Good afternoon. This is the cross-call conference operator. Welcome, and thank you for joining the El.En. first half 2020 results conference call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Miss Bianca Fersini of Polytems HIR. Please go ahead, madam.
Thank you so much. Good afternoon or good morning to everyone, and thank you for joining us. 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 the 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 expectation 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 conditions 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. Let me introduce to the call Andrea Cangioli. Go on, Andrea.
Thank you, Bianca. Good morning, everybody. Good afternoon, and thank you for joining this conference call after the release of our six-month financial report. We're talking from our premises in Florence, where from the mid of August, all of our employees are working full-time again. After about four months of extensive recourse to the payroll protection programs, the so-called Cassa Integrazione, that we had to adopt due to the sudden demand fall caused by the COVID pandemic. Our premises and all the premises of the El.En. Group as well, are a safe working place since we adopted all the measures needed to protect health and safety of our employees. Some of them are still working remotely in order to reduce the physical contact, but we can say that the pandemic is not impacting our internal processes anymore.
This is obviously good news, a sign of the ongoing recovery process from the darkest days of the lockdowns to the normal status we were experiencing in the first weeks of the year. The six months financial results that we will shortly see in detail with Enrico, and that in the most synthetic summary showed a 13.8% decline in revenues and a sharper 44.4% decline in EBIT, with EBIT margin down to 5.7%. These numbers, the numbers of these financials, are in fact the results of a trend that due to the impact of the pandemic in the period, has been very uneven in the various months of this six-month period. All of our businesses jumped at the starting signal of the year, running fast as never before. After a few days, the pandemic hit China and then Italy and then the rest of the world.
We had to fully stop operation in China for almost three months, in Italy for more than one month in the companies of the industrial sector. Though they were not forced by any official decree, but they were forced by the sudden demand fall, also in the companies active in the medical market. As this very dark cloud abruptly shielded the very brilliant sunshine of the first months of the year, production and sale levels dropped. In certain cases down to zero. We had zero production and turnover in February in China. We had no sales at all in April in the medical sector and in the professional beauty sector in Italy and France. In Italy, we were blocked in industrial laser system manufacturing, servicing, and delivery for the most part of the months of March and April.
The clouds that were so thick and dark started thinning, and we started progressively seeing some sunlight again. The length of the stall period and the intensity of the recovery, both were very different depending upon the geographic area and the specific market. Just to mention a few meaningful examples. In the sheet metal laser cutting market, the rebound of demand was extremely buoyant, allowing Cutlite Penta to register revenue growth on a six-month basis, and the Chinese business to work at full production rates in all the factories again today. In Japan, where we hold a significant position with our subsidiary, active in the professional aesthetic and spa market, the pandemic had a milder impact, and we registered a significant growth over the six-month period over 2019.
Sales to the U.S. and in the medical aesthetic business, after a two-month slowdown, were back to satisfying level in the month of July. Sales in the medical market in Italy, through our Renaissance distribution network, marked records level in July and in August. Sales through Esthelogue network to professional beauty shops were also back to a good level after the April stop. Given the overall circumstances, I'd say that the demand recovery was stronger than expectation. As much as the original expectation for this 2020 were extremely ambitious, the recovery expectation from the COVID-19 blow were modest. We are happy to see demand and orders flowing in again, to see customers releasing the backlog orders they had asked to hold. In specific segments and in certain months, we were back to sales and production level of 2019 and higher.
On the average, we are still facing a market situation that is weaker than 12 months ago. Let me this time tell you that I'm very proud of the achievements we accomplished in this month. Although far from the growth expectation that the group had for 2020 at the end of last year, these results are, in my opinion, very good given the circumstances. They testify, in the most difficult situation ever faced by the group and the world economy in the recent past, the great solidity that the group has in its structure, technical structure, financial structure, operational structure. We proved in the past our potential to achieve brilliant growth rates. Now we displayed our ability to resist to adverse condition without sacrificing the potential for future growth. The group owes these characteristic and capabilities, in first place, to its employees.
They delivered a response of exceptional depth in keeping vital activities dynamic, lively, and proactive. Despite the limitation of means and hours available, the payroll protection programs, Cassa Integrazione, were adopted quite extensively. Important research and development projects were completed even in the darkest months, allowing the launch of new products. Relation with customers have been cultivated with a creative and assiduous presence on social media, providing information, commercial and training events. The logistic and operational structure, together with the auxiliary support functions, worked in adverse condition to assure product deliveries and technical support to all our global customers. We can count on this extraordinary wealth to return to record brilliant results also from a financial point of view, as soon as the surrounding conditions will allow it.
Prior to getting into the details of the financials, I'd like to mention how the investments are going on. Our investment plans in the expansion of production capacity are still worth a few million EUR of investment in this half year, since we are completing the plans in Wenzhou, Jena, Linyi, and Torre Annunziata. There is also an unscheduled investment coming up in 2021. We have the chance to profit of the availability of the plant adjacent to the new Cutlite Penta plant in Prato. We therefore secured the purchase with a preliminary agreement that we signed at the beginning of September. With a down payment of more or less half a million EUR, we will be immediately in the condition to use this building as an expansion for our production capacity.
As I mentioned before, production and sales volume for Cutlite Penta are really rocketing in this phase. We will then close the contract in the first weeks of 2021. I remember when presenting our structural expansion investment plan, I was saying that if more investment were to be added in the future, this had to be considered a good thing as it would be a sign of strong demand. In fact, this is actually the case. It has also been the case for the extra monies we invested in the plan. We are today at about EUR 38 million, due to the opportunity to further expand capacity in China and in other locations. I'd like to pass the call to Enrico, that will bring you in the details of our six-month financials.
Thank you. Thank you, Andrea, and good morning to everybody. As usual, I'm going to give you some details on our financials. The first half of 2020 closed with a consolidated turnover of EUR 163 million, down 15.8% compared to the first half of last year. The gross margin stood at EUR 59.9 million, down 19.5% compared to the EUR 74.4 million on June 2019, due to the decrease in turnover. The impact on turnover decreased from 39.5% to 36.8%, it is mainly due to a reduction of profitability in both sectors due to the COVID, even though higher in Industrial than in Medical. The decrease in gross margin percentage in Q2 compared to Q1, it is also due to a greater impact of Industrial than Medical on total revenue. In fact, Medical in Q1 was 73% of total sales, when in Q2 was 53%.
Industrial in Q1 was 27%, in Q2 was 47%. Because of that, the gross margin percentage in Q1 2020 was 43%, while in Q2 2020 was only 32%. Operating costs amounted to EUR 16 million, down compared to the EUR 21.5 million on June 2019. Their incidence on turnover reduced from 11% to 10%. The savings derive mainly from the limitation to travel and from the cancellation of all fair and congress events, as well as the reduction in the volume of activities. The amount of staff cost on June was equal to EUR 29.3 million compared to the EUR 32.3 million of last year. A reduction in labor cost, as already mentioned by Andrea, is mainly due to the government payroll protection programs such as Cassa Integrazione in Italy, used in France, Germany, and in Italy too.
EBITDA was EUR 14.5 million, down by 29.7% compared to EUR 20.6 million of H1 of last year, with an impact on sales of 8.9% compared to 10.9%. Amortization and other accruals increased due to the important investment made in 2019, and the provision for bad debt increased compared to H1 2019 to represent, in the most balanced way, the possible deterioration of some credit positions. In the first six months, the total amount of fixed cost, operating cost, staff cost, and depreciation decreased in total value in line with the drop on sales and impact on sales was around 31% as for H1 2019. EBIT marked a positive balance of EUR 9.3 million, down from EUR 16.7 million, with an impact on sales of 5.7% and with a reduction of 3% mainly due to the reduction in gross margin.
Pre-tax result was EUR 8.9 million, with a negative effect of Forex and a negative contribution of associated companies. Net income was EUR 6.4 million compared to the EUR 10.2 million of last year, with a tax rate of 24% that benefited of a tax reduction allowed to Italian company on IRAP income taxes to face the COVID emergency. Group's net financial position had a positive balance of EUR 27.9 million compared to the EUR 61.4 million at the beginning of the year and to the EUR 27.5 million at the end of Q1. 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 20 million, mainly due to the increase in the value of inventories.
The amount of investment in technical fixed asset was around EUR 5 million, down from the last year, and investment in the expansion of production structure are in fact less than the previous year, since most of the new structures are completed or in the completion phase. The overall decrease of 13.8% in total turnover was due to a reduction in medical sector of 10.5% and in the industrial sector of 18.5%. In Q2 2020, the trend in turnover between medical and industrial was antithetic compared to the Q1 2020, when medical sector grew 7%, in Q2 -25%, and industrial sector dropped 44% in Q1 and grew 1% in Q2 2020.
In medical sector, the minor contraction in turnover recorded in the aesthetic and service segment, decreasing by 8% and 7% respectively, stems from the positive trend in Japan, one of the most important markets in which the group operates. The surgery segment also suffered the impact of the downturn due to the sudden focus of all hospital activities on COVID patients. It showed revenues for EUR 19.9 million compared to EUR 23.3 million over the same period of 2019, with a reduction of 14%. The therapy segment recorded a turnover of EUR 3.3 million compared to EUR 5.4 million in the same period last year. Industrial sector showed in Q2 a strong recovery in sales compared to the Q1.
The sector benefited, in particular, from the recovery in turnover in China, in the sheet metal cutting segment, even though in the first six month 2020, we had a decline of 23%, and of the very good performance of Cutlite Penta, thanks to a high level of demand and with the COVID effect limited to the period of forced closure. In fact, Cutlite Penta registered an increase in turnover in the six months. The overall turnover of the segment for the six months was €49 million compared to the €58 million of the same period of last year, with a decrease of 16%. In Q1, the decrease was around 15%. The marking sector underwent a trend similar to sheet metal cutting, but in which the decline was wider in the second quarter.
Turnover in H1 2020 was €7.6 million, compared to the €9.2 million of H1 last year, with a reduction of 18%. Similarly to the sales of system, also the after-sales service suffered a significant slowdown. Looking to the distribution of revenues by geographical areas, we see that in the rest of the world, we had a decline in industrial due to China, when in medical we had a growth of 1%, thanks to the excellent performance of Japanese and American markets. In Italy, we had a good performance in industrial, thanks to Cutlite Penta, while in medical, the freezing of activities in the medical and professional beauty sector hit Italy and caused a contraction of 37%, with a turnover of €9.9 million compared to the €15.8 million in H1 last year. In Europe, both sectors showed a decline, even though higher in medical than in industrial. Andrea, please go ahead.
Today, to summarize and give you, let's say, an idea of what is expecting us in the coming months. We can confirm the gradual recovery of demand volumes and therefore of results. I said that those results are quite satisfying given the circumstances. Of course, the overall volume of demand has not yet reached the levels of last year, and it is still made uncertain and unstable by the limitation in place, and above all, by the uncertainties due to the development of the pandemic and its effects on the economy. Therefore, the overall situation of the markets in which the group is active remains weak. It will not be possible to fill the gap with the 2019 results. We expect sales volumes and operating results to improve in the second half compared to the first half, but still at lower levels than those recorded in 2019.
In the presence of current market conditions, trusting that there will be no further repercussions and restrictions, we aim for the full 2020 year to contain within 10% the decrease in turnover compared to 2019, improving EBIT margin on sales in the second half compared to the first half. Thank you for being with us. We are done with the presentation, and we are ready for your questions.
The first question is from Francois Robillard of Intermonte. Please go ahead.
Hi. Good afternoon, everybody. Thank you for taking my question. First one is on guidance. The target is rather clear. However, can you give us some more color on the breakdown of how you are trying to achieve this contained revenue decrease? I mean, compared to H1 trends, what can we expect as well on a year-on-year basis in both medical and industrial, and which segments are expected to perform better? You talked about Cutlite Penta doing well. Will it be the main growth driver in the second half? Second question, coming back on what Andrea stated about CapEx going forward, can you give us just a reminder of your CapEx targets for expansion in the second half of the year and in 2021? Thank you very much.
Thank you, Francois, for the question. Concerning our expectation for the second half, you are correct. The recovery in terms of revenue was much stronger in industrial than in medical. We expect, and from what we have seen to date, a very strong second half in the industrial business, which, compared to 2019, will have better results in terms of turnover. We also expect a recovery in medical in absolute value, but of course, we are facing a very challenging half because the second half of 2019 has been extremely brilliant in medical. For this reason, we plan and we know that we'll do better than the first half, but as I mentioned before, it will be very hard to match the 2019 results. This will be an effect on profitability too, because as in the second three months, the recovery industrial has been very strong.
High volumes, also lower margins. For this reason, the overall EBIT margin cannot be expected to be comparable to the EBIT margin of the second half of 2019. Moreover, we are also going to be hit by the unfavorable development of the foreign exchange rate with the US dollar, that lost about 10 points. We were around 1.1, now we are around 1.2. The U.S. have been a significant market this year, unfortunately, this drop in the US dollar value will, of course, not dramatically, will hit our margins. About CapEx, I said that we were going to have a huge reduction of CapEx this year. This is what's going on. I believe the CapEx of this year, altogether, will be lower than EUR 10 million, I would expect something closer to between EUR 7 million and EUR 8 million.
In 2021, we should have a slowdown on the real estate investments. Now, what I just told you is that we'll have this EUR 5 more million for the new Penta plant that will hit H1 2021. Probably in 2021, the total CapEx will be a little bit over EUR 10 million.
Thank you. Just to follow up on the top line guidance. It's inclusive of the FX effect, of foreign exchange effect?
Yes. Of course, yes. The top line, when we deliver this guidance, we make our calculation with the dollar at 1.2.
Okay. Thank you.
The next question is from Pierre Castella of GNP. Go ahead.
Yeah. Hi, guys. Thank you very much for taking my question. A quick one on receivables. What's the situation like regarding receivables? Do you see any deterioration there and a bit more difficult in medicals, in particular, to get those bills paid? Thank you.
No, we don't see any sharp change in the way we collect our receivables. We actually used a more prudent approach in the calculation of the reserves for uncollectible receivables. This also, let's say, being compliant to a guidance, which has been released by the auditing principle body, which I don't remember the name, but ESMA. By ESMA. There's more, let's say, allowance which hits in the depreciation, amortization, and allowances line of the P&L. For the moment, we haven't seen any real problem. As I told you before, I am a little bit concerned because of what can happen when all those moratories will be over. There are several customers which are, in this moment, not paying their monthly installment to the leasing companies because by a state, by a government, let's say, resolution, the leasings and the banks are not asking for the monthly installments.
At first moment, it was until September 30. I believe it's until January 31st. We live in a sort of bubble under this point of view. This could, in particular, affect one segment where we work, which is the professional beauty segment. For this reason, we were specifically, let's say, aggressive in the uncollectible receivable allowance in that specific sector. I don't see it as a great problem in general terms.
Thank you.
You're welcome.
The next question is from Katharina Raatz of Berenberg. Please go ahead.
Hello. Hi, Andrea. Hi, Enrico. This is Katharina from Berenberg Asset Management. I have three questions, if I may. First of all, regarding the operating leverage. If I'm not mistaken, your sales decline in Q2 was roughly similar to that you generated in Q1. However, the operating leverage seemed much stronger. Could you please give more color on that? Talking about the inventory, which was the main driver for the increase in the net working capital, I'd also be interested in a bit more details on the inventory increase. Talking about the pricing environment in industrial and China, I'd just be curious to better understand whether you now need to adapt to this new level of pricing, and what is the strategy for this going forward? Thank you.
Okay. Thank you, Katharina. Leverage. Yes, you're right. Leverage was much higher in Q2, because in Q2, we had a great cost reduction on our fixed costs. We had extensive use of payroll protection programs, Cassa Integrazione, which reduced the payroll cost, in Italy, in Germany, in France. Cost was reduced materially. Also, since we are not working at full throttle, we had less cost for, let's say, all the management by objectives, because, the targets were not met. We had less cost for, also the extra hours. People are not working for extra hours. There was a great saving in the employees' expense. We had a great saving, compared to normal with all the commercial expenses, because we couldn't do any traveling, we couldn't do congresses. We're stuck at home, so fixed costs were much lower.
Fixed costs will return to normal in Q3, or almost to normal. For what concerns payroll expense, it will be still a little bit lower because still we are not running at full level, all the additional components of payroll are going to be reduced also in Q3. Also, we will still have reduced commercial expenses, though we start attending to some fair. We are attending today to the Beijing Industrial Laser Fair. We attend to the Shanghai Industrial Laser Fair next week. Something is going to start moving, but still not in full. We were able to get the same result in absolute value, due to the very significant savings we had in certain cost aggregates. Inventory. Inventory was at the real top, at the end of Q1. We had a little bit of reduction in Q2.
Still, the levels are quite important because, as it always happens, we had inventory to manufacture a certain item. They block the order for the item, and they want something else. So we have to purchase goods to manufacture things that were not originally scheduled, while we have materials that stayed longer in inventory. I don't see, sincerely, any real problem in inventory on the midterm. We don't have anything which we won't be able to use. Of course, this always under the assumption that the activity will be back to normal or close to normal, and there won't be any really return to a very strong lockdown situation. Third question, the pricing change in China. The pricing change in China has been quite strong. After the end of the lockdown, we are manufacturing at very high volumes, but at lower prices.
This was quite evident in the Q2 financials of our Chinese business, which were able to sell and to have revenues higher than the corresponding quarter of 2018, but with a very low profitability. We have various kind of countermeasures. We negotiated better terms for laser source purchase. We will see a significant reduction in laser source cost in Q3 and Q4. We launched a comprehensive cost reduction plan, which was actually launched in the very first days after the recovery, which will be effective with its results basically in Q4 2020. We hope, and we count, to have an increase of margins in the Chinese business from the lower level we are now, in Q4 and in the second half of the year.
Okay. Understood. Also understood that it's a continuous struggle in China, but do you think that you can return back to the attractive EBIT margin levels that you had previously in China?
I think that, if the market maintains its status, and we have good elements to think that we will be able to increase volumes, at higher volumes, we could, again, take advantage of a leverage effect and become profitable as we were before. We need good demand, because at this point, the Chinese business, with its three, let's say, production site and four factories, needs to have significant volume in order to be able to grab the scale savings, and the leverage.
Okay, understood. Sorry, just one follow-up. Did the chance, so to say, to grab this operating leverage change? Implying that, due to COVID-19, has the competitive environment changed in China?
The competition has been sharper. It depends also on the mix. In the Q2, we sold a number of systems that we had never sold in any quarter before, not even in Q4 2019. We launched a few products which are fully Chinese manufactured, these products, which are fully Chinese, have a lower margin. Though we had an increase in the sales of the higher margin, let's say, hybrid systems, which are manufactured in China but have several European components, their impact on the total was reduced. Moreover, the recovery was a purely Chinese, let's say, event. Last year, China had about 10% of sales to the surrounding countries, and this year, this percentage is probably down to 1%, because the recovery is a Chinese event.
Since, let's say, international sales out of China, they are higher margins, also, this effect is expected to hit back again, when we will be able to return to decent sales volumes in international sales. This is going on. Slowly, it's going on. While the Chinese recovery was extremely quick, the rest of the world recovery was slower. Again, I see a positive trend, and how positive this trend will be, will also depend on how the other economies will continue to recover in their volumes, in their economies, in the rest of this year, and then in 2021.
Okay, great. Thank you very much.
You're welcome.
The next question is a follow-up from Pierre Castella of GNP. Please go ahead.
Yes, thank you very much. Sorry for that. I've got two little questions here. The first one is, on the net capital employed of close to EUR 200 million, can you give us an idea of the split between the two divisions of that capital employed? The second question is, considering that you have consumed about EUR 35 million of cash in the first half, can you give us a feel of what you expect, taking into account the land acquisition and so on, what you expect for the second half in terms of cash consumption or generation? Thank you.
I don't know. Maybe Enrico can give you the amount. I believe in the financials, we have a segment reporting, which can give you the exact detail. I don't know it here, and I know it by heart, but you can find it in the financial report.
Okay.
About cash generation, we believe that the second half, as always, and also in this 2019, should be a better half than the first one in terms of cash generation. We expect that the normal operations will lead to an increase of the net financial position. EUR 5 million, EUR 10 million, really, in this moment, given the current guidance, I could say that we could expect a EUR 5 million increase. Really, we are not in the condition to precisely model, because we don't know also how the sales will hit, and so also the receivables and the inventory will hit the P&L, and when exactly. If in December or in November, this would make a change. Generally speaking, I see the trend, which is positive. I see our strength on the market. I see us coming back to a good generation of cash in the second half.
Thank you.
In terms of capital employed, the capital employed is higher in medical, around EUR 150 million, and compared to the industrial, around EUR 70 million-EUR 80 million, more or less.
Thank you.
The next question is from Andrea Bonfà of Banca Akros. Please go ahead.
Hello. Good afternoon to everybody. Andrea, I was thinking if you can just give us the heart of consumer attitude across the globe, and let's say your client in the medical aesthetic on, let's say, on the resumption of activity and treatment. For sure, medical and aesthetic is more affected by, let's say, social distancing and all measures to contain the coronavirus pandemic. If you can just a little elaborate on that, if you think it's the final customer, which I would say, would take time to return or our clients, which are skeptical on ordering right now. That's it for the time being. Thank you.
Thank you for the question, Andrea. It's not easy to answer the question because I can answer exactly, give you what we see, where we go direct, where we have distributors. There is an interface which is not always completely transparent to us. We don't know the exact behavior of the customer. What we have noticed here, there are several things that have been noticed in the consumer behavior. First, an incredible reaction by many of them that jumped into aesthetic parlors in order to make treatments, that are willing to react to the long lockdown period by spending more in aesthetics. This is quite awkward. The aesthetic sector is less hurt, for instance, than the therapy sector. Even though we read that, for instance, athletes in this moment are much more hurt than usual because after a few months of inactivity, they are more exposed to injuries.
Our therapy sector has been suffering in the last month more than the aesthetic sector. In the aesthetic sector, we had peaks of consumption, for instance, in Italy. In Italy, we did extremely well in the medical sector in July and also in August, which can be justified only on a very particular psychological reaction to the lockdown in the post-COVID period. Generally speaking, all over the world, I believe that this kind of reaction is quite widespread. But nevertheless, we sell capital equipment, and so in order for a doctor to face an investment, you need to be a little bit more confident in what's going on in the near future. In Italy, I believe we are quite confident. In other countries, the pending limitation are still limiting the purchases to be at the same level as 12 months ago.
For what concern the surgical business, theoretically, we're expecting a good behavior in demand because surgical procedures do not depend on anything that has been hurt by COVID. If one has kidney stones or one has an enlarged prostate, it doesn't depend on the economic cycle. Nevertheless, also in this, COVID hit us because the hospital structures are focused on COVID, and they, in this moment, simply for several months, did not consider other disciplines, and therefore they slow down purchases also on other segments. I believe this will last quicker than we will see a full recovery in other segments, because actually, also the full focus on COVID will go away again, always unless the situation worsens. This is more or less what we perceive in this point.
Okay. Thank you very much.
You're welcome.
Gentlemen, Mr. Fersini, there are no more questions registered at this time.
We can close the conference. Andrea?
Yes. Thank you, everybody, for attending. We will be attending a few conferences on a virtual basis in the next weeks. I know some of you have already enrolled. If there are still spaces, you could contact Bianca, because we will be available for one-to-one meetings in the next weeks for at least a couple of times. Thanks again for attending the call, and have a nice day. Thank you.
Thank you so much for everything. Bye. Bye-bye to everyone. Bye.
Ciao, Bianca.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.