in regards to the marketing aspect of the Natuzzi Group, right. In the current state, right, where we are today, most of the furniture suppliers are opening an e-commerce, right, so to enable consumer to buy via the web page of any furniture company, right. What are you doing on that front? Just remember that their habits, consumer habits, are changing and most of the consumption are happening through the web page. And I don't kind of see anything being reflected currently -- I mean, there is no opportunity for people to purchase your furniture online. What are you doing in that space?

Okay. First of all, we are very much aware the change of the consumer habit, no question about. But Mr. Saltalamacchiai, our Chief Commercial Officer, he would like to answer to your question, if you don't mind, okay?

Sure.

All right. Thank you.

This is Marco Saltalamacchiai speaking. So thank you for the question. We are very fully aware of the growing potential of the e-commerce. As a matter of fact, we are starting experimenting in U.K., the first e-commerce activity with Re-vive. On top of that, we are also starting a collaboration with major e-commerce players. We have finally signed a contract with Costco and we are in the process of starting a collaboration with Amazon. So on the basis of all of those experience, some of them will be, in our experience, British experience and that the others being work with third parties, we will start to elaborate our e-commerce strategy during 2015.

Okay. And what would you say is the time line for that to fully implement the strategy and then mimic that strategy on to the North America market?

Well, actually, this is impacting North American first because Costco and Amazon.com experience will be nationwide starting, well, not January, February at the latest. And when it comes to our specific e-commerce, then we need to run the entire first half year before to understand and also to set up the supply chain and logistics behind that. In the case of Costco and Amazon, we will rely on their logistic platform.

There are no further questions at this time. I'd like to turn it back to our speakers for any additional or closing remarks. [Operator Instructions] I'd like to turn it back to our speakers for any additional or closing remarks.

So this is Piero speaking. So it seems there are no further questions. And this time, we end the conference call. Thank you for your attention. And remember to send us e-mail should you need further explanation or information. Thank you, and have a nice day.

This concludes today's conference. Thank you for your participation.