Good afternoon. This is the corporate conference operator. Welcome, and thank you for joining EL.En.'s 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 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 Ms. Bianca Fersini Mastelloni of Polytems S.p.A. Please go ahead, madam.
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 there is a 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 to 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. Let me introduce to the call Andrea Cangioli. Go on, Andrea.
Thank you, Bianca. Good afternoon, everybody, thank you for joining this call after the release of our Q1 2020 financials. Frankly speaking, we are experiencing an unprecedented situation. The COVID-19 pandemic has deeply affected our operations and our markets. We are, for this time, in the quite awkward situation in which the past months are not necessarily a reliable reference for the future. 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 new normal could be. Anyway, let's start from the comments about our first quarter financials. After Enrico will have given us the 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, Enrico.
Please go ahead with the comments on the Q1 financials.
Thank you, Andrea. Good morning to everybody. As usual, I'm going to give you some details on our financials. The first quarters of 2020 closed with a consolidated turnover of EUR 73 million, down 13% compared to the first quarter of last year. The gross margin stood at EUR 31.5 million, down 5.2% compared to EUR 33.2 million 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 changes 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 grants related to R&D activities in the quarter is higher than usual and amounted to 0.7% of turnover.
Operating costs amounted to EUR 8.8 million, down compared to the EUR 9.9 million of March 2019, even though their incidence on turnover remained almost unchanged, around the 12%. The savings derives 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. Staff cost equal to EUR 15.7 million is probably unchanged compared to March 2019, with the incidence on 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 Cassa Integrazione in Italy, will be much important in the second quarter, while in the first one they had a very limited impact. EBITDA was EUR 7.1 million, down 7.8% on the EUR 7.7 million of the first quarter 2019. With an impact on sales of 9.7%.
Amortization and other accrual increased to the important investment made in 2019, the provision for bad debt increased too, compared to the first quarter 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 revenue, the impact on sales increased from 33% to 37%. For this reason, EBIT decreased from EUR 5.7 million to EUR 4.5 million, with an impact on sales of 6.2%. The tax result was EUR 4.7 million, 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 EUR 27.4 million compared to the EUR 61.4 million of last year. As for EUR 20 million, cash was used in the purchase of an important minority stake in Penta Laser Wenzhou in the month of January.
An increase in net working capital led to an absorption of liquidity of approximately EUR 18.5 million, mainly due to the increase in value of inventories. The amount of investment in fixed asset was around EUR 3.2 million, down from the first quarter of 2019. Investment in the expansion of production structures are in effect less than in previous years, since most of the new structures are completed or in completion phase. 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, a remarkable result given the circumstances. In the beauty sector, we had excellent performance in the Japanese market, one of the markets least affected by the COVID effect in the first three months.
The physiotherapy sector is down, hit first by others, 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, an upgrade sold on the Japanese market, and to the sales of optical fibers for urological application. The turnover of the industrial sector shows an overall decrease of 43%, recording contraction between 30% and 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 cutting sector, which suffered a stop in China and then in Italy, 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 geographic areas, the effects of COVID-19 have effectively blocked the sales in China for more than two months. It is the reason of the drop in sales in industrial sector outside of Europe. Significant is the drop in sales in Italy, where the market in the medical and industrial sector was completely blocked in March. European area, on the other hand, recorded excellent growth with the trend in line with pre-COVID-19 forecast, thanks to the possibility of delivering to distributors up to the end of March, even though the lockdown in Europe became effective in April. Andrea, please go ahead.
Thank you, Enrico, very much. Okay. 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 operations 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 months. First of all, the first 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 second half of 2019 had been laser metal cutting 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. 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 a EUR 20 million investment that, quite ironically, in the short-term view of this month, according to the purchase agreement, was wired to China on January 16th 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, Excuse me, but the city of Wuhan was subjected to a very strict one, and subsequently, also other cities where the virus had spread were forced to severe restrictions. As mobility was within China, our three factories based in Wuhan, Wenzhou, and Linyi 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 Wenzhou and Linyi in the past years, the Spring Festival caught most of our people in the epidemic center of Wuhan. We had only one infected employee, thank God, that healed right after. We had to stand a very long halt of our operations and of our sales activity.
The factories in Wenzhou and Linyi were down for over a month. When after mid-February, Wenzhou and Linyi 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. 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 westward, Italy was the first country to be severely affected. In our industrial laser business, especially in the laser metal cutting, 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.
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 Cutlite 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 a slowdown beginning from the month of March, since the demand softened, experiencing reduced order acquisition volumes, and requests to suspend order delivery.
The pandemic, still talking of our 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 two full months of January and 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 DEKA, the professional aesthetic business network in Italy, Esthelogue, 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 Quanta System plant in Lombardy, in the very center of the Italian pandemic, voluntarily decided to stop production for two weeks in order to protect its workers and their families. 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 U.S.A.
Demand slowdown meant for us the request to suspend deliveries of booked orders, even though we 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-19 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 aesthetic was hit by the pandemic. During the lockdown periods, we were forced by law and by the demand drop, to close down or reduce the activities in our factories.
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 conferences 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 conferences cancellation, especially in the medical aesthetics sector, where these sales and marketing costs represent a large share of our expense, were marked. Of course, the benefits on the P&L is short-term, since it will be missing the benefits on order booking sales, on order bookings, and on sales of our usual extensive marketing activity. As I was saying, we could consider a more comprehensive web approach with limited traveling in the future, too. The factories that have been up and running in this phase have first and foremost adapted their work organization to protect the health and grant the safety of our employees. All the protection measure 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 sanitization when needed. To reduce cost and preserve cash, we were forced to adopt the so-called salary integration fund, Cassa Integrazione, in all of our factories in Italy, in France, and to a certain extent, in Germany, too. The behavior of our employees has been excellent. I 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.
The impact of such a sudden and widespread downturn will 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. 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 18.5 million of net working capital increase in the period, EUR 11 million are related to the Chinese company in the metal laser cutting business.
As the pandemic wave hit in different times and ways our worldwide business, we're 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. 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, Han's 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 first quarter, but we are doing fine now. It is difficult to tell if this gap is going to stay, is just this gap of revenue and profits is what we'll miss at the end of the year, or if in the next months, we 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, mainly Cutlite Penta business, once allowed to run its 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, as it was three 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 panel and windows adoption is widespread in offices and shops, including the beauty spas, in order to protect operators and customers. On the same line, O.P.L.A.S. is supporting its customers in adapting their systems to laser cutting for protective masks, a task that is very well performed with our laser marking system for large surfaces. The demand for laser marking system for identification, the business of our company, LASIT, based in Torre Annunziata, close to Naples, in this phase too, is on the other side, still soft. As the effect of a stronger tie to certain of our customers to the verticals of automotive, they are still struggling.
To close the industrial marking overview, after the halt, demand for mid-power CO2 laser sources is promising, also due to the continuous improvement that our R&D has brought to our technologies and its wide range usability. Brazil remains a market with great potential in metal cutting, but as the COVID wave moved 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. In April and May until today, our direct markets in Italy, France, and Germany were still closed. Therefore, direct sales revenues were close to zero. Shipment to worldwide distributors were performed in the period, but the overall revenue level was low.
We maintained our decent sales volumes toward 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 other 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 the respective 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 will be needed to restate 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 threats 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 custom guidance release as soon as the trend of the business for the future months will be, if not more stable, at least dependent on business trends and not on the unprecedented and unpredictable effects of the pandemic. Thank you for your attention.
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We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and One on their telephone. To remove yourself from the question queue, please press Star and Two. Please pick up the receiver when asking questions. Anyone who has a question may press Star and One at this time. 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. First question is on, you mentioned bad debt getting higher in the first quarter. 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 and May? On plastic surgery, you mentioned some opportunities already in the short term in Italy, 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. 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? 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. Bad debt, we have a situation in very, very fast evolution. We applied our allowances for bad debt in a more generous way. They were wider than in the past. Also, taking into consideration what could happen 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 Enrico 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, excuse me.
No, Enrico. Yes, go ahead.
Q1 2020, the bad debt increase compared to the first quarter of last year of EUR 0.5 billion differentially in terms of impact on profit and loss.
In Q1, we had EUR 0.6 million of bad debt compared to the EUR 0.1 million of first quarter of last year. Of course, this kind of provision 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 over a certain period, that will cost us in term of P&L, that will cost us financially, but that will not kill our work. Otherwise, we would have different provisions. In plastic cutting, 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 cutting. 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, in May, what we expect. We are not releasing any guidance, and therefore, we cannot give you any further detail. We can say, I confirm, that what we are seeing in China is extremely encouraging in terms of return of life to normality. This is true a little bit over the board. Restaurants were opened in Shanghai for a long time. People were moving within the cities quite freely.
Also, the only person, the only talent manager that we succeeded in repositioning in China, because only one could fly, the other one are still in Italy because they cannot fly back to China now, is experiencing a very proactive environment. He's moving around the various cities of China by plane or by car. It's seen a very strong recovery after these months of halt. I'm done for the answers.
The next question is from Andrea Bonfà of Banca Akros. Please go ahead.
Hi, good morning, good afternoon to everybody. My question, Andrea, is related to the profitability that we shall expect in Q2. The first quarter was, I believe, better than my expectation, and I think the market, because also the gross margin was a very nice surprise. Given, again, your mix, it might be the other way around in Q2. If you can maybe elaborate on that. The second question is actually a more qualitative one. From your observation point, what is your sensation in terms of perception of the gravity of this pandemic across the various countries? My sensation again, is that from Italy and from Milan in particularly, we got the situation is worse than what it might be, especially in the aesthetic sector. I don't know if it's unclear. Just, what you sense across the globe from the various markets?
From a Milan standpoint, I would say the aesthetic sector we should experience a very slow recovery. Maybe that's not the case in other countries. Just your thoughts on this will be helpful. Thank you very much.
Thank you, Andrea. Yes, you're right. Growth 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. Also, among the industrial, we were missing the lower margin part, which is the Chinese part. The ratio of medical to industrial was 60% to 40% in 2019, and was 73.3 to 26.7 in 2020. This is the reason for the margin increase and the very good profitability. Actually, if we take the medical business, we had an excellent profitability also because we benefited of all the sales revenues, almost in full in the three months, with reduced expense, because we have no expense for congresses and traveling. The profitability of medical was excellent in Q1.
In Q2, we know that this will be completely inverted, because China, April, May, and June, we expect good months. In the industrial business, May and June, we expect very good months. While in the medical, we know that April and May will be very slow. June, it's hard to give projection now, because June will be heavily dependent on how the reopening will be in the market. This ties the first question's answer to the second question. Yes, I believe that we will have some markets 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 aesthetician, which includes going to the medical staff or the medical doctor for certain 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 strong one. Now we have to see. Today, in Tuscany at least, aesthetic centers are reopening. In most of Italy, they are reopening. I know that women, we know it in our web activity this month, are struggling to go back to have themselves treated and their hair made again and everything. 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. 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. 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 laser business. It will be a slower recovery, but the signs are not so negative in this very last days.
Thank you very much.
You're welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Once again, if you wish to ask a question, please press star and one on your telephone. For any further questions, please press star and one. The next question is a follow-up from Arturo Birra of Intermonte. Please go ahead.
Sorry. Can you hear me?
Yes.
Okay. Sorry. Just a quick one on labor cost. You mentioned Cassa Integrazione in Italy, what kind of fixed cost reduction we can expect on staff cost for Q2?
This I cannot answer for several reasons. 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. 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 Esthelogue, which actually didn't work for six weeks, the employee cost should be about 20% of the normal cost for these first seven weeks of the quarter.
Probably in the second half, they will work full time because now that the institutions 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. Overall, I expect a reduction of cost, but not a 50% reduction on personal cost.
Okay. No, thank you very much.
Once again, if you wish to ask a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
I'd like to thank everybody for being with us. Enrico, I believe we have a short-term, let's say, schedule for our next meeting since in about 10 days from us, the virtual STAR Conference is coming up, isn't it?
Yes. We attend the STAR Conference on the 26th and 27th of May. In 10 days, we can meet again.
Thank you, Bianca, and thank you everybody. I'm looking forward to meeting you in face, even though virtually, in 10 days from now. Bye-bye.
Thank you so much to everybody. Bye. Bye bye.
Bye-bye. Enrico?
Si?
Bene. Okay. Tutto a posto.
Ladies and gentlemen, thank you for joining the conference and you may disconnect your telephones. Thank you.