Go on, Andrea.
The introduction this time will be done by me, Enrico Romagnoli. I'm the CFO and Investor Relations Manager of the company. The purpose of this call is to report in detail about the preliminary agreement signed on Friday with YOFC, namely Yangtze Optical Fibre and Cable. Then to answer all your questions.
Just a moment, Enrico. Please switch on all the microphones, please. Thank you.
The proposed transactions set forth the sale of the majority of the laser cutting division of our group through the sale of the shares of Penta Laser Zhejiang and Cutlite Penta. As you might recall, Cutlite Penta owns about 98% of Cutlite do Brasil, while Penta Laser Zhejiang controls in full Penta Laser Wuhan, Penta Laser Shandong, and holds a 60% control share of KBF in Shenzhen. For a total consideration of roughly EUR 55.3 million, YOFC is proposing to purchase 59.2% of Penta Laser and 60% of Cutlite Penta, a percentage that will be rounded up to 70% with a EUR 2.5 million share capital increase of Cutlite Penta that YOFC is proposing to subscribe.
The underlying valuation of the equity of the two companies are respectively CNY 504.7 million, roughly EUR 65.5 million for the Chinese leg of the business unit, and EUR 24.7 million for Cutlite Penta, corresponding to the amount paid by OT-LAS at the end of August to buy the company back from Penta Laser Zhejiang. Accordingly, El.En.'s remaining stake after the proposed sale will include an approximately 19.3% stake in Penta Laser Zhejiang and 30% stake in Cutlite Penta. Moreover, 10% of El.En.'s stake in Cutlite Penta will be the base for a three-year incentive plan for the key executives. The final price is going to be subject to adjustment based on the financial performance of the sold companies in 2025, 2026, and 2027, and to customary warranty and indemnity clauses.
The financial performance adjustment may be as high as 5% of the proposed consideration, while the items potentially subjected to indemnities could as well materially affect the final transaction price. In the first six months of 2024, the business being sold reported revenues of EUR 98 million, down 22.3% compared to the first six months of 2023, and an EBIT of EUR 2.6 million, up 120% compared to the first six months of 2023. The business unit net profit was substantially at break-even. The net financial position as of June 2024 showed a net debt of EUR 39 million. YOFC is among the leaders in the global market of optical fibers and components for telecommunications and is headquartered in Wuhan, the original site for our first Chinese venture as well. YOFC holds manufacturing subsidiaries in Europe, Asia, Africa, and America.
YOFC is currently engaged in the manufacturing of high-power laser sources, also suitable for the laser cutting system through its subsidiaries, Everfoton, based in Wuhan. Its technical background, together with the worldwide scope of its activities and the international footprint, will be of great benefit for the future development of the business in which the sold companies are engaged. While the proposed agreement marks El.En.'s disengagement from the direct responsibility in running the business unit, El.En. made sure that the agreement provides for the continued support of El.En. to the future activities of the sold companies, with particular respect to the activities in Cutlite Penta, where the local experience and knowledge will be available to the partner YOFC for the successful management of the companies. Now, we are happy to answer to your questions.
Hello? Can you hear me?
Yes.
Ciao, Andrea. Ciao, Enrico. Well, first of all, thanks for organizing the call. It's much appreciated. I have a couple of questions, some financials and some very, let's say, more general. I will start with the general one. So what should we think about the rest of the industrial division going on? I mean, as far as I can remember, the marking division runs at a profitability that is similar to the one of the medical business, but at the moment, it's still very small. So should we think that the money that you cash in will be directed to develop this activity, or is it also an activity that going forward is going to probably likely dismiss?
The second question is maybe, again, with the cash, as you were saying, there's a net debt position of roughly EUR 40 million attached to the industrial, well, to the cutting business, let's just say. So if we sum this EUR 40 million to the current cash position, we get to more than EUR 100 million cash position to be developed. Is your intention to, let's just say, buy something in the medical division, pay an extra dividend, or impact tax? I mean, it's just to have an idea of what you intend to do with the cash. And then I have two, three very brief financial questions. So if I read the press release, you say that the revenues associated with selling the division are EUR 98 million, but on your first half, you reported EUR 90 million for the cutting division unit. The remaining 8 is, let's say, linked to aftermarket activities.
The second very, let's say, quick question is around the capital gains. So when should we think this will be recognized in the P&L? Thank you.
Enrico, you can answer on the financial question. And then I will answer to the other questions. Enrico.
Sorry, the microphone was switched off. Okay. On what concerns the revenues on June, we say that EUR 98 million, the revenues include the sales referring to the sales of laser system and service. And also, so we are talking about the consolidated result of the cutting financial division on June. And for what concerns the other financials information, the EBIT of EUR 2.6 million referring to the cutting division info, so talking about the laser system and service.
Okay. On the other two points, I will answer. I excuse myself with everybody. I am down with voice. So I can't talk any louder than this. The industrial division leftover after the potential sale of the cutting division is comprised of three items. The laser marking unit of LASIT, which is small, growing very quickly and very profitable in this point. The OT-LAS marking unit, I mean, size of LASIT expected order of magnitude this year, EUR 30 million in sales. OT-LAS, which is marking on larger surfaces with CO2 lasers only, a difficult year. This year, I continue to hear noises in the background. If you could please switch your microphones off, it would be cleaner. I mean, OT-LAS, EUR 5 million of revenues roughly in 2023 and more or less the same. More or less the same in 2024.
And then we have the laser source business unit of El.En., which is, as you know, located. The one who visited El.En. knows it's located within our building, and it has certain connections with the manufacturing also of the medical laser sources. So we do not have any disinvestment plans for these three businesses, even though they are quite small. And we plan to continue to invest in them in order to have them grow if we feel there is an opportunity of growth, of course, growing from their size. They never become a huge company. For what concerns the cash that this potential transaction will bring to the company, strengthening a lot the Net Financial Position, we do not yet have any specific plan for investing this money in any particular acquisition.
As we have always said, we have many investment opportunities for enlarging the activities of our current activities. In our current activities, we do not have any specific M&A plan. Of course, large availability of cash may change this view, but we will have the time and the chance to talk about this in the future.
Hi, Andrea, if I may. Hi. Very quickly, my only element of concern of the deal is the Golden Power issue. In your press release, you mentioned that you kind of segregated the Italian activities, and you want to remain with a stake on those ones, but after 2027, you might be free to sell them to the Chinese partner. Do you see this issue, and it might affect the deal? Thank you very much.
The deal involves the selling of the Italian activities to the Chinese partners, and the deal involves the need for asking for authorization to the Italian Presidency, to the Italian government in order to be set free from the Golden Power. We believe we do not fall under the cases that should trigger an intervention from our government to inhibit such transaction, but we are aware that we have this issue today, so the schedule of the proposed transaction involves signing the final stock purchase agreements by the end of the year, and at the end of the year, we will have to submit those purchase agreements to the Italian government for what concerns Cutlite Penta, of course, for having the nod to move to the sale of the stake in Cutlite Penta.
This is supposed to take two or three months, but today, we have no particular reason to think that the Italian government will inhibit the transaction.
Thank you very much. If I may, final one. If the deal would close by the year end, and hypothetically, you would sell 100% of those activities, your net financial position will improve by roughly EUR 120 million, which is the EUR 90 million equity plus the implied net debt that you mentioned in your press release.
Yes, but we are not selling 100%. We are selling a certain percentage of the units only. And so at the current valuation and without any price adjustment that, as I mentioned, as we mentioned in the press release, could hit the consideration for the sale of the companies, we are talking of a cash inflow of about EUR 53 million that, of course, in terms of net financial position, needs to be added to the release of the negative net financial position. So the numbers, Enrico, please confirm, should be, as of today, 53 plus 39.
Yeah. Yes. You're right.
Thank you very much.
You're welcome.
Some other questions from the floor?
If I may, just a couple of questions.
Yes, of course. Go on, Cangi.
Good afternoon, everyone. The first one is on authorization. Is there any other authorization you need to get to complete the transaction, or is it only the Golden Power? And the second one, just want to check with you if my numbers are correct. So disposing this part of the business, I mean, thinking about the companies doing double the EBIT done in the first half, what remains would have an EBIT margin between 15% and 16%. Is it something you think is correct? And does the remaining part of the industrial business have similar margins, so in the same range? Thank you.
I am not aware of any other authorization that we need to gain in order to complete the transaction, and so the Golden Power should be the only one. Concerning the EBIT margin, you're right. The company without the cutting division would be running with a higher EBIT margin. We've never disclosed such EBIT margin in detail. You get it by calculations, not by explicit release. I can tell you that more or less you're right, and I can tell you also that the EBIT margin of the rest of the activities is also in line with the EBIT margin of the medical excuse me, the EBIT margin of the other industrial activities is more or less in line with the EBIT margin of the medical business. Depends on the years, depends on the volume that each year they're able to develop.
But the EBIT margin of the industrial business that will remain with the group is higher than the EBIT margin that we enjoyed with the laser cutting business unit as an average.
Okay. Thank you.
Some other question?
Yeah. Maybe just a clarification. This figure of 55 can be, let's just say, lower by a maximum of 5% based on the results of the period 2025-2027. Did I understand correctly?
Yes. There are two means through which the consideration could be adjusted. This potential discount that the buyer would get if certain financial targets were not met at the end of 2027, which can be as high as 5%. And then there are indemnification clauses on certain issues that have been analyzed and surfaced during the due diligence that might also materially affect the price in an amount that in this moment is unknown, but that will be better defined at the moment of the SPA. But it could be also significant. Of course, we are not talking of an immaterial amount of the potential warranties in it, and this could be material as well.
Okay. So just to have a rough idea, when should we know exactly if this discount is going to be 5, 10, or whatever significant?
I don't know also what we will be able to disclose. I know that we will discuss about these indemnities. I believe the next time that we will report about the financial details of this transaction is when and if the transaction will be closed. At that moment, we will give you the details, and unfortunately, not necessarily both elements will be known because the discount based on the financial results will be triggered at the end of 2027, and the potential discount on indemnities will be triggered if the events that trigger the indemnities will take place, but anyway, we'll try to be more precise when we will release, hopefully, the closing of this deal. Unfortunately, today, we can only tell that we have these two potential areas of price adjustment, but we are not able to quantify them under any means.
So the eventual capital gain, let's just say assuming nothing goes wrong and you don't have any discount and you have a capital gain of 13.5, this will be booked only at the end of 2027?
No. No. No. I don't know accounting-wise how this will work and how we will account this avoiding to pay undue taxes. But I believe that we will call to pay capital gain at the moment of the sale, which will take at the actual sale, which will probably take place in the first months of 2027 because typically, if we close an SPA for the, excuse me, the first months of 2025, because if we close the transaction as we scheduled for the end of 2024, signing the SPAs, then the actual sales contract going to the notary in Italy and registering the transfer of shares at the Chamber of Commerce in China will probably take place in the first days or weeks of 2025. And this will be the actual date of the transfer and the actual date when capital gain taxes are triggered.
Okay. Thank you very much, and see you on Friday.
Yes. Thanks.
Other questions from the investors?
Yeah. I have three questions. So if you would not get approval from the Italian government, would you sell the Chinese business anyway, or is that related to each other, then the whole deal is off? That's the first question. The second question is, what is the basis of the valuation of the put option for the remainder of 30-ish% of the business in 2027? Is that a multiple on the earnings at that point? And then the third question is, what is the working capital intensity of the business you are selling? Is that more or less than the group average? The group average is around, was it 26-27% of revenues. Is the business you're selling more or less working capital intensive? Thank you.
I don't know what actually happens if the deal. I believe that simply the deal is not affected, and we have to continue as we continued before in case the Golden Power is exercised, or maybe the Italian state has to somehow intervene. I'm sorry, but I'm not prepared. We are quite confident that we will not receive any opposition given our size and also the business in which we are operating and the fact that many technologies on which we are operating are already widely retained in China, so the second question was the valuation of the potential exit. We are negotiating it. We didn't disclose it, and we will disclose it when it will be finally defined. What we set forth in the framework agreement is there will be a potential for exiting at a certain multiplier of a certain financial quantity.
Concerning the intensity of net working capital, I believe that the cutting systems run more or less at the same ratio of the rest of the group, so there is not a huge difference.
There's no material difference.
Yes.
Okay. Thanks.
You're welcome.
Other questions?
Hello. Good afternoon.
Go ahead.
Good afternoon, Andrea. This is Andrea Scauri from Lemanik. When and if the deal is finalized, what are your plans, the strategy for the medical division once you have delivered the balance sheet? Do you see a chance to grow externally, any targets that might be interesting for you that are not at the moment feasible given the business, the Chinese business, the laser cutting business? Thank you.
Thank you, Andrea. Of course, having more cash and not having such a large industrial business would simplify potential transactions dealing with medical business companies only, which were somehow hindered by the presence of such a large business in the industrial, which was inconsistent for all the other potential partners to the medical activity. As I answered earlier to Giovanni Cangioli's question, we, though, do not have yet a plan, and we do not have yet a target. We are now planning to close this transaction, which is going to be hard. I mean, we are just at a preliminary phase, and it's going to be a complex deal, and then we will be able to concentrate on the expansion of our medical business, which could include M&A's activity.
But as always, and I repeat, as a primary goal, we always have the expansion of our own business, which by itself was in the past and could in the future be the basis for a very interesting growth by itself.
Okay. Thank you, Andrea. Very clear.
Hi. It's Matteo Ghilotti.
Okay.
Can you hear me? Okay. I have a very simple question. I understand that the deal has not been signed yet in the sense that you are, say, very, very close. You have to discuss still a few details. But can we say that it's, I mean, 99% done just because you said, you wrote in the press release that clearly there are still some details missing?
The point is the following. The deal, the framework agreement has been signed, but the binding conditions are not very strong, so it's very difficult for me to tell you if you are 90% there or 50% close to the deal. I can tell you that ourselves and YOFC are strongly committed to finalize this deal because we feel that the strategic reasons underlying this deal are compelling, and this deal is something very good for both the Chinese and the Italian companies, which make up our laser cutting business division, so what we could disclose in the press release is that we signed this preliminary agreement, which doesn't bring with it any assurance that the final agreement will be signed.
What I can tell you in addition is that both parties are thrilled and are going to work in order to define all the terms for which this deal can effectively fly because both parties are convinced that the complementarity and the capabilities of each of the partners will be accretive for the business. And this is very important on one side for the investor who, of course, wants to see a good financial return for its monies that it's investing. And it's very important for us, especially concerning our activities in China, but also here in Prato. We believe we found a partner that is understanding the peculiarities of our industrial organization in Italy and will be able to enhance this activity as it has enhanced all its international activities in the past.
Thank you.
Other questions from the floor?
Just a quick question, if I may. Are you happier with this outcome compared to the IPO that you were pursuing in the past?
Financially speaking, of course, no, because you see what we are talking about here. We are talking about an exit value, which is in the neighborhood just a little bit more of the net equity of these businesses. This is far away from what we were thinking of when we started working on the IPO and what we could have got in terms of valuation when we were close to closing the IPO. The events, especially the downturn of the Chinese economy following the years of COVID in China, inhibited our IPO project to succeed, and in this new scenario, we looked for a strategic partnership, and we feel that this partner is very appropriate, and so given the current condition, I believe we found a very, very good partner for our activities.
As you might have understood from the short description in the press release, we are talking with a company which is, yes, Chinese, but has a very strong international base, has internationally formed and with international background management, has several subsidiaries for manufacturing worldwide, and has a facility which this YOFC is willing to develop, which manufactures already with success, well integrated on the Chinese market, industrial laser sources, fiber laser sources that can be used and are used already in China in the laser cutting business, so there is also from that side an integration of the business, a vertical integration, and at this point of view, we believe that we found an excellent match with YOFC, an excellent strategic match with YOFC.
Okay. Thank you.
You're welcome.
Andrea, we have not any other question, but just some other question from the floor or not?
Hi, Andrea. Can you hear me okay?
Yes.
Yes.
Yes.
Hi. Trevor Fitzgerald, how are you doing? Well, I just want two questions. The first one is, are there any you mentioned it's a vertical integration by the YOFC. Are there identified synergies there from the business?
There are potential future synergies because potentially YOFC as a manufacturer of high-power laser sources could become a supplier of Penta, which today it's not. And so this is the most important synergy that potentially arises. Then there are local synergies, considering that they are operating in the technological environment in China. And so there could be synergies in R&D. They have a large amount of specialists in optics. And there could be optimizations also operation-wise, considering also their international footprint, where we could take advantage of certain capabilities they have in their overseas facilities, which are, as I mentioned to you before, worldwide in Europe, Asia, Africa, and in the Americas. So this is the answer.
Thanks, Andrea. I mean, it leaves your business now with a very well-financed. I mean, probably shouldn't put the horse before the cart or the egg before the chickens or whatever. Do you have any plans on capital allocation going to 2025?
Trevor, as I said before to Giovanni and then also to Andrea and the investors that raised this question, we do not currently have any plan. We will be with a secure bank account in case the transaction finalizes. This is not necessarily enough to change our development strategy that, as you know, in medical, in the last years, has always been focalized in investing in our business to make it expand internally, and so this will be and will continue to be our main goal. Of course, we will be more free to look for certain potential integration with other partners once freed up with this very large part of business that we had in industrial, but I'm not ready to make any disclosure for any different approach to capital allocation that the company will undergo once this transaction will be closed.
We will keep you updated as soon as we have new ideas for that.
Fantastic. Well, thank you very much. Have a good day.
You're welcome.
Any other questions? Okay. If there are no more questions, this conference is over. Please do not hesitate to call Enrico Romagnoli if you need to go in-depth with our questions. Thank you for participating in this conference, and we hope to see you on Friday for the third Q3 2024 financial report. Bye. Thank you so much.
Thank you, everybody. Bye
Bye. Ciao.
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