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Edited Transcript of NTZ earnings conference call or presentation 31-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Natuzzi SpA Earnings Call

Santeramo (Bari) Apr 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Natuzzi SpA earnings conference call or presentation Friday, March 31, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nazzario Pozzi

Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit

* Pasquale Natuzzi

Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer

* Piero Direnzo

* Vittorio Notarpietro

Natuzzi S.p.A. - CFO

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, thanks for standing by, and welcome to the Natuzzi's Full Year 2016 Conference Call. (Operator Instructions)

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.

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Piero Direnzo, [2]

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Good morning to our listeners in the United States and good afternoon to those of you connected from Europe. Welcome to the Natuzzi's Full Year 2016 Conference Call. After a brief introduction, we will give you room for a Q&A session. Mr. Pasquale Natuzzi, together with 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 would 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.

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [3]

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

I would like to emphasize that we are still working on our turnaround and we have much still to do, but I can assure you that we spend the clear majority of our time and efforts aimed at improving our volumes, our efficiency and returning to profitability. As we have said before, we are well on our way in pursuit of our new direct-retail strategy. We have invested much time and effort in the company in all areas as a very solid 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 the company alongside the brand. At the same time, we have managed our cost structure and negotiated successfully with the Italian Government for labor subsidies. While our gross revenue declined in 2016, the rate of decline was slowed 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 could have grown revenues if we had cut price. And with the favorable costs, we could have done so, however, we decided to maintain our strategy and focus on growing the value in our brand and our product and even with the small decline in revenue 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 scaled organization. We are committed to regaining our growth, maintaining our value and returning our great 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 question. Thank you.

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit [4]

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Thank you, Pasquale. All right, as Mr. Natuzzi has just said, we are aggressively pushing our direct retail strategy around the world. Since we have announced new strategy last July, we have opened new stores in U.K., in United States and in Australia, and these stores are in high density, high-traffic areas. They have been designed and merchandised by our team in Santeramo. We have also acquired 8 Natuzzi Italia stores in the United States, 7 in Florida, 1 in Pennsylvania, 3 Natuzzi Italia stores in Mexico and also 5 stores in Italy Divani & Divani by Natuzzi. And considering that this is the new effort, we are very pleased by the results we are having so far.

In -- so far in 2017, our like-for-like stores are improving both in volume and price, particularly with our high-end brand, Natuzzi Italia and the new stores are performing even better. For the first 2 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, the increase over last year is up to 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 a 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. These of course is (inaudible) 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 foot towards battle with our partners in (inaudible). We have stepped up (inaudible) franchise owners and store designed for (inaudible) display and merchandising, marketing regeneration, brand marketing and we are sharing with them the knowledge we are gaining from our direct retail experience. And our strategy is both direct sales as well as growth with these partners, who represent the Natuzzi brand worldwide. We have still much work to do, but the team is getting stronger and we are making progress every day.

Let me now turn the meeting back to Mr. Natuzzi, who will discuss Softaly.

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [5]

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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 primary portion of our group, and is of course the success to our original vision having started in 1959. The business has changed much since then, it is truly global requiring nuances for different market around the world, it faces many new competitive forces, all of which have pressured the returns and threatened its ability to make money.

We have worked hard to offset the cost elements of this competition and the hard work on product and process innovation is giving us the best results. We are now focusing on rationalization of the business. We are positioning our 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 new customer throughout Europe, where we have also rebuilt the relationship with the largest retailers. This allow us to improve the production efficiency in our plant in Romania. EMEA grew revenue by 5% in full year 2016 versus 2015, on top of the plus 20% grow in 2015. So we expect to show stronger grow in current years. In addition to the 5% grow in Europe, we experienced a plus 13% grow in Asia Pacific. We are continuing our focus in our Chinese manufacturing facility to increase efficiency and make it truly competitive with the largest of its local competitors. Our focus now is to recover our business in North America, we are restructuring and focusing our sales efforts on the customer who represents the greatest opportunity. We are working on our management team to fill some key position and are confident we will drive grow in current and again 2017. Softaly is and will continue to be uniquely strong player in the global private label upholstery market.

I will 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.

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [6]

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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 including the caption other expenses net, specifically, the impairment of long-lived assets and non-current investments and the accrual for the onetime termination benefits are now included in the cost of sales or selling expenses and G&A expenses based on the function of the cost to be reclassified. Due to the requirement to adopt the principle on a 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 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 saw furnishings sales grow by 6.5%, which is a good sign regarding the potential for this new segment in the branded division and confirms the power of Natuzzi name on the market. We had a negative impact of foreign exchange of 1.6% on sales, but slightly positive on operating income by EUR 0.3 million. Total net sales were EUR 457.2 million, including noncore sales of EUR 25.5 million. So that core business sales were EUR 431.7 million and Natuzzi branded business represented EUR 73 million 7-3 of total core business sales or EUR 313.1 million, of which EUR 45.4 million were done by the directly operating stores chain, what we call DOS, D O S. Natuzzi sales performance was minus 4 compared versus 2015. Private label sales in fact went down by 10.6% and represented the remaining 27% of total core business sales. In 2016, we improved in DOS 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 reach further efficiency in transportation costs too. 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 EUR 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 2015. During the fourth quarter 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 EUR 26 million at the end of the year and more than offset the net cash invested of EUR 10.7 million. As a result, the net financial position almost doubled and reached a positive EUR 28.9 million. As Mr. Natuzzi said before, the company has just begun our direct retail strategy. I would like to say something about the associated capital expenditure. The CapEx to start a new direct-operated store with the characteristics we have in our high-traffic model are in the range of 400,000, 800,000 per store depending on the location and other factors, so not so huge. Having said that, the financial cycle of 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 so 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 retail model generates cash faster than the franchise business.

I'd like to talk a little about our early restart in 2015 -- '17, I'm sorry. Please keep in mind, it is still very early in the year, so this information is preliminary. In December, we experienced a slowdown in order flow that affected January 2017 invoice and fees. But we started recovering in February and March. We continued to see an economic slowdown in some countries, some concern in 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 sales growth and capture the available synergies.

I would like now to turn the call back to Mr. Natuzzi.

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [7]

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Thank you, Vittorio and Nazzario. We have a strong and dedicated -- I would like to again emphasize that more than ever, today, we have a strong and dedicated management team. These executives are supported by long-standing managers at our company, and as a CEO, I'm pleased with their efforts working together. Our environment is still tough as it was established with the new political reality, but our goal are clear, our dedication is unyielding and our results are starting to reach towards their potential. We are the most recognized high-end furniture brand in the world. We are global in every aspect of our business, unique among our competitors. We are strong, we are focused and we are growing the value of our company, while maintaining the highest standard of design, quality and customer satisfaction.

I will now be happy to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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

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Unidentified Analyst, [2]

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Congratulations on the nice improvement in 2016. First question is the -- this 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?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit [3]

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Sure. Since we approved the strategy, the direct retail strategy in July, we have opened 6 stores, 1 direct operated stores and 5 franchise stores. We have opened direct operated store in end of January in New Jersey and 5 franchise 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. 4 direct operated stores and 4 franchised stores. But it is not a matter of how many doors we're going to open, but it's about opening those stores in the right location, high density, high traffic retail parks with the right format and hopefully in the right merchandising needs. And these of course takes time. So we are going to accelerate these as fast as possible. We are further strengthening our team to scouting for appropriate right locations, and this is our plan for 2017.

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Unidentified Analyst, [4]

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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 4 franchise. So is that...

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit [5]

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4 franchise and 4 direct.

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Unidentified Analyst, [6]

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

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit [7]

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These are locations we have already acquired. So these locations are secured.

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Unidentified Analyst, [8]

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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?

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit [9]

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Can you say again, sorry?

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [10]

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

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Officer of The Natuzzi Business Unit [11]

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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 EUR 500,000 and EUR 800,000 depending also on -- depending from -- on locations and also on manual 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 through DOS, we capture the whole value of our brand from sell-out and margins, and those margins are targeted to be up to 10% at store level in the second year.

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Unidentified Analyst, [12]

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Okay. So the benefit -- I just want 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 that you're saying is that from a working capital perspective, this is positive, I'm assuming it because people give you the deposit upfront, you're not tying 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?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [13]

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Okay. Let me say something about margin. In the Natuzzi existing direct retail operations, our stores, the new ones they are already at 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 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 we receive the order. The opening of DOS will have a first negative impact because of the opening. So the amount of cash you have to open between 400,000 and 800,000. But as far as the entire financial cycle is concerned, you're right. We get paid 30%, 40%, in some cases 50% of sellout price at the moment of the order so when you enter the store and then we get the balance to delivery. Today when we do the -- in the United States wholesale business, we get paid in an average of 70, 75 days from invoicing. So you can imagine for sure our well management -- well managers DOS will generate cash.

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Unidentified Analyst, [14]

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

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [15]

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Yes. Yes. On average. Yes, you're right. And further comment on your -- sorry, to further comment on your question, I gave you the number of franchise 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 stores for Natuzzi Editions in China with overall plan for the full year, which are ahead and we will start executing these in 2017.

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Unidentified Analyst, [16]

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Okay. So you're -- 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?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [17]

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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. I would remind that 2 years ago, we reached EBITDA positive, this year EBIT breakeven. So next goal would be -- is to go further.

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Operator [18]

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(Operator Instructions) And we'll go to our next question from (inaudible) of Donald Smith & Company.

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Unidentified Analyst, [19]

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What would be the impact of the border adjustment tax? Should it be passed?

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [20]

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Are you mentioning duties, possible duties or...

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Unidentified Analyst, [21]

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Yes.

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [22]

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Okay. We have -- I mean, yes, we have been thinking about that basis on Mr. Trump announcement that very often we have a new scary announcement around the world, but we have a production system. We build up in the last 5 years through the product innovation, which means not the new style or new function or new trend, but just the way we engineered the product, we revolutionized it the way we engineered the product in order to create a synergy between various components. But also we redesigned the production process. Our factory are -- they've been revolutionized compared with our older system and that allow us to manufacture quality product 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 retail. But it depends because if we talk about 2%, 3%, 5% duty assuming that America will decide to apply an import tax of 5%. I believe that the basis on the strength of the brand we can absorb that 5%, will be not big difference because our average ticket in America in our store, it's $4,000. So if instead, it's $4,200, I don't see big difference. But in the case, where there is a very high duty then we'll take 6 months at the latest for us to come in America and build out the factory. Consider that our America's regional in the quarter is based in North Carolina since 25 years. So we feel in America as our almost second home. No, it is our second home, it's not by coincident we went public in New York (inaudible). So certainly, we hope that it will not happen, but if in case happen, we are ready. We are ready to come in America and manufacture the product locally, improving delivery time and all the rest.

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Operator [23]

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

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Unidentified Analyst, [24]

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

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [25]

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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 the new openings, which I mentioned, overall sales increased versus same period of last year is 39%.

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Unidentified Analyst, [26]

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Okay. And this is for what months? It is for the entire first quarter or just January, February?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [27]

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January, February.

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Unidentified Analyst, [28]

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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?

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [29]

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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 already, we are talking since now almost couple of months with people, with 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 the 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 the comfort, the same way, whatever will be the future, but again, we all believe that the future is online, not in the same way the (inaudible) obviously, but we strongly believe that it's important for us to initiate this new venture.

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Unidentified Analyst, [30]

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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, #1, I would like to commend you for the good job you've done in turning around the business, rightsizing it, and now generating substantial free cash flow, okay. However, that -- 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 of a stock buyback because we're 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, it's something that I would like for you guys contemplate and talk about on the board level.

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [31]

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Thank you so much for this question. For the moment, we are investing in our expansion, okay?

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Operator [32]

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(Operator Instructions)

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Pasquale Natuzzi, Natuzzi S.p.A. - Founder, Chairman, CEO, President and Ad Interim Chief Operations Officer [33]

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While there are no more question, I 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.

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Operator [34]

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