EL.En. S.p.A. (ELN) Earnings Call Transcript

Good afternoon or good morning to everyone, and welcome to EL.En's First Half Year Financial Results of 2021 conference call. Today's call will be recorded. [Operator Instructions]. With me on the call are 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 to put your expectations, 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 a possible future results or events are forward-looking statements. Forward-looking statements involve known or unknown risks, including general, economic and business conditions and conditions in the industry we operate and to maybe affecting should our caption prove 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. But at this time, I want to turn the call to Andrea Cangioli. Please go ahead, Andrea.

Thank you, Bianca. Thank you very much. Good afternoon, everybody, and thank you for attending this conference call. With Enrico Romagnoli, we will discuss and comment the financial results of the El.En. Group in the first 6 months of 2021. As we disclosed last Friday with our press release after the Board of Directors meeting, our financial results were very strong. Constant growth and good profitability have been El.En's business card over the last years. We have always shared with you our ambition to continue the run along our growth path for several years based on the growth expectation of our markets and on our efforts and investments aimed at setting up an organization capable of seizing the market opportunities, and to create new opportunities through the continuous innovation of our product range. Representing the EUR 273 million in sales, the EBIT margin over 11%, and net profit over EUR 20 million for the 6 months, we are, therefore, very pleased not only for the record results itself, but also for how these results represent the materialization of our plans. They are based on our long-term planning with an infrastructural investments and the yearly expense aimed at progressively improving our capabilities in research and development, in clinical studies, in marketing and in regulatory, just to mention some of the areas and the functions that were deeply strengthened in the last years. Grounds for the 2021 performance don't rest in one single product or one single customer or one single market. But are widespread in the capabilities that the various functions of the Group reached, the knowledge actively cultivated and strategized over the years that allows us to continue to generate business opportunities. At the same time, our market recognition is becoming wider and more solid. Our brands in the medical business, DEKA, Quanta, Asclepion, Asa and Renaissance are not anymore and not only seen as the brands of a smart, innovative organization, challenging the market leaders but are stable and reliable reference for our customers and benchmarked for our competitors in several application segments. In the industrial business as well, Cutlite and Penta are acknowledged today of an interesting market recognition in Europe and in China, respectively. In China, our presence in the ship mental cutting business is now roughly 15 years long. And the brand Penta is recognized as 1 of the leader with its hybrid Euro-Chinese technology offer. Only in the very last year, Cutlite was able to gain in Italy and Europe recognition and size that are making it an actual player in a market dominated by giants, where 5 years ago, our presence was negligible. When looking at the details of the financial results, comparison with the first semester of 2020 are not very meaningful this time. The first months of last year were severely impacted by the pandemic. Our business on the industrial market in China was halted from the middle of January to late March in Wenzhou, and to April in Wuhan. In Italy, we had to stop industrial business operation in March and April. And worldwide medical-linked systems demand abruptly dropped at the end of March. It's more worthy to compare the current results with the first half of 2019, reporting the average growth from the last semester run by the Group in a pre-pandemic condition, let's say, in a normal environment. Average 2019, 2021 growth for the first 6 months was 20.9% on a consolidated basis and 20.4% and 14.4% and 29.1% respectively, for the medical and the industrial sectors. These numbers are telling us that over the last 2 years, despite the revenue slump of the acute pandemic phase, our growth was stable, strong and well above the expected growth in our reference markets. Success in the medical business was driven in first place by aesthetics where our solutions for hair removal, body contouring, tattoo removal and rejuvenation led to solid growth. Performances were strong for our publicly reporting peers top. We don't feel that we gained market share in certain application segments, especially in hair removal. The negative effect of COVID was deeper and longer lasting in our surgical application, which are registering a slower recovery, especially in the system sales. Growth in the industrial business was twice as fast as in the medical, by the way, getting close to balancing the ways of our 2 sectors in terms of revenues. This was mainly due to the traction of the ship metal cutting business in China and in Italy as well. The market size is continuing to enlarge the effect of the improvements in the technology, thus in the productivity and the effectiveness of our systems in their traditional application fields and in more applications that are being opened and made affordable or simply doable by the improved performances of our systems. Large infrastructural investments have been performed and are being carried on in order to adapt our production capacity in China and in Italy to the expanded market size. We are talking of a very large investment, which today is totaling up EUR 30 million spent in new plants, about EUR 70.5 million in China and EUR 12.5 million in cutting for Cutlite Penta. As our results are testifying the transition phase for the most acute phase of the pandemic is reserving and sustained demand levels in all or almost all of our businesses. Is it a rebound? Is it driven by the optimism tied to the expansive policies that several countries outlined from last spring and are promising to sustain over the next year? It's very hard to tell. What we see is a very strong demand for our products, stronger than we have modeled. We shared with you how we were expecting strong growth and we were expecting the pandemic to be a parenthesis after which growth would have showed up again. In fact, the current sales and order bookings volume put us ahead of where we had planned to be today, prior -- in our planning made prior to the beginning of the pandemic. But the pandemic is still there with the unpredictability of its effects, not only in terms of the spreading and mortality of the infection, but also with the complex demands on the markets. The most evident negative effect that we currently are experiencing is the strain in the supply chain, suffering of the star shortage of certain materials, ranging from electronic components to metals like aluminum and copper. The real effects on us are uncertainty in the delivery terms of certain supply, price increases of several components, and increase in our stock in order to cover the longer supply lead times. A few words on our cash position, which is becoming stronger as an effect of the increased profitability, which is covering the financial needs driven by growth in investments. It's now worth it to remember that after the suspension of 2020 El.En. is back paying a dividend to its shareholders in May 2021. Finally, at the beginning of the summer, we performed our second 1 to 4 share splits. The first one took place 5 years ago in 2016. The goal is to keep our share price in the apparently more attractive range from EUR 10 to EUR 40. Moreover, during the last weeks, for the first time, our market cap exceeded EUR 1 billion, a remarkable milestone. And we hope a further investor attraction enabler, consistently shifting the company towards the mid-cap area. At this point and then with my general introduction, please, Enrico, go ahead with your part of the presentation.

Thank you. Thank you, Andrea. As usual, I'm going to give you some details on our last financials. And in the first half of 2021, in continuity with the end of 2020, the growth progression of the Group continued after the parenthesis due to the effect of COVID. As you can see in this slide, we did a comparison, not only with the 2020, but as already said by Andrea, we did 2021 -- 2019. And in H1, the turnover increase of 68% and reached the EUR 274 million. The gross margin stood at EUR 99.9 million, an increase of 66.9% compared to the first half of last year, thanks to the significant increase in turnover. The gross margin percentage slightly decreased, but it has actually improved both in the medical and industrial sectors. And the overall decrease is given by the increase in the weight of industrial sales, which structurally have a lower margin compared to the medical. On June, the gross margin of Medical was 44% when the Industrial was 27%. Operating costs amounted to EUR 20.8 million, an increase compared to June 2020, but with a sharp decrease in the impact on turnover which went from 9.9% on June 2020 to 7.6% on June 2021. For this cost, aggregate is significant -- the comparison with 2019 when the total amount was higher than 2021. In this cost aggregate, we benefit from the lower commercial expenses and we had significant savings for international travel and trade fair and congress activities, which particularly in the medical sector, represent a significant cost. The only trade fairs we were able to attend in this period were held in China for metal laser cutting sector, in Japan for beauty treatment sector equipment, in Italy and Europe and Dubai for specialized congress of various medical disciplines. In the coming months, participation to important and numerous event is expected, but it will still take a long time before returning to the pre-COVID intensity of these activities. Staff costs equal to EUR 40 million are up compared to the EUR 29.3 million of June 2020 but with a lower impact on turnover, decreasing from 18% in 2020 to 14.6% on June 2021 and lower than 2019, too. On June 2020, we had more than 1,800 staff. EBITDA was EUR 39.1 million, almost 3x debt 2020 and double than 2019. [indiscernible] Sales increased at 14.3% compared to the 8.9% of last year. Amortization and other approvals showed a market -- is growing from EUR 5.2 million on June 2020 to EUR 8.3 million on June 2021, while their incidence on turnover remains substantially unchanged at 3%. The main increase was warranty provision to take into consideration the increase in sales volume and some extension of warranty period. In H1 2021, the total amount of fixed cost, operating cost, staff cost and depreciation totaled an increase of almost 56% but the impact on sales reduced from 35% -- 31% to 25%. Thanks to the increase in gross margin and to the reduction of impact of fixed cost, operating result marks a positive balance near to the EUR 31 million, with a strong increase compared to the EUR 9.3 million for the first half 2020, an incidence of turnover increasing to 11.3% from 5.7% in the same period of last year, and over 2019 when it was 8.9%. Pretax was [indiscernible] with a positive effect of ForEx, mainly due to the U.S. dollar, which appreciated against the euro in the period. Net income was EUR 22.4 million compared to the EUR 6.4 million of H1 last year. The net financial position has an increase of approximately EUR 50 million in the period from a EUR 64.2 million on December 2020 to EUR 78.8 million of June 2021. In accordance with European Securities and Market Authority requirement and adopted by [Conso] before the financial as of June 2021, the net financial position need to include the long-term payables even if not refer to financial liabilities. The main long-term debt is towards the former minority shareholders of Penta Laser Wenzhou for RMB 40 million, approximately EUR 5 million, to be paid in accordance with an earnout close included in 2020 sales contract in case of an IPO of Penta Laser Wenzhou within 5 years from the date of purchase. And in accordance with this new requirement, we restate our net financial position at the end of 2021. In the first 6 months, CapEx were EUR 11 million when for the whole year 2020, were EUR 13 million. The main investment was a new building of Cutlite Penta in Prato for EUR 5 million, purchase without leasing. The cash generated by operating activity covered the mix arising from the increase of capital, which is logical in this phase of rapid growth, those resulting from [indiscernible] and the payment of dividends to reach El.En and the subsidiaries returned after a 1-year suspension. The graph shows a positive cash flow for the items of other current payables and receivable determined by the increase in advance received from customer, a practice that takes a significant volume in China by that of tax payables as a result of other income and higher cost for direct taxes allocated in the period. The capital increase collected by the company due to their exercise of stock option assigning to employees amounting to EUR 4 million in the half year and also contributed to the improvement of the net financial position. Since the comparison with last year is not very significant, we also reported for the sales and the turnover, the comparison with 2019. And in 2021, the medical sector was accounted for approximately 54% of the group [indiscernible] and the CAGR for medical sector 2019, 2021 was 14%. The jump in sales of aesthetics segment has a very significant value, with the best growth rate since 2019 in medical sector. It is based on a solid growth, in particular in hair removal and body contouring application, thanks to an offer of innovate system that are able to meet the needs of a demand that after the pause of the first wave of the pandemic is gradually returned to growth. The lockdown restrictions have not -- have had more deleterious effect on the surgical segment than on the other one due to the difficulties of accessing hospital and the focus of them on the COVID treatments. We hope to be able to recover in the coming quarters. Excellent is the recovery in physiotherapy where Asa is backed on the path of growth over the past year. The turnover of after sales service was also good. It includes retiring assistance service and the sales for spare parts and consumables. The recovery could have been more important if external production difficulties had not limited us in the first month of the year in sales of optical fibers for urology. The critical issues has been resolved. And already in the second quarter, the volume of product and turnover was largely satisfactory. For Industrial, the industrial sector has a CAGR of 29% higher than the medical sector with an exceptional performance recorded by the cutting sector, which is working at a very high rate of plus 35%. These are production and sales volume for which production capacity has been prepared with important investment now used in an increasing manner with a beneficial effect also on the income statement, thanks to the operating leverage. The trend was also very positive for the other main segments, such as marking and laser sources in rapid recovery from the last year. Excuse me. For one concern, the breakdown by area, the growth is significant in all geographical areas in which the Group operates for medical and industrial sector. Andrea, please go ahead for the guidance.

As we said in the press release, we are updating and improving our 2021 guidance. The projected 2021 sales, of course, counting there won't be any material disturbed by the development of the pandemic and by the supply chain strength and shortage as I mentioned before. I mean, the projected sales should exceed EUR 550 million. Driven by a further increase in revenues, EBIT in the second half should beat the results of the first half of the year. We are done at this point with our presentation. And so the Q&A session can begin.

[Operator Instructions] We have one question, Andrea, from Francois Robillard.

The first one is on the breakdown of the second half growth that you see between your medical and surgical segment. Can you give us a bit of color on what kind of growth rates you are expecting. I see that some of your U.S. listed medical laser peers expect a top line growth of approximately 20% in the second half compared to the second half of 2020, which was rather strong. Do you expect the same for your division? And for your Industrial segment, the EUR 67 million of sales since the second quarter, is that your new baseline speed, I mean can we expect a similar amount in the coming quarters as well? Can you just please comment on that? And then on your new guidance for the full year '21 EBIT, can you give us some more details on these expectations? I saw that you booked a provision of EUR 2.8 million in the first half. Is that reflected -- how do you reflect this in your new guidance? And is it reasonable to expect an EBIT margin of 12%? And last question, going into 2022, do you have any visibility for growth for next year? And can you share with us your expectations?

Thank you, Francois. I mean, technically, I cannot answer to any of your questions because of -- we have our guidance, and the guidance is what we gave. And so more than EUR 550 million and improved EBIT in the second half. Trying to give you some -- the color that you wanted, what I can tell you is that we are experiencing sustained demand in Medical and Industrial. And therefore, we expect strong growth in both areas. In this moment, I can tell you that we are expecting a relative -- relative, not absolute, slowdown in the Chinese market for industrial laser application, but we are nevertheless expecting an orders growth, which should be able to reach the consolidated targets as we mentioned. Yes, you are right, the first half -- in the first half EBIT, we had some extraordinary accrual, which probably is not to be replicated in the second half. And for this reason, we could expect an improvement of the EBIT, not only as an effect of the increased revenues, but also as an effect of the missing accrual that we should -- we shouldn't have, again, the accruals as we had the impact in the first half. What we expect, to be a little bit more expensive, therefore, to be a little bit more -- to cause a cost on EBIT, is that we are slowly going back to congress and fair activity. This week -- at the end of this week, the Congress -- the antiaging congress will take place in Monte Carlo in Monaco. And for the first time, we will be able to gather our distributor in a distributor event, something which has not taken place for the last 2 years. So we are attending in person this event, which is in the category of events, which we hold abroad and which are quite expensive, which have been missing from our activities and from our P&L in the last 18 months. So slowly, they are sliding up again. But nevertheless, we can confirm that we expect EBIT to be higher in the second half than in the first half. And since we were above 11%, yes, we hope to be able to get closer to 12%. But we don't give any guidance, any detailed guidance on that number.

And on 2022, any first expectations you may share with us?

On 2022, I mean in my presentation, I somehow mentioned how, at this point, we find ourselves well ahead in the growth path that we have. If I look at what we have now in order, I believe that I can tell you that we have a very solid position, a very solid position. And that some of our backlog will probably slow into 2022 because we ask the customers to plan deliveries in order to be able to set up for their appropriate production capacity and to be able to meet their requests. So currently, what we see is a strong second half of 2021 with a good momentum into 2022. But I'm not telling you anything new. Our market is a market in which orders are not placed with financial collateral. We have seen back in 2020, how quickly our huge backlog was basically canceled by our customers. Therefore, it is that -- even though we are extremely confident, it's not on an order book that we piled up today that we can count for 2022. What we can count for 2022 is the strength of the market, the good conditions of the market and the good positioning that we still have, and that we have today. For this reason, all I can think about 2022 is that we are very optimistic about what can be done in 2022 based on the current information. But we are not committing and we are not promising anything today, as usual, trying to be very prudent, considering the nature of our markets and of our demand.

Well, Andrea, we have a question from Andrea Bonfa of Banca Akros.

Okay. I got essentially, for time being, 2 questions. One is related to the Industrial performance in the second quarter. It seems that Italy and Europe performed extremely well and almost accelerating from Q1. So is that again a trend that you are experiencing? I mean, what's your view on this specific geographical performance? If you can comment on that. And secondly, if you want, it's a provocative question that you are mentioning that you are returning to spend in congresses and likely marketing. But I mean, you are growing at 70% year-on-year or 60%, if you look at H1 '19. And the question is, do you need these kind of expenses because I mean you are performing so well without them, maybe they are not so necessary. I mean, again, I understand it's a provocative question. And of course, you need to have some kind of marketing activities, but I would like to have your opinion on future budget on these kind of expenses.

Thank you for your questions, Andrea. Starting from Italy in the industrial, we're doing very well. I believe that our facility in Italy had a very, very good strategy and has a very, very good positioning and the extraordinary results of Q2 2021 just demonstrate how strongly we were able to attack the market, how we are gaining shares vis-a-vis our stronger and larger competitors. And the trend is currently still extremely positive. As I mentioned also in the first answer I gave, we are expecting a better performance of the Italian activities than the Chinese activities, of course, relatively speaking, in the second half of 2021. We have been extremely aggressive. We have products which are highly performing. We offer them at a price which, of course, is not extremely lucrative for us that it has a good industrial profit, which is allowing us to make good profits on one side but also to rapidly increase our share, to rapidly increase our position in the market and to have more visibility on the market. And this is accruing in a virtual process which is making our Cutlite Penta a very, very successful company in this months, in this quarter. Yes. Your question is a good question, and there's some very good question about the marketing expense, and we are always thinking about this because, of course, in this month, we are experienced this very positive situation in which we have a large quantity of orders but we are not spending the amount of money we were spending before in order to generate those orders. So I mean, logic would say, well, we have all these orders, why are you spending money? Why do you continue spending money? I believe that there was an overshoot in the expenditure, which ended with the pandemic. So in 2018, we were spending, I mean, the marginal benefit of the money spent in marketing was getting quite low. Now there has been an overshoot due to the pandemic, in which we couldn't do any international marketing activities. I believe that since we are in a competitive market, since the marketing and market activity presence is part of the margin mix, I believe all the companies will go back to some marketing presidents -- presence. All the company will start attending the main congresses. Probably, there will be less attendance to the second body of conferences, there will be less travel. By the way, in this case, unfortunately, we are not spending any money because these congresses is one of the various activities for which a ticket was given when the first congresses were canceled. So if we don't attend -- if we didn't attend this time, we'll lose the down payment we made at this point 2 years ago. So we are not creating an additional expense by participating to this progress because if you wouldn't participate, we would have lost everything, down payments the hotel's down payments to the fair organization. But for what I believe is going to go on in the next years, I believe there will be a slower return to the expenditure. And I believe that finally, we will remain lower in expense than we were at the end of 2019.

Andrea, we have one more question from Andrea Randone from Intermonte.

I have a couple of questions, if I may. The first one is about your aesthetic business. You already commented on top-performing applications. I wonder if you can provide additional comments on geographical trends? And more in general, what is your perception about business performances of your customers in this segment. The second question is about your production capacity and more in general about your future CapEx plans, if you can provide us an update.

You meant customers or competitors?

I meant customers in order to understand if the business is going very well for them, and they acquire new applications, new machinery, if the customers -- so for instance, we talked about the people going back to gyms and they ask for new equipment for this restart? And I wonder if -- is this similar -- something similar in aesthetic centers or what you see in terms of business trends for your customers?

Yes. Yes. I believe that you made a good point. Our customers in this moment are working at full [ review. ] They are facing a very strong demand. And this is what is giving us a very strong demand for systems. People have been willing to spend money in aesthetic treatments. This has been a psychological effect after the lockdowns. This has been also a disposable income effect due to the fact that not many leisure expenditures have been allowed. But bottom line, demand has increased. And we were in a position to be able to fulfill a high and growing level of demand. The areas -- geographic areas in which we have been particularly successful, are at first place, the United States. In the United States, we are encountering great success in aesthetic with 2 distribution channels. One is the distributor for aesthetic application for DEKA, the brand DEKA. And for the brand Quanta, which is part Asa and the other one is our long-term partner Cynosure, which is selling our hair removal laser in the U.S. and also worldwide. Also, we have been extremely happy for the success of our professional statics market in Italy and in Japan. It's not medical aesthetic, it is a spa and salon aesthetic, and it has been extremely successful, both in Italy, in Japan and also in Germany. For what concerned production capacity, you're right. We have been investing in production capacity for years, but the volume growth has been constant in years. Therefore, we have to continue to invest in the further increase of our production capacity. For what concerns industrial laser applications, we are building new facilities in 2021 in the city of Leni and in the city of Wenzhou, which will bring to 5 the available facilities. During the month of the year of 2022, we might enlarge also our facility in Wuhan. It's not -- currently, we do not own a facility in Wuhan. We are on a rent but also based on the opportunity to receive a significant support by the local authorities, we might be considering the further expansion of Wuhan's production capacity, too. For what concerns medical business production capacity, we just ended a round of enlargements of the companies in Germany, in Quanta System, in Asa. And we have enough room to expand capacity without large infrastructural investment. Nevertheless, should the trend continue to be strong as we have experienced in the last months, we will need to redesign certain products on the line, and not only by expanding our capacity, but also by allowing our partners to expand their capacity with us. Please keep in mind that we do not bear the full production cycle for each of our products. But for several products, we have third parties which perform a part of the production cycle. And so we will have to reinforce the network of third parties, which are performing some of the manufacturing job for us. I don't see this as a significant problem. We have done this in the past, and the growth of El.En has also been the growth of our partners over the last years.

Andrea, we haven't received any other question, then I want to ask to investors if there are more questions. Some more questions?