Piero Direnzo - IR Pasquale Natuzzi - CEO Vittorio Notarpietro - CFO Nazzario Pozzi - Chief Officer, Natuzzi Division.

David Kanen - Kanen Wealth Management.

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi Third Quarter and First Nine Months 2018 Financial Results Call. At this time, all participants are in a listen-only mode. Following the introduction, we will conduct the 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 the Chief Financial Officer, Mr. Vittorio Notarpietro; Mr. Nazzario Pozzi, Chief Officer of the Natuzzi Division; Mr.

Gianni Tucci, Chief Officer of the Softaly Division; 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..

Thank you, May [ph]. 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 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, 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 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..

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 manufacturing 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 and then, international retailer organization, as 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 may 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, [indiscernible] shareholders. What I want to share with you all today is the reason why I -- my endless optimism, in fact, two-third 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 demonstrate that we have created an asset, the Natuzzi brand, which is a blinging [ph], is a first positive evidences.

In addition to the above, during the first nine months of the year, the Natuzzi Italia U.S. division composed off 38 stores, shows an increase of 26.6% in net sales versus the same period of 2017.

If we look at recently opened stores in United States; Chicago, Costa Mesa, King of Prussia in Philadelphia and West Palm Beach having the new to citalia [ph] detailed format, those of the U.S. direct operating store have delivered the sense as expected and reached breakeven in the third quarter of the year.

These positive results 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 sides to grant a profitable display, merchandising adequate to the customers area, marketing initiatives planned on demographics, retail selling ceremonies and retail 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 existing DOS profitability, we must now duplicate the best practice generated on DOS chain through the franchises 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 usually [ph] we collected various commitment from our customer.

In this regard, we have an aggressive plan of opening mono-brand store in China of which about 50 in 2019.

Going forward, we continue to evolve towards the branded business, at the same time we will maintain our partnership with those key unbranded 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 today's pleasant [ph] performance and are intensively working on that.

In fact, for the last quarter of this year we expect 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 concentrating on reducing the complexity of the overall process, improve the supply chain and enhance the quality of our cells, 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 the listener [ph], after years of continuous investment, not yet return, we need today to focus all of our efforts in improving quality of our sales and deficiency 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..

[Operator Instructions] We'll take our first question from David Kanen from Kanen Wealth Management..

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?.

Let me give you an entire picture of the net financial position. By the end of June, we had a net financial position of minus €9 million, at the end of July towards minus €19 million, and we got net from the deal in China €35 million. The net financial position as of September is positive by €9.1 million and with the €54 million of available cash.

The difference was of €7 million between the end of July and the net financial position by the end of September is about €7 million, and we use that cash as follows; we shortened payment terms to our suppliers and finance and some CapEx in the third quarter 2018, we got all the cash from the deal..

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

Correct..

Okay, that's all I need 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?.

Yes. The partners 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..

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?.

In the last quarter of 2018, we have opened two key DOS, one in London, one is Paris, whereas with regard to 2019 we are still in the budget process. We are considering very few and selective locations for the U.S.

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 big practices all over 2019..

So right now in the U.S.

or even globally you're saying very few DOS stores outside of the Kuka deal, correct?.

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

I see.

And then, Vittorio, can you talk to -- you made reference on 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 and expenses that we should expect in the fourth quarter and in 2019?.

Let's start from -- do you know the reasons why we lost some money in Q3 on efficiencies 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 management team focused on that.

And then raw materials, you for sure had a look to the Q3 results and you will find a lowering raw material in terms of consumptions. As far as 2019, first of all, we had to increase the profitability of existing DOS with toll which rolled into press release that -- and Mr.

Natuzzi underlined the fact that in just three quarters the new stores in America reached breakeven but in the previous two quarters they lost almost €1 million; this is one of the improvement we have in mind for next year and the reason why Nazzario is saying what is said 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 cost that we incurred in 2018. We have to save cost as said before in the supply chain and logistic platform of the company.

We will have hopefully a better impact of foreign exchange in 2019 compared with 2018. The prize 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 showed 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, recall that in profitability recovery of this company before speaking about any sales volume increase..

So with the reduction of raw material costs, 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?.

In Q4 we had 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..

That was in Q3.

And in Q4 it's going to be more significant or similar to that?.

Should be in line with Q3 or even better..

I understand.

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

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

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

So in the first nine 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..

4.5% is that for the third quarter or is that the nine months?.

No, no, this is the nine months..

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

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

I understand the nine month number, but I'm interested in the latest quarter in the third quarter; what was that number?.

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

Okay, that's pretty much all I have. Thank you..

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..

Okay, this concludes 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..

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