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

So good afternoon to everyone, and welcome to the EL.En.'s Fiscal Year 2023 Financial Results Conference Call. Today's call will be recorded, and therefore, will be an opportunity for questions at the end of the conference call. With me on the call are Andrea Cangioli, EL.En.'s CEO; and Enrico Romagnoli, EL.En.'s Chief Financial Officer and Investor Relator. Before we begin, please note that there is a remark that the management makes on the conference call about the future expectations, trends and prospects and forward-looking statements. Certain statements in this call included 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 general economic and business conditions and conditions in the industry, the company operates and may be affected should be the assumption turnout to be inaccurate. Consequently, no forward-looking statements can be guaranteed, and actual future results, performance or achievements may vary materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation about the contents nor to update the forward-looking statements to reflect events or circumstances that may arise after the date hereof. [Operator Instructions] At this time, I want to give the floor to Andrea Cangioli. So Andrea, please go ahead.

Thank you, Nicola. Thank you, Bianca for hosting the call and thank you for joining us in this conference call. We are holding after the release of the draft 2023 financial report end of the 2024 guidance on this call myself, Andrea Cangioli and Enrico Romagnoli that will be commenting the financial part of the report. 2023 turned out to be a fairly challenging year but the EL.En. Group managed to face the circumstances that have been making our business environment less favorable without interacting the revenue growth trends and limiting the decline of our profitability within the guidance provided throughout the year. For the 14th year in a row, the group registered a year-over-year sales volume increase. This year, revenues ended up growing by 2.8% -- 2.7%. We are very satisfied with this outcome, which sets at approximately 10% the average revenue growth for the last 3 years. Consolidated revenues were approximately EUR 692 million, an increase of approximately 3% compared to 2022, and EBIT was approximately EUR 73 million, equal to 10.5% on revenues. In the fourth quarter of 2023, record sales volume was just shy of EUR 200 million and EBIT margin stood at 10.5% as well. Foreign exchange was accretive of revenues if we had maintained the same foreign exchange rates of 2022, revenue would have exceeded the threshold of EUR 700 million in 2023. Enrico will show you the details of certain cost accounting highlighting how nonrecurrent and nonmonetary expenses hit our Q4 and our yearly financial results. For the moment, I would like to share with you that removing the nonrecurring expenses, our financials would have looked significantly better in the fourth quarter and in the year, and net of stock-based nonmonetary expense, the EBIT margin gap between '22 and '23, 2022 and 2023 would have been quite lower. In fact, this 2023 has been very positive for most of our business units. Our net business was off to a very strong start of the year benefiting of the momentum of the strong 2022 order intake and managed the normalization of the market demand progressively reducing its growth compared to 2022. Eventually, registering a volume decrease in fourth quarter -- in the fourth quarter. At the same moment, since the order intake normalization and sales volume reduction mainly involved the hair removal which is the most competitive and therefore, lower margin barrier application segment, overall margins on sales improved over the year. Sales were strong in surgical devices, namely in urology and ENT, and we're strong in anti-aging skin treatments where product innovation provided our product range with significant improvements. Marketing support to sales activities was extensive and expensive. The times when traveling was banned and sales and marketing expense was virtual network activities only is gone. And we are now back to the traditional approach. Even though the P&L increase of the sales and marketing line is evident, we are quite pleased with the effectiveness of the expense in supporting the success of our sales activity as the help in appropriately positioning the products and the brands in the high end of our markets. Just to give you an example, of the extent of our investments, the presence of our three medical aesthetic brands and companies, Deka, Quanta System and Asclepion at the World Dermatology Congress held in Singapore last July. By the way, Singapore is probably the most expensive venue for a similar event by itself involved the market investment in excess of EUR 0.5 million. Good news here is this kind of congress takes place once every 4 years. The industrial business managed to achieve an overall sales growth in line with the consolidated sales growth. And this fell below the initial expectations that were largely tied to the recovery that everybody was expecting from the Chinese markets. The reality on the trend of the Chinese economy turned out to be much different. And instead of being a revenue growth driver, our Chinese business was, in fact, our downward profit driver in 2023. I would like to leave China to the end of my presentation and keep looking with you to the other business areas and comment their success in 2023. Cutlite Penta active in the sheet metal laser-cutting business on, let's say, the Western world markets, managed to weather the weakness of the Italian market and to achieve a year-over-year sales increase due to its international sales expansion. In a year where most of the machine supplier years for manufacturing struggled, revenues were up 9.3% and EBIT was up 5.5%, notwithstanding the nonrecurring cost that will be hopefully reversed in 2024. Cutlite offers a product range that maintains its attractiveness on the market for its cost effectiveness and also for the variety of the product range. Ranging from compact low-cost but high-performance systems to complex systems with extended Cutlite surface, combined with handling and storing automations. Lasit active in the identification of laser marketing markets is benefiting of a favorable market and of the long-term investment planning, which was initiated with the acquisition of the new large production plant, and is now moving forward with the creation of a network of distribution subsidiaries aimed to better control the market and better serve the end user of the most significant international markets. Subsidiaries were set up in Poland, Spain, Germany and the U.K. And the good news here is that after the startup period, with the needed investment and subsequent losses, we are experiencing the transition to profit generation in these new entities as well. We are talking of a business unit that won't be able to overcome EUR 30 million size in 2024, so not a game changer for the group but an interesting business, bearing EBIT margins well in excess of the sheet-metal market. The other businesses within the industrial sector performed fairly well given the economic environment of the year, basically confirming the financial results of 2022. We are talking of the marketing systems for decoration of large surfaces, the sale of mid-power CO2 laser sources and the sales of innovative marketing systems for selected applications in the manufacturing world ranging from solution to the so-called hairpin stripping for the wider defined market of electric vehicles to new approaches to the packaging markets. The activities undertaken by the group in the field of sustainability continued and were also included among the performance indicators for management compensation. A new 5 years sustainability plan was released, targeting climate change in terms of emission reduction, circular economy, promotion of a responsible supply chain, valorization of the people and contribution to the community. It's a major commitment, and we are happy to see positive feedbacks of our -- to our extensive work in the improvement of our ESG ratings provided by primary rating agency in the awards that we have been rented. One of the most positive financial trends of the second half of 2023 has been the return to massive cash generation well beyond the seasonality that sets our fourth quarter as the main cash generator quarter. We have shared with you how the supply tranche of 2022 tied to a demand pressure of unprecedented intensity had forced us to several emergency actions in order to preserve our capability to meet the requested and projected delivery plans. Long-term purchase plans were granted to vendors to secure product availability. Advanced payments were allowed to scale up and allowed to vendors to scale up in their short-term delivery priorities, purchasing volumes were adapted to the projected growth. This action led to the rapid increase of net working capital as the effect of heavier inventories and lighter account payables. When the demand initiated its normalization phase in the first months of 2023, we also remodulated our purchasing policies and the excess of inventory took some time to enter in its progressive release phase, which is now fully in place with evident benefit to our cash position. One relevant factor of our financial position is still lagging behind in realigning to the standards of a couple of years ago. I'm talking of the customer down payments accounts. Its decrease -- their decrease by EUR 24 million in the year explains by itself, the full cash transaction accounted for in financial year 2023. This decrease in down payments paid by customers is mainly affecting the sheet-metal cutting business. It is hitting the Italian business of Cutlite Penta, where the tax cuts that were requesting a timely down payments are not in place anymore and therefore, customers are returning to the original customs that do not foresee the payment of significant down payments. And it is equally hitting the Chinese business of Penta Laser. In this case, as a direct effect of the reduced demand and subsequently of down payment bearing backlogs. This introduces us to the Chinese topic, the most disappointing in 2023. Not only China wasn't the revenue and profit driver we're counting on, but by registering an 8% sales decrease and an EUR 8.5 million negative EBIT. It was almost entirely responsible for the variance of the 2022 results from the ones achieved -- excuse me, of the 2023 results from the ones achieved in 2022. Moreover, the sales decrease was obtained growth of the incremental sales volume brought by the acquisition of KBS, which was worth about EUR 14 million of revenues in 2023. The Chinese domestic market for our system is not growing as expected. Tainted by the evidence and ease of the Chinese economy and becoming very competitive due to the large number of participants that are effectively and aggressively covering every niche. We are expanding our overseas volume -- sales volume in order to benefit of both higher margins and increased volumes. Good results were achieved in the fourth quarter of 2023, which marked a good recovery out of the negative trend of the year, still not sufficient to materially improve the anuual results. For what concerns the IPO application in Mainland China, we updated you throughout the year on how the weak financial results were unsuitable for the filing of a successful IPO. During 2023, the leasing project was therefore suspended while waiting for the counter measures adopted in China to once again outline growth and profitability prospects capable of supporting listing aspirations. In the first week of 2024, having found it impossible to proceed with the subscription of an IPO application with reference to the 2023 results, the private equity funds that had invested in Penta Laser Zhejiang during 2022, forwarded the withdrawal request that were contractually provided with. Meetings are underway in which the funds are evaluating the opportunity to extend the stay in their shareholding structure, in light of commitments and guarantees that are currently being negotiated. Confirmation of the exit by the funds would determine the interruption of the IPO process and the need to identify alternative solutions for the business unit. Another more specific event occurred in late February 2024 and a factor affected our 2023 financial. A customer of Penta Laser Zhejiang initiated a lawsuit claiming reimbursement and damages of a fairly large and complex systems we custom manufactured for him. We are planning to counter sue him for payment, but in the meantime and in light of the initial state of the dispute and the uncertainties about the probability of succumbing. In closing, the 2023 financials, we decided to prudentially set aside an amount equal to EUR 25 million of renminbi, roughly EUR 3.5 million expense in Q4 2023. As mentioned, we have seen some material improvement in the business performance in China. And after the cost reduction activities, the 2024 plan, we -- in 2024, we are planning to improve our business performance compared to 2023. This leads us in the topic of 2024 guidance, but I will be back on this after Enrico's report. But one last point before I give the word to Enrico, I would like to make a comment on dividend distribution, sticking to our rationale of distributing dividends proportionally to the generated income, the Board of Directors is proposing to the shareholders the distribution of a EUR 0.20 dividend, which is 10% less than last year, like roughly 10% less was EBIT and net profit. Please, Enrico, go ahead with your section.

Thank you, Andrea. Good morning, everybody. As usual, I'm going to give some comments about our financials released yesterday. The group achieved in 2023 a total turnover of EUR 692 million, up 3% compared to the last year. And in the medical sector, the increase was approximately 3%, the same for industrial sector that recovered a decrease of 4.1% until the end of September 2023. The impact on sales of the two sectors remained the same as for last year. In Q4, a record turnover was recorded close to the [ three shorter ] of EUR 200 million, with an increase of 5.3% compared to the fourth quarter 2022 with an operating result of EUR 21 million. The main increases were achieved in cutting and marketing business, while the performance of the medical sector showed the tendency towards a progressive slowdown during the year. Having exhausted the residual push of the large order acquisition of 2022, and gradually, we confronted with market conditions made less favorable by the uncertainty induced by the wars in Ukraine and Palestine and by the high level of interest rate, which does not facilitate investment in capital. In -- on a yearly basis, the gross margin stood at EUR 261.4 million, up 4.7% compared to the EUR 249.7 million as of last year. The increase was higher than in sales test recovery in sales margin from EUR 37.1 million to EUR 37.8 million and the better margin is essentially due to the sales mix of the medical sector, while the margin in sales in the industrial sector suffered a slight decline. The margin of the industrial sector is also influenced by the nonrecurring cost of approximately EUR 3 million due to the damage caused by the November fluid in Italy and to an accrual for potential impairment and inventory value in relationship to the legal dispute in China as already mentioned by Andrea. Operating expenses increased and the impact on sales up from EUR 8.4 million to EUR 8.6 million and the main reasons are the sales and marketing expenses for the trade fair in Congress in covered by both in medical than in industrial sector. Staff cost increased of EUR 13 million, up as impact on sales from 14.6% to 16.1%. The cost for stock option and share-based payment to employees contributed to the cost increase. In 2023, the amount was EUR 3.5 million compared to the EUR 1.5 million in 2022. The total stock option expenses in 2023 was EUR 3.9 million compared to EUR 1.6 million in 2022 because EUR 0.4 million referring to the BOD was accounted in G&A expenses. The impact on sales in 2023 was 0.6% compared to the 0.2% of 2022. As of December 23, the group had 2,082 employees lower than last year. The decrease affects the Chinese companies apart from the newly acquired KBF of Shenzhen, whose numbers were not included in 2022 totals. As a result of the adoption of the workforce to the current different needs of the market, the staff employed in China without considering KBF went from 894 units at the end of '22 to 663 at the end of '23. New hires instead mainly involved Asclepion in Germany and Quanta System in Samarate. EBITDA was EUR 90.9 million, down by 4.6% compared to the 95.3% of '22. And the impact in sales -- on sales decreased marginally 14.1% in '22, 13.1% in '23. The cost for depreciation and provision show an increase going from EUR 14.2 million to EUR 18.1 million, and the impact on turnover goes from 2.1% to 2.6%. The legal dispute already mentioned for the Chinese company, with a customer in Q4. In Q4, we did an accrual for risk for EUR 1.6 million, which combined with a EUR 1.7 million inventory devaluation for the system involving the supply, still booked within our inventories bringing the cost allocated to the dispute in the fourth quarter to EUR 3.3 million. EBIT marked a positive balance of EUR 72.7 million, down compared to the EUR 81 million as of December '22, with a 10.5% EBIT margin compared to the 12% in the previous year. We remind you that in November '23, Cutlite Penta suffered extensive damage from the fluid that hit their plants. Damages to the goods in the warehouse to the system in progress and to the equipment, forced us to account expenses for approximately EUR 1.7 million. If acknowledged, insurance reimbursement and a state compensation will be accounted for upon collection. Therefore, in Q4, EBIT -- coming on the next slide, was affected by 1.7 million expenses booked for the fluid, EUR 3.3 million for the Chinese legal dispute, total EUR 5 million of nonrecurring costs. In addition, compared to '22 in '23, annual EBIT was hit by higher nonmonetary cost for stock-based compensation for EUR 2.3 million. The overall nonrecurring expenses was equal to 2.5% in Q4 revenues and 0.7% on the U.S. revenues, while the higher nonmonetary cost accounted for 0.4% of onward sales. This means that current Q4 EBIT margin would have been 13%, current annual EBIT margin would have been 11.2% instead of 10.5%. And that half of the 0.8% points gap between '22 and '23 EBIT margin was due to an increase in stock-based compensation expenses and yearly income before taxes show a positive balance of EUR 71.1 million with a decrease of 9.9% and the group closed the '23 financial year with a net income of EUR 48.2 million compared to the EUR 55.1 million last year. The impact on turnover for the period was equal to 7%. The net income of '23 was negatively affected by Chinese activities that accounted a net loss of EUR 6 million compared to an income of EUR 1.3 million for the last year. Talking about balance sheet. We can see that the net financial position recorded in the year EUR 20.8 million decrease from the EUR 75 million at the end of '22 to EUR 54.6 million as of December 31. We also remind that in non current assets are included midterm liquidity investment for EUR 23.8 million and so this amount is not included in the net financial position. Capital expenditure was EUR 13 million, a significant amount, but well below the average of the previous year in which substantial investment aimed at increasing production capacity were undertaken. Looking in the cash flow in the second half of 2023, the group returned to generating cash from its operational activities, recording an improvement in the net financial position of approximately EUR 45 million in the period, reversing the trend of cash absorption highlighted in the first half of the year. In the main cash absorption, you can see on a yearly basis on the net working capital of EUR 34 million, even though there is -- and you can see in the second picture, a reduction during the year. The other receivable payables for EUR 25 million, the other receivables and payables mainly referring to the down payment already mentioned by Andrea, and there is also a payment of EUR 90 million of dividends in the month of May. In -- for what concern the revenue breakdown by business, in the medical sector, revenues was EUR 392.4 million with an increase of 2.7 percentage. The growth derived from the good performance of system for surgical application and after sale services and consumable which more than offset the decline recorded in the aesthetic segment. The aesthetic, which is the most significant segment with a 58% share on a total medical turnover, marked up 5% decline with a sales amount of EUR 226 million, affected by the weakness of some important accounts for our removal system. The fastest growth was recorded in a surgery plus 25% mid turnover of EUR 77.2 million compared to the EUR 61.9 million in the previous financial year 2022. In surgical application, a urology system constituted the most significant share of turnover and also the fastest growing one. There was also a slight growth in therapy segment, plus 1% and the turnover in after services and consumable recorded approximately 10% growth with a really bad contribution of optical fibers for subject application. We represent a significant and recurring share of after sales revenue. In industrial sector, revenue growth was approximately EUR 2.9 million, up to EUR 300 million compared to the EUR 291.5 million in the same period of the previous year. An excellent fourth quarter contributed to the result, plus 22% compared to the Q4 '22, which was particularly encouraging for sales in China for the laser cutting plus 58% in the quarter in euro, plus 71% in renminbi. A sign of market relaunch, which, however, did not prevent Chinese activities from recording a 8.3% decline on our basis in euro, 0% in renminbi despite the acquisition of KBF at the end of '22, which growth in organic growth of approximately EUR 50 million. In the average exchange rate of renminbi devaluated compared to today euro up 7.6% in 2023. Laser cutting sector continued to grow in Italy, Europe and the Western market, thanks to Cutlite Penta, plus 9.3%, Cutlite to Brazil, plus 2.8%. And Cutlite Penta most entirely based its growth on the expansion into international markets, particularly those outside you. In the marketing applications segment, the activities of the Lasit and its subsidiaries emerged significantly in 2023, recording the best growth in turnover plus 27% and profitabilities, plus 123% in EBIT. The activities controlled by Lasit of Torre Annunziata, which include distribution branches in Poland, Spain, Germany and the U.K., recorded an excellent performance exceeding EUR 26.7 million in revenues. Ot-las also operating in the market sector recorded a reduction in sales of 48%. And therefore, the overall increase in the market segment was 22%. The same, all other sources and activity mainly carried out by the industrial division of [indiscernible] registered a good performance plus 33%. In addition, to the increase of installed base for laser system, the provision of services, system rentals and consultancy has taken a prevalent rule in the art conservation which contributed to the rapid development of revenues for the after sales service in the industrial sector, which marked growth around 15% with revenues of EUR 20.4 million. Since by area, the sales trend by a macro geographical area for the two sector confirms the best performance in free markets for medical sector. While in the industrial sector, the excellent sales performance in Europe contrast with the slowdown in the rest of the world caused by lower sales recorded in the cutting sector by Chinese companies minus 8%, a contained slowdown, thanks to the rapid development of sales by the other group companies involved in the industrial sector, especially Cutlite Penta. At constant exchange rate, industrial sector revenues in the rest of the world would be increasing. Andrea, please go ahead on the rest of the presentation.

Yes. Thank you, Enrico. I would like to confirm that the midterm -- the positive midterm outlook for the growth of our markets, both in the medical and in the industrial sector, as confirmed by several researchers available in the market, which even if certain specific outcomes of each of them are arguable, they all converge to expected average growth rates around 10% for the medical sector and just over 6% for laser industrial applications. The needed correlate to these figures is that growth is driven by demand, but also by enough supply that stimulates demand. This is why R&D activities are so vital for us, and we allocate an increasing budget to make sure we maintain the capabilities and the resources to continuously improve the performance and the effectiveness of our product range in order to be able to effectively compete on these growing markets. During 2023, demand pressure normalized, and the group returned to operating according to the canals that have historically characterized its activities. As much as 2023 started with a strong increase based on the momentum of a very strong year in 2022, the sales results of this first month of the year 2024 since aligning to the normalization trend of 2023. But the order collection for the following months is to date encouraging and outlines the expectation of a progress acceleration throughout the rest of the year. This allowed us to release a revenue and EBIT growth guidance for the year 2024. Given the uncertainty of the global market environment, no further detail on the extent of such growth can be released today. Obviously, the achievement of our revenue and profitability targets that we are sharing with you today also depends on the possibility of meeting the plants defined for the industrial sector in China, which in the recent past has shown high instability and unpredictability. We are done with our prepared comments. And so I believe Bianca, we can initiate our Q&A section.

I give the floor to Giovanni Selvetti from Berenberg.

Hello, everyone can you hear me, Andrea, Enrico?

Yes, we can.

Yes, yes. We can hear you.

First of all, congratulations for the set of results, not easy given the circumstances. So I have a couple of questions, some more broad and some more specific. I start with the broad ones. I mean you are actually just mentioning now that research seems to point to a 10% growth in medical and 5% in industrial. So my question was really that, so how would you -- in terms of, let's just say, division, what can we expect? So growth in both divisions. And what's the assumption for China for this year? And again on guidance, is it fair to assume that aesthetic division is expected to grow in 2024 after the inflection and how Accure is going to contribute on that? The second question is on China, very glad to see that China is recovering in Q4. And given the strong top line growth in Q4, is it fair to assume that in the last quarter, there was also a positive contributor at the EBIT level after 3 quarters of negative impact? And staying on China, from the press release, I struggled to understand whether the project of listing the IPO is definitely off the table or it's off the table now because the private equities are actually going out. On that, if it's possible to say which one confirmed that they're going to stay in which one they will leave and how much this corresponds in moderately terms. I have two other questions, very specific, very short. If you can -- I was looking at the P&L after 8 years of positive figures, the change in inventory of finished goods and work in progress was negative with a big figure in Q4. So if you can explain that. And the second one is more technical about the accruals for the lawsuit with Penta. So this impact below EBITDA and explained by the weight of DNA on sales in Q4 is so high. And if -- does it also increase the reserve for risk and charges in the balance sheet? And my very last one, I promise, is the growth for Cutlite Penta, you say that it's mainly due to the expansion in international market. Is this mainly U.S. and who are you competing with there?

Giovanni, I will ask you the last question. I'll have Enrico answer the other questions. The other, let's say, numbers question. Well, last question, the growth is on international market. Growth in the United States is significant for Cutlite Penta, but it's not the only growth driver. Also Europe is significantly helping in the growth. Enrico -- I got the answer about the accrual for the lawsuit. I got it. I didn't get your first question. I don't know if Enrico, you got it?

Yes, I don't know if you got it, I can repeat it otherwise.

No, I don't got it.

So the first technical question was why there was a big change in inventory of finished goods and work in progress in the last quarter of the year. If I look at the P&L, 2023 was the first year after 7 where this figure was negative.

This is typically at the end of the year, higher sales. We had inventory of finished products, we discharged in the fourth quarter. This is quite normal.

Yes, but it was negative on the year as well. That's why I asked.

Probably the same could be applied on year. We had probably high -- it means that at the end of 2023, we didn't send everything out and we had something more stayed in inventories than last year. Probably this was -- this is mainly the reason I believe we are lighter in terms of finished good last year -- this year than last year. While on the EBITDA on how the accrual hits EBITDA and EBIT, Enrico can tell you.

Yes, the accruals of China had hit the gross margin or RMB 130 million, so more or less EUR 1.6 billion, EUR 1.7 million and for RMB 12 million, so around EUR 1.5 million the accruals. And so we did a provision for risk and the RMB 12 million has accounted in accrual and profitable risk and depreciation. So below the EBITDA before the EBIT.

Going backwards, China fourth quarter was strong. Actually, it was very loss due to this accrual, would have been slightly loss anyhow. The issue is that we are moving -- we're trying to move our revenues to higher-margin bearing revenues in outside China. We are progressively doing it, but the process is ongoing. And so for the moment, we are still struggling. The budget for 2024 underlying the guidance for China foresees a revenue growth, but does not foresee a profit contribution to the consolidated results. This is where we are today. For what concerns the medical market growth, yes, you're right. We are looking forward to continue to be back to growth in aesthetics also thanks to the expected recovery of certain large accounts that were quite slow in 2023 in hair removal, but we are expecting strong results a little bit over the board in all our medical application, especially again, in the skin tipping anti-aging application. So we are not disclosing the details today. But of course, having plotted growth in 2024, medical and aesthetic are expect to grow. Accure is going is going not very fast. I wouldn't attribute to Accure a significant part of the expected growth. Quanta System, which is the company that manufactures the system is expected to grow once again. But the impact of the growth of Accure is not the main driver of growth for Quanta System in 2024. The IPO, your question about the IPO, I was as precise as I could in my exposition about the IPO. Of course, the request of withdrawal by the private equity funds, if accepted or enforced would cause the technical suspension of the IPO because as much as we had to take on board the private equity funds to be able to file for an IPO with a financial shareholding by local investors should they leave, but we wouldn't be in this condition. So this would technically suspend the IPO. They all asked to withdraw, and we are discussing to see if we can convince them to continue believe in the plan. The point is that we need also to be able to show them a strong financial recovery that would support an IPO project. In this moment, the results are very weak and also the additional issue of this loss is not helping under this direction.

And now we have Carlo Maritano from Intermonte.

I have a couple of questions, both related to cash generation. So in this year, you reduced CapEx to around EUR 13 million. So what do we have to expect in the next couple of years. So we do have to expect a normalization compared to IDI level of the previous year? And the second one is on net working capital. So you have reduced by a lot the net working capital in the last 2 quarters. I was wondering if we have to expect still some quarters of reduction given the delay in the efficiencies in net working capital that we usually see. So if we have -- if you have to expect a first part of the year, we're still quite good and robust cash generation.

First, CapEx. CapEx is well below the average of the previous year because we do not have in this moment the need to expand our production capacity. We -- or at least to expand it with very large investments. China, which was one of the main investment drivers in terms of capacity is not needing any more capacity. In the rest of the world, in Italy here, we are undergoing smaller projects here in Florence, we have some investments. Lasit will continue to spend on the new building. Penta will do it. But I believe that the order of magnitude of the CapEx investment of 2023 will more or less be confirmed in 2024. Cash generation and net working capital, there is a seasonality behavior, which usually privilege sees in the fourth quarter as the best quarter, not only because we sell the most in the fourth quarter, but also because our planning are typically tied to year plans. And in the first quarters, we tried to be richer, let's say, we safer. So we buy more and we then tend to divert -- to reduce purchasing in the second half where purchasing was in excess. For this reason, I do not expect to see a strong net working capital reduction as we have seen it in the last quarter in the first quarter of 2024. Though I do not expect a trend in the direction of what we have experienced in 2023.

Just a follow-up on the aesthetic business. So you said that you expect growth in 2024. I was wondering if you expect a start to the year quite weak given the exit speed from 2023 and you expect a strong recovery in second half, maybe also thanks to interest rate decrease. So if this is also a driver that we have to look at in 2024?

Yes. This is what -- I confirm what I was saying that we expect a weak start compared to the strong start of 2023. We see -- I mean, it's March 15. So we are quite in the first quarter of 2024. And we expect a progressive recovery this given what we see in order bookings. So we have seen during -- throughout 2023, what I call normalization, which is a slowdown of this massive order intake to a normalization of normal volumes. With this beginning of 2024, we have seen an increase, a good vitality that makes us expect good revenue results starting from the second quarter and forward.

And now Andrea, we have Andrea Bonfa from Banca Akros. Andrea Bonfa, hello?

Yes. Sorry, now you can hear me. Sorry about that. No, I do apologize, my connection is very poor, but I mean -- and most of my questions have already been answered, but I was wondering again, Andrea, if you can elaborate on your guidance because I mean you are counting on a recovery in medical, but we are -- we got this minus 6% exit. So I was wondering if that is more because of our new pipeline of products or because on the commercial side, you've got these accounts, which are supposed to recovery -- recover. And if you can maybe elaborate more, maybe what are the geographical areas in which you are counting, let's say, this recovery coming from? And the second one is on the industrial laser, you already anticipated that you do not expect China to contribute to profitability recovery, but are you any way expecting industrial to contribute to your EBIT growth guidance?

Yes. Let's start from the second question. Yes, you're right. I said that, in fact, I don't expect China to contribute to the profitability while I expect China to contribute to the profitability recovery. This meeting that I don't expect the big profits coming from China this year, I expect a strong reduction in the losses. . Concerning the medical, you are right. Our expectation of growth, especially in aesthetic are based on specific facts. The first and most important is a transverse effect is that we released an impressive set of new products and of new improved products starting from the half of 2023. I'm talking just to make an example of the pro line of Deka, which started with the release of Asia Pro, [own the Pro ] and [indiscernible] in July and finished with the release of DataPro, Motus PRO and SmartSide Pro in the month of January 2024. So we are renewing the product range, and this is expected to stimulate our customers. Then we have important new products for our large OEM customers in the U.S. market that should hit the market in the first and second quarter, we are talking of new products for her removal and new products for body contouring. There's great expectation, especially for her removal where we were weak throughout the year, also due to the slow performance of certain large U.S.-based accounts. Third, we are seeing recovery from an area which had been extremely brilliant in 2022 which marked a slowdown for geopolitical reasons in 2023, we are talking of the Middle East, which is a very significant market for hair removal. We are seeing good recovery sign as of today for this specific market.

And now Andrea, we have Emilie Da Silva from Eiffel Investment with a question about China.

Just a quick follow-up on China. So you mentioned the recovery you're expecting for 2024. I have a question on the Q4 figures in China. This recovery was mainly driven by volume. How were the prices also in China? And what your expectation in terms of volumes many new clients or new contracts just to have elaborate a little bit more on the dynamics there? And what is the level of revenue you have to reach in order to be profitable there?

Thank you, Emilie, for the question. It's not easy to answer because we have exact plans, which show volumes per area, price per area, margin per area based on the margin that we expect to obtain in the past, not always, let's say, these plants have proved to be reliable due to the very quick changes in the market. So today, what sure is that we reduce the cost base. And so we went -- our breakeven point is much lower. And so I believe that while the internal plans call for a very large recovery, a quick recovery, I am more prudent and I believe that slightly beating 2023 would be a good results in China this year. We expect that the revenue mix will be much more weighted on overseas where we have higher margins, and we expect even lower margins in China currently. The whole mix would anyway be able, as I mentioned, also answering Andrea Bonfa's question to strongly reduce the losses or also to see a profit for the end of the year.

Andrea, we have one more question from Giovanni Selvetti from Berenberg.

Maybe one about the market. Recently, there was a big merger in the industry between Cynosure and Lutronic. Now given your historical partnership with also Cynosure, I was just kind of wondering what's the potential in part if revenues from Cynosure had to go to zero?

It's a good question. Cynosure was our company, was our partner. And so this is quite an important change. Currently, Cynosure is buying from us on OEM basis their high-end per removal device. Currently, we have orders in place for the whole year 2024, and there has been no sign by Cynosure in trying to get out from their commitment, which is a firm commitment. In the midterm, Cynosure with Lutronic might work out an internal solution, being Lutronic, a very good manufacturer of high-end hair removal devices based on Alexandrite laser heads. The order of magnitude of the sales volume to Cynosure, which has been accounted for in 2023 and which is expected to be accounted for in 2024 is well below EUR 20 million, just to give an order of magnitude. On the other side, I would like to discuss that a merger of two large players of course, puts on the market a very strong player, which might combine distribution capabilities to technical capabilities. But on the other side, as we have very often seen on the market, faces the merged company with a challenge of managing the two different teams and not always companies that have been able to successfully manage that kind of mergers. Typically, the merger synergies that show up in the financial support for the Board direction decision to the merger are not achieved. This also leaves on the market, several professionals, which in the merger are sacrificed because you select, for instance, a distribution in a certain country rather than the other one, when you have to choose whether to go in a market with distribution of company A or company B. And so we believe that even though we have a large competitor, we will also have an opportunity to further penetrate certain markets by taking advantage of what is left aside by the merger.

Then Andrea, we have not any other questions in our list, then I kindly ask to the floor if there are some other questions. If no, if there are no more questions, we finish this conference. And if you have some questions to investigate, please do not hesitate to contact Enrico Romagnoli. He will be happy to answer your questions. Thank you for attending this conference, and we hope to have you all again next time. Good afternoon to everybody.

Thank you everybody.