EL.En. S.p.A. (ELN) Earnings Call Transcript & Summary

Good afternoon. This is a Chorus conference operator. Welcome, and thank you for joining the EL.En's Full Year 2019 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. [ Nicola Fiore ]. Please go ahead, sir.

Thank you. Good afternoon to everyone, and thank you for joining us. With me on the call are Andrea Cangioli, EL.En's Managing Director; and Enrico Romagnoli, EL.En's Chief Financial Officer and Investor Relations. Before we begin, please note that the recent remarks the management makes on the conference call about future expectations, plans and prospects are forward-looking statements. Certain statements in this call, including those addressing the company's beliefs, plans, objectives, estimates or expectations of possible future results or events, are forward-looking statements. Forward-looking statements involve known or unknown risks, including the general economic and business conditions and conditions in the industry the company operates that may be affected should our assumptions turn out to be inaccurate. Consequently, no forward-looking statements can be guaranteed and actual future results, performance or achievements may vary materially from those expected -- expressed or implied in such forward-looking statements. The company undertakes no obligation about the content nor to update the forward-looking statements to reflect events or circumstances that may arise after the date hereof. Now let me introduce to the call, Andrea Cangioli. Please go on, Andrea.

Thank you, [ Nicola ]. Thank you very much, and thank you, everybody, for joining this conference call on the financial report for the full 2019 year that we released on Friday. As usual, Enrico Romagnoli will guide you through the details of our financials, I'll give you a very brief highlights on the year and spend more time then on the present status of our business and activities. 2019 was indeed a superlative year. Despite the material fees, accounting write-offs due to the International Accounting Standard 15 requirements, the EUR 400 million threshold was overcome by our consolidated revenues. Due to improved metrics all over the board, our EBIT increased by 27% to EUR 38.2 million and improved its margin on revenue. Despite the EUR 4.6 million adjustment due to the Accounting Standard 16 requirements, despite EUR 8.6 million of dividends and EUR 23 million of investments in fixed assets and despite the 15% and more growth in revenues that, of course, needed funding for working capital, despite of that, the net financial position basically stayed where it was at the beginning of the year. The overall result was excellent, and nearly all of our businesses contributed to the increase of revenues and profit. There were only 2 segments that struggled this year. Monna Lisa Touch in the United States was at 0 for the year. We did not do so bad worldwide, but without the drag by the U.S. sales, it will be difficult to maintain a positive sales trend worldwide for this product. And the other area struggling was the sales for cutting systems in China that registered a small slowdown in presence of a fairly strong headwind due to the tariff war and the related effects on the performance of the overall Chinese economy. Most of our competitors booked double-digit sales reduction, but our competitive position allowed to leave the decrease in China and provided worldwide [ 70% ] increase in laser cutting system sales due to the excellent picking up of the sales in Europe and in Italy in the second half of the year. These were the 2 [ slots, the only slots ], let's say, of 2019. All the other segments went from good to very good to extraordinary. Urology and hair removal leading the path in terms of sales growth. Quanta System in terms of profitability jointly to utilize it, which, I recall, specializes in laser marking systems with a market of identification. Our new system, Onda Coolwaves, performed very well in the body shaping market. Asclepion's MeDioStar Monolith was our best seller in hair removal, and several new products are lining up ready for launch in 2020. Most of our construction work dedicated to the strengthening of our logistics in our production capacity was completed. The initial EUR 30 million budget was not sufficient due to the [ decision on the run ] of 3 projects. First, the new plant, Lin Yi, our third plant in China; second, a larger-than-expected plant needed for Cutlite Penta here in Prato about 10 kilometers away from where I am talking from here in Calenzano where Penta [ moved to December ]; and third, the refurbish of the plant that Cutlite Penta itself left vacant by [ midyear ], a surface that is going to be occupied by the new 4.0 plant for our mid-power CO2 RF laser sources. Now please, Enrico, you can go ahead with the details of 2019.

Thank you, Andrea, and good morning to everybody. The year 2019 showed a strong growth in sales volume and in profitability, as already mentioned by Andrea. Revenues was over EUR 400 million, up 16% compared to the last year. And the fourth quarter was also excellent, with a turnover of EUR 117 million and an operating result of EUR 11.7 million with an impact on sales of 10%. It should also be remembered that in the period, EUR 1.5 million of sales to leasing company with our purchasing obligation have been accounted in compliance with IFRS 15. And so the sales have been recognized as multiyear rentals despite the fact the price was already fully collected. And the negative impact on operating income was EUR 0.6 million compared to our traditional accounting. And the lower revenues and margin for the year will be recovered linearly in the multiyear period in which the operating leasing contracts will be effective. The gross margins was EUR 156 million, up 13.5% compared to the EUR 137 million of last year. And the slight drop in sales margin from 39.7% to 38.9% is due to a slight decline in margin in both sectors, Medical and Industrial, and also suffers from a slight reduction in grant received. The operating costs were EUR 43.6 million, up 1.8% and staff costs were EUR 66.1 million, with an increase of 12% compared to EUR 59 million of the last year. In December, the group's employee were almost 1,500, with an increase of 130 units from the beginning of the year, the main increase was in China. EBITDA was EUR 46.3 million, up 30% on the EUR 35.7 million of last year, with an impact on sales of 11.6%. Amortization and other accruals were EUR 8.1 million, up 44% on the EUR 5.6 million of last year, due to the capital expenditure effective during the year and to the increase of bad debt accrual and warranty accrual on products sold. It also should be noted that starting from January 1, the IFRS 16 was applied and an amount of EUR 1.6 million was reclassified from operating cost to depreciation. In 12 months, fixed cost has operating cost plus staff cost and depreciation, decrease in impact on sales from 31.1% to 29.4%, with a positive leverage effect on operating result. For this reason, EBIT was EUR 38.2 million, up 27.4% on the EUR 30 million of last year, and the impact on sale improved to 9.5% from the 8.7% of last year. Pretax result was EUR 38.6 million, and net income was EUR 20 million, up 55% and with an income per share of EUR 1.33 compared to the EUR 0.8 of last year. Group net financial position showed a positive balance of EUR 61.4 million, EUR 1 million less than year-end, but with a strong cash generation during the fourth quarter of EUR 10 million and with an improvement of the ratio net working capital on sales from 29.5% to 27.6%. The main cash absorption of the year were dividend for EUR 8.7 million, capital expenditure for EUR 23 million, of which EUR 14 million of new buildings and factories. And there also be noted that the IFRS 16 has an impact too on net financial position of EUR 4.8 million. Without it, the net financial position has been over EUR 66 million and higher than the last year. During the fourth quarter, Quanta System invested EUR 2.5 million in insurance policy, increasing the EUR 12 million already invested by EL.En. during the past year. This kind of investment by their nature of long-term investments are included among no current financial assets, and so not included in the net financial position. In the Medical sector, representing in 2019 more than 60% of the group's turnover, after-sales service showed the most relevant growth rate with revenue up by approximately 36% and becoming about 19% of the Medical sector sales. All the types of revenue included in this category like creams and accessories in the beauty sector, full risk contract for technical assistance, ordinary service on the installed base contributed to this remarkable result, but the most important contribution was given by upgrades on IPL system for hair removal and by sales of single and multi-use optical fibers for urological application. It should be noted that upgrades already registered in the past year constitute a type of revenue that cannot be replicated in its entity in the next year. In the Medical sector, sales in urology included in the surgery sector stand out; secondly, volume only for those in the application segment, historically, most relevant for the group, that of hair removal. The growth for laser system is over 19%, but considering the turnover for laser system together with that of optical fibers accountant in service segment that has consumable goods, this business altogether, almost reached EUR 50 million in 2019, up 46% compared to the corresponding period of last year. The Aesthetic segment was up about 22%, remained the most relevant for the group due to the sustained growth in the application segment of hair removal and tattoo removal. A significant contribution to turnover is attributable to Onda Coolwaves by Deka for body contouring, EUR 11 million of sales in the whole year, and B-star distributed in Italy by Esthelogue for the professional aesthetics sector. As a whole, the body segment become among the most relevant segment in 2019, second only to hair removal and with a size similar to tattoo removal. The Industrial sector instead faced less favorable condition in 2019 than the recent years. Nevertheless, the growth in the sector on the annual basis is 4.4% for the system and 7% as a whole, including the service, which recorded a leap greater than 40%. The laser sector grew of 3.6%, not the bad result in absolute terms and in relation to the general trends in the manufacturing sector, but far from the recent growth rates. In our most important market, the China's Wuhan, after very rapid start in the first month of the year, plus 15% in H1, the H2 showed a decrease in revenue of 17%. So we had an overall reduction of 2% for the year in China. The marketing segment is still excellent, especially in the identification market where Lasit, our subsidiary of Torre Annunziata, Naples, operate. In the 12 months, we had an increase over 13%. The result in laser sources is decrease of 9%, hit by the market slowdown. In the Industrial sector too, the most significant growth was recorded in after-sales services and sales of consumables, which showed an increase of over 44%, thanks to the consistency achieved by the installed base. Looking to distribution of revenue by geographical areas, the largest growth in Medical sector was recorded in ex-European countries, followed by Europe, while the Italian market was stable. During the period, there was a recovery of competitive position and profitability on the Japanese aesthetic market after a very bad year in 2018. Thanks also to the sales to large chain of beauty centers of small aesthetic system suitable for home use and to the upgrade on IPL system. Moreover, Quanta System recorded excellent performance in urological system, particularly sold to American OEMs. In Industrial sector, we had a very good performance of Cutlite Penta for cutting and Lasit for marking in Italy and Europe, with a slowdown in China and Brazil. Andrea, please go ahead.

Okay. Thank you, Enrico. So you had all the details of our great 2019. 2020 started with all the positive momentum of 2019 with, in addition, the rebounce in order bookings in China that had initiated with the month of December. Then suddenly the world changed. Firstly, China. The COVID-19 wide spreading forced the Chinese authority to lock the city of Wuhan up and several other provinces of China and engaging the pre-festival vacation. What was initially looking like a minor issue turned out to be a large epidemic disease that led to the stall of most of the business activities in China for over a month. Our 3 factories had to be shut down and only at early March, the Lin Yi and Wenzhou could start working again, while the factory of Wuhan is still closed and it will be probably for at least this current week. Work in Lin Yi and Wenzhou is not fully operational since several of our employees originate from Wuhan, where they were having their break when the real virus exploded and where [ their feet stuck ]. News about the current market mood are not bad. We are starting to sell again. But it's, of course, very difficult to predict how long the market will need to return to its standard levels, and this is the Chinese part. The rest of the world seems to be able to continue its virus-free life, but the recent events and statistics in Italy at first and in several European and finally the U.S. counties and finally the U.S. are telling us that the world would be swept by the coronavirus. As you might know, all Italy lives today in a semi-quarantine stages. All the shops, pharmacies and food stores and supermarkets are closed. Hotels, restaurants are closed. Factories can work but in a very complex environment, especially in Northern Italy, where the virus has, for the time being been hitting harder with hundreds of casualties. Currently, our Quanta System plant in Samarate, which is the one of the so-called red areas, highly subjected to the epidemic, has been shut down for 2 weeks. Similar decision could be taken in Florence and in Prato, have not been taken yet, and in the other clients based in Italy. None of our European employees have been reported as positive to the virus. Safety and health of our employees and partners is our first responsibility and care. In this particular moment, we need to comply to the regulation and can't make our very valuable employees feel uncomfortable or in danger. In the meantime, traveling has been banned, and international sales for all of our businesses, Medical, Surgical and Industrial, have been canceled or postponed. So at the moment, we are surrounded by a strongly unfavorable environment. Production has been halted in China and in one factory in Italy. We had a rich, I would say, a record backlog, but it's hard to say now when the market will be back to normal and how long it will take to reinstate the confidence that is needed by the demand of capital goods like the ones we manufacture and sell. For this reason, we decided not to release any guidance. We don't want to be too optimistic modeling a short close down period or 2 facilities [ seeing ] a very long one. For sure, our numbers will be hit, but I'm not able to reasonably predict how much. Before leaving the session to your questions, I want to tell you that there are several good news and there are very many positive things that we have ready for 2020. For instance, we just received the FDA clearance for high-power hair removal laser systems that is going to be sold in the United States, which is one of the areas in which strongest growth is -- was expected for 2020. And moreover, the good news -- the general good news is that our trends, which was demonstrated in 2019 and in the dawn of 2020, our resilience and commitment to resist in this current environment are very strong with a willingness to react and to the best full strength and -- excuse me, once this period that [ will be probably touching, most of our award ] will be done, we will be back with all our resources ready to start rolling again. So thank you for your attention, and please go ahead with your questions.

[Operator Instructions] The first question is from Andrea Bonfa of Banca Akros.

My first question is related to the operational leverage of Q4. Although it's not particularly relevant at this point in time, but just a curiosity, I mean, your mix was pretty good with a strong growth in Medical and Surgical. But the operational leverage didn't, let's say, impress particularly compared, especially with the 9-month performance. If you can elaborate on that, please. The second one is, of course, mostly relevant to the current economic situation, the impact of the coronavirus. I mean, in the likely scenario or a recession globally in H2 2020, the trajectory, let's say, of your fixed costs and say variable costs, I mean, all those costs below the gross margin, how can you manage those in the hypothetical scenario of a decline in sales? Are those set -- still set to increase? Or can you manage those aggregator costs? And if I may, on the third -- sorry, point, my curiosity is that if I -- if we arrive that there is going to be a recession, you might need to support your client with extension of payments. So will you use your cash to support working capital? Or would you consider launching a buyback of your shares?

Thank you, Andrea. Three questions. First, leverage on Q4. Q4, the reason why you noted -- what you did is that sales in China were very, very low compared to the cost. We have a structure which starts having a certain level of cost. We were expecting a certain level of revenue. Revenue in China as an effect of the low older collection during December was low. We did a little bit better in December. But in the month of October and November, we had a very low sales level. Then, as I said before, we had a good order booking in December and beginning of January before everything stopped. And the second question is about fixed costs. Of course, there are large parts of certain fixed costs that, for instance, for this moment are gone. All the international sales are not going to take place. So we are not going to pay the international fares. We are not going to pay any international traveling. We are not going to pay all the expenses, all the traveling and also the training that is very relevant with our customer, and it's cost -- it's part of the fixed cost. So we will be able to cut these kind of costs. The largest part of cost is easily employee. And so for instance, in Italy, where we are slowing down, we are having people go home and work from home. From home, probably, they are working a little bit less than they are working here. Production will probably has to -- will need to be slowed down because we won't be probably allowed to ship at least in the very next weeks because of -- I mean, we could face some volume reduction. In this case, I mean, we first -- we will have our employees benefit of their period off. And then we'll see if the period should be extremely long, if we would need to call for the standard state support in these occasions. Ironically, we are far from this situation because our books -- our order book is extremely interesting. As I told you, we had a record order books running into the period. But we need now to see how everything develops worldwide because we might encounter difficulties in shipping all the groups that we have on the order books to our customer because of the spreading of the virus worldwide. So I mean, in a nutshell, we have -- we can have some handle on the fixed cost trying to reduce them in case of limitation of revenues like we will encounter in the very next weeks. For the third point, you're right. The stock dropped at a very low level, which makes it interesting as an investment also for the company itself. I believe that we already allocated a good amount of cash to the payment of dividends that we left unchanged, even though we know we are going into a very, very difficult year. We will see what kind of financial effects the virus will have. If -- as it happened in 2009, there will be a credit crunch, we would be probably forced to use some of our cash to support our most valuable customer. But it's early now to -- I mean, to see and to give you a forecast on what we will be able to do. Sincerely, for the moment, we are -- I mean, today, we are continuing to ship, and we don't see problems to -- with our customers, I'm talking of foreign customers. This can change tomorrow, the day after tomorrow. For sure, in this moment, we are not shipping at all to customers in Italy because our customers in Italy in the medical system -- in the medical market cannot work.

The next question is from François Robillard of Intermonte.

First one is just to clarify. Enrico told -- talked about the FDA clearance for a product in the U.S., but you didn't touch the name of this product. If you can just come back on that. Then another thing is on the recent FDA clearance on the Coolwaves. What are your expectations, although, I guess, it might be difficult to give at that point. Then if you can give us an update on the works made at all the plant enhancements that you had announced until late last year, are they all over and ready to operate? And finally, your recent investment in minorities, about that? Is it too early to think about some impairments on those assets?

Okay. Three questions. Onda received a clearance in the United States, but the clearance is not for Onda itself, but for products that is similar to Onda that its specification, and most important, its intended use [indiscernible] is a little bit different from Onda. This system anyway will be sold in the United States by a new distributor that we had, it's called [indiscernible] which has a strong distribution network in the United States. The other product for hair removal will be sold through an OEM partnership, and the name is [indiscernible]. The other question then was about the minorities in China. Well, the transaction took place first half in 2019 with the purchase by Wenzhou of Wuhan and second part in 2020 January with purchase and payment by Ot-las of about 30% more of Penta Wenzhou. I believe it is really too early to start talking about impairment. Of course, the results in 2020, especially in the first half, will be far from what we would have expected on January 15 when we paid -- we sent a wire to make the payment. But we are extremely confident that the market will be back and that we will be able to complete our, let's say, business case in developing our business capacity in China and seeing further growth in this market. Of course, we paid a considerable amount of this share -- this 30% share of our company. But for the moment, I believe we are able, I believe, to justify -- still to justify the value of the acquisition. What was your third question, excuse me, François, I don't remember?

Sorry. Just on the plants construction and upgrade, if you can give us an update, are they all finished?

Yes, yes, the plants, we are -- they are not all finished because we have some work that will roll on 2020, and that will be also slowed down. The most important of the work that will be slowed down is the Chinese ending of the Wenzhou plant. So we finished up the new plant in 2019. We had the grand opening in December. But we have not fully completed the second Wenzhou facility, and this will go on slowly, given by the -- given the current situation of the Chinese economy. The -- we have to complete the new building here in Florence for the industrial laser source of manufacturing the medium-powered CO2 RF-excited laser sources. And we still have to complete in full the move in Torre Annunziata of Lasit into the new building with some expenses, but we are talking of "minor, minor" expenses. We were planning of expanding, which was something absolutely unplanned, but needed due to the pace of growth of the European and Italian business of Cutlite Penta. We are planning to expand further our production capacity in Prato, which to the pace that we held in November and December was not sufficient anymore. We have been growing really in a very, very potent way. But of course, this investment is now on hold.

[Operator Instructions] The next question is a follow-up from Andrea Bonfa of Banca Akros.

Now just an input from your side, if it's possible. I mean, we are really in uncharted territories in order to make the forecast for the first quarter and especially for China. And we were wondering if you can guide us what you're expecting in terms of sales for China in the laser -- industrial laser division because as our preliminary input, we put minus 50%, but maybe it is too little. Are we going there for minus 80, minus 70, minus 30s? I mean some ideas of what we should expect at least in China for the first quarter. And then we can take some -- maybe some recovery scenario for the following ones. And if -- Andrea, if I may, if you can give us a color, I mean, outside of the -- outside of Wuhan, I mean, is really the economic, let's say, situation really gradually improving? And with, let's say, economic activity returning to normal level, what are the inputs from your side that you can share with us?

Starting from the last question. So the input are fairly good that the economic situation is returning to good levels. And also, we know that our salesmen, the one that can move because we have many salespeople which were in Wuhan, so they can't move, started booking new orders. So we started booking orders in the first 15 days of March, which, I mean, was very positive because we have seen a decent work under this point of view. For what concerns the expected turnover for Q1, we didn't guide anything, and I am not guiding you to any number, but the math is quite easy. We worked 15 days before the spring break. And following those 15 days, we started working again at very low rates in, let's say, 50% -- with less than 50% of our capabilities on a market that anyway was -- is still very, very, very, slow. So we're expecting -- we're not expecting an interesting number, a good number of sales in the first quarter of 2020 for our Chinese activities.

[Operator Instructions] Mr. Cangioli, there are no more questions at this time.

So at this point, thank you for being with us. And we -- I hope to have a new meeting with you in a few weeks when we will give the first quarter financials. This should take place about, yes, 2 months from now -- about 2 months from now. And I hope at that point to be able to give you a much clearer situation on how our business will develop and most of everything I hope that at that point, most of the hits that we received and are receiving from the coronavirus situation will be gone. Thank you for being with us.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.