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Good afternoon, or good morning to everyone, and welcome to El.En.'s Third Quarter Financial Results 2020 Conference Call. Today's call will be recorded. [Operator Instructions]
With me on the call, Andrea Cangioli, El.En.'s Managing Director; and Enrico Romagnoli, El.En.'s Chief Financial Officer and Investor Relator.
Before we begin, please note that there is remarks management makes on the conference call about future expectations, plans and prospects and forward-looking statements. Certain statements in this call, including those addressing the company's beliefs, plans, objectives, estimates or expectations of a possible future results or events are forward-looking statements. forward-looking statements involve the known and unknown risks, including general economic and business conditions and condition in the industry we operate and 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 expressed or implied by 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.
But at this time, I want to turn the call to Andrea Cangioli. Please go on, Andrea.
Thank you, Bianca. Thank you, and welcome everybody to this conference call after the release of our third quarter financial reports. As the numbers show, and as you will shortly see in detail, it has been a quarter of strong recovery for our sales volume and also for our profitability. We had guided you of the expected improvement of both revenue and profits in the second half of the year. Our financial results are well aligned with such expectations, actually beating them on the revenue side, getting to a 5.2% revenue decrease after 9 months, which is better than the less than 10% we had guided for.
EBIT and EBIT margin also improved in the period, leading to a year-to-date EBIT margin of 6.8%, markedly increasing from the 5.7% margin registered in the first 6 months. So the third quarter, usually the weakest one due to summertime and summer breaks, in this 2020, took advantage of the positive impact that the summer months had on the spreading of the pandemic, took advantage of the liner restriction and of the optimism spreading within the people. I recall that the first quarter was heavily impacted by the Chinese lockdowns and the second quarter by the Western countries lockdowns. First, among all, in Italy, where we were forced to slow down our operation and in certain businesses hold them in full. Revenue and profitability were severely hit, markedly in the industrial sector during the first quarter when the medical sector was not yet touched by the effects of the pandemic.
And subsequently, the medical sector during the second quarter, when, on the other hand, we already started to see strong recovery, especially in the industrial business laser activity. Restriction were progressively lifted all around the world. Business relations that we have cultivated throughout the lockdown months with great determination, with a continuous and lively remote marketing and contact activity efforts started to be fruitful again and progressively generated a good volume of new orders. The restrictions were bottom line limited to international traveling and to the canceling of most of the trade fairs and congresses we had planned to attend. But this did not inhibit the recovery we were expecting and that you see [indiscernible]. In the laser cutting business, sales were up again to record volumes. In China, we are catching up with the market, which moved very quickly and so was heavily penalized by our location in Wuhan and Wenzhou. The third quarter marked record revenues. Record sales were achieved also by Cutlite Penta on the Italian market, being Cutlite one of the few entities of the group in 2020 to grow in sales and profits. As we discussed, the sustained growth calls for an extensive logistics efforts to allow the management of the increasing number of large and heavy laser systems we manufacture. Also worth to mention is that in order to improve our market share and position, we engaged in a very aggressive commercial approach which involved decreasing margins, especially in China, where post-lockdown competition appears to be stronger than in the past.
Another area of significant rebound was the aesthetics segment within the medical sector. It appears that after the lockdown, the demand for cosmetic treatments has been robust. As a reaction to restriction, people are eager to allocate part of their disposable income which in terms of net availability is increased by the savings in travel and celebrations, just to mention something, in order to improve their appearance. We confirm also that the long attendance of video calls drew the attention to facial imperfection and raised the need and demand for facial treatment. This, in general, is the behavior of our markets.
On our side, we did a very good job in providing products and procedures capable to accommodate such needs and demand. We are proud and grateful for how effective our R&D and engineering function were in the period, allowing several new systems to be released to the market. I'd like to mention 3 new products available for body treatments, 2 based on the high-intensity magnetic field technology for muscle stimulation; these new systems are called SCHWARZY for the medical market and B-Strong for the professional and aesthetic market. And 1/3 based on mechanical micro massaging technique, the system Icoone which we manufacture under license.
New technologies were also developed for our surgical business with among others, Quanta System completing its product offering for neurological surgery devices. So overall, we have seen an excellent recovery in the laser cutting business that is currently running at higher pace than in 2019.
Within the medical sector, certain segment of aesthetics outperformed 2019, specifically the Japanese market. For all the other application segments and businesses, the business is recovering, but still running at lower pace when compared to 2019 with a gap in operation and sales pace that has been progressively narrowing. We are pleased with our Q3 results, especially with the outstanding sales volume but also with the profitability, which, given the circumstances, was actually outstanding as well.
Gross margins for the period showed a slight decrease, mainly due to the fact that the areas in which we better performed in terms of revenues, laser cutting system for sheet metal in the industrial business and medical system distribution on the Japanese territory, are also the areas in which gross margin are lower and also further decreased in the period. But even though the preservation of sales margin is of paramount importance, there are moments in which the expansion of sales for the protection of market shares are strategically more important. We feel that our competitive position and strength was improved in the period in all our markets. We're confident that the growth potential that our markets are offering over the next years is unchanged and that it will be on our side to take advantage of this potential by providing our sales and distribution network with an adequate range of innovative systems. And this is something we are even more confident in based on the excellent operational standards that we have in all of our vital functions.
Finally, cash generation was excellent as operational cycles are back to a smooth behavior after the abrupt disturb we had to bear in the spring months. As it already happened throughout this doomed 2020, addressing the business trend of the most recent months is not necessarily representing well enough what is -- will happen in the next months. In the very last weeks, the pandemic is hitting hard again, and several countries are back to lockdowns. Germany announced and started with November 1. France followed a few days later. Italy joined the pack last week with a variety of restriction modalities that unfortunately are quickly flattening out to the tighter ones. The evidence of how quickly the situation is changing in the restriction status is what happened in our region, in Tuscany. Here in Florence, over the turn of a week, we were moved from the yellow status, the lighter restriction status, to the red status, which currently is the stricter of the restrictive status enforced in Italy.
Good news is that the new lockdown is not as tough as the first one. Production activities are not touched at all. The restrictions directly hit restaurants, shops and traveling. As we already let you know in recent communications, all of our factories adopted strict prevention measures and procedures that allow our workers to have to work with the confidence they are protected in a safe workplace. Moreover, many of them are back to remote work in order to minimize contact potential. We're having issues or cases certain employees or their relatives have been tested positive to COVID, but we follow strict procedures in order to appropriately segregate according to regulation and subject that could be potentially contagious.
Bad news is that certain of our markets are directly hit by restriction. Aesthetic centers have been forced to close in Germany and in the Italian red areas. Attending medical centers should be limited to emergencies. This is already impacted and will impact our sales in the next month, especially in the German and Italian markets where we have our direct distribution network. For what concerns the markets where we operate through distributors, to date, we are not seeing any change in the quite large backlog we have and that we are planning to discharge in the last weeks of the year. Same for the industrial market where no abrupt demand alteration is in sight. Of course, our path to the return of normality would have been quicker and easier without the double dip to restrictions.
Before getting back to the guidance, I'd like to give the word to Enrico which will -- he will drive you through the details of our quarterly financials. Thank you, Enrico.
Thank you, Andrea. And as usual, I'm going to give you some details on our last financials. The first 9 months of 2020 closed with a consolidated turnover of EUR 268 million, down 5.2% compared to the first 9 months of last year and with a strong recovery in the third quarter, 11.8%, reducing the decrease of 30 -- 13.8% of the first 6 months. And as already mentioned by Andrea, the results are strongly impacted by the effects of the COVID pandemic that had on our business and on our markets, mainly in the first 6 months.
In terms of gross margin, the gross margin stood at EUR 94.4 million, down 15%, compared to the EUR 111.1 million on September 2019 due to the decrease in turnover and due to a reduction of margin that the crisis has induced in both sectors, medical and industrial, more incisive in the industrial sector for the cutting laser system where the return to high volume of production and sales was also accompanied by greater competitive pressure, and partially in the medical sector due to the notable increase in sales volume of some aesthetic devices sold as accessories of the laser system produced by the group and mainly sold in the Japanese market with a margin lower than the sector average.
Operating costs amounted to EUR 24 million, down compared to the EUR 31 million on September 2019, and the incidence on turnover reduced from 11% to 8.9%. The savings derived mainly from the limitation to travel and from the cancellation of all fair and congress events as well as the reduction in the volumes of activities. The amount of staff cost on September 2020 was equal to EUR 44.7 million compared to the EUR 47.5 million of last year. Reduction labor cost is mainly due to the government payroll protection programs, such as Cassa Integrazione in Italy, used also in France and in Germany and to the reduction of staff over times. On September, the employees of the group were more than 1,600, and the new hires were mainly in China, where the factory are working at a full capacity with the volume exceeding the volume of last year.
EBITDA was EUR 25.8 million, down by 21% compared to the EUR 32.6 million of 9 months of last year and with an impact on sales of 9.6% compared to the 11.5%. Amortization and other accrual increase of EUR 1.5 million due to the relevant investment made in 2019 and to the increase in provision for bad debt to represent, in the most balanced way, the possible deterioration of some credit position. The bad debt increase in the first 9 months of 2020 was EUR 0.9 million increase.
In the 9 months of the -- the total amount of fixed cost, operating cost, staff cost and depreciation showed a decrease of 10% higher than the drop on sales, and impact on sales was 28% compared to the 30% of last year. Thanks to the reduction of the impacts of fixed cost of sales, the reduction of profitability of 4% on a gross margin level was reduced to 2.5% on EBIT level, and it marked a positive balance of EUR 18.1 million, down from the EUR 26.4 million, with an impact on sales of 6.8% compared to the 9.3%. Pretax result was EUR 16.9 million with a negative effect of ForEx and a negative contribution of associated companies.
In Q3, we can mention the same explanation used for the 9 months to explain the decrease in gross margin, profitability. And in the meantime, we had a recovery in profitability with an EBIT margin of 8.4% lower than Q3 of 2019, but the best result achieved in the first 3 quarters of 2020. Also in Q3, there was a huge impact of ForEx that reduced the income before taxes to EUR 7.9 million.
Net financial position had a positive balance of EUR 49.8 million, down compared to the EUR 61.4 million of last year and with EUR 27.9 million of the first half. About EUR 20 million cash was employed in the acquisition of an important minority stake in Penta Laser Wenzhou in China. And the increase in net working capital led to an absorption of liquidity of approximately EUR 9.6 million, mainly due to the increase in the value of inventories. The amount of investment in technical fixed asset was around EUR 9.6 million, down from the last year. And we had a strong cash generation in the quarter for over EUR 20 million, thanks to the good level of activities and to a reduction in net working capital.
In the Medical sector, the decline of 6.4% is slightly more pronounced in the sales of system than in the other sales services and consumable which recorded stable revenues for optical fibers for urological surgery. The stability of aesthetic sector is extraordinary. Two main reasons behind this result. The first one is launch on the market of the new system for hair removal, body shaping and skin treatment with a high degree of innovation who have found rich success on the market. And the second one is the good performance of our Japanese branch with upgrade on the installed base and sale of interesting volume of locally produced equipment through the same channels. On the contrary, the sales in surgery and even more markedly in physiotherapy was affected by COVID pandemic as the attention of medical health structure was concentrated mainly on the treatment of COVID problems. After a strong recovery in Q2, the recovery of Industrial sector continued with an extraordinary third quarter with a growth of 28.8% compared to the third quarter of last year. In the cutting segment, which, in the recent year, has become the most significant for the group, there was a consistent recovery in the turnover with an increase of 2.4% compared to the last year, and the increase in the quarter was extraordinary, plus 43%. The other 3 main segments, marking, laser sources and after-sales service continue to suffer the effects of the pandemic and after 9 months, they recorded a double-digit decrease without any significant improvement in the quarter.
Looking to the distribution of revenue by geographical areas, in the industrial, the good performance in the Italian and European market was due to the growth in the metal cutting system. And in the rest of the world, we had a reduction of 10% due to the stock accrued in the first quarter on our Chinese activities, but the gap is reducing compared to first 6 months.
In the Medical sector, European and ex European markets are affected by the generalized decline in demand, even though in the rest of the world, we are stable, thanks to the good performance on the Japanese market and thanks to the strength of the American market. In Italy, the freezing of activities in the medical and professional beauty sectors hit heavily and caused a contraction of 37% in the first half while in the Q3, we had a strong recovery of 28% that reduced the decrease from last year to 21%.
Andrea, please go ahead.
Okay. So just to finalize our presentation, thank you, Enrico, I go back to the guidance. As I mentioned before, we are on the right track. We're returning to our planned growth and profitability rates. Had this call taken place 2 weeks ago, we would have been talking of adjusting the guidance upwards acknowledging the third quarter results and the momentum we have. Given the recent developments of the pandemic and the restrictive limitation being enforced worldwide again, we are entering in a phase of increased uncertainty. Confident and hoping that the following weeks, the next weeks, we confirm that such restrictions are not altering the general trend of our demand, we're able today to confirm the current guidance that's released in September, which is to improve profitability in the second half of the year and to limit to 10% the yearly sales shortfall of 2020 versus 2019.
At this moment, we are done with our presentation, and we are opening the call to your questions. Please go ahead.
[Operator Instructions]
François Robillard from Intermonte speaking. Can you hear me?
Yes.
First one is on the medical and aesthetics. Pretty good performance last quarter. Just curious to know how much of this rebound was due to the backlog of order left behind during the second quarter closures and how much of it is due to the new production -- due to the new products, sorry? Can you -- another connected question is, can you give us an update on how well the sales of your new products have been going, I'm thinking about SCHWARZY here and all the other innovative products you presented us after the second quarter results.
Then can you give us an idea of the gross margins of both segments in the third quarter? You talked about some competitive pressure in China impacting quite a lot your Industrial segment gross margins. Can you just give us an idea of the consolidated levels of gross margin in Industrial and in Medical in the third quarter?
And then on the last question, a bit of trading update. You mentioned Japan and the U.S. were doing pretty well in the third quarter. I guess lockdown restrictions lately in those geographies have been as well less restrictive than the ones in Europe. Is this some -- can you confirm that you still have some good expectations for those geographies in the fourth quarter? And that's it.
Thank you, François. First, the orders. I can tell you that in medical aesthetics, the backlog at the end of September was higher than the backlog at the end of March. So this means that during this quarter, we have been delivering on orders that we had before, but also we have acquired a very good volume of orders. As I mentioned during the call, situation has been progressively improving. And at the end of the quarter and in October, we were progressively doing better and getting closer to the pace that we had in 2019.
About gross margin, and as I somehow described during the call, during my presentation, gross margin has lowered both in Medical and in Industrial. We had an overall 35.2%. In -- gross margin in Medical was around 42% and the gross margin in Industrial was around 25%. What I'd like to mention under this point of view is that in the third quarter, Medical gross margin decreased because we had a batch of very, very significant sales in Japan, in which we are acting as distributor, which had a relatively small margin. And this lowered the margin in the Japan sales and lowered the margin in overall Medical segment to medical sector sales.
The situation in Japan has been extremely positive. There have been 2 companies increasing revenue and profits in 2020 as opposed to 2019. One is Cutlite Penta in the industrial laser cutting systems, one is with us which is the Japanese distribution. Japan had lockdowns, but they were not as tight as they have been in Italy or in Europe. And also currently, the news came out today, the economy is rebounding very, very strongly in Japan. And even though the pandemic is showing up again in Japan, too, still, still, it looks like to be much more under control than it is in our Western countries. For this reason, we expect good business levels in Japan also for this last part of the year.
The same thing holds for the United States, in which we are doing quite well, especially in aesthetics, very in aesthetics than in surgery. I'll make a comment about this. And our main customers based on the U.S. territory, which are Cynosure, which we are selling an OEM-based hair removal system, which is expected to actually take off in the next month; and Cartessa, which is the distributor for the Deka branded and Quanta System branded devices for the United States are both doing very well. Of course, we don't know if the Biden administration will adopt a different behavior towards the fighting of the pandemic, and this will have an effect on our margins. But for the time being, a significant part of the recovery in our order books is related to a very good behavior on the U.S. market.
What I wanted to mention, that I didn't mention earlier in my presentation, is that while in aesthetic, we see a great standard to trend to spending more money in the appearance and to allocate disposable income to aesthetics in this post lockdown period, in surgery, there is still a moment in which the demand remains weak because all the hospital structures, all the national health structures are heavily concentrated on fighting the COVID and on organizing their structures for the COVID. And all the investments and all their attention is to COVID. And it's harder now to do any commercial activity towards structures that are, as I mentioned, heavily focused on the pandemic. I think I answered the 3 questions.
Andrea, if I may, can I make a question? Bianca, is that okay?
Yes, of course.
My question is related to, once again, the gross margin. We know that the competition is very tough in China in industrial laser. Is that possible to have an update on your action to reduce the breakeven in China or to improve profitability? You mentioned in the past some specific action. If you can recap what's the state-of-the-art for the action in China in industrial laser?
And the second one is just more specific on the guidance. You stick to your guidance. But it implies a very quite sharp drop in the last quarter of the year despite solid October. So are you expecting a very strong lockdown in the last couple of months of the year just because of the European lockdowns? That's for the final question.
I'll start with the second question. No, I mean we simply do feel that there's a great deal of uncertainty. As of today, the only thing we know for sure is that we would not be able to deliver almost anything in Italy to cosmetic centers in the red areas, which are most of the country today. We know that the same will hold true for Germany in this period and though this is a limited impact. For the rest, we believe that we -- the trend that we had in the third quarter will continue, while actually -- and just what we did is not saying that our revenue will decrease, our trend will be decreasing, but we do not have the confidence given this turmoil that's going on to confirm that we'll be able to consistently improve. So I don't believe that we will have a bad fourth quarter with that. I just -- we are just not confident as we were 20 days ago that we will be able to further improve. This is the point.
Concerning the gross margin and the industrial business, there are 3 aspects that I'd like to underline here. First, in the business segment in Italy, we are being very aggressive, and we are reducing gross margin in order to gain market share which is vital for our business which was very small and which is looking to achieve the EUR 50 million milestone in 2020. So we have an aggressive expansion policy in order to occupy spaces that our competitors were not fast enough in occupying.
In China, margin reduction is due on one side to the same strategy and on the other one, to the strong competitive pressure. You're right. You remember well, Andrea, we are undergoing a redesign process, which will allow us to save a few hundreds of thousands of [indiscernible] on each system and which is already allowing us to save some cost in the Q4 2020, as we had, let's say, promised or forecasted. I was talking this morning with my management in China about the situation, which is one of the focal point of their management in this end of the year, in which demand in China is still very strong because China, as you know, is basically unaffected by the COVID in this moment. So we are expecting strong demand, and we're also expecting to recover a few decimal points, hopefully, a few points in gross margin as an effect of this effort, which is a technical effort, as I mentioned.
Also, I was looking at the reports, the monthly reports of sales in October. The other good news we have here is that overseas sales are becoming, again -- are growing again. And this means that we will have a more significant share of sales that go outside China, and these sales bear a higher margin and so will also allow us to improve the performance. I'd like also to mention one thing here about China. December 12, we'll have the grand opening of the second factory and offices in Wenzhou. This will be an event in which we are having customers flying from all China. And apart from the fact that we have another facility which is now structured and well prepared, it's already working, but I mean, will be officially opened that date for increasing our sales volume. We are also expecting a very important commercial impact by this event which we should see hundreds of customers gathering in Wenzhou for this event.
Some other questions?
Yes. If I may make a follow-up, if nobody else has a question. François Robillard from Intermonte again.
Sure.
Yes. Just a quick one. You had recourse, if I recall correctly, to some of government-backed loans or guarantees in Italy. Will that impact your ability to distribute some dividends next year?
This is an interesting question, François. I don't believe that the company will continue to hold the distribution of dividends if the situation will be consistent of what we are seeing today. So we didn't pay dividends in order not to inhibit the potential recourse to government funding in case of disaster. As of today, the disaster has not taken place. Hopefully, when it will be, again, dividend decision season. So early in the spring, we will have a good -- a better idea if a disaster would have happened or not. Currently, we don't see a disaster. And so currently, I don't see why we wouldn't be in a position to pay a dividend in 2020. About the government support, this is a hot topic for us because we are struggling to understand if certain government support that we have received has to be considered within a limit of EUR 800,000 per company... [Technical Difficulty]
Please your phone, mute your phone, please.
Okay. So I was saying that we are struggling with the government support in Italy, which in the first place was looking like they were supporting EUR 800,000 per company under a certain rule called de minimis and now it looks like backing up to EUR 800,000 for the group, which is a material difference. But anyway, this has nothing to do with the dividend. I confirm that if the financial situation will allow it, and there is no reason today that makes us believe that this won't happen, we will probably -- we will return to paying back the dividends in 2021.
Okay. And do you think you will use again Cassa Integrazione in the fourth quarter?
For the moment, we haven't been using Cassa Integrazione. We are using it in France because we have a distribution company which can't distribute currently or which is very limited in distribution. We might be forced to go to Cassa Integrazione for the company, Esthelogue, in the aesthetic -- professional aesthetics distribution in Italy because currently, the market is extremely limited. We cannot sell any devices where the cosmetic centers are closed, which is all the red areas. For all the rest of the business, we are running normally. And I mean, as of today, we don't see the need of going back to Cassa Integrazione.
We are in a situation in which -- we are in a current status which is not bad. Also production is running in full here at Florence. But there is a great uncertainty. So we hope that the situation remains unchanged, and we would be closing a very good year. But these events, which are completely out of our control, may interfere with our financial results from here to the end of the year. And unfortunately, we have no control on that at all, though we are confident because we have a very good order backlog, and if we are allowed to continue working, I believe that the results will come.
Any other question?
Okay. Looks like everybody is happy with what they have been hearing. No more questions so.
Any more questions from the investors? No. If there are no more questions, we finish this conference. Thank you for attending this conference, and we hope to have you all at the next occasion. Good afternoon to everybody. Bye. Thank you.
Bye-bye.
Thank you, bye.
Thank you.