Good afternoon or good morning to everyone, welcome to El.En's first quarter 2023 financial results conference call. Today's call will be recorded, will be an opportunity for questions at the end of the conference call. With me on the call, Andrea Cangioli, El.En's CEO, and Enrico Romagnoli, El.En's Chief Financial Officer and Investor Relations. Before we begin, please note that there is remarks management makes on the conference call about future expectations, plans and prospects, forward-looking statements.
Certain statements in this call, including those addressing the company's beliefs, plans, objectives, beliefs 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 the 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 other 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 or not to update the forward-looking statements to reflect events or circumstances that may arise after the date hereof.
If you need to ask a question, please book your question on the top of Barbara Poli. She will be pleased to introduce you following the booking order. At this time, I want to give the floor to Andrea Cangioli. Please go ahead, Andrea.
Thank you, Bianca, and thank you everybody for attending this call after the first quarter financial results of 2023. On the call myself with Enrico Romagnoli, and you see us on the same screen today. Our consolidated financial results for the first quarter of 2023 were perfectly in line with our guidance for the full year of 2023. Revenues were up slightly more than 10%. EBIT was more or less the same as in the first quarter of 2022.
This is what the external envelope of the results looks like. Drilling down to a deeper level of analysis, the business dynamics were quite different depending upon the market segment, and also in certain cases they were slightly different from the expected trends for the full year. Let's start with a comment on the medical business trends.
Growth was over 11%, an excellent result on top of a record year as 2022 has been. Gross margin marked an increase compared to Q1 2022, and though staff expenses and sales and marketing expenses did mark an increase, EBIT margin was basically in line with Q1 2022. We enjoyed good sales traction in the skin treatments, both in the ablative section with CO2 and laser systems for rejuvenation, in the ultrashort pulse pico- and nanosecond laser systems for tattoo removal and skin toning.
Sales and order bookings were softer in the hair removal segment, where growth had been outstanding in 2022. As I was saying, margin on sales improved in 2023 for several reasons. The lower share of high volume hair removal devices, which bear a lower sales margin. The increased sales volume in certain higher margin systems.
The slight price increase, which helps offset the significant cost of goods increase we are bearing. The dynamics of foreign exchange, especially with the US dollar, which is today weaker than at the end of 2022, but still stronger than in the first quarter of 2022. Expenses experienced an increase in sales and marketing.
Business travel and trade fairs are back at pre-COVID levels, and activities were quite intensive in the quarter, with several annual events falling within the end of March. Looking to the next quarters, expense will stay higher than in 2022 due to more events coming up, like the World Congress of Dermatology, which takes place each fourth year. The last one was in Milan, Italy in 2019, and the 2023 edition will be held in the very expensive venue of Singapore.
Expensive sales and marketing activities are needed in this phase, where demand is still very satisfactory, but is not as buoyant as it was one year ago. Order bookings and deliveries in the latest months have been good, but the impact of increasing interest rates and uncertainties in the strength of the world economy is projecting for the next month a more moderate sales volume growth. Business results were excellent for Cutlite Penta in the laser cutting business on the Western markets, with sales volume increasing sharply in Q1 2022, as the progressive effect of the continuous growth achieved in 2022.
Profitability was pleasing as well, benefiting of a more favorable sales mix as demand and sales were stronger than the best in the higher margin export business. This trend should consolidate over the year as an effect of the intense preparatory work performed in creating or consolidating the export distribution networks, and also due to the relatively softer demand expected in Italy, where the tax cut granted under the so-called Industry 4.0 provisions are reduced in 2023.
The other smaller businesses within the industrial sector performed quite well in the quarter. I'm talking of the marking business with Lasit and Oplas, and the laser sources business managed by LM. Financial results in these segments were in line with expectation in terms of profitability, slightly better in terms of sales volume.
The business area that underperformed in the quarter was the Chinese leg of the laser cutting, where after a slow fourth quarter of 2022, we reported an even slower quarter in this beginning of 2023. The impact of the extended lockdown policy was heavily detrimental to the Chinese economy and to the market for this application.
Demand and order booking was very slow, and the market became progressively more competitive throughout 2022. After the long-awaited end of December release of the lockdown policy, the Chinese economy and our markets as well have experienced a recovery, and the outlook is now more positive than the results of the last six months demonstrated.
The first quarter could not rely on a strong order book at its beginning, and started seeing some real traction only once the Chinese New Year break was over at the mid of the month of February. Order intake has been satisfactory, and we will see the benefit in the next quarter. Margin compression due to the increased competition has been taking place in the progressively declining market of 2022, and is evident in the comparison of the sale margins of early 2022 with the ones of early 2023.
Our 2023 guidance for the cutting business is relying on a strong comeback of the Chinese market, which did not take place at all in the first quarter, but on which we count for the coming quarters. As we disclosed in our reports and during our meetings, the laser cutting division is undergoing the activities aimed to prepare for an IPO filing on a Mainland China financial market.
The compliance to CSRC, the Chinese Commission or SEC, is not a simple task for an issuer with a strong international presence and a foreign controller. It slowed down our preparation. What is currently holding us back from the initiation of the formal filing process is not the compliance, but the soundness of the financial results that need to be stronger in order to support a successful transaction.
Another theme that deserves a few comments beyond the report that Enrico will in a few minutes give to you on the changes in the net cash position of the group is the net working capital trend. Of course, its effect on the net financial position.
At the end of March, consolidated net working capital was up roughly EUR 25 million in the quarter, totaling up to EUR 125 million, which is 32% of the last 12 months revenue, up from 30% at the end of December 2022, and 25% as of December 2021. We managed to reduce net working capital in the fourth quarter. We plan to control its amount over the year. This first quarter trend was of a significant expansion as the figures stay beyond the revenue growth.
The production cycle of our activities stretched due to the need of anticipating purchases in order to prevent delivery delays from jeopardizing our production schedules and pace. This effect of the supply chain strains and problems is still there. We are not confident in pulling back from the expensive purchasing yet.
Our purchasing plans are based on yearly forecast and would tend to be more heavily weighted in the first quarters of the year in order not to prevent our manufacturing to meet its goals, which, unless sales volume materially exceeds the planned, the planned volumes, leads to the increased inventory, which is the main contributor to the working capital increase.
Days of sales outstanding in receivables actually improved in the quarter, while we also continued to improve the payment terms to our vendors, I mean improve for them, which is part of the burden that is falling on us in trying to prevent the supply chain problems.
Though, I believe the 11% and change revenue increase is an excellent result for the period, as I will shortly elaborate, our growth plans for 2023 were more ambitious at the end of 2022 than they are today. Therefore, actual sales did not exceed projected sales, which had an effect on final goods inventory as well.
This is of no concern and will be absorbed and managed in the next months or quarters. Another item affecting our cash position is the trend in deposits from customers and deposits to vendors. The customer deposits balance typically increases when the order book increases and vice versa.
In the quarter, the balance decreased by almost EUR 4 million, mainly due to the decrease of a specific segment of the order books, the one related to the 4.0 tax cut, which required an advance payment to be paid before the end of the last year in order for the beneficiary to take advantage of the cut. Deposits to vendors increased by roughly EUR 4 million in the quarter, this is another way to ensure ourselves in order to have timely supplies, as we discussed before. I'll be back for general trend comments after the detailed financial reporting that Enrico is going to provide you.
Thank you, Andrea. As already mentioned by Andrea, the sales increase of 12% in the first quarter of 2023. In the same time, the gross margin increased to EUR 61.1 million, up 11%, more or less in line with the increase in sales. The impact on sales recorded a slight decrease, going from 38.1% in the first quarter of 2022 to 37.9% of Q1 2023.
The sales margin recorded a slight improvement in the medical sector, where the mix of products sold was more favorable, and the price increase had the effect of mitigation of the increases in material costs. On the other hand, the margin on sales in the industrial sector suffered a decline, above all due to the difficulties on the China market.
In terms of operating expenses, we have an increase in total value and as impact on sales that increased from 8.2% to 8.7%. The main reason are the system marketing expenses for trade show and congresses encouraged by both medical and industrial customers. The staff costs are also increasing with a slight increase as impact on sales too. On March 31st there were over 2,200 group employees.
The most part, 90 units, derives from the personnel the new acquired KDS in Switzerland, while the other new hires mainly concern Atec in Germany, a company that with a growth rate of 15% in the quarter, and Quanta System with a growth rate of 21% in the quarter.
In EBITDA, was equal to EUR 21 million, up 4.3% on the EUR 20.1 million of the first quarter of last year. The EBITDA margin was equal to 15%, slightly down from the EBITDA of the Q1 of last year, that was 13.9%. Depreciation and other accruals increased for the investment we did in the past and to increase in bad debt reserve, even though the overall impact on sales is more or less stable. EBIT showed a positive balance of EUR 17 million in the quarter, slightly down from the EUR 17.1 million of March, 2022. The 10.6% EBIT margin is as well slightly decreasing from the, 2022's 11.8%.
The pre-tax income affected by negative Forex showed a positive balance for roughly EUR 16.6 million, marking a 5.3% decrease on the EUR 17.5 million of Q1 2022. The group net commercial position at the end of the quarter was positive by around EUR 56.7 million, compared to the EUR 88.5 million at the end of the last year, down by around EUR 32 million.
In terms of the cash flow, the expansion of net working capital functional to guarantee stability of production process, also in view of a further increase in volume produced, there is an absorption of cash of approximately EUR 36 million, in addition to over EUR 60 million due to the changes in our payable and receivable, including an increasing in advanced pay to supplier, a decrease in advanced receipt from customer, and an increase in VAT credit.
It should also be noted that investment in fixed assets in the period exceed EUR 4 million. I remind you that on May 31st, the group will pay a dividend of EUR 0.22 for a total payment of EUR 17.5 million. The medical sector, looking... The medical sector recorded growth of more than 11%, thanks to the positive contribution of all segments.
Revenues and quarterly order acquisition confirm the excellent state of health of the market in all the applications: aesthetics, surgery and therapy. In line with forecast for the full year 2022, growth was more marked in the surgical sector, but it also recorded an interesting result in aesthetic application. The main medical segment with a 57% share of medical sales, close to 10% and in therapy sector.
In industrial sector, revenue growth was close to 13%. The laser cutting segment represents about 80% of the sector, a share obtained through the constant and rapid growth in recent year and expected in the current year as well. In Italy, Cutlite Penta registered an excellent result with a 70% growth, which compensated the decline in turnover of the China business. Revenue growth in laser marking was very interesting, exceeding 62%, thanks to the excellent performance of both Lasit in the marking for identification and Ot-Las for decoration and special process.
The sales trend in the medical sector is positive in all geographical areas, the best results were obtained in sales on non-European markets. The sales in the industrial sector, highlighting the very rapid growth in turnover in Italy and in Europe, set back on the Chinese market, which leads to a 26% drop in non-European sales. Andrea, please go ahead.
Okay. As I was mentioning before, our expectations on 2023 were stronger than today at the end of 2022. Today, we're still confident in our ability to deliver another very strong performance in this year, our projections need to be more cautious in order to take into account a worldwide economic environment that is currently proving to be colder than expected.
The factors underlying the expected growth for our main businesses are solidly in place, and rest both on the general consumption trends in the medical aesthetic sector and in the surgical sector, and on our ability to deliver to the market innovative technological solutions that satisfy the market needs, and are also accretive to the expected market growth by introducing new applications, both in the medical and in the industrial sector, that expand the market potential.
The general economic trend has an impact on our market trends and our performance, that we pride ourselves to be able to minimize based on the attractiveness, on continuous innovation of our product range, but it nevertheless has an impact. We sell capital goods, and we count on our customers' confidence for them to commit to investments which can be quite significant for their pockets.
Inflation and interest rate hikes both have a direct impact on the customers facing a more expensive purchase, which will also bear higher lease monthly installments. This, together with the general economic expectation news that have not been looking positive in the last months, especially in the United States, is creating a general climate which makes it more complex to approach our markets than in 2022, when, apart from China and from the general impact of the Ukrainian war, that was by the way, quite well absorbed.
Everything had been looking bright and with great confidence in the future development of the economic environment. Everything said, we confirm the 2023 guidance as delivered last March. Revenues will grow in 2023, both in the medical and in the industrial sector.
Due to several factors ranging from lower gross margins to increased sales and marketing expense, to the general increase in expenses from operations that will reduce the operating leverage in the expected revenue range, the EBITDA target for 2023 is to replicate the results of 2022. We are done now with our prepared remarks. We are now ready to answer the questions.
Andrea, we do, we have no question on the list. We can ask if investor has some question for you.
A very complete report which needs no further questions. Okay.
Test the microphone. Do you hear me?
Yes.
Yes.
Hi, sorry. No, I didn't see who has booked the question to answering the questions. Sorry about that. Thank you for taking my questions. The first one is about the expectations for the Chinese business. If you can comment on the current trading. If you can go back to the comments you provided about the project of an IPO in the region, because I missed some of what you said. This is the first question. Thank you.
Okay. The business was extremely slow in the first quarter in China. Sales volume was definitely lower than in Q1 2022, and definitely lower than the expectation. Even though, the reason underlying this underperformance are to be looked into the poor performance of the last year and the poor order books that was left as heritage by 2022 to 2023.
The Chinese situation started to improve once the lockdown policies was lifted at the end of 2022. Traveling and life went back to normal, both in day-to-day life and in business life. The first three months of the year are usually affected by the New Year's break, which took place in the first days of February this year.
We started working again and looking for POs for our production, really starting from February. I mean, the current trading is positive. There is a good order inbox in this 1st month, which is promising for the 2nd quarter and for the following quarters. The situation though, after one year of deep downturn, turned, it is today more competitive than it was at the beginning of 2022.
This is quite evident in the reduced margins on sales that we have to accept in order to increase the sales volume. We are working in order to improve, as usual by setting our product range to a higher standard than the average of the market. In this moment we are facing a very competitive market.
Concerning the IPO, I made an elaborate comment. On one side, I said that we have been working in order to make our businesses compliant for an IPO on the mainland China, which is quite complex because we are operating for almost 50% of the business outside of China, and we have a foreign controller for a Chinese company seeking a listing on a mainland China market, which is not ordinary at all. Apart from the compliance issues, the poor results of Q1 2023 suggests that we see the development of the business, and we wait for a sounder financial results before we approach the listing with a formal IPO application.
Thank you again, Paolo Salvadeo. The second question, I leave the ground for other questions, but the second question is about the component, the EUR 16 one-sixth million component of cash absorption related to better payment terms you granted to clients and suppliers. I mean, can you give us an idea of what are the segments where you are according this kind of favorable conditions? Is this the aesthetical segment, for instance, or certain areas? Just to understand where you are granting these more favorable conditions. Thank you.
Actually, I, I believe the EUR 60 million are not fully made of advance to suppliers. The EUR 60 million actually have three components. EUR 60 million is the cash absorption. It's EUR 4 million in reduction of down payments from customers, which is mainly in industrial and mainly in Italy.
It depends from the Industry 4.0 effect because everybody paid down payment at the end of the last year in order to be able to grab the Industry 4.0 tax cut in 2022, and now we are delivering against those deals. EUR 4 million is advanced to vendors, and this is quite widespread. I would say that more than it's mainly supporting the medical business. It's mainly supporting the medical business and only marginally supporting the industrial business.
For what concern purchases, actually, medical, aesthetic and medical surgery have typically a unique purchasing system. We don't have separate system because they insist in the same manufacturing facilities. There's no differentiated purchasing procedure for surgical and for aesthetic. There's one purchasing for medical only. The other EUR 8 million stem from the change in tax debit and tax credits, and mainly, the increase is related to the increase in VAT credits in the period.
Thank you again. Sorry for asking something you already commented, I missed the reconciliation you have now provided me.
No, no. I added, Andrea, I added more information. Your question was useful.
Okay. Thank you, and looking forward to seeing you in Florence.
Oh, sure. Sure. Yeah.
Now we have another question from Carlo Maritano from Intermonte. Go on, Carlo. Carlo?
We can't hear him.
Carlo Maritano? You have to, maybe unmute.
I think-
It's perfect. Carlo?
Can you hear me now?
Yes.
Yes.
Okay, fine. Thank you for taking my case. My question is on net-net working capital. You already partly answered to my question with Andrea, but I was wondering what we are to expect in the next part of the year. If the demand will be a little bit softer compared to the first quarter, if we are to expect some cash generation from net working capital or if the supply situation remains uncertain, so you will keep a cautious approach, especially on inventory? Thank you.
Typically, the more we, let's say, make sure the balances are matching for the end of the year. Now we are still, I mean, looking at our one-year plan. We are still working with production pace that are set in order to meet certain production volumes which are needed to meet certain sales volume.
As I mentioned in my comments, sales volume in Q1 was a little bit lower than initially expected at the beginning of the year. Now we've tuned production volume and to a certain extent, we tuned also purchasing for the second quarter, and it's early to say because we are at one half of the second quarter.
The actual ability to deliver goods in these 6 weeks of the second quarter will determine if we will be able to reduce, drastically reduce the net working capital significantly. I am under the impression, and we are working in order to reduce it, to make the Q1 2023 net working capital a peak in its amount for 2023. According to what we see today, we should be able to achieve this goal.
Again, this depends also on our ability to deliver, which depends on our ability also of our customers to timely meet their payment schedules. Everything was easier in 2022. In this 2023, we are back to a more normal situation, still very positive.
While in 2022 our only commitment was to prepare the goods for delivery, now we need to make sure that also our customers are ready to receive the delivery. It's a little bit more complex. It's still very positive, but a little bit more complex. In order to answer your question, we are confident that at the end of the second quarter of 2023, the impact of net working capital on the revenue of the last 12 months will be lower than it was at the end of March.
Thank you.
Andrea, we have no more question. I just want to ask you for from investor there are some questions. Any other questions?
Can I ask a question? I have one.
Yes, please. Go on.
Yeah. Andrea, how long does the Chinese business to be at normalized earnings for it to be able to be IPOs? I mean, obviously Q1 was weak. We're gonna see an improvement throughout the rest of the year. Does the Chinese business need to be on stable footing for at least 12 months or maybe two years before it can be IPOd? How long do you see that normalized period to be required for it to be able to be IPO?
Yeah. We need to see two things: positive results, stable results, and positive outlook. In this moment, in this Q1, we have negative results, a decent outlook, but not... I believe we will need a few quarters. We will need a few quarters. I don't think we are in the position to file for an IPO reference, the June 30, 2022. This means we will have probably to wait at least to file with reference to the yearly results.
Okay.
Nothing is set, nothing is sure yet, as we couldn't file with the underlying numbers of 2022, we hope to be able to do it with the numbers of full 2023. We had initially an expectation and hope to be able to file with the numbers of June 2023, after the very, very slow Q1, we believe that this chance is very, very small.
Yeah. another question I had: Are you gonna be launching something on the medical side in Singapore on a new innovation, something exciting or is that not going to be the case?
Yes. Yes. We will have an enhanced high-power hair removal device, which is much expected, and will help to revitalize, I mean, or to reboost a market which after an exciting 2022 is now, let's say, not registering a growth in 2023. We will present the improved version of the Red Touch, which is our dermatology device emitting in the red 675 nanometers, which is a great non-invasive rejuvenation device. And also able to treat dyschromic diseases.
On this Red Touch device, I would like also to add that not only we are introducing it in its enhanced RedTouch PRO format, but also we are launching a clinical study aimed to the release by the FDA of the clearance for sale of the device in the United States. We have not been selling the device in the United States yet because we didn't have an FDA clearance.
We plan to get this clearance in the coming 12 months, so it won't be a 2023 event. It will be a 2024 event. We believe that that device could be extremely significant in the sales mix of 2024. These are the main points. We have concerning new products.
We are developing a new body shaping device for the U.S. market based on a new technology compared to the one we have, we currently have. We will submit for FDA clearance, and hopefully we'll be able to sell for revenue already in Q4 2023, or latest Q1 2024.
Okay. A last question. Obviously you don't report this, but if you think about the book-to-bill, right? The order intake versus the revenues. In other words, you know, whether the order book is growing or shrinking. What are you seeing at the moment in the industrial and the medical side? Are you, are you seeing as many orders come in as you are, products are, and revenues are, and products are shipping out? Or how are the trends at the moment?
It is quite difficult to answer. I say for the industrial, we have a book-to-bill, which is bill, actually book is higher than bill in this moment. Q1 for sure book has been higher than bill. This is obvious in, for the whole industrial. For the medical, the opposite is true, but we are in a different condition because orders are, in many circumstances, yearly orders.
I mean, it's obviously book-to-bill is obviously down because we peak our order books at the end of the year, and then we discharge them all over the year because they are blanket orders over 12 months. What I can tell you, the trend was the same in 2022.
We peaked orders in December 2021, we went down, we peaked again the order books in November 2022. It's today the rhythm of depletion of our order books is faster than it was last year also because we have increased capacity. Again, this reflects in the fact that we are less confident in the actual value of the growth rate of 2023. We believe that we will not be able to match the growth of 2022 in 2023, I mean the trend it is not negative. The trend is still positive. It's not as strong as it was last year.
Clear. Thanks.
You're welcome.
I kindly want to ask again to the floor if there are some other questions. Andrea?
Hello, this is [audio distortion] from Mediobanca.
Andrea Bonfà. Marco. Marco, go.
Marco and Andrea.
Hello, Andrea. Hello, Enrico. How are you?
Hi.
Nice, nice speaking to you again. I have a question on the component situation. You mentioned that the situation and supply chain is still stressed. I remember last year you mentioned, or in the last call you mentioned you were increasing pricing and managing around with substituting components. Can you elaborate a little bit on the situation, and are you considering raising prices maybe again?
We raised prices in our medical segment at the end of 2022. Some of the price increases have been pulled back. Some are still there. We have a cost inflation. We have cost of goods sold. I mean, a laser system that costed us 100 at the beginning of 2022, costed us at least 105 at the end of 2022.
It partially turns this cost increase into our prices. In the industrial segment, the situation is a little bit different because we have been facing decreasing prices, and we are still facing decreasing prices. Rather than increasing prices, we do not lower prices anymore at the speed we were doing before.
It, there's not an inflationary effect, but it's a slower deflationary effect in a market which is experiencing decreasing prices due to increasing productivity of production and decrease of cost of the main components. For what concerns the supply chain strains, as I mentioned in my report, it's still there. It means that in order to be able to secure to secure deliveries, we have to purchase with several months in advance.
In order not to be too tight with our forecasting models compared to the actual production needs, we need to buy before, and therefore this basically stretches the length of the manufacturing cycle and increases the amount of cash trapped in the manufacturing cycle, typically into the inventory of materials.
Under this point of view, in this moment, we still see the possibility of increasing volume of doing very well. We continue. We do not pull back the investment in inventory because we believe that it's a good investment in order to make sure that we are able to deliver the volumes that our customers are asking us.
Yeah. Very clear. Thank you. I have another one on your investment in Accure. One of the, or the most main competitor to Terra in the U.S. seems to be in a little bit like a turmoil. Do you think this may have an potential benefit for your investment in Accure?
We are now doing a limited marketing launch program, targeting an early adoption plan by top recruited dermatologists and physicians in order to set and to establish what we believe is the superior performance of the Accure system compared to our competitors', systems, and the excellent performance that can be achieved by our Accure system.
Andrea, we're finished.
Go on. Can you please elaborate on the potential for the industrial laser in the USA? Yeah, there is an interesting potential. We do not have yet a solid presence, but we started selling our high power lasers for laser cutting in the U.S. territory. We will attend to the FABTECH, which will be held in Chicago this year. We will attend with a stand and with a distributor.
Therefore, even though for this 2023, we expect the sale of a few units, it will not be materially affecting the business. I believe we are planting the seeds that we'll also flank with an appropriate package of service to support our installations in the United States. I believe that this market could be progressively interesting, going forward in 2024.
Andrea, do you have another question? Any other questions from the floor? Okay. If there are no more questions, we finish this conference. 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. Bye.
I might say, see you next time. We have our company visit on May 30 coming up. We will be delighted of hosting you and to the visit, which includes a visit to the Calenzano plant and to the Cutlite Penta plant of the laser cutting systems as well.
Thank you so much.
Thank you.
Bye.
Bye. Bye-bye. Bye-bye.