Please stand by. Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Third Quarter and First Nine Months 2019 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 on the call are Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi; the Chief Financial Officer, Mr. Vittorio Notarpietro; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded.

And now I would like to turn the conference over to Piero. Please go ahead..

Thank you, Kathie. In just a short notice, together with the Chief Financial Officer and the Chief Executive Officer, we also have today, Mrs. Italia Casalino, who is in charge of the Retail Channel and then we have also Mr.

Cosimo Bardi, who is in charge of the wholesale branded channel and then, we have also Gianni Tucci, who is in charge of the wholesales unbranded channel. So, 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 Third Quarter and First Nine Months 2019 Conference Call. After a brief introduction by the Chief Executive Officer and the Chief Financial Officer, 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 securities 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 Annual Report on Form 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..

Thank you. Good morning to everyone. Despite the unpleasant number that we generated during the first nine months of 2019, which disappoints everyone. But caused primarily by the trade war between United States and China, like still without a solution. The management has taken initiatives aimed to overcome this difficult situation.

In fact, I would like to emphasize that the retailer division represented by direct operating store and franchising one the percentage of volume has increased to 49% of the entire business compared to 44% of last year. Within the retailer business, the rollout of franchising store in China proceeds according to the plans.

By the end of this year, we will have 240 stores in China, thanks to the 55 new Natuzzi store opened overall in 2019. We will continue to open store in China with this intensity and this will positively support our revenue in that region.

In United Kingdom, we have recently reached an agreement with two historical partners for the aggressive development of the retailer business. Within end of this year, we plan to open five Natuzzi retail stores in United Kingdom. The Italian Divani & Divani by Natuzzi store network continues to deliver a positive sales performance and be a profitable.

In consideration of the ambitious program, we have for the retail development, recently hired a new Corporate Retail Manager, Mrs. Italia Casalino, who will be responsible in supporting the regional manager for the achievement of their P&L early target and the execution of the retailer business model.

The Wholesale branded channel consisting mainly of Natuzzi galleries represents 32% of the total business. The same percentage as last year, the strength of Natuzzi brand has allowed us to limit the volume and margin erosion in America caused by the U.S. This distribution channel is now entrusted to Mr.

Cosimo Bardi, who will support the regional manager in the development of such business. Eventually, Mr. Bardi and Mrs. Casalino they are available for any explanation if needed. The wholesale branded and unbranded – the wholesale unbranded division lead by Gianni Tucci represents 19% of the total business. It was 24% one year ago.

The performance of this division has reflected the imposition of such U.S. tariffs. Of course final resolution is still unpredictable unlikely. So in order to overcome the U.S. custom duties which started the revision over the entire group industrial allocation to recover volume and margin including outsourcing action in both Asia and the Europe.

The first step of such revision started from China. In fact, our plant in China has become less competitive because of the abovementioned tariff. So it must be downsized.

Therefore, the current 88,000 square meter plant would be replaced in third quarter of 2020 by a smaller plant 38,000 square meters in order to satisfy the development plans only for China and the rest of Asia-Pacific market which – they are not impacted by duties.

We are now in advanced stage of negotiations for an outsourcing production in Vietnam that will manufacture unbranded products for the North American market. Production in Vietnam will start gradually from the first quarter 2020.

As for the production of wholesaler branded for North America, our Brazilian plant which has production capacity will start serving the East Coast within the first half of 2020 that will improve the margin for this channel – business channel.

At the same time, we are progressing in negotiations with an external player to find additional outsourced production capacity in Mexico to serve the United States of West Coast. We believe such outsourced production in Mexico could start in the second half of 2020.

To recap, North America market would be served from plants in low-cost countries outside China to avoid the U.S. tariff. The unbranded production for mass market would be made in Vietnam. The wholesaler branded production will be made part in Brazil and part in Mexico.

The complete industrial review we have almost completed the shift of certain low-margin production from Italy to Romania as it was in no longer sustainable here in Italy. So we need further industrial capacity in Eastern Europe.

That's why we are negotiating with third parties production players located in Belarus to get the low-cost production capacity in outsourcing to favor the unbranded business in EMEA region, we believe the production Belarus could start gradually in the second half of 2020.

The Romanian plant will continue to manufacture wholesaler branded for the EMEA region. Nothing changed for the high-end Natuzzi Italia production that will remain based in Italy regardless of the market to be served. Lastly, we are progressing in the selling process of certain assets no longer consistent with our strategy.

We have also decided to hire an advisor firm to support us in the sale and if needed, in the financing of such sale process. And now, I will pass the conference over to Vittorio who will go through numbers in more detail and then obviously, I am available for any questions the management is here even in this meeting.

And any questions we will be very pleased to answer to you. Thank you. .

€4.5 million reimbursed on long-term borrowings, €10.5 million used to payback lease contracts related to our own stores; and €21.1 million to reimburse short-term debt, mainly related to lower sales of trade receivables to the securitization of financing vehicle in line with lower sales.

What we do expect for the next quarter? We will have sales a little higher than those in the third quarter 2019 just displayed, but still lower compared with the fourth quarter 2018. In spite of that, we should display an improvement of operating results when compared with that reported in the third quarter 2019. Thanks everybody. .

[Operator Instructions] And we'll go first to David Kanen of Kanen Wealth Management. .

Good morning, gentlemen. My first question is in regard to Q4. The guidance that you gave for improved results.

What do you expect adjusted EBITDA to be in Q4 if we take out one-time charges and so forth? And what do you expect cash flow from operations to be in Q4?.

I am sorry that's my microphone. We cannot anticipate so many details, David. We know that the order flow will allow us to make a certain amount of sales, which again will be higher than Q3, but lower than Q4 last year, okay? We know that, we will have single-digits in terms of €1 million loss in Q4 which will be better than the Q3 just displayed.

So EIBITDA should be a little bit positive. We don't expect any particular improvement of free cash flow. So, we should be more or less in line with the positive, I would say, results in terms of cash flow displayed in Q3. .

Okay.

And then, can you speak a little bit to your direct operated stores? At this point, how many new stores do you think you'll have in Q4 in the current quarter openings that you have in queue and then also in 2020? So my question is, ending the year, how many more DOS stores will we have by the end of 2020 versus currently?.

Okay. Italia Casalino speaking. So, for the Q4, our expectation is to reach additional 30 shops. So 28 FOS and two new DOS in UK that we are going to open for the – at the Boxing Day. For the 2020, we are consolidating the figures. So we are going to open most FOS than DOS. But in the next quarter, we will give you more details about these new openings. .

Can you just clarify for me, FOS versus DOS? What is FOS again?.

Yes, sorry. FOS, talking about franchising and DOS we are talking about direct retailer. Our shop, our stores. Sorry. .

Okay.

So the FOS stores are these – where are these going to be located primarily?.

Yes, the so 28 or 11 in China. We have six in South America. One in North America. Three in Italy and four in Europe. .

Okay. So you're going to have 28 franchise stores open in Q4. .

Correct..

Two FOS stores in England.

And then, for 2020, how many FOS stores do you anticipate?.

So, to be honest, we are going to consolidating during these days. So, I will give you an exactly number in the next call for the next quarter. I will be provide you exactly also by quarter what we are going to open. .

Okay. Alright. Thank you. Good luck. .

Thanks. .

[Operator Instructions].

Hi, Kathie. This is Piero Direnzo. Okay. It seems that there aren’t further questions at the moment. So, this concludes today's conference call. So, please feel free to contact us if you need further information. Thank you. Have a good day. Bye..

And again, ladies and gentlemen, that does conclude today's call. We thank you again for your participation. You may now disconnect..