Natuzzi S.p.A.
Q3 2017 Earnings Call Transcript

Published: 27 Nov 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter and First 9 Months 2017 Conference Call. At this time all participants are in a listen-only mode. Following the introduction, 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 Italy are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi; then Nazzario Pozzi, Chief Officer of the Natuzzi Division; Mr. Gianni Tucci, Chief Officer of the Softaly Division; the Chief Financial Officer, Mr. Vittorio Notarpietro; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Piero. Please go ahead, sir.

[Piero Direnzo:]

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 nine months 2017 financial results conference call. After a brief introduction, we will give room for a Q&A session. Mr. Pasquale Natuzzi, together with the top management team, will 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 20-F filed with the SEC for a complete review of those risks. The company assumes no obligation to update 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.

[Pasquale Natuzzi:]

Thank you. Good morning, everyone. I thank you for being here with the Natuzzi management and for giving me the chance to update you on the result together with the activities that we have been implementing in the last nine months in continuity with the restructuring plan from manufacturer to manu-tailer. The financial result for the third quarter were disappointing me, because our numbers were damaged by the lack of proper coordination between procurement and production that resulted in lower invoiced sales and margin. But within that disappointment, I see reason to be optimistic. Let me now explain what happened this year. 2017 third quarter result have a very poor invoiced sales, minus 6.1% versus previous year, while 2017 nine months result gave fairer view of how the business is developing. In spite of such stable net sales, the operating margin is negative by €21.6 million, as a consequence of the following

[Vittorio Notarpietro:]

Thank you so much, Mr. Natuzzi. Our third quarter and first nine months results are obviously disappointing. As said before, these results were also affected by the imbalances between our production operations and supply chain versus a growth in orders, more concentrate in the second part of the third quarter, in particular for our Italian production. In the third quarter, when we got an increase in the order flow, fortunately, we had already planned our Italian operations and consequently, we had already programmed the purchase of raw material and finished goods and furnishings from our suppliers. So we were not immediately ready to be provided in time with all the additional needs of material and accessories. This impacted both our production and deliveries, causing a delay in the voiced process of about - that we calculate in the area of €11 million at least and, as a consequence, €4 million of additional contribution margin would have - could have been done. But let's speak about the future. Now the Italian operations are running faster and above their standard rates through an increase in work shifts per week. We confirm that the increased backlog is being reduced, and we expect that will support sales during the last quarter of this year. We are then planning to organize 2018 Italian plants in a different way, in order to be ready for additional production needs and some more flexibility. As stated in the press release, our 2017 gross profit, which was €101.5 million for the 9-month period was affected by 2 events already described by Mr. Natuzzi, which -- one is the accrual of €9.3 million for the unfavorable judgment with regard to Italian labor, then we incurred in Q3 restructuring costs of €1 million, as we reduced our management structure in Santeramo, which will enable us to begin a saving next year. Then we have a small increase of industrial cost as a percentage of net sales due to lower volumes. Therefore, if we exclude those two items totaling €10.3 million, the gross margin for the 9-month period would be equal to €111.8 million, a little bit better than a year ago and in spite of the decrease in sales. In the area of variable cost, in the first nine months, we displayed lower transportation costs, which were 8.9% from 9.7% on sales. This is not the result of lower shipping rate, which are instead increasing, but the result of - the combined result of higher sales to clients with Free on Board or Ex Works delivery condition versus the ones which we provide with laded shipping services. Commissions to agents are stable as a percentage of sales. Then we invested €1.1 million net more than a year ago as a result of higher advertising and marketing, including some additional cost for digitalization and adv campaign, which I'm sure Nazzario will elaborate later. As a percentage of sales, adv - advertising and marketing went from 3.8% to 4.2% on sales. Lastly, let's say, again, on the other SG&A. We know that they increased in the nine months by €9.8 million, and we know that most of it around 7.4 million is consistent with our main driver in growth for such expenses - and such expenses are strictly related to our Natuzzi expansion program. These expenses increased, mainly in the first two quarters, this is important to say, of the year. Indeed, if we consider the trend of these expenses, we see that in Q1, SG&A increased by €3.1 million. In Q2, the gap increased up to 4.9, while in Q3 the increase versus the same quarter 2016 has been €1.8 million, so the trend is improving and as soon as the productivity of the acquired newly opened store improve, the ratio of our net sales will improve too. Group's available cash as of September 2017 was €47.9 million from €65 million as of December 2017. So the difference is €17.1 million in cash. As a result of cash flow used from operating activities was minus 20.3, of which, is important to see the reason, which were, we had an earning before interest taxes, depreciation and amortization, EBITDA, loss of 2.6. Then we had a €12.5 million for onetime termination benefit paid in accordance with the agreement signed with Italian workers that accepted incentive for voluntary resignation. Third, working capital negative by €6.4 million and €3.7 million of withholding tax on dividends from Chinese companies to Italy. Then capital expenditure were 7.1 million, and we generated cash by our financing activities of about €13.1 million with new medium- and long-term loans. Then we had 2.8 negative impact of foreign exchange on cash deposits in China. As a result, available cash by the end of the period is, as said, a positive €47.9 million. I would underline that in this 17.1 difference, we have 12 onetime -- €12.5 million for onetime termination benefit and 3.7 withholding tax on Chinese dividend paid to Italy. Thank you so much. Now the management is ready to answer your questions. Thank you.

[Operator:]

Thank you, sir. [Operator Instructions] We’ll take our first question from David Kanen with Kanen Wealth Management.

[David Kanen:]

Hi. First question is, what were same-store sales during Q3? And then in terms of your one anomalous production issue in third quarter that you stated cost you about $11 million - €11 million in revenue. You're indicating that you expect to fulfill that backlog in Q4. Will you be able to fill that backlog as well as resume a normal production and delivery on invoices at retail that come in Q4 and thereby show growth in the fourth quarter?

[Vittorio Notarpietro:]

Dave, this is Vittorio. We are not sure if we got your question. Are you asking if in Q4, also the DOS will recover from the backlog we accumulated by the end of Q3?

[David Kanen:]

Yeah. Well, you did state that you expect - or Mr. Natuzzi stated that you expect to realize that $11 million (sic) [€11 million] in backlog, okay, that wasn't fulfilled in Q3. My question is, in addition to that, will you be able to on time produce and deliver and recognize revenues for Q4 of retail, the normal flow that you got? So in other words, pick up the incremental €11 million on top of normal invoices for Q4?

[Vittorio Notarpietro:]

The €11 million are calculated at the wholesale level. And those numbers, there is a portion for DOS. So yes, we will have the benefit also in the DOS sales because of the backlog we had at the end of the Q3. Then, David, we are trying to accelerate any kind of delivery, including, obviously, the DOS deliveries, which are, as you know very well, very much important for the consolidated results. But you know that - and we were putting all our efforts in order to speed up the - any kind of deliveries, including the DOS in Q4. You know that revenue recognition for DOS is when I arrived at your house and you pay me the balance with a receipt. So the revenue recognition is something that we will - we have to address in Q4. But yes, we are very motivated on recovering that amount that will be at least €11 million.

[David Kanen:]

So - yes, my question is, will you get the benefit of both bill? I don't know if you fully understand my question. Will you get the benefit of growth in DOS in normal Q4 as well as catching up, for lack of a better word, on that €11 million? And do you expect overall, excluding Softaly, do you expect overall to show growth in the fourth quarter?

[Pasquale Natuzzi:]

David, this is Pasquale. For sure, a part of the €11 million backlog increase will be delivered in the fourth quarter. That means, we will recover volume and invoice that we did in the third quarter. A part of this volume increase will be delivered through final consumer, through our DOS stores, which means, we will gain also a better margin for our DOS. Now if I understood well your question, you are saying, if, in addition to the recover of the €11 million backlog increase, we will also delivery whatever order we will get in November. I mean, is - that's the question, because to...

[David Kanen:]

Yes. In other words, do you expect production and deliveries to be normal in the fourth quarter for your production to catch up with the deliveries or rather, the deliveries to catch up with the production?

[Pasquale Natuzzi:]

The problem we had with our vendor have been resolved, okay. We are sure that we had a good backlog as end of September, and we are now - while we resolved the problem, we are manufacturing and delivering the product. Now we know how much order we got until last week. We don't know how much order we will get until the end of the year. You know what I mean? So - but anyway, you will see a good performance. We all expect good performance for the fourth quarter, no question about.

[Vittorio Notarpietro:]

The issue, to be clear, has been fixed. The issue we experienced at the end of the quarter.

[David Kanen:]

Okay. And then – I am going to let it go for now. Thank you.

[Operator:]

[Operator Instructions] We will take our next question from Anthony Lebiedzinski with Sidoti & Company. Anthony, your line is open. Please go ahead.

[Anthony Lebiedzinski:]

Yes, good morning. Can you hear me now?

[Operator:]

Yes. We can hear you.

[Anthony Lebiedzinski:]

Okay. Just wanted to follow up on the previous caller's questions about the same-store sales, if you could provide those, what those were for your third quarter? And if you could perhaps break that down by region, that would be very helpful? Thank you.

[Nazzario Pozzi:]

Nazzario Pozzi speaking. Let me first confirm the overall like-for-like growth in the third quarter. So overall, like-for-like growth in the third quarter is 10.6% across all our brand, which is Natuzzi Italia, Natuzzi Editions and Divani & Divani. This is our like-for-like retail DOS network. The vast majority of this business is made of Natuzzi Italia, our lifestyle brand. And Natuzzi Italia has delivered a increasing progression during the year, because like-for-like growth of Natuzzi Italia in the first quarter of the year versus the same period in 2016 was 2.6%. In the second quarter, the like-for-like growth of Natuzzi Italia in the U.S., again, versus the same period of 2016 was 12.5%. And in the third quarter, like-for-like growth of Natuzzi Italia was 22.8% versus the same quarter of 2016. So this is the progression that quarter-after-quarter Natuzzi Italia like-for-like stores have delivered. On the other side, overall, Natuzzi Italia is being delivering over the year a 18.7% increase. This is the all business, both stores and - DOS store, franchise stores and galleries. And such 18.7% increase year-to-date have been delivered across all markets, so all markets have contributed strongly to this growth. Year-to-date, the Americas grew 23.5% versus last year. Asia-Pacific grew 29% versus last year, and EMEA grew 11% versus last year. And this is overall Natuzzi Italia. Within this, I would like to mention the contribution that came from furnishing and accessories, because we have been steadily executing our lifestyle brand strategy, which, of course, includes furnishing and accessories as key component of our value proposition to consumers. And furnishing and accessories on a year-to-date basis have grown 44% versus last year in the Americas, 45% versus last year in Asia-Pacific and 25% versus last year in EMEA. And as of today, Natuzzi Italia already accounts for over 40% of our branded sales. And as Natuzzi Italia has higher retail margin than the rest of our sales, we are very much persuaded that such a progression will continue in the fourth quarter and next year, thus helping been to deliver and drive higher growth in our corporate profitability.

[Anthony Lebiedzinski:]

Great. Thank you.

[Operator:]

All right. [Operator Instructions] We'll go back to David Kanen for a follow-up question.

[David Kanen:]

Yes, just a clarification, Nazzario, on terminology. So when you say like-for-like, okay, for example, 10.6% like-for-like - I'm sorry, yes, 10.6% Q3 like-for-like growth, that is the - that's the same thing as same-store sales growth, correct?

[Nazzario Pozzi:]

That's correct.

[David Kanen:]

Okay. I just wanted to qualify that. Okay, thank you

[Operator:]

[Operator Instructions] And with no further questions, that will conclude today's call. We thank you, everyone, for their participation. You may now disconnect.