Nazzario Pozzi - Head of Natuzzi Division Pasquale Natuzzi - CEO Vittorio Notarpietro - CFO Piero Direnzo - Investor Relations.

David Cannon - Cannon Wealth Management Velin Mezinev - Donald Smith & Co.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Natuzzi’s Full Year 2016 Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session and 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 Mr. Nazzario Pozzi, Chief Officer of the Natuzzi Division; the Chief Financial officer, Mr. Vittorio Notarpietro and Piero Direnzo, Investor Relations. As a reminder, today’s call is being recorded.

And 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 who connected from Europe. Welcome to the Natuzzi’s full year 2016 conference call. After brief introduction, we will give you room for a Q&A session. Mr. Pasquale Natuzzi together with the top management team will be glad to answer your questions.

By now, you should have received an e-mailed 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 0039-080-8820-812 to receive the results by e-mail.

You can also e-mail information request or questions to our e-mail address, investor_relations@natuzzi.com. We will respond to you as soon as possible. Before proceeding, we’d like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States Securities Law.

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 condition.

We have discussed that 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, 2015. This report is available within our website, www.natuzzi.com or from us upon request.

You may also obtain a copy of our Form 20-F filing from the United States Securities and Exchange Commission. And now, I would like to turn the call over to the Chief Executive Officer. Please, Mr. Natuzzi..

Thank you, Piero. Good morning, and welcome to our conference call. Joining me today are Nazzario Pozzi, our Global Head of Retailers and Vittorio Notarpietro, our Chief Financial Officer.

I would like to emphasize that we are still working on our turnaround, and we have much thing to do, but I can assure you that we stand the clear majority of our time on efforts at came in at improving our volumes, our efficiency and returning to profitability. As we said before, we are well on our way in pursuit of our united retail strategy.

We have invested much time and efforts in the Company in all the areas as a base over this strategy to succeed. We have greatly reinforced our brand.

We have broadened our product offering and product mix and we have focused much attention on procurement, production and delivery logistics, marketing and communication to evolve with the Company along the sides of the brand.

At the same time, we have to manage our cost structure and negotiated successfully with the Italian Government for labor subsidy. While our gross revenue declined in 2016, the rate of decline was lower in the last quarter and we are increasingly confident that our strategy will succeed and my highest priority is to return this company to growth.

It is important to understand that we believe we can drive grown revenues if we had cut price. And with favorable cost, we could have done so or have done.

We decided to maintain our strategy and focus on growing the value in our brand and our product and dealing with this more decline in revenues, we are increasing our gross margin, our price per seat and our cash flow. Softaly has been working on a similar focus.

Our private label is growing in Europe and Asia, thanks to a well structured organization, but we are having issues in North America where we are still working on an appropriate and skilled organization. We are committed to regaining our growth, maintaining our value and returning our greater company to strong profitability.

Let me turn the meeting over to Mr. Pozzi to update you on our retail progress. And then I will be available for you for any kind of questions. Thank you..

Thank you, Pasquale. As Mr. Natuzzi has just said, we are aggressively pushing our direct-to-retail strategy around the world. This was announced new strategy last July, we had opened new stores in U.K., United States and in Australia and these stores are in high density, high-traffic areas.

They're being designed and merchandised by our team in Santeramo. We were able to acquire eight Natuzzi Italia stores in the United States, seven in Florida, one in Pennsylvania, three Natuzzi Italia stores in Mexico and also five stores in Italy, Divani & Divani by Natuzzi.

And considering that this is a new effort, we are very pleased by the result we are having so far. So far in 2017, our like-for-like stores are improving, both in volume and price, particularly with our IN brand, Natuzzi Italia, and the new stores are performing even better.

For the first two months of 2017, on a like-for-like basis, the direct-owned stores increased sales by 6.9% over the same period last year. And if we include sales from our new stores, increase over last year is up 39% in DOS, direct-owned stores.

Divani & Divani continues to underperform its potential and also our expectations, but we have begun extensive restructuring of management, store locations, store format, product offering, and our marketing group is developing the strategy to reposition this important product line.

We will continue this strategy, and we are in process for opening additional new generation direct-owned stores, namely in the United States, in the United Kingdom and also in China. This of course [Indiscernible] time-consuming and we are adding experienced managers so that we can accelerate store openings going forward.

In addition, we are also stepping up our force to work better with partners in branded sales. We have stepped other stores towards these franchised owners in store design, display in merchandising, marketing regeneration, brand marketing; and we are sharing with them the knowledge we are gaining from our direct-to-retail experience.

And our strategy is both direct sales as well as growth with this partner who represent the Natuzzi brand worldwide. We have still much work to do, but the team is getting stronger, and we're making progress every day. Let me now turn the meeting back to Mr. Natuzzi who will discuss Softaly..

Thanks. Good morning, again thanks Nazzario. I'm covering today for Mr. Tucci who is in meeting with very important client and hopefully closing a very important deal today. Softaly represents the private label portion of our group. And is of course the successor to our original vision having started in 1959. The business hasn't changed much since then.

And this is truly global requiring nuances for different market around the world, experiencing many new competitive forces all of which have pressured its returns and treatment, its ability to make money.

We have worked hard to offset the cost elements of this competition and the other work on product and process innovation which is giving us the fresh results. We are now focusing on rationalization of the business. The acquisition of new partner with whom we can have high growth and profitable relationships.

We have made the progress, but we have more work to do. We have gained the new customer throughout Europe, where we have also rebuilt the relationship within the largest of retailers. This allowed us to improve production efficiency in our plant in Romania. EMEA grew revenue by 5% in full year 2016 versus 2015, on top of the plus 20% growth in 2015.

So, we expect to show stronger growth in current year. In addition to the 5% growth in Europe, we experienced a plus 15% growth in Asia Pacific. We are continuing our focus in our Chinese manufacturing facility to increase efficiency and make it truly competitive within the largest local competitors.

Our focus now is to recover our business in North America. We are restructuring and focusing our sales efforts on the customers who represent the greatest opportunity. We are working on our management team to fill some key position and are confident we will drive growth in calendar year 2017.

Softaly is and we will continue to be uniquely strong player in the global private label of all the market. I'll now turn the meeting over to Vittorio Notarpietro, our Chief Financial Officer, who will go deeper in our financial results for the fourth quarter and full year of 2016..

Thank you, Mr. Natuzzi. Let me say first that in the fourth quarter 2016, the Company adopted newly issued Italian GAAP rules.

Under these rules, expenses previously included in the caption other expenses net, specifically, the impairment of long-lived assets and non-current investments and the accrual for the one-time termination benefits are now included in the cost of sales or selling expenses, SG&A expenses based on the function of the cost to be classified.

Due to the requirements to adopt the principle on retrospective basis, also previous year operating loss has been revised for a better comparability of the figures. Having said that, let me start by reiterating what Mr. Natuzzi said, our revenues were down, okay but we made a conscious decision to keep the value.

So, we are quite pleased with the results so far. While sofa sales were lower by 6.6% in 2016, we still furnishing sales grow by 6.5%, which is a good sign regarding the potential for this new segment in the branded division and comforts the power of Natuzzi name on the market.

We had a negative impact of foreign exchange of 1.6% on sales, but lightly positive on operating income by €0.3 million. Total net sales were 457.2 million, including non-core sales of €25.5 million.

So that core business sales were 431.7 million and Natuzzi branded business represented 73 of total core business sales or 313.1 million, of which, 45.4 were done by the directly-operated stores chain, what we call DOS. Natuzzi sales performance was minus four compared versus 2015.

Private label sales instead went down by 10.6% and represented the remaining 27% of the total core business sales. In 2016, we include industrial margin by 2.7%, mainly due to favorable raw material prices and industrial process efficiency. And we did this in spite of lower sales. The Company was capable to further efficiency in transportation cost to.

As a result, Natuzzi has almost reached the operating margin breakeven despite lower sales.

It's interesting to underline that in the fourth quarter 2016 with sales of €124.6 million, down by 5.4% from the same quarter of 2015, the Company was able to achieve a 2.4% operating margin, positive operating margin, higher than the 0.6% of fourth quarter of 2015.

During the fourth quarter of 2016, the Company was able to reach a little net income in spite of higher tax rate. Net cash from operating activities continues to improve and was positive by €26 million at the end of the year and more than offset the net cash invested of 10.7 million.

As a result, the net financial position almost doubled and reached a positive €28.9 million. As Mr. Natuzzi said before, the Company had just begun our direct-to-retail strategy. I would like to say something about the associated capital expenditure.

The CapEx despite the new direct-operated stores with the characteristics we have in our high-traffic model are in the range of 400,000 to 800,000 per store depending on the locations and other factors, so not so huge.

Having said that, the financial cycle of the DOS is largely positive versus the normal financial cycle we have with independent dealers. In fact, in the case of DOS, we get paid between 30% and 50% of sellout at the time the final customer enters the store and writes an order well in advance.

In the case of wholesale business, the independent retailer pays us the selling price in an average of 30 days from shipping. So, direct-to-retail model generates cash faster than the franchised business. I'd like to talk a little about our early research in '17.

Please keep in mind, it is still very early in the year so this information is preliminary. In December, we experienced it is slowdown in order or a flow that affected January 2017 invoice and feem, but we started recovering in February and March.

We continued to see an economic slowdown in some countries, so I am concerning other countries, but as we said, we are now starting to see the first signs of recovery in the order flow.

DOS metrics are improving, it's our intention to continue to open, acquire existing franchisees, and maybe consider joint ventures with some of our stronger dealers to accelerate its growth and capture the available synergies. I would like now to turn the call back to Mr. Natuzzi..

Thank you, Mr. Vittorio and Nazzario. We have a strong and dedicated -- I'd like to, again, emphasize that more than ever, today, we have a strong and dedicated management team. These executives are supported by longstanding managers at our company, and as a CEO, I'm pleased with their efforts of working together.

Our environment is still tough as of the world to strugglers with the new political reality, but our goal are clear, our dedication is unveiling and our results are starting to reach towards their potential. We have the most recognized high-end quality brand in the world. We are global in every aspect of our business, unique among our competitors.

We are strong, we are focusing, and we’re growing the value of our company while maintaining the highest standard of design, quality and customer satisfaction. I’ll now be happy to take your questions. Thank you..

Thank you. [Operator Instructions] And we will take our first question from David Cannon of Cannon Wealth Management..

Good morning, guys. Congratulations on the nice improvement in 2016. First question is the – the shift in strategy to opening direct-to-consumer, opening your own Natuzzi Italia stores.

Can you tell me how many stores were opened in the fourth quarter and how many were opened in the first quarter and what the plan is total number of openings for 2017?.

Sure, [Indiscernible] that the strategy, the direct retail strategy in July we have opened six stores, one direct operator stores and five franchise stores. We have opened direct operator store in end of January in New Jersey and five franchised stores in U.K. and Australia since September to December 2016.

Our plan for this year 2017 is to open between 8 and 10 stores namely in the United States and in U.K. four direct operated stores and four franchised stores.

But it is not a matter of how many stores we’re going to open, but it’s about opening those stores in the right location, high density, high traffic retail parks with right format and also in the right merchandising needs. And this of course takes time, so we are going to accelerate these as fast as possible.

We are our team to scouting appropriate right locations, and this is our plan for 2017..

Okay. Can you just clarify something for me? You said you plan on opening 8 to 10 stores in 2017 in the U.S. and the U.K. These are direct operating stores and four franchised. So is that....

Four franchised and four direct..

Okay, okay. I see. So the total is 8 to 10....

Because these are making sure we have already acquired. So these locations are secured..

Okay. So half of the 8 to 10 will be franchise, the other half will be direct operated.

And then, can you tell me going forward on these stores what the margin impact is to your overall results?.

Can you say again, sorry?.

Can you explain to me what you expect the margin impact to be on those direct operated stores?.

We have a clear vision on the targeted operating margin and EBITDA store level.

So, first of all as Vittorio has mentioned, we have initial investment which is between €580,000 depending also depending from locations and also on contributions and the shift in the cash flow cycle allows us for a payback in between the end of the first year and the second year because of margins.

So DOS, we capture all value of our brand from the margins and those margins are targeted to be up to 10% at store level in the second year..

Okay. I just wanted to make sure I understand it correctly. So you're going to capture both the retail margin, which is about 10 points in the second year and then you're going to capture the wholesale margin.

So, and then the other thing you're saying is that from a working capital perspective, this is positive, I'm assuming because people give you a deposit upfront, you're not tying up your money in inventory and receivables.

So you get a deposit upfront in the store to build it which helps you with working capital and then they pay the balance upon delivery, is that pretty much how it's structured?.

Okay. Let me say something about margins. In the Natuzzi, existing direct-retail operations, our stores the new ones they have already a 60% gross margin, including everything, okay? And this is much better than the 34.3% that we displayed so far because the composition, the mix of our sales between the wholesale and DOS.

Having said that and this capture all the values you are mentioning rightly. Working capital, we already have our working capital to produce since Swedish give the order. The opening of DOS will have a first negative impact, because the opening, so the demand of cash you have to open between 400,000 and 800,000.

But as far as you know the entire financial cycle is concerned, you're right. We get paid 30%, 40%, in some cases 50% of the sellout price at the moment of the order. So, when you have service stores, and then we get the balance to delivery, today when we do in the United States wholesale business, we get paid an average of 70, 75 days from invoicing.

So you can imagine for sure how well managers thus will generate cash..

Okay.

And then, what would be the, so the CapEx impact will be as assuming you open 10 stores would be about $6 million, is that correct about 600,000 on average?.

Yes. Yes. On average. Yes, you're right. And further comment -- sorry, to further comment on your question, I gave you the number of franchised and direct stores, which we are going to open in 2017 for Natuzzi Italia new format retail stores, which I have -- we have all mentioned to you.

Let me add that, of course, we -- our plan also includes openings in other countries.

And a specific comment on the plan we are designing for China where our current direct operated stores are delivering so far like-for-like in 2017 dramatically increasing sales year-on-year, and that's why we are also planning four Natuzzi Editions in China with overall plan for the full year, which are ahead and we start executing this in 2017..

Okay.

So are you implying based on what you saw in the first quarter, which is basically complete and with the store openings, are you implying that you expect 2017 to be a growth year with margin improvement?.

I have already said something about what is the situation today. We are working to grow as Mr. Natuzzi said and of course, we are working to improve our margins. However, I would remind that two years ago, we reached EBITDA positive, this year EBIT breakeven. So next goal would be -- is to go further..

Okay, I have other questions but right now I'm going to go back into queue in case there's anyone else, and then I may ask a couple of follow up, thank you for the insight..

[Operator Instructions] And we will go to our next question from Velin Mezinev of Donald Smith & Co..

Hi, guys, what would be the impact of the border adjustment tax? Should it be passed?.

Are you mentioning duties, possibly duties?.

Yes..

Okay. We've been thinking about that based on Mr.

Trump announcement that very often we have new scaring announcement around the world, but we have a production system that we have build up in the last five years through the product innovation, which means not the new style or new function or new trend, but just in the way we engineered the product and we revolutionized the way we engineered the product, in order to create the synergy between various components.

But also we redesigned the production process. Our factories are revolutionized compared with all the system and that allow us to manufacture quality products anywhere in the world with unskilled people. This is really the miracle that we have made in our operation after 59 or 58 years experience. So, I mean we are ready.

Today, we don't have any reason to do further investment in manufacturing the product in America, because we are all focusing in developing a retailer. But it depends because if we talked about 2%, 3%, 5% duty assuming that America will decide to apply an import tax of 5%.

I believe that the basis of the strength of the brand that we can absorb it 5% will be a not big difference because our average ticket in America in our store is $4,000. So, if instead 4,200 I don't see big difference.

But in the case, that there is a very high duty then we take six months labors for us to come in America and build that for the factory, consider that our America's regional quarter is basis [Indiscernible] since 25 years. So, we feel in America as our almost second home -- no, it is our second home.

It's not by coincident where we were established in New York [Indiscernible]. So certainly, we know that what happen, but it's been case happen, we are ready. We are ready to come in America and manufacturing the product locally, improving delivery time and the rest..

[Operator Instructions] And we do have a follow-up question from David Cannon of Cannon Wealth Management..

Gentlemen, can you please reiterate what you have said about I believe, it was January, February or February, March that you saw a like-for-like store increase? Are you saying that same store sales were up 6.9%, could you just give -- reiterate that, just wanted to make sure I understood it correctly? It sounded like you are saying same store sales in Q1 were up about 6.9%?.

That's correct. Our like-for-like stores had 6.9% increase year-on-year versus last year. And this is existing support base, whereas with the addition of new openings, which I mentioned, overall sales increased versus sales of last year is 39%..

Okay.

And this is for what month? Is this for the entire first quarter or just January, February?.

January, February..

Okay.

And then can you share with us your e-commerce strategy at this point some of your plans to acquire customers in a cost-effective way, if you have that?.

Yes, we are very much interested now and focusing on developing the online business. We are working on defining the models. The model, which means primarily, which platform we are going to use? And we are in favor to use an existing platform to start with in online business.

And we are in touch, we're talking since now almost couple of months with people, with the different company to finalize the way we should start this business, which we consider very important, not for the business itself, but just to show the Company and direct-to-consumer in the store, because as far as we know through our network colleagues around the world and also customer still furniture people prefer to go in the store, touch the furniture, sit on the sofa, try to comfort.

But same way whatever will be the future, but again, we all believe that the future is online, not in the same way the [Indiscernible], but we strongly believe that it's important for us to initiate this new venture..

Okay. On a different subject I'm going to just a comment for Mr. Natuzzi and for the Board of Directors as a fellow shareholder.

I mean, number one, I would like to comment you for the good job you have done in turning around the business, rightsizing it, and now generating substantial free cash flow, and positioning us well having a strategy for growth and margin expansion in the future.

However, all of that being said, with that being accomplished, looking forward, when I look at your balance sheet and the valuation of the stock and the financial attributes going forward, it seems to me that it would be wise for the Company to have in their capital allocation strategy stock buyback, because we are trading almost for tangible book value, okay, generating very substantial double digit free cash flow yield when we look at the enterprise value.

So as a shareholder, my commentary is, I think it would be wise for the Company to buy back stock significant amounts of stock, and a significant portion of their free cash flow. So just a commentary something that I would like you guys contemplate and talk about on the board level. Thank you..

Thank you so much for this question. For the moment, we’re investing in our expansion.

Okay?.

Okay. Good luck. Thank you..

[Operator Instructions] And there are no other questions in the queue at this movement. [Operator Instructions].

While there are no more questions, I’d like to thank you very much all the listeners. And I look forward to talk with you again in the next conference call or any time you would like to. Thank you very much, again. Have a good day. Bye-bye..

And that does conclude our conference for today. Thank you for your participation. And you may now disconnect..