Earnings Call: Q1 2020

May 18, 2020

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the LN First Quarter 2020 Financial Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to questions. At this time, I would like to turn the conference over to Ms. Bianca Fertini of Polygence Acallero, Medan. Good afternoon or good morning to everyone, and thank you for joining us. With me on the call are Andrea Candiori, Allianz's Managing Director and Enrico Romagnoli, Allianz's Chief Financial Officer and Investor Relations Officer. Before we begin, please note that there is a remarks management makes on the conference call about future expectation, 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 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 actual future results, performance or achievements may vary materially from those expressed or implied by such forward looking statements. The company undertakes no obligation about the contents nor to update the forward looking statements to reflect events or circumstances that may arise after the date hereof. But let me introduce to the call Andrea Candelis. Go on, Andrea. Thank you, Bianca. Good afternoon, everybody, and thank you for joining this call after the release of our Q1 2020 financials. Frankly speaking, we are experiencing an unprecedented situation. The COVID-nineteen pandemic has deeply affected our operations and our markets. So we are, for this time, in the quite awkward situation in which the past months are not necessarily a reliable reference for the future. And also, our current status is probably deeply different from what our status will be in a few weeks, though we only have vague ideas on what the normal, the new normal could be. Anyway, let's start from the comments about our Q1 financials. And after Enrico, who has given us a detailed introduction, I'll give you more color on the reasons behind the Q1 performance and on the current status of our operations and business. Thank you, Elvico. Please go ahead with the comments on the Q1 financials. Thank you, Andrea, and good morning to everybody. As usual, I'm going to give you some details on our financial. The 1st quarters of 2020 closed with a consolidated turnover of €73,000,000 down 13% compared to the Q1 of last year. The gross margin stood at €31,500,000 down 5.2% compared to 33 200,000 of March 2019 due to decrease in turnover. The impact on turnover, however, increased from 39% to 43% on March 2020, and the increase is mainly due to the change in sales mix with a decrease in turnover in the industrial sector that presents lower margin compared to the medical one. It also should be noted that the income recorded in China for brands related to R and D activities in the quarter is higher than usual and amounted to 0.7% for tomorrow. Operating costs amounted to €8,800,000 down compared to the €9,900,000 of March 2019, even though the incidents on turnover remain almost unchanged around 12%. And the savings derives mainly from the limitation to charter and from the cancellation of all fair and congress events as well as the reduction in the volume of activities. Staff cost of equal to €15,700,000 is probably unchanged compared to March 2019 with the incidence of turnover increasing from 15.7% to 21.5% at March 2020. Reduction in labor cost as a result of government income support measures, such as the adoption of Casa Integrazzone in Italy, will be much important in the Q2, while in the first one, they had a very limited impact. EBITDA was €7,100,000 down 7.8 percent on the €7,700,000 for the Q1 2019 and with an impact on sales of 9.7%. Amortization and other accrual increased to the important investment made in 2019 and the provision for bad debt increased to compared to the Q1 of 2019 to represent in the most balanced way the possible deterioration of some credit positions. In Q1, even though the total amount of fixed cost decreased in total daily, the impact on sales increased from 33% to 37%. For this reason, EBIT decreased from €5,700,000 of euros to €4,500,000 with an EBITDA consist of 6.3%. The tax rate of R and D was €4,700,000 with a positive effect of ForEx and a negative contribution of associated companies. In terms of net financial position, we had a positive balance of €27,400,000 compared to the €61,400,000 of last year. As for $20,000,000 cash was used in the purchase of an important minority stake in Pentelaza Greenjob in the month of January. The increase in net working capital led to an absorption of liquidity of approximately $18,500,000 mainly due to the increase in value of inventories. The amount of investment in fixed asset was around $3,200,000 down from the Q1 of 2019. Investment in the inspection of production structures are in effect less than in previous year since most of the new structures are completed or in completion fees. There was a decrease in overall turnover of 15% with the medical sector growing by 7% and industrial sector in a strong contraction. We note the double digit growth in aesthetic and service segment are remarkable result given the circumstances. In the beauty sector, we had the excellent performance in the Japanese market, one of the market least affected by the COVID affected in the 1st 3 months. The physiotherapy sector is down 8 1st by other by the drop in demand, while the surgery segment is stable. The service maintained a growth rate of over 10%, thanks to the full risk maintenance contract and upgrades sold on the Japanese market and to the sales of optical fibers for neurological application. The turnover of the industrial sector shows an overall decrease of 43%, recording contraction between 30% 50% in all the main segments. In general, the extent of the quarterly drop in turnover is proportional to the length of the downtime that each activity has undergone. Larger in the captive sector, which suffered a stop in China and then in Italy, were relatively more contained in the other segment with activities outside of China, which stopped only during the month of March. Looking to the distribution of revenue by geographical areas, the effects of COVID have effectively brought the sales in China for more than 2 months and is the reason of the drop in sales in industrial sector sector outside of the Europe. Significant is the drop in sales in Italy, where the market in the medical and industrial sector were completely blocked in March. European area, on the other hand, recorded excellent growth with a trend in line with pre COVID forecast, thanks to the possibility of delivering to distributors after the end of March, even that the lockdown in Europe become effective in April. Andrea, please go ahead. Thank you, Rico. Thank you, Rico, very much. Okay. So what we get from the Q1 financials is basically a dreadful quarter for our industrial business and a good quarter in our medical business. Since our positions are quite diversified in term of areas and market segments, we need to go into deeper detail in order to have a better clue of what actually happened and to have an idea of what is happening now and will possibly happen in the next month. First of all, the 1st days of the year. 2019 had just closed with record results all over the board, growth and earnings over expectation, and the only business with a slowdown in the metal casting in China. In the very first day of 2020, order bookings were excellent in all of our businesses, from surgical to aesthetic, from Brazil to the U. S. In China, they were very good, in line with our projected growth for the year. And you know that we count on the growth of our Chinese industrial business to the point that we decided to liquidate our main minority shareholder in order to improve our ability to grow on the market. Incidentally, this meant EUR 20,000,000 investment that's quite ironically in the short term view of this month. According to the purchase agreement was wired to China on January 15 at the beginning of 2020 spring festival break, which at the end, turned to be a very, very long break for China. The term lockdown was not yet popular at the time not popular at the time, but the city of Wenzhou was subjected excuse me, but the city of Wuhan was subjected to a very strict one. And subsequently, also other cities where virus had spread were forced to severe restrictions as mobility was within China. Our 3 factories based in Wuhan, Wenzhou and Li were shut down. Most of our employees were forced to stay home for a very long time. Since our business presence in China originated from Wuhan and we moved workers from Wuhan to enjoy leanings in the past years, the Spring Festival cost most of our people in the epidemic center of Wuhan. We had only one infected employee, thank God, that healed right after. But we have to stand a very long hold of our operations and of our sales activity. The factories in Wenzhou and Limi were down for over a month. When after mid February, Wenzhou and Lini could reopen their activity, only a small number of employees could actually work, being several of them locked in Wuhan, where the restriction were lifted towards the end of March only. So this is the reason why we booked a 70% revenue drop quarter on quarter in Q1 2020, which is worse than what happened on an average in China. As the pandemic started moving westwards, Italy was the 1st country to be severely affected. In our industrial laser business, especially in the laser metal cuttings, we were having a record quarter. The restriction hit our industrial laser business from the very first steps since they prohibited, in fact, business traveling. And for this reason, we could not proceed to finalize the installation of several systems that we had shipped to customers all over the country. With great dismay of our customers, too, that badly wanted our system to accommodate their increasing demand. Customers had to postpone the acquisition even though they did not cancel a single purchase order. When the restriction became even tighter towards the end of March, we had to completely stop production. The overall effect on CatLife Penta, the company in Italy that handles the laser cutting business, was a 3% revenue reduction on Q1 2019, which said it all about what the quarter could have been in standard conditions. Other business segments within our industrial sector experienced slowdown beginning from the month of March since the demand softened, experiencing reduced order acquisition volumes and request to suspend order delivery. The pandemic, and still talking about industrial business, finally reached Brazil and caused the suspension of several orders for laser cutting system we had in house, chilling down the strong recovery trend that initiated in 2019. What happened in our medical business was completely different. First of all, our presence in China is not as significant in terms of revenue as in the industrial business. Therefore, we initially had close to no impact from the Chinese lockdown. Business was excellent for the 2 full months of January February. With the pandemic hitting Europe and Italy, the effect was different depending upon the area and the distribution channel. Where we run direct distribution, the effects of the lockdowns were immediate and drastic. The medical aesthetic network in Italy, Renaissance by Deca, the professional aesthetic business network in Italy, Estelog, and the medical aesthetic distribution in France were halted during the very first day of March. The distribution in medical aesthetics in Germany was materially slowed down. At the same time, our worldwide distributors maintained a very strong demand level. Therefore, our factories could work full time and full throttle for our export customers. Only our quantum system plant in Lombardy, in the very center of the Italian pandemic, voluntarily decided to stop production for 2 weeks in order to protect its workers and their family. International slowdown in demand showed up in the second half of March only when the pandemic forced to lock down all other Western countries, including last and not least for us, the USA. And demand slowdown meant for us the request to suspend deliveries of booked orders, even though we did not book did not register any order cancellation, but we have seen a very slow order acquisition in this period. Our Japanese direct distribution was very marginally affected by the COVID in Q1 since the mild restrictions enforced by the central government in certain areas actually took place in April only. Finally, with respect to the various market segments, the most resilient turns out to be the surgical segment, especially urology, which is less affected by its nature than the medical specific what is by the pandemic. During the lockdown periods, we were forced by law and by demand to drop by the demand drop to close down or reduce the activities in our factory. We allowed people to work remotely from home, what in Italy is now called smart working, which in fact for certain activities was very smart. I mean, on the sales and marketing side, since traveling is banned, we took advantage as never before of the capabilities of web marketing with web TV and webinars catalyzing the attention of hundreds of customers and potential customers. Since congresses and fairs where we traditionally were doing it are canceled, we launched new products on the web and held training session webinars on several topics related to our system. We feel this experience was very positive, and this kind of web marketing will be a more substantial part of our marketing offer in the future. The profit and loss benefits short term of the travel ban and Congress's cancellation, especially in the medical aesthetic sector, where the sales and marketing costs represent a large share of our expense, where marked. Of course, the benefits on the P and L is short term since we're missing the benefits on order booking sales on order bookings and on sales of our usual extensive marketing activity. But as I was saying, we could consider a more comprehensive web approach within their traveling in the future, too. The factories that have been up and running in this phase have 1st and foremost adopted their work organization to protect the health and grant the safety of our employees. All the protection measures requested by the authorities have been proactively adopted: temperature measurement when entering the buildings, limited presence in the office in order to grant minimal distance, remote working, as said, continuous cleaning and thorough sanification when needed. To reduce cost and preserve cash, we were forced to adopt the so called salary integration fund, Castia Integrazione, in all of our France in Italy, in France and to a certain extent, in Germany, too. The behavior of our employees has been excellent. I'd like to thank them for the dedication, tenacity and also the patience showed in this crucial situation. Before getting to an overview of the current status of our business, a note on the cash management side. We feel our group is solid enough to manage this downturn. Of course, the impact of such a sudden and widespread downturn would have an effect on our profits and already had an effect on net working capital since all our manufacturing facilities were organized and ready to sustain increased production level in the coming months. Therefore, inventory levels were high as of the end of March, which is causing an anticipation of the cash outflows for the purchase of raw materials that we will have to fund for a certain period until production and sales level will absorb this excess inventory again. Under this point of view, out of the EUR 18,500,000 of net working capital increase in the period, dollars 11,000,000 are related to the Chinese company in the metal laser cutting business. And as the pandemic wave hit the different in different times and waves our worldwide business, we are now having a variety of different situation as over the time the restrictions are lifted. First of all, let's see how it's going where everything started in China. The impact was sharp and tough, but the good news here is that the recovery appears to be strong. What needs to be considered is that the virus affected severely only a small part of China. If you want a relatively marginal area for China's economy. Unfortunately, the most vital part was. And therefore, China and its internal markets are back to business relatively easily. In Q1, we had to bear a heavier impact than our competitors based in other areas of the country. For instance, Hans Laser is based in Shenzhen, and they had the chance to return to work earlier than we could. Currently, our order acquisition and production level are back to normal. I mean, what we see is that we had a gap in the Q1, but we are doing fine now. It is difficult to tell if this gap is going to stay. It's just this gap of revenue and profits is what we'll miss at the end of the year or if in the next month you are going to be able to make up for the revenue and profit loss of Q1. The overall impression is that China is better set to a rapid recovery than the rest of the Western countries. Our laser cutting business in Europe, namely cataract center business, once allowed to run business again with production and on field service and installation, looks quite healthy and somehow like we are seeing in China. The market is robust and as it was 3 months ago before the gap opened. An interesting effect of the pandemic is that we benefited of a few orders for plexiglass cutting system as the acrylic protection panels and windows adoption is widespread in offices and shops, including the music pads in order to protect operators and customers. On the same line, Autolasa is supporting its customers in adapting their systems to laser capping for protective masks, a task that is very well performed with our laser market system for large surfaces. The demand for laser market system for identification, the business of our company, lasers, based in Todal and Sierra Club, close to Naples, in this Phase 2 is, on the other side, still soft. Also as the effect of a stronger tie to certain of our customers to the verticals of automotive, they are still sluggish. To close the industrial market overview, after the hold, demand for mid power CO2 laser sources is promising, also due to the continued improvement that our R and D has brought to our technology and its wide range usability. Brazil remains a market with great potential in better capital. But as the COVID wave move from east to west, the latest news tells us that they are still under a severe phase of the pandemic impact. Our medical business, as we have seen, had a very good Q1 had a good Q1. In April May until today, our direct markets in Italy, France and Germany were still close. Therefore, direct sales revenues were close to 0. Shipment to worldwide distributors were performed in the period, but the overall revenue level was low. We maintained a decent sales volume to our customers in the surgical market and in Far East since the pandemic seems to be better overcome in those areas. Today is the reopening day in Italy, following similar milestone days in Europe and others that will come worldwide. It is very difficult to know how the market demand will move. At the micro level of our customer in Professional Aesthetics and Medical aesthetics in Italy, we note a great desire to be back to normal. Our customer, medical doctors and beauty spas are pressed by their own customers that can't wait to start getting ready for the comeback of social life and for the summertime body exposure. The large picture sees us very confident in the recovery of our markets based on the determinant of their expected long term growth and based on our strength and ability to take advantage of such expected demand. Of course, it is impossible for us at the time being to have a clear view on the time that we believe that we will maintain the pre COVID levels of demand. We do not know how the normal life will be in this transition phase from the pandemic to the normal life once the pandemic will be overcome or will disappear. We don't know how the pandemic will change our life to a new normal that could present significant steps as well as significant opportunities for our business. During this lockdown period, we reduced our activity volume but kept all our vital functions not only alive but lively. Research and development, marketing, regulatory continued all the preparation work needed for our organization to be effectively in condition to take advantage of the recovery whenever and in whichever form it will materialize. The scenarios we can depict for the near future are still very uncertain. Therefore, we are not releasing a guidance for the moment. We will be back to our Capstone guidance release as soon as the trend of the business for the future months will be, if not more stable, at least depending on business trends and not on the unprecedented and unpredictable effect of the pandemic. Thank you for your attention. The first question is from Francois Billard of Intermonte. Please go ahead, sir. Hi, there. Good afternoon, everyone. Thank you for taking my question. First of all, I hope you're all well. And first question is on so you mentioned bad debt getting higher in the Q1. Can you give us some more color on the impact of this bad debt increase in Q1 and how it went going forward in April May? Then on plastic cut, you mentioned some opportunities already in the short term, if I understood correctly. Can you give us some more detail? Is it something material? And in terms of marginality compared to your usual business, what can we expect from it, if it's material, of course? Then on China on Chinese recovery, if you just come back to this point, you mentioned that your production and order intake is back to normal. Can you link according to you to some negative evolutions going forward, maybe in the international orders, industrial orders going to China? And finally, on your order book, if you can give us some visibility, you mentioned that no order had been canceled. Is that true across all of your segments? Thank you very much. Okay. Let me start from bad debt. I mean bad debt, we are we have a situation in very, very fast evolution. So we applied our allowances for the debt with a more in a more general way. So they were wider than in the past. Also taking into consideration what could happen in the next in the coming months. Of course, we have certain sectors we are suffering, and there are areas in which customers, as they ask to postpone deliveries, they also ask to postpone payments. It's nothing that in the moment can be exactly defined. Maybe Rinco can give you the details of the numbers, but there's nothing specific. There are certain markets in which we decided to have special allowances in China and in Europe. On that, you ask us No, Rodrigo, yes, go ahead. On Q1 2020, the bad debt increased compared to the Q1 of last year of EUR 500,000,000 before ICL in terms of impact on profit and loss. In Q1, we had EUR 600,000 dollars of bad debt compared to the $100,000 of our Q1 of last year. Of course, these kind of provisions are made on the assumption of continuity of our business and of the business of our customers in which we strongly believe because otherwise the provision should have been completely different. But the assumption here is that we are in phase of an interaction of a certain period that then that would cost us in term of P and L, that will cost us financially, but that will not yield our award. Otherwise, we would have different provisions. In plastic casting, I mean, we sold a few units. I believe we sold a handful of units. It's not a material effect overall. It's interesting that in this phase, we could sell more of these units than we were normally selling, given the fact that lately, our sales activity has been mainly concentrated on metal casting. The future in China, I'm sorry, I cannot give you any more details. I spent quite a long time in explaining to you what's going on in April, May, what we expect, but we are not releasing any guidance. And therefore, we cannot give you any further detail. I mean, we can say I confirm that what we are seeing in China is extremely encouraging in terms of returns of life to normality. This is true a little bit over the board. I mean, restaurants were opened in Shanghai a long time. People were moving within the cities quite freely. And also, the only person the only tenant manager that we allow where we succeeded in repositioning in China because only one could fly. The other one is still in Italy because they cannot fly back to China now. Is experiencing a very, very proactive environment. It's moving around the various cities of China by plane or by car. And it's seen a very, very strong recovery after these months of hold. And none for the answers. The next question is from Andrea Boulffa of Banca Acro. Please go ahead. Hi, good morning, good afternoon to everybody. My question, Andrea, is related to the profitability that we shall expect in the Q2. I mean, the Q1 was, I believe, better than my expectation and I think the market because also the gross margin was a very nice surprise. But given the again, your mix, it might be the other way around in Q2, if you can maybe elaborate on that. And the second question is actually a more qualitative one. I mean, from your observation point, I mean, what is your sensation in terms of perception of the gravity of this pandemic across the various countries. Because my sensation again is that from Italy and from Italy particularly, we got the situation worse than what it might be, especially in the aesthetic sector. I don't know if it's unclear, but just I mean what you sense across the globe from the various market because from I mean, that's the point I would say the aesthetic effect should experience a very slow recovery. Malmedicine is not the case in other countries. Just your thoughts on this will be helpful. Thank you very much. Thank you. Thank you, Andrea. Yes, you're right. Gross margin in Q1 was a very positive surprise, but actually, it's something that comes from the math. The weight of our higher margin sales in Medical was much higher than in the past. And also, among the Industrial, we were missing the lower margin part, which is the Chinese part. And the ratio of medical to industrial was 60% to 40% in 2019 and was 73.3% to 26.7% in 2020. So this is the reason for the margin increase and the very good profitability. And actually, if you take the Medical business, we had an excellent profitability also because we benefited of all the sales revenues almost in full in the 3 months with reduced expense because we have no expense for congresses and traveling. So the profitability of Medical was excellent in Q1. In Q2, this we know that this will be completely inverted because China, April, May June, we expect good months. In the industrial business, May June, we expect very, very good months. While in the medical, we know that April May have been will be very slow. June, I mean, it's hard to give projects on Nano because June will be heavily dependent on how the reopening will be in the market. And this ties the first question's answer to the first to the second question. Yes, I believe that we will have some market that will recover very fast also in aesthetic because the countries that have been less affected and that will be able to more rapidly go back to normal life, which includes services to people, which includes going to the physician, which includes going to the medical spouse or the medical doctors and setting treatments will recover more quickly. It is true what you said. In Italy, we had the sensation that the blow on the aesthetic market could be a very, very strong one. Now we have to see, I mean, today, Tuscany, at least, aesthetic centers are reopening. In most of Italy, they're reopening. I know that women, we know it's been a lot of activity this month, are struggling to go back to have themselves treated and their hair made again and everything. So I know that the demand from the base is extremely strong. Of course, this is not enough for us because we need the confidence to be reinstated. We need the confidence to be reinstated in our customer in order for them to invest again. But I'm telling you, we'll see at the end of the quarter how many. We are delivering systems in Italy in the aesthetics today in these weeks and also in the medical aesthetics. So we see some demand. We see some demand. It will be, I'm sure, on the slower return to normality than it has been in China for industrial business and maybe also slower than it looks like it's been in the industrial as a business. It will be slower it will be a slower recovery, but the signs are not so negative in these very last days. Thank you very much. You're welcome. The next question is a follow-up from Tranferro Biar of Intermonte. Please go ahead. Sorry, sorry. Can you hear me? Yes. Okay. Sorry. Just a quick one on labor cost. So you mentioned Casa Integralazzione in Italy. What kind of fixed cost reduction we can expect on staff costs for Q2? Also, this I cannot answer for several reasons. But the main reason is that we are 50% through the quarter. And if demand will pick up again, we'll have people working in full force as we have in industrial. If demand will keep smooth, we'll have to keep people home for a little bit longer. Of course, this cost reduction is impacting the Italian factories only. There will be a reduction. We had but I'm sorry, I don't have the number yet. Of course, it will be significant if you take it business by business. For instance, if you take the company Estelog, which actually didn't work for 6 weeks, the employee cost should be about 20% of the normal cost for this 1st 7 weeks of the quarter. But probably in the second half, they will work full time because now that the stations have reopened, we have to support them and to make sure we make our presence felt by everybody in order to try to recover with sales and distribution. For other companies, the impact on cost will be much lower because we continue to work, we continue to produce to a certain extent. And overall, so I expect a reduction of cost, but not a 50% reduction on personal Gentlemen, there are no more questions registered at this time. Okay. So I'd like to thank everybody for being with us. Henrico, I believe we have a short term, let's say, schedule for our next meeting since in about 10 days from us, the STAR the virtual STAR conference is coming up, isn't it? Yes. We will be we will attend the STAR conference on the 26 27 of May. So in 10 days, we can meet again. Thank you, Bianca, and thank you, everybody. So I'm looking forward to meeting you in phase even through in the event of virtually in 10 days from now. Bye bye. Thank you so much to everybody. Bye. Bye bye. Bye bye.