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Edited Transcript of NTZ earnings conference call or presentation 3-Dec-18 3:00pm GMT

Q3 2018 Natuzzi SpA Earnings Call

Santeramo (Bari) Jan 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Natuzzi SpA earnings conference call or presentation Monday, December 3, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nazzario Pozzi

Natuzzi S.p.A. - Chief Natuzzi Division Officer

* Pasquale Natuzzi

Natuzzi S.p.A. - Chairman & CEO

* Piero Direnzo

Natuzzi S.p.A. - IR Manager

* Vittorio Notarpietro

Natuzzi S.p.A. - CFO

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Conference Call Participants

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* David Kanen

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter and First 9 Months 2018 Financial Results 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. Nazzario Pozzi, Chief Officer of the Natuzzi Division; Mr. Gianni Tucci, Chief Officer of Softaly Divison; 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.

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Piero Direnzo, Natuzzi S.p.A. - IR Manager [2]

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Okay. Thank you, May. 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 and First 9 Months of 2018 Financial Results. After a brief introduction, we will give room for a Q&A session. Mr. Pasquale Natuzzi, together with the top management team, would be glad to answer your questions.

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. Please refer to our most recent 20F filed with the SEC for a complete review of those risks. The company assumes no obligation to upgrade or revise any forward-looking matters discussed during this call.

And now, I would like to turn the call over to the Chief Executive Officer. Please, Mr. Natuzzi.

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [3]

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Good morning to everybody, and thanks for attending today's call. This is not the first time that I tell you about the huge transformation of our company from a pure value for money upholstery manufacturer in the lifestyle consumer brand and retailer-oriented company. Globalization and the continuous pressure on margin have forced us to invest in the brand, which means investing in the product marketing and retailer. Building up a brand, and setting up an efficient retailer business model as an international retailer organization has a required time and resources. This strategy was the only available option to face the continuously changing global business scenario we have been experiencing for the last 20 years.

I'm not yet obviously satisfied with the numbers disclosed so far, but certain numbers started to support our choice. We believe we are moving towards the right direction. Anyhow, dear shareholders, what I want to share with you all today is the reason why my endless optimism. In fact, 2/3 of our overall revenue are generated by our branded business. During 2018, our retailer network has increased by 19 stores as a result of new openings and closures of unsuitable location. The deal with our partner in Greater China demonstrates that we have created an asset, the Natuzzi brand, which is bringing -- is the first positive evidences. In addition to the above, during the first of the 9 months of the year, the Natuzzi Italian DOS division composed of 38 stores, shows an increase of 26.6% in net sales versus the same period of 2017.

If we look at the recently opened store in United States, Chicago, Costa Mesa, King of Prussia and Philadelphia and West Palm Beach, having the new Natuzzi Italia retailer format, those in the U.S. direct operating store have delivered the sales as expected and reached breakeven in the third quarter of the year.

This positive result are strictly linked to the new retail store format, which we continue to fine-tune since we started in December 2015. That model is based on store opening in high-traffic location, store size to grant a profitable display, merchandising adequate to the customers in the area, marketing initiatives planned on demographics, retail selling ceremonies and retailer excellence, to enhance the customer experience. At the same time, we have also completed the turnaround of our store located in Florida and Mexico. While we continue to further improve the exciting -- the existing DOS profitability, we must now duplicate the best practice generated on DOS chain to the franchised operating store network.

As far as the brand Divani&Divani that we have in Italy and the Natuzzi Edition for China, where we have a store in China and in Brazil are concerned, we have reinforced and improved the new mono-brand store concept that has already collected various commitment from our customer. In this regard, we have an aggressive plan of opening a mono-brand store in China, of which about 50 in '19 -- in 2019. Going forward, we continue to evolve toward the branded business. At the same time, we will maintain our partnership with those key and branded accounts, which rely on the quality of our product and service, and at the same time generate for us the expected marginality.

With regard to the consolidated profit and loss result, we have clearly identified the main issue, which are beyond the today unpleasant performance and are intensively working on that. In fact, for the last quarter of this year, we expect a significant improvement versus the third quarter 2018, mainly as a result of the efficiency recovery measures that we have been implementing in our operation.

As for 2019, we will continue being concentrated on reducing the complexity of the overall process, improve the supply chain and enhance the quality of our sales, both in the retail and in wholesaler distribution channel. The uncertainties in the economic scenario, including the ongoing discussion on tariffs, are leading us to focus more on improving the profitability of the existing business instead of looking for growth at any cost. So dear listener, after years of continuous investment not yet returned, we need today to focus all of our efforts in improving the quality of our sales and efficiency of the entire business operation to consolidate the foundation of the company. We are getting there.

Thank you very much for listening, and now we are ready for any question and answer. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from David Kanen from Kanen Wealth Management.

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David Kanen, [2]

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First question is how much cash did we receive during the quarter from KUKA? And is there another payment left that will show up in Q4 or we've received everything at this point?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [3]

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Let me give you -- hi, David, this is Vittorio, an entire picture of the net financial position. By the end of June, we had a net financial position of minus EUR 9 million. At the end of July, it was minus EUR 19 million, and we got net from the deal in China, EUR 35 million. The net financial position as of September is positive by EUR 9.1 million and with EUR 54 million of available cash. The difference was up EUR 7 million between the end of July, and the net financial position by the end of September is about EUR 7 million, and we used that cash as follows. We shortened payment terms to our suppliers and financing some CapEx in the third quarter 2018. We got all the cash from the deal. We expect to stay...

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David Kanen, [4]

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Okay. So the total cash received is EUR 35 million, correct?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [5]

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Correct.

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David Kanen, [6]

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Okay. That's all I needed to know. And then in the commentary from Mr. Natuzzi, I believe I thought I heard him say -- make reference to the number of stores that will be opened mono-brand stores in China. Is that correct, 50 stores will be opened in 2019?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [7]

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Yes. We are -- the partners are still discussing their own budget about that. The first information we got from them say that they at least will open 50 new stores during 2019.

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David Kanen, [8]

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Okay. And then how many stores will be opened? How many DOS stores will be opened in Q4 of 2018? And then in your budget for 2019, how many DOS stores will you open?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Natuzzi Division Officer [9]

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David, this is Nazzario. In the last quarter of 2018, we have opened 2 key DOS, 1 in London and 1 in Paris. Whereas, with regard to 2019, we are still in the budget process. We are considering very few and selected locations for DOS opening so that we leverage on the best practice, which we have commented on regarding the latest opening in 2018. And at the same time, we bring into the existing store network, both direct retail and franchise network, which is very large, such best practices all over 2019.

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David Kanen, [10]

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Okay. So right now in the U.S., or even globally, you're saying very few DOS stores outside of the KUKA deal, correct?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Natuzzi Division Officer [11]

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That's correct. Whereas of course, we will keep opening franchise stores, both Natuzzi Italia and Natuzzi Editions in Europe and U.S., on top of China.

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David Kanen, [12]

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I see. And then Vittorio, can you talk to -- you made reference in the prepared remarks about significant improvement from "efficiency measures", so I'm assuming these are cost cuts that will show up both in cost of goods sold as well as operating expenses. Can you take me through any reductions in expenses that we should expect in the fourth quarter and in 2019?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [13]

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Let's start from the reasons why we lost some money in Q3: Inefficiencies in the supply chain and increasing raw materials. The supply chain has been already operated much better in October and November, so we know already that the output, the invoiced amount is better than in Q3 because the team -- the management team, focused on that. And then raw materials. You, for sure, had a look to the Q3 results, and you will find a lower -- a lowering raw materials in terms of consumptions. As far as 2019, first of all, we have to increase the profitability of existing DOS. We told -- we wrote in the press release that -- and Mr. Natuzzi underlined the fact that in just 3 quarters, the new stores in America reached breakeven. But in the previous 2 quarters, they lost almost EUR 1 million. This is one of the improvements we have in mind for next year and the reason why Nazzario is saying what he said a few minutes ago. But we have to improve also the profitability with independent customers. We have to speed up deliveries, we have to save money in the delivery costs that we incurred in 2018. We have to save costs, as said before, in the supply chain and logistics platform of the company. We will have, hopefully, a better impact of foreign exchange in 2019 compared with 2018. The price of some raw materials is already lowering, and this will help us -- is already helping us in Q4 and will continue in the next year. Then we have to deconsolidate the fixed cost coming from the Chinese entity that we sold to our Chinese partners. These are the main drivers that allow me to say -- allow us to say that 2019 will be first focused on the efficiency recover and profitability recover of this company, before speaking about any sales volume increase.

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David Kanen, [14]

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Okay. So how -- with the reduction of raw material cost, just strictly in gross margin or your direct cost, what is the improvement? Is it 1 point, 2 point, 3 points? How would I model that?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [15]

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In Q4, we had a significant improvement versus previous year. We have not yet finalized 2019 numbers, but you can see that consumption in Q3 came down from 42.6% to 41.9% on total net sales.

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David Kanen, [16]

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That was in Q3. And in Q4, it's going to be more significant? Or similar to that?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [17]

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I'm sorry. It should be in line with Q3 or even better.

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David Kanen, [18]

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I understand. And then for DOS, how are same-store sales for the quarter?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Natuzzi Division Officer [19]

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So the same-store sales were up in the last 9 months -- the first 9 months of the year. And in the quarter, order flow and revenues are doing well because of the traditional marketing calendar on -- in each market. So we confirm the same trend we had in the first 9 months.

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David Kanen, [20]

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What was that? What was the percentage increase, like-for-like?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Natuzzi Division Officer [21]

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Yes. So in the 9 -- in the first 9 months, the net sales generated by the direct stores were, overall, up 19% over the same period of last year and 27.2% under constant exchange rate, and this is total direct stores. On a like-for-like basis, the same-store network has reported a total increase of 4.5% against last year.

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David Kanen, [22]

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Okay. 4.5%, is that for the third quarter or is that the 9 months?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Natuzzi Division Officer [23]

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No, no, this is the 9 months.

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David Kanen, [24]

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What was it for the third quarter, though, same-store sales, like-for-like?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [25]

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This is Vittorio. Like-for-like sales in the first 9 months, including all the stores, not only the 38 in Natuzzi Italia, was up 4.6%.

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David Kanen, [26]

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I understand the 9-month number, but I'm interested in the latest quarter, in the third quarter. What was that number?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [27]

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We'll check later and we'll inform you more precisely.

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Operator [28]

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There are no further questions from the phone. (Operator Instructions) As there are no further questions, I'll now turn the call back to your host for any additional or closing remarks.

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [29]

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Okay, this concludes the today's conference call. So please feel free to contact us in case you need further information. Thank you all, and have a nice day.

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Operator [30]

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That will conclude today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.