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Edited Transcript of NTZ earnings conference call or presentation 24-Sep-18 2:00pm GMT

Q2 2018 Natuzzi SpA Earnings Call

Santeramo (Bari) Sep 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Natuzzi SpA earnings conference call or presentation Monday, September 24, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Giovanni Tucci

Natuzzi S.p.A. - Chief Softaly Officer

* Nazzario Pozzi

Natuzzi S.p.A. - Chief Natuzzi Division Officer

* Pasquale Natuzzi

Natuzzi S.p.A. - Chairman & CEO

* Piero Direnzo

Natuzzi S.p.A. - IR Manager

* Vittorio Notarpietro

Natuzzi S.p.A. - CFO

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Conference Call Participants

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* David Kanen

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Natuzzi Second Quarter and First Half 2018 Financial Results Conference Call. (Operator Instructions)

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. Ed Teplitz, President of Natuzzi Americas, second largest market in the world for our group; Mr. Nazzario Pozzi, Chief Officer of the Natuzzi division; Mr. Gianni Tucci, Chief Officer of the Softaly Division; and Mr. Piero Direnzo, Investor Relations.

As a reminder, today's call is being recorded.

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

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Piero Direnzo, Natuzzi S.p.A. - IR Manager [2]

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Thank you, Matt. Good morning to all our listeners in the United States, and good afternoon to those of you connected from Europe. Welcome to the Natuzzi's Second Quarter and First Half 2018 Financial Results 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 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, 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 update or revise any forward-looking matters discussed during this call.

And now I would like to turn the call over to the Chief Financial Officer. Please, Vittorio.

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [3]

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Thank you so much, Piero. Good morning, everybody, and apologize for this delay. We hope that our technical problems have been solved. As announced, we have recently concluded the partnership with KUKA Group for the expansion of the group retail presence in Greater China, mainly China and Hong Kong. The operations have just started, but let me give you an update on the financial impacts that will be recognized in the third quarter 2018 financial statements, deriving from the conclusion of this agreement. First, a recap of the transaction foreseen by the partnership, the contracts. One, the capital increase of EUR 35 million in Natuzzi Trading Shanghai, afterwards the Chinese legal entity subscribed and paid by Kuka. Two, the transfer of some Chinese legal entity shares from Natuzzi S.p. A. to Kuka for a gross amount of EUR 30 million. And three, the sale of the Natuzzi Brand distribution license in Greater China by Natuzzi S.p. A. to the Chinese legal entity for a gross amount of EUR 15 million. At the end of the day, the capital increase and the share purchase let Kuka achieve the majority stake, 51% in the partnership.

The above-mentioned steps generated for the group at total extraordinary income of about EUR 48 million that will be reported in third quarter 2018. As a consequence, the group has already collected a total amount of about EUR 40 million already net of any taxes.

In fact, during the third quarter 2018, Natuzzi already paid a total amount of taxes equal to almost EUR 5 million. In executing the agreement, the parties have contributed to the Chinese partnership breakup a total amount of EUR 25 million in order to support the investments needed for the retail expansion in Greater China. This partnership has been in force from August 1, 2018, and therefore, starting from that date, the group will consolidate this partnership breakup by the equity method as affiliated company and no longer by integral method as full-controlled subsidiary. This means that we will consolidate only 49% of the net equity of this partnership breakup.

Further, in the future financial statements, we will not consolidate line by line the Chinese legal entity financial statements, rather we will recognize an investment asset in the financial statements, which will be estimated equal to 49% of the entity's net equity, net of intergroup figures, of course. In other terms, we will not consider integrally the entire revenues, such as the loss and even other revenues and all the operating costs that now pertain entirely to the breakup of this partnership. In fact, we will include in the consolidated statement of operations only the change in value of the 49% stake in the partnership. This change in value will be accounted for in the nonoperating part of the income statement, I mean, in the future. Of course, the group will continue to manufacture and provide this legal entity with products at the selling or -- selling price or a sale price, if you prefer, taking advantage of the retail development plan, which is the goal of the partnership.

For 2018 full year results, we will consolidate integrally the numbers up to July 31, 2018, whereas the 49% stake in the Chinese breakup will be considered with the equity method from August 1, 2018 onwards.

Now let's go a bit deeper into 2018 second quarter and first half numbers. As anticipated in our previous conference calls, the strengthening of the euro versus major currencies is continuing to play an important role also in the second quarter. In the second quarter 2018, net sales were EUR 108 million, minus 7.1% versus second quarter last year or minus 3.4% if we consider constant exchange rates. Gross profit was 32.8% of net sales or 34.2% under constant exchange rates, almost the same at 34.1% in Q2 2017 and not withstanding a price increase experienced in raw materials.

Our efforts in rationalizing the SG&A cost has continued also in the second quarter of this year. And indeed, will reach the reduction in such costs, both in absolute terms from EUR 26.2 million last year second quarter to EUR 23.9 million this quarter and as a percentage of sales from 22.5% to 22.1%. As a result, the operating result has been negative by EUR 5 million or negative by EUR 3.3 million under constant exchange rates versus minus EUR 4.5 million in Q2 last year.

Let's have a look to the 6 months. As for the 6-month period ended on June 30, 2018, total consolidated net sales were EUR 225.7 million, down 2.7% from EUR 232.1 million in the same period last year. Excluding the currency effects, sales for the period would have been higher by EUR 12 million and consequently, would have increased by 2.4%. Sales for the Natuzzi division, which includes Natuzzi Italia, Natuzzi Editions and Divani & Divani increased by 1% or by 7% under constant exchange rate. Within the Natuzzi division, the wholesale business decreased by 1.5%, but it would have increased by 4.7% under constant exchange rate.

The Natuzzi directly operated stores, DOS, division grew by 13.3% or 18.2% under constant exchange rates. On a same-store basis, that is considering only those stores that were operating throughout the first half of 2018 and first half of 2017, increased by 2.2% or 5.5% under constant exchange rates. In a nutshell, our direct control of the distribution is starting delivering positive results.

You might recall that we acquired some business in Mexico and in Florida. We needed first to restructure those stores. Now we have completed turnaround and the upgrade of the DOS in Florida and Mexico, and these stores are now profitable. I'm sure of that as we elaborate on that. We've also opened 3 new stores in U.S.A. between the end of 2017 and the first half of this year. Now such stores are quickly getting closer to their full sales potential. Nazzario will surely add more flavor on this during the Q&A session.

The DOS network is improving its profitability, especially if we consider the network on same-store basis. The 58 DOS existing during the first 6 months last year and this year generated an operating result positive of EUR 0.8 million from EUR 0.2 million during the same period last year. As of today, the entire DOS network consists of 64 directly operated stores and 20 concessions in the United Kingdom and Mexico. And we plan to open 3 new DOS by the end of this year: 2 in the United States and 1 in France. This rollout number does not include the plan in China.

As far as private label business is concerned, Softaly reported disappointing sales of EUR 49.7 million, down 13.7% in the first half. The decrease was concentrated mainly in the North American market, while shifted sales from the EMEA and Asia Pacific region increased by 5.6% and 5.9%, respectively. Gross margin for the first 6-month period of 2018 was equal to 31.9%, negatively affected by currency movements. It should have been 33.6% under constant exchange rate. For the first half last year, we reported a 30.7% gross margin, or a 34.7% excluding the EUR 9.3 million accrual made last year for labor-related risk. During the period, the gross margin was affected also by increased price we saw in some raw materials. We had an increase in the labor cost as compared to the first half of last year, net of the EUR 9.3 million accrued, following some extra work required to speed up the production, especially towards the end of June -- production and shipment, especially towards the end of June and meet the delivery time required by our customers.

On the SG&A side, which was the biggest financial issue last year, our cost-reduction program continues to deliver sales in absolute terms and as a percentage of net sales. During the first half of this year, other SG&A was 45 -- EUR 46.6 million or 20.6% on sales, including from EUR 50.1 million or 21.6% on net sales reported last year. We achieved these improvements notwithstanding the further investments made this year in expanding our DOS network. As said in 2017 first half, we reported an operating loss of EUR 14.7 million, of which EUR 9.3 million for the said accrual versus an operating loss of EUR 8 million this year. But under constant exchange rates and excluding the extraordinary accrual of last year, 2018 first half operating result would have been minus EUR 3.5 million better than the EUR 5.4 million loss last year.

Gianni, Nazzario, Edward and of course, Mr. Natuzzi will be pleased to answer later. An introduction of Mr. Natuzzi. Mr. Natuzzi, please.

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [4]

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Okay, thank you. Thank you, Vittorio, and good afternoon to everybody. Today, I would like just to give everyone an overview of the furniture business, primarily the upholstery business. The global upholstery market, according to the recent market research conducted by an independent company, total global upholstery sales are growing. Some markets are growing faster than others, with China and United States responsible together considering for more than 50% of the total worldwide upholstery sales. China is the fastest-growing market in the world and that's consistently grown by double-digit percentage over the last several years. United States is also growing, but at a lower single-digit pace annually.

Natuzzi has a strong presence in China, including manufacturing, retailer, marketing and commercial organization. More importantly, we have just, as Vittorio said, finalized the partnership with KUKA Group, which will allow us to expand at much quicker pace. Prior to our partnership with Kuka, we have about 160 stores there in China, which 50 are Natuzzi Italia and 110 are Natuzzi Editions, which 20 had been opened the stores this year in China, and we expect to open an additional 30 stores by the end of this year and hundreds of stores over the next several years, that's the plan.

United States is another key market for us. We have been in the marketplace for more than 30 years, I would say, 35 years, furnishing the homes of several millions consumers and have been publicly traded on the New York Stock Exchange for 25 years and enjoyed strong awareness as a preferred brand. We currently have 12 directly owned stores that are performing well, both in terms of sales and profitability. We believe that growing this footprint of directly controlled retail is an important strategy moving forward.

I want to now touch upon our overall global business. As you just heard from Vittorio, our overall business and profitability in our controlled retail distribution continued to grow. This is currently approximately 1/3 of our total turnover distribution. This controlled distribution is currently for Natuzzi Italia globally and primarily in China and Brazil for Natuzzi Editions.

We continue to be committed to investing in and growing our directly operating store network, as Vittorio just highlighted. Total direct operating store sales were 13.3% over the prior year, or 18.2% increase under a constant exchange rate. We will continue to grow our direct operating store and our franchising retailer footprint for mono-brands, Natuzzi Italia and Editions store. Based on the experience and success of developing the Natuzzi Editions mono-brand store network in China and Brazil, we are now planning to move forward with a small test of opening the Natuzzi Editions store in the United States and United Kingdom. Over the last several years, we had invested in upgrading the Natuzzi Editions product styling, marketing, store display, store experience and overall brand messaging. We now believe Natuzzi Editions is a lifestyle brand and able to compete and be successful as a mono-brand concept. We believe that the combination of direct-to-consumer and continue to work with our stronger retailer partnership will allow us to leverage on the assets and grow our Natuzzi Editions sales and profitability.

Let me now touch upon the challenges that we are currently facing and discussing with you our strategy for overcoming them. Private label in North America is challenged with extreme price sensitivity and competition. All of the China manufacturers are there in America, fighting for price and margin. Competing only on price is not the solution for us certainly. We are focused on increasing efficiency and production by reducing the complexity of our offering. We are using the knowledge we have learned from our recent private label success in Europe and focusing on improved process and manufacturing efficiency in order to meet the -- build the name and maintain profitability and fulfill the factory targets, because that's the main reason why we have a private label, because we have a factory, we are global, we have a factory and we need to fulfill the production. Tariffs have just been imposed today on all private label and Natuzzi Editions products entering in the United States that we manufacture in our factory in China. In particular, the tariff rate is currently 10%, and we have announced short-term solutions [to overcome] this. This will protect our business. However, would short term negatively impact our margin? However, there is [retreat] of 25% tariff beginning in January 2019. Fortunately, Natuzzi is a global manufacturer with manufacturing facility in Italy and Romania and in Brazil, and we are taking action and planning on how to move the production to other facilities in order to avoid this tariff and the negative impact it will have on our business. That's the -- in general, just an overview for you, shareholders and analysts, to understand that we are strongly committed to overcome our current situation.

I thank you very much for listening. And obviously, I'm here open and available to answer to any questions. Today, we have here with us Edward Teplitz, which is the President of Natuzzi Americas. Because in America, as I said before, we have a good brand awareness with the business is 35 years, we satisfied a lot of customers there. We have an organization. We have the people. Our Natuzzi Italia stores are performing well and are becoming profitable. We are confident. We are confident even in the presence of a balance sheet that are not certainly pleasant for anyone.

Okay, so I'm here for any questions. Thank you for listening me.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from David Kanen with Kanen Wealth Management.

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David Kanen, [2]

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So can you clarify on the Kuka deal? Two things. Number one, what would be the pro forma amount of cash that we have? I mean, the quarter has ended at the end of September. So where do you expect to be in terms of pro forma cash for September with Kuka? And then can you quantify for me the trajectory of the rollout of stores? Any detail that you can give on that front would be appreciated. Like how many stores you expect Kuka to open this year, if any? And then how many next year?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [3]

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Okay. So I mean, some questions will be answered by Vittorio.

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [4]

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The first one -- good morning. The cash position by the beginning of September is -- gross cash position is around EUR 60 million, positive of course.

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [5]

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So then the second question was...

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

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The second question is about our plan about the rollout...

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [7]

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We opened -- from the beginning of the year before we finalized the JV with Kuka, we already opened 20 stores in China, and we expect to open another 30 within end of the year. Then we have 5 years of business plan that we are finalizing together with our total business plan, which the management -- we all are working to present the business plan at the Board of Directors within November. So that's our expectation. But then we have -- we are very much, I mean, enthusiastic about the potentiality of the growth. Obviously, we should consider that if the duty that's been raised and if for January, then the increase will be raised to 25% from the import from China. I expect that even the economy in China will impact, but we have an ambitious plan for growing in China. Again, 20 stores have been opened from the beginning of the year, and we expect -- we are at the end of September almost, so we should open 10 stores per month in order to achieve 30 stores more opening for the end of the year.

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David Kanen, [8]

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Okay. And will there be any cash contribution from Natuzzi to open those stores? Or that's handled from the partnership, it gets funded from the joint venture?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [9]

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No, we are -- no, the plan so far is to develop franchise store. We have only a plan to open very beautiful flagship store in Shanghai, which I've seen the location. It's really prime location, beautiful. So that will require some investment from the JV. But for the rest, I mean, it's just franchising.

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [10]

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But in any case, the JV will use its own cash to do that, okay?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [11]

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Oh, certainly, certainly.

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [12]

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We have placed EUR 25 million cash. The true shareholders provided the JV, let's say, the JV, EUR 25 million, as I said in my speech cash, in order to support any kind of investments and rollout in the foreseeable future.

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David Kanen, [13]

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Okay. Okay. That's what I was looking for. And then Vittorio, if you could clarify for me on the balance sheet, you ended June with a category called other accounts payable that were $66 million (sic) [EUR 66 million] up from $29.8 million (sic) [EUR 29.8 million] at the end of the year. Can you explain to me what that is?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [14]

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It's a very good question. Thank you. I told in my speech, if you remember, that we were forced, and we sustained some additional costs in order to speed up the shipments by the end of June, because we needed -- because our customers needed to be served properly. So we pushed our sales, our invoicing, our shipments and as a consequence, the trade receivable went up by the end more than normal, let's say, by the end of the quarter.

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David Kanen, [15]

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Okay. And then I see also accounts receivable were up something like $9 million (sic) [EUR 9 million]. Do you anticipate collecting that cash between now and the end of the year? Usually, when companies' revenues are declining, there is cash generation from receivables, but in this case there's been a consumption of cash. If you could just explain that and let me know if there is a normalization that's going to occur in the next couple of quarters?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [16]

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I already explained the reason why, with a lower -- a little bit lower sales, we increased our receivables due to the timing of shipments. So we pushed all the shipments by the end of June, that's why up EUR 9 million in receivables. We hope to have a more normal shipments period in the next quarter, because we were forced to speed up our shipments and to avoid -- to be transparent to you, to avoid even some of the extraordinary cost we had in Q1 and Q2 this year. As cash is concerned, it is -- we use cash by -- in our balance sheet for accounts receivable, but we use those receivables 1 month later with our factoring, let's say, financing program. So we have [less leveraging] cash in a few weeks.

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David Kanen, [17]

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Okay. Okay. So the -- really in the June quarter, the majority of the weakness, if not all of it, came from really the wholesale -- the low-margin wholesale business, is that correct? And if so, can you comment being that the third quarter is almost over at this point, what kind of trends have you seen in July, August, September versus the previous quarter?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [18]

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The overall situation has been given by Mr. Natuzzi. Natuzzi division is doing well. Within the Natuzzi division, retail division is doing better than the average, and we still have some problems with private label. That's the situation at the 37th week and is the picture as of today. For the third quarter, we are working very hard in the last days of the quarter in order to achieve some dollars more than one year ago and achieve, of course, a little bit by the results in terms of operating margin, although we continue to suffer, and we will continue to suffer from exchange rates in the comparison between Q3 and Q2.

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [19]

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But in addition to that, I'm just still -- Pasquale. In addition to that, I'd like to emphasize that division wise, we are planning to test the opening of a Natuzzi Editions store in America. It's because we have been investing a lot of money and the entire company's management time to be consistent with the brand value and positioning. If you consider, for example, the performance of the Restoration Hardware, okay, at the rate that they are growing is just unbelievable, even Williams-Sonoma or Room & Board for example. So that they will be updating their product proposition to the consumer. And today consumer, they move much faster than the retailers, especially when you have a large retail chain, before you review location, you review your product or procedure, your advertising, your sales consulting, your store manager, because when you have a different positioning, you need to be consistent and everything must be aligned. So while there are some brands that are high rise, all those brands are growing, very -- I mean, very exciting the way they are growing. The traditional retailer community is suffering. We have been analyzing what's going on in America. With the Natuzzi Editions, the future of that thing is a Natuzzi company, in general, the future is controlled distribution. And then we made the future to the consumer, the Italian lifestyle -- Apulia lifestyle, with Natuzzi Italia, but even with Natuzzi Editions, but we can get different consumers. So I mean, honestly, the reason why our controlled distribution is performing well, while also, let's say, is not performing well, when we have Natuzzi Editions in some markets, primarily in America. And we have also Softaly in America, all the private label is Softaly. And today, we are here, Edward Teplitz, our President, just because we said work together and understand how to address the issues in terms of business development that should be profitable and how we should focus and address the duty that has been raising. So that's -- I mean, it's not an easy time, but we feel very much confident because we have strong basis, we have the fundamental, okay? We are the manutailers, we know how to design product, how to manufacture product, how to retail the product today, and we are global with a factory in Brazil, a factory in China, factory in Italy, factory in Romania. We are confident, and we are aware in the meantime, to be honest. I mean, we are not sleeping -- sleep dreaming certainly.

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David Kanen, [20]

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Okay. So are you saying that the weakness in Softaly -- I mean, I'm sort of trying to piece together what you're trying to say here and implement in terms of your strategy. So are you saying that due to the weakness in Softaly for private label lower-end furniture that was previously sold through large retailers, like Macy's and so forth, that you're going to try and shift that business to where you control your own destiny to opening Natuzzi Editions stores in the U.S.? Is that what you're saying that that's going to offset the declines over time in Softaly?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [21]

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That's partially correct. That's partially correct. But if you want to hear Gianni Tucci, which is responsible for Softaly, he can give you a better explanation. Just 1 second, please. So Gianni Tucci is responsible, he is chief of private label business.

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Giovanni Tucci, Natuzzi S.p.A. - Chief Softaly Officer [22]

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Good afternoon, sir. Yes, private label clearly has the challenging role of running the industrial strategy of the group. Therefore, we are in a situation where we have to go by priorities, and we readvised all the strategy for euro, which was our main priority, as I said, in the past years, and is now consistent, while it was more challenging for the North American market. And we are also in, as a consequence of the tariffs and the new American strategy, reviewing the channels of distribution, and therefore, it's for us extremely important in the next weeks to work through the business plan for wholesale distribution in North America. That's the reason why also Mr. Ed Teplitz is here and together with Nazzario, we will review what's the best. What I can tell you is that as a private label, which is dedicated to specific accounts and Mr. Natuzzi was transferring to you this message, is that the traditional retailers are facing completely different situation versus the new type of retailer, and we are here just saying in accordance of our strategy.

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David Kanen, [23]

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Okay. So what will the CapEx requirement be, let's say, in the next 12 months with the Natuzzi Editions stores that you plan on opening in North America? What do you expect the total capital expenditure to be?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [24]

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We need to address that issue within a couple of weeks, I mean. That's why Mr. Teplitz is here with us. We haven't defined yet where to open a store, Natuzzi Editions. But certainly, based on the success of China and Brazil as all the investment we have made to make Natuzzi Editions store a great experience for the consumer, we should consider now where to start to test the store. Would it be New York, New Jersey, Pennsylvania, Connecticut, New England, somewhere, because we need -- I mean, it's not just opening the store, but also provide for supply chain, customer satisfaction, customer care, aftersales, there are several issues to be analyzed in order to -- and even management and even advertising, we need to maximize. So it's important to understand where to open, why and how to then implement the strategy. So next conference, hopefully, you will have a much clear answer.

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Operator [25]

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(Operator Instructions) Next we'll hear from [Timothy Stabosz], who is a Private Investor.

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Unidentified Participant, [26]

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Could you discuss the nature of the Costco initiative in the United States? I'm a bit surprised that there's been no discussion of that, that I've seen in press releases. Costco is a very respected retailer in the United States. I saw your product in Costco. I think it only went in, in the last couple of months. And the price points is very competitive with IKEA and other types of merchandise. And I'm wondering can you explain the nature of the Costco arrangement, if you anticipate how it's been going so far for the company? If it will continue, for how long it's -- it will continue? When the merchandise is in the store and if they are happy and you are happy, both Costco and Natuzzi, with that relationship? Are you in all of the stores? Can you explain that relationship, please?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [27]

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Okay. First of all, the [demands] with Costco, it's very challenging. And they are so demanding that -- and we like challenge. As a company, we like challenges. We like to do business even with very difficult customer or very demanding customer because we learn from them. We learn how to be efficient and how can -- because if we succeed to supply a customer like Costco, then it will be easy to supply all other retailer or satisfy all other consumer around the world. So it is just a matter of principal, okay? But -- I'm Pasquale Natuzzi and this is my principal, all right? But basically that -- then eventually, there is Gianni Tucci here that -- Gianni is responsible for the Costco business. But as far as I know, Costco 2 times a year they choose 1 or 2 models, they test in their store. If the test works, then they rollout in other stores in America or in Canada or Mexico or in United Kingdom, where they have a store. But the reality, I mean, we give them the product that are not available anywhere in Natuzzi Editions or even in private label, we do the product exclusively for them. And because they promote Maserati car for $110,000, and they promote also sometimes water normally for $0.50, but they promote $500 bottle of red wine and then it's -- they are unbelievable. It's a very important window for the brand. That doesn't impact on our business, certainly. I mean, because our best standard model in Natuzzi Italia store, it's a sofa that we retail for $8,000. And in our store in Costa Mesa, California or in King of Prussia in Pennsylvania or in Chicago, our customer doesn't happen every day, but very often, I would say every week or every 2 weeks, we have a customer that they get in our stores and we decorate their entire house for $150,000, $140,000, $160,000. So that's the power of Natuzzi brand. So back to Costco. They are good customer. We succeeded to supply them, they should be around -- between $2 million to $3 million, let's say, would be $5 million customer for us, profitable, then they have retailer policy where I mean, their net profit is very low, but doesn't affect our business. I don't know if I -- that was your concern and if I answered your question.

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Unidentified Participant, [28]

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Well, it's a high volume, it's -- the Natuzzi products are in every store in the United States or not?

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Giovanni Tucci, Natuzzi S.p.A. - Chief Softaly Officer [29]

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Yes. This is Gianni Tucci. So we took the advantage of using their network in order to extend our brand awareness, but we did it in a very specific and -- well, within certain parameters. We gave them -- they are the only account at worldwide level using -- they're buying Natuzzi, and we have a specific collection completely dedicated to them and they work by division. So we present specifically the specific collection, which is agreed with the merchandising team, and they have the capability of choosing for one or more divisions at worldwide level. Clearly, we have lot of exclusivity only for certain specific areas, for instance, China, where we cannot allow the use of the brand. And for us within North America, therefore, United States and Canada has brought positive results once again with limited models, limited SKU and with tests and rollout.

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [30]

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And we have done 2 special orders with them. I mean, suggest best model, best covering, in best color, in best consideration. I mean, there is no customer order, no special order. I mean, that's the nature of the business.

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Unidentified Participant, [31]

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Yes. When did they start carrying our products, was it July, was it...?

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Giovanni Tucci, Natuzzi S.p.A. - Chief Softaly Officer [32]

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We start -- no, no, no. We started to them in 2014 with tests. As Mr. Natuzzi was saying, probably you have only noticed recently because we have gone through few years of testing in order to better understand each other and finally, we have now built a product that is rolling out. So finally, we are projected on a positive revenues with them.

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Unidentified Participant, [33]

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Okay. I have one other question. Pasquale, as you know it's been very difficult for the company for 10 years. I have been following the company for at least 10 years. And I remember as recently as almost 10 years ago now, the company publicly set a goal, which it had to quickly pull back out of earning 15% operating margin. Then more recently, we talked about how the moving line in the institution of a moving line for production, while regrettable to the traditions of Natuzzi's handcrafting was necessary and would dramatically reduce costs. Your credibility on Wall Street -- you point out that you're listed on the New York Stock Exchange, and yet your stock is probably down 90%, I'm guessing, from what it was trading at shortly after you went public. How -- can you speak to investors when you keep talking about how you're going to turnaround the company and 10 years have gone by now almost and it hasn't worked. And while China looks exciting with what you're doing, and I commend you and congratulate you on that effort to earn profit through China, what happened with the moving line that it didn't nearly reduce costs like we thought it was going to because investors believe in you when you say that certain things are going to be dramatic in changing the company and then nothing happens. What's wrong with the Natuzzi business model? And are you the one who should be fixing it or should we be bringing in someone else to run the company? And have you considered that question because you do have a public shareholder base?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [34]

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Well, certainly, I have been considering -- I consider that almost every day of my life, okay? So let's say, that -- I need to remind you and all the shareholders -- I mean, what you have said is right, it depends. If you look from your perspective, your questions are absolutely right. But I would like you please to consider that we were a manufacturing company, okay? We were a manufacturing company based primarily in Italy. Then the globalization, manufacturing -- I mean, China became the worldwide factory. They damaged the production in America. They (inaudible) in all the Western countries. All the Western countries have been damaged by the worldwide competition. So for us to move from manufacturer to a consumer brand that has been not initially exercised. We have been investing the fortune. The entire company has been dedicated to repositioning the product, to do the product extension. For your information, you should know that in our Natuzzi Italia store, we have living room, we have dining, and we have bedding and -- so we have a furnisher. While our background, our tradition, we were leather/upholstery manufacturing company. Today, we are an Italian lifestyle consumer brand, recognized and well appreciated. We invested a fortune to create the brand awareness that was level and to experience also -- not to experience, to create the retailer model, which has not been initially exercised to identify who are the consumer that we want to target, where those consumers are located, where we should open the store, how we should change the sell to consulting or the store managing, how we should define the merchandising in order to satisfy the expectation of the consumer, how to deliver the product in the consumer home, how to do aftersales, how to retarget them and call them back to sell our product. These are all experience and several hundred million euros or dollars of investment that we have made and now we are starting to get return. There is someone -- I'm heading the standards of this company. For your information, since 15 years how -- what it pays -- what the company pays to me. I have only the mobile phone, that's it. And the board insists to give me EUR 100,000 per year because they say, if you don't want to get paid, which was my desire, they said we will be embarrassed. We are the Board of Directors people, very professional, okay? We have a board of directors meeting, very professional, we're very, very open. So I mean, there is someone that has an eye to run the company probably, let's see around. I mean, we're looking around. I believe that I'm proving to myself, my people, the management, my shareholder, that I'm responsible person, that I know these stores. I know this company. I know what works, and I know what doesn't work and what needs to be done. And by the way, we create a brand company, consumer brand company in the worst period of time over last century. And by the way, if Kuka has evaluated the brand for $130 million just for the America -- for distribution in China, think about that. Probably somebody -- if you know someone, please, again. I'm here. If you know someone capable, I would be very pleased because I would be pleased to rest a little bit. But even if I love what I do and don't even -- I don't have a car company, I don't get paid. I mean, that's what I do for the company 18 hours per day, for the shareholder interest. Believe or not, that's the reality. Good question, okay? Best question. Best question.

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Unidentified Participant, [35]

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Yes. The stock was at $1.50 and -- or maybe a little bit less in March of 2009, and here it is almost 10 years later and it's where it is. I guess, what's interesting to some outside shareholders, as you point out, just how valuable the Chinese license was to the joint venture purchaser and some of us who are on -- some of us who own shares look at if the company were sold, may be $1.50 a share per the U.S. trading price, is $6. And so I take it with your having 60 -- only 60% of the company that a sale of the company is not going to happen, correct?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [36]

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No. Sorry, I missed the -- could you please repeat? In U.S. -- to understand...

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Unidentified Company Representative, [37]

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What you're asking is, is the company entertaining the possibility of selling the company?

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Unidentified Participant, [38]

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Yes. I'm asking Pasquale. With him owing 60%, roughly, of the company that a sale of the company, even if it would earn a multiple of the current stock price, is not something that he is willing to entertain at this time, correct?

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Unidentified Company Representative, [39]

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Are you -- Pasquale, are you or the board willing to entertain the thought of selling the company?

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [40]

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No, I mean. There is -- absolutely. No. I mean, there is no intention from my side and my family side as a major shareholder for sale of the company. Our commitment is to make this company successful. I mean, that's our goal.

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Unidentified Participant, [41]

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Okay. So -- I'm sorry, is that a yes or a no that you're not willing to entertain the sale currently?

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Unidentified Company Representative, [42]

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That is a no. It is not being entertained at this time.

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Unidentified Participant, [43]

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And would it be entertained? Or they're not interested in that?

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Unidentified Company Representative, [44]

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The answer is no.

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Unidentified Participant, [45]

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Okay. So the final question that I asked earlier, I would like an explanation on the moving line and why the cost reductions that we are looking for it didn't happen in the way we would have liked? Or they did happen, but there are other things that offset those cost reductions to keep us in a loss -- an overall loss position, the moving line?

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Vittorio Notarpietro, Natuzzi S.p.A. - CFO [46]

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Moving line probably was the wrong term to explain, and it's not just the moving line. Moving line is a production system that should make the production leaner than it used to be, but the issue is not just the moving line, but the issue is to make a leaner this entire company. So that's the challenge that we are facing and we are progressing in a way. In fact, talking about private label, okay. Talking about the private label, last year, as Gianni Tucci said before, we started from Europe, because the group business with the -- let's say, the big box, the guy that runs today in Europe like in America, the big retailers are getting bigger and bigger and the smaller are going out of the business, an exception of the lifestyle brand like Restoration Hardware, Room & Board, Natuzzi Italia or not. I mean -- but for the rest, there is mom-and-pop store, the provision store traditional ones are going out of business. As it happened already in America, is happening also in Europe. So the big box are becoming bigger and bigger. So do good business with them and make a profit is not an easy exercise. Last year, we faced this issue with the Europe -- European distributor of the big box. We have been working on a project on product and then on -- and even on production process in our factory in Romania, because remember that we have a factory in Romania, we have a factory in Italy, we have a factory in China, we have a factory in Brazil. It's a huge effort to review the entire operation system. We are very much committed to improve the production operation or, let's say, the entire operation that has to do with the desired product design, production process, supply chain in order to improve the productivity, improve margin and improve the quality. It's a huge, huge, I mean, effort that we are facing. If you will join us to visit us, we would be very pleased to have you in our company and show you what we're doing in terms of operation improvement in general.

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Unidentified Participant, [47]

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I want to congratulate you for building a tremendous lifestyle brand with a very impressive reputation globally. I would just encourage you as someone who owns 300,000 shares to entertain a notion of a new CEO and/or selling the company, because I believe the lifestyle brand that you have very impressively created has a lot of value if it were sold and that it is time for either someone else to run the company...

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Pasquale Natuzzi, Natuzzi S.p.A. - Chairman & CEO [48]

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And they should be unsold. (inaudible) Okay. Listen, I mean, what I've done in my life has been first for -- I mean, not for making money, that we know. I'm a person with the responsibility. I have a responsibility to run this company. I'm not looking to make money. I'm looking to give satisfaction to the shareholder, I mean, that's my goal. You are insisting. I mean, really I don't have any intention to sell the company or to sell my shares.

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Unidentified Participant, [49]

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Okay. Okay. Thank you for clarifying that.

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Unidentified Company Representative, [50]

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Let me provide you some numbers about strategy execution, as you said. So some numbers which are updated to last week.

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Unidentified Company Representative, [51]

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Introduce yourself, and then...

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Nazzario Pozzi, Natuzzi S.p.A. - Chief Natuzzi Division Officer [52]

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I'm Nazzario Pozzi, the Chief Officer of the division -- Natuzzi Division. So on a year-to-date basis until last week, the brand, as you said, the brand which you have described as a strong asset which the company has built over the past decade. So the Natuzzi Brand is delivering a consistent growth against last year. Natuzzi Italia is growing 30% at constant exchange rate against last year in direct stores and is growing 8% at constant exchange rate against last year in the entire wholesale business worldwide, which is mostly made by mono-brand stores. So Natuzzi Italia is a brand combined with a direct-to-consumer strategy, which is more than 2,000 stores worldwide -- 200 stores worldwide is delivering a double-digit -- a high single-digit growth in franchise stores and double-digit growth in VOS. Natuzzi Editions as a brand is growing 6% in Asia Pacific against the last year at constant exchange rate and 8% against last year at constant exchange rate in South America, which means that the brand, Natuzzi Edition, is delivering high single-digit growth in those markets in which we have a direct-to-consumer business model. Where we are decreasing against last year is Natuzzi Edition business with third-parties traditional retailers. So in terms of strategy execution, we see very clearly that the brand and the asset that has been built over the past are delivering growth and profitability wherever we have built a direct-to-consumer business model, which is already delivering growth and profitability. And that's why we are now moving to the next stage, starting with mono-brand, direct-to-consumer retail business for Natuzzi Editions also in U.S. and in Europe, which is the next stage of an accelerated growth for the brand in key markets.

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Unidentified Participant, [53]

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Well, we need to see cost control along with growth in order to have a profitable company. And is it accurate to say, that if it were not for the Chinese joint venture investment from Kuka that we might have liquidity problems in 2019 -- we might have had liquidity problems in 2019? The situation is very serious, is it not?

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Unidentified Company Representative, [54]

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For sure, you're right, because the rollout must be followed and sustained by a very fast cost control. We completely agree with you. What about the JV and the waste utilization in 2019, we didn't get the point, sorry.

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Operator [55]

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(Operator Instructions) And with no further questions, I'd like to turn the call back over to management for any additional or closing remarks.

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Piero Direnzo, Natuzzi S.p.A. - IR Manager [56]

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Okay. So see you again. So it seems that there are no further questions, so we will close the conference call today. Please feel free to contact us, if you need further information. Thank you all, and have a nice day. Good bye.

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Operator [57]

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And once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.