Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Fourth Quarter and Full-Year 2018 Conference Call. At this time, all participants are in a listen-only mode. Following the introduction, we will conduct a question-and-answer session. Introductions will be provided at that time for you to queue up for questions.

Joining us on today's call from the Natuzzi store in Milan are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi; 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 from the Natuzzi headquarters, 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, Arnam. Good morning to our listeners in the United States, and good afternoon, to those of you connected from Europe and Asia. Welcome to the Natuzzi's fourth quarter and full-year 2018 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 upgrade or revise any forward-looking matters discussed during this call. And now, I would like to turn the call over to the CEO. Please, Mr. Natuzzi..

Good morning, everyone, and thank you for participating in the Natuzzi conference call. As already communicated last November, the first nine months of 2018 were very difficult for us due to the important issues we faced in the supply chain. This explained most of the operating loss of €15.2 million we reported at that time.

We have reacted to that and reinforced some key management position, particularly in the operation, with professional coming from primary industrial players. In particular, we had these new hirings, and they are, indeed, Mr.

[Aldo Anarti] with an extensive experience in aerial space industry as the Chief Process, Innovation and Product Development Officers. The operation department is now led by Mr. Antonino Gambuzza with the 25 years of experience in manufacturing and engineering industry as the new Chief Operating Officer of the Group. And we have Mr.

Umberto Longobardo with the deep experience in the fashion industry as the new Chief Quality and Customer Care Officer, and Mr. [Paolo DiMaggio] from the automotive industry as a new Global Procurement Director.

We immediately started working together, checking a list of the KPIs on a daily basis, and the first improvement is scheduled to arrive almost immediately during the fourth quarter of 2018 and that confirmed in the first month 2019. This has lead to a better and efficient programming and quicker delivery of our products.

So we didn't have delays in the production and the invoicing process, as occurred in the past. Furthermore, the strict collaboration among managers as also lead to finding a new solution to further improve the overall supply chain process. The senior management is in place.

I am extremely confident about the contributions that can derive from the job and recovering efficiency. We also hired a new Human Resource Director from primary industrial player in Italy.

The name is Michele Onorato, which has made already great job with achieving the agreement with Italian government and National Unions that allow us to reduce the cost of labor in the Italian plants and starting from April 1, 2019 to shifts the volumes of production from the Italian plants to Romania plants.

That's related to the Natuzzi Editions production because Natuzzi Italia product will be manufactured still in Italy, where we have higher margin, obviously in Natuzzi Editions, the margin we have doesn’t allow us to manufacture in Italy. So that's the reality.

As a result to the overall labor cost in the production plants will improve accordingly starting from the second quarter 2019, and it will improve the company margin. This is by far the most important news for Natuzzi for this year and going forward.

At the same time, I would like to remind you that we transformed our growth from a manufacture company in the lifestyle brand. This has required the huge investment over the years, which relates to the worldwide brand awareness that Natuzzi name has gained over time on a global scale.

Such company transformation has been presumed also through huge investment on mono-brand store in fact that are the evidences of such transition.

If you give a look at today’s performance, we clearly see that the retailer mono-brand store business, which represents almost 50% of the entire business, is growing – allow us to control the brand revenue and margin.

As a result, the learning curve we have done in the retailer business in the recent years, we intend to increase the percentage of our controlled distribution going forward. The wholesale, on the contrary, is characterized by strong competition on price, putting high pressure on margin.

For this reason, we would sell the unbranded product only to selected customer with accessible volumes and margins. But what I just said, going forward, we intend to focus on the retail-based strategy on the development of the mono-brand store network, most directly and franchises operating.

We are very well positioned for this and this will deliver an effective return of the investment made on the brand over the last few years or many years, I should say, and that journey has been done so far.

A lot is still to do, but now we have clear in mind the path to be followed and confident that for the reason I just explain, we would be capable to overcome the turnaround and create the value for the company and for shareholder. Thank you very much. And we are here available for any questions. Thank you..

one, a weak [auto] [ph] business; two, raw material price increase; three, inefficiencies in the Romanian and Italian production plant; four, some extra cost with the logistic processes; five, unfavorable exchange rate.

But at the same time, we clearly stated that the retail operations were improving already, raw material pricing [indiscernible] was changing, and we were adopting measures to address the supply chain. So the Company agenda for the fourth quarter 2018 has been organized on the basis of the items just mentioned, of course.

Let's analyze the Q4 2018 results. The consolidated gross margin was 27.4% from also lower than 28.9% in the previous fourth quarter because it included €5.6 million of restructuring cost pertaining to workforce reduction program at the Italian operations.

[Indiscernible] the cost of sales, net of the above mentioned cost and also thanks to a favorable trend in raw material prices in Q4 last year gross margin would have improved at 32% on revenues. In the fourth quarter, we have also seen the first tangible results of the action implemented in the meantime in the supply chain.

The favorable trend of raw material prices has been confirmed in Q4 2018. The retail – the direct Retail business has continued to improve.

As of today, the DOS, directly operated cost of sales are €66 million of which €39 million, Natuzzi Italia €15 million, Divani&Divani by Natuzzi, as well as Natuzzi Italia concessions in Mexico having closed eight loss-making concessions in UK, House of Fraser to be precise.

During the fourth quarter of 2018, net sales generated by the direct retail division were €16.8 million, up 4.4% over the same period of last year, with positive sales numbers in USA, plus 46%, Italy plus 19.5% and Switzerland plus 22.2%. Q4 2018 sales on a like-for-like basis were €12.9 million, up 10.6% from €11.6 million in the last quarter 2017.

Thanks to the performance of our DOS located in USA, Italy and Switzerland. As a result, the group reported again an operating loss of €8.9 million versus operating loss of €6.3 million in 2017 fourth quarter.

But excluding the €6.9 million of the cost relating to the restructure of Italian operations for 2018 fourth quarter, the group would have reported operating loss of €2 million, so improving from the previous nine months 2018. On this basis, let's now have a look to 2019.

The business environment and global economy are still quite difficult almost everywhere, uncertainty about tariffs between China and USA are still there and Brexit consequences are unpredictable. As said before by Mr. Natuzzi, we continue our strategy while we are changing the industrial footprint between Romania and Italia.

Now along with the new production allocation between Italy and Romania explained by Mr. Natuzzi, which are the other main pillars of 2019. We do not expect a significant increase of business volume in 2019. We will focus on the quality of the business.

Indeed, we have planned a further improvement in a like-for-like performance in the retail chain where we have opened six stores in 2018. We planned a modest growth in the branded sales, whereas as far as private label is concerned, we will focus on a few selected primary customers delivering reasonable margins.

As a consequence of Natuzzi's primary focus on branded sales, the mix is expected to be more favorable. In addition to that, we also put in place some price increase. The raw material is going down as expected.

And finally, the continuous job in the industrialization of the product by R&D department is progressively improving the cost of quality and we contribute to improving the overall production efficiency. Finally and differently from last year, exchange rates are more favorable this year versus 2018.

Overall, together with the further rationalization of our operating cost structure, we will contribute to the return to a positive EBITDA in 2019 which is the management goal for this year. Thank you. Now Mr. Natuzzi and Mr. Pozzi will be happy to answer your question..

[Operator Instructions] We will take our first question from Garrett Larson from Kanen Wealth Management. Please go ahead..

Hi guys. Thanks for taking my question. My first one is you mentioned a $6.9 million cost in OpEx. So on a go-forward basis, what should we expect OpEx to be? Number two, it looks like you had a one-time expense impacting gross margin. I think it was €5.6 million.

Can you just quantify that? And then going forward, should we expect gross margin to get back into the low 30 percentage range? And then I just had one follow-up after that. Thanks..

Okay. Let me be more precise. The €6.9 million restructuring cost is the sum of €5.6 million in the operations are in the cost of goods sold plus €1.3 million in SG&A. The total is €6.9 million. This was linked to a set of you know that was closed in December 2018 in order to incentive people to lay the company, to lay off the company.

We incentivated about 60 people by the end of last year, and we accrued another €1 million that we want to spend this year in order to reduce the cost in the – in our structure [indiscernible]. Going forward, I have to come back to the plan that Mr. Natuzzi has claimed to the agreement that Mr. Natuzzi claimed a few minutes ago.

We have one third of our workers in Italy that are redundant versus the Natuzzi Italia today overflow. With this agreement for the next foreseeable future, we will reduce this redundancy by the sustain of the Italian government. So that's the plan for the redundancy cost.

As far as the gross margin is concerned, of course, we are aggressive this year in terms of improvement of our gross margin. Let's say this way. If you can see the Q4 2018 net of those, let me say, restructuring cost, the gross margin is already in the area of 32% instead of the reported 28%.

That's more or less the goal we have in mind for the full-year in 2019..

Thank you. And then one more on KUKA.

Do you expect KUKA – the KUKA deals are contributed to revenue this year? Or when do you anticipate that? And then, what are the anticipated increase in China store count for KUKA year-over-year?.

That’s a great question. This year, obviously that we are starting with them, but they are of course 2019 we are still fine tuning some of the operational steps in order to let the JV, joint venture work, but we planned that the – of this company approved which is the basis of the agreement is very aggressive for the next year.

So just in 2019, they have a goal to open in China additional 60 stores and they are – normally they are quite on time with their plans..

Great. All right. Thank you. That’s all for me. I’ll jump back in the queue..

You are welcome..

We take our next question from Giovanni Danisi from Seeking Alpha. Please go ahead..

Hello, guys. Good afternoon. First of all, correct me if I'm wrong, but I think that this quarter and the quarter to come, the two, three quarters to come probably, will be quite challenging in [indiscernible], so last year, you sold to China directly and China accounts for I think around 10%, 15% of your net sales.

And this year, you are selling to China – through your joint venture – you are actually selling to your joint venture with a markdown probably. So dependingly from the markdowns from discount to which you sell to the joint venture, you all say China should be – more than last year, so this could be quite difficult to compare the quarter.

So because we are – we don't have kind of apple-to-apple comparison. So I think that basically it should be a little bit more of what they appear in sales. Correct me if I'm wrong. And also I would like to know if I got it good. So you have signed a fair value of around €48 million to the joint venture you said, or I didn't get it good.

So – and another one is about this 60 stores that KUKA is planning to open. And these 60 stores will be directly operated stores or just franchisee? Thank you..

Regarding the opening of the store, approximately, we expect in China to open 50 franchisees and 10 would be operating directly from the company. Okay..

Thank you..

Giovanni, hi. Yes, €48 million is the entire fair value of the 49% of the company in China. Yes, you got precisely. About China, apple with apple, you're right because price is different in the two years. So this year, we will exercise in order to explain better to give the best representation. But let me say something about the structure.

While they consolidating the business, we also they consolidated the cost of the structure. So don’t see just sales but also the impact of minor cost on the structure of the company. One, as far as the Natuzzi Italia is concerned, yes, there is a different calculation in the agreement I mean the price.

But as far as contribution margin is concerned, we are still there with very positive contribution margin of Natuzzi Italia, [indiscernible], shifted to the JV and partnership also. So yes, we obviously – we have reduced a little bit in the company price.

But at the end, the name of the game is the 60 stores that this year and the other stores that kind of people in China, we’ll be able to open in the next years, so volume is what we need in order to leverage the Company. And that's why Mr.

Natuzzi agreed to this joint venture agreement because we understood the need to have a Chinese partner in order to accelerate volumes in the midterm..

Thank you very much guys..

Thank you..

[Operator Instructions] We take our next question from [indiscernible]. Please go ahead..

Yes, thank you. [Indiscernible] questions have been answered. Thank you..

[Operator Instructions] And we just have a question. We take our next question from Michael Feder from Feder Group. Please go ahead..

Michael?.

Good afternoon, gentlemen..

Good afternoon to you..

I don’t actually have a question. I just want to make an observation.

As you know, I follow the company very closely and I continue to believe that your transformation to a lifestyle brand, your focus on mono-brand retail, which you can control, your focus on only those private label customers that will be profitable is exactly the direction that you should be going.

I remain very hopeful, as do we all, that the economy will help us all see the results of those actions in the near future. But I commend you all on your strength and conviction to move forward during these tough times. So thank you..

We appreciate that you share our strategy. Thank you, Michael..

[Operator Instructions] We take our next question from Giovanni Danisi from Seeking Alpha. Please go ahead. Your line is open..

Yes, just one follow-up, if I can. Maybe you would like to speak about to add some color of the – about the performance of your Natuzzi Editions wholesale operation in the fourth quarter. That came in, I think, worse than expected.

There was some particular challenge there maybe or it was a problem of difficult comparison or maybe, I don't know, other environmental problem for the fourth quarter that have been difficult all over the world for all companies, actually.

And because actually, for what I can see, both sales operations of Natuzzi Editions, the performance even worse than Softaly in the fourth quarter. So this is kind of surprising. So maybe you could add some information about it. Thank you..

Let’s take the opportunity to update all the shareholders and the listener regarding an updated way of interpreting our business.

Before we need to have Natuzzi Italia and Natuzzi Editions, in Italy we have Divani&Divani, it’s a chain of store Divani&Divani by Natuzzi and then Softaly which was pure retailer, no, pure wholesaler, I’m sorry – pure wholesaler for I mean big guys, big distribution, okay.

Today, because retailer represents almost 50% of the business, so we dropped Softaly. We have just retailer division and retailer collection which is separated from the wholesaler collection. We have two collection. Natuzzi Italia is made in Italy. Then we have wholesaler collection is made in China, Brazil and Romania.

And in wholesaler, we have multi-branded store that we supply product and they have gallery inside, there is a space brand for Natuzzi, and then we’ve also – we distribute the products to pure wholesaler.

Again, the division retailer, which includes Divani&Divani which is comparable with Natuzzi Editions is performing well, the store, the mono-brand store.

The wholesaler, because of the competition, the price pressure and the margin, we are intentionally refocusing a little bit in order to focus our – and dedicate our energy primarily on the retailer, which is what really gives us – is giving us a good response, good result.

So do we have Vittorio here, the numbers? I mean so it would – the last quarter, Natuzzi Editions, let's say, which is primarily wholesaler, except for China and Brazil where we have a store and now we’re just started to open the smaller very successful store in United Kingdom of Natuzzi Editions.

A big part of the business in the Natuzzi Editions is wholesaler, and probably – not probably, I'm sure that our wholesale business is not performing well, but that's because we don’t want to accelerate - to reduce our margin. I mean, we are not willing to work with low margin, with the price pressure.

Did I answer your question?.

Yes. So just to – for a better clarify, so is it kind of intentional, intentionally choice like to reduce the volume of the wholesale part.

No matter if it is Softaly or Natuzzi Editions or Divani&Divani?.

Divani&Divani and Natuzzi Editions retailer are the same, just the logo – just, I mean the name of the distribution is different. But again we have the two – we have a factory and collection dedicated for the retailer and the wholesaler. Within retailer, we have Natuzzi Italia and we have Natuzzi Editions, which is the equivalent of Divani&Divani.

We are trying to simplify the understanding of our business. We are retailer and wholesaler. We used to be 100% Wholesaler Company. And 50 years ago, we transformed, as I said in my speech, from a manufacturer company to a large size brand.

New investment also in the retail division, and today we realize that the future of the company is just retailer in order to get the return on the investment that we've done on the brand and on the learning curve of the retailer..

Okay. Thank you, Mr. Natuzzi..

Welcome..

That concludes today's question-and-answer session. I would like to turn the conference back to our host for any closing remarks..

Yes. Thank you, Arnam. So it seems that there are no further questions. Therefore, this concludes our conference call today. Please, as usual feel free to contact us should you need further information. Thank you and have a nice day. Good bye..

This concludes today’s conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect..