Amplifon SpA

MIL:AMP

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Amplifon First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relations Director. Please go ahead, madam.

[Francesca Rambaudi, executive]

Thank you. Good afternoon, and welcome to Amplifon's conference call on first half 2020 results. Before we start, a few logistic comments. This morning, we issued a press release related to our H1 2020 results, and this presentation is also posted on our website in the Investors section. The call can be accessed also via webcast, and dial-in details are on Amplifon's website as well, as well as on the press release. I have to bring now your attention to the disclaimer on Slide 2, as some of the statements made during this call may be considered forward-looking statements. With that, I am now pleased to turn the call to our CEO, Enrico Vita.

[Enrico Vita, executive]

Thank you, Francesca. Good afternoon, everyone, and welcome to our quarterly conference call. Today, I would like to start by spending some words about how our organization reacted to the unexpected and unprecedented crisis related to the COVID-19. And I can certainly say that since the very early days of the crisis, our organization reacted immediately, very quickly and very effectively, with only two, but very important goals in mind.

Our first priority was to safeguard the health of all our people while continuing to serve safely our customers that still needed our services. Our decision during the outbreak was to remain always open even if, of course, with a limited number of stores in order not to abandon our customers during these difficult times. The decision, which was different, maybe from the one of many of our competitors and maybe not always financially convenient, but that I'm very convinced that it will pay strong dividends and is already paying strong dividends in the near future.

Our second priority was to safeguard our profitability, cash flow and balance sheet. I believe that the numbers we are presenting today in terms of profitability and cash generation despite revenue contraction in the quarter of circa 45% versus previous year, so about EUR 190 million less than previous year, represents a truly outstanding result. All in all, I want to say that I'm extremely proud of how our entire organization responded to the crisis, always acting as one team. In fact, I can say that everyone has contributed to these results with no exception whatsoever. I also believe that this team has now demonstrated its ability in outperforming both in times of growth and in times of crisis as well. That is why, with no doubt, I can say that our people today represent our most valuable asset. Gabriele will give you all the details with numbers about our financial performance.

So I would like now to move to the next chart, Chart #4. Here, I would like to give you an update on our sales and the message that I would like to immediately pass to you is that we have seen an impressive speed of recovery through the quarter, which was without a doubt, much faster than we expected only some time ago.

During our last quarterly call, I said that we were expecting April to be heavily affected by the lockdown measures in place in most of our markets, and this is exactly what happened. Our revenues in April were significantly down, around minus 65% versus previous year. But since then, we have also seen a steady and very faster recovery during the rest of the quarter. In May, our revenues were down around minus 45%. And then June confirmed the recovery trend with revenues down around 20% versus previous year. And the very good news is that July is confirming this trend. And in fact, month-to-date, we are currently trading above previous year. I believe our revenues have been supported by significant market share gains in all core markets, in particular in the U.S., and I also believe that this pace of recovery is showing once again the resilience of our company and our business. With this, I now hand over to Gabriele.

[Gabriele Galli, executive]

Thanks, Enrico, and good afternoon to everybody. Moving to Slide #5. We have a look at the group financial performance in Q2 which posted an outstanding result in terms of profitability and cash flow, thanks to the strong and timely measure adopted. Revenues in local currency were down around 43% with organic performance at minus 44% due to COVID-19 outbreak and M&A contribution at plus 1%. After a strong start in January and February, sales were impacted by COVID-19, starting from March and especially in April, but strongly improved thereafter as restrictive measure were eased. Despite lower revenues, EBITDA came in at EUR 66.4 million, with a margin at 26.5%, up 100 basis points versus previous year thanks to the strong set of action we have implemented on our main cost categories. This action included a significant decrease of labor cost, our largest cost category, accounting for around 40% of revenues, thanks to the activation of government social schemes and employment support tools as well as significant productivity improvement.

With regards to marketing expenses, which represents around 10% of our revenues, we have reduced the overall spending in the quarter by around 65% versus previous year, with a progressive increase of marketing investment as demand improved. With regards to rents, we benefited in accordance with the amendment of IFRS 16 introduced by the IASB of around EUR 7 million of income related to the renegotiation with the landlord of the lease agreements of our shops. Finally, in relation to the period, April, June. On general expenses, we benefited from tight control of discretionary costs and the renegotiation of several supplier contracts.

Moving to Slide #6. We have a look at the financial performance for H1 2020. Revenues in local currency were down around 26%, with organic performance at minus 27.8% due to COVID-19 outbreak. And M&A contribution positive at 1.8%. EBITDA amounted to EUR 131 million, thanks to the strong cost-containment measures with an EBITDA margin at 21.4%, down only 100 basis points versus previous year.

Financial indicators also came in strong in this unprecedented period, thanks to the action implemented to maximize cash generation and protect our net financial position. Firstly, we reduced CapEx to essential projects since March, April, thus operating with only around EUR 5 million in Q2 versus the usual EUR 20 million we invest in a quarter. Secondly, we temporarily put on hold our bolt-on M&A activity, thus having no cash out in Q2, with cash out for H1 being primarily related to the Attune acquisition completed at the beginning of the year. In addition, we adopted a very tight control on operating and nonoperating working capital.

Moving to Slide #7, we have a look at EMEA financial performance, which was affected by COVID outbreak since March, but recovered strongly from early May with the easing of the lockdown measures. In H1, revenues were down around 28% in local currency, with organic performance at minus 29.6% and M&A contribution positive at 1.5%. Whilst in Q2, the quarter more affected by COVID and relative containment measures, revenues were down 44.6% in local currency. The performance was good in Germany, thanks to less restricted measures and in France, which reported an impressive recovery as lockdown eased with sales in line with prior year already at the end of June. The pace of the recovery in Italy and Spain was also better than expected with a strong sequential improvement month-over-month during Q2.

EBITDA amounted to EUR 103 million in the first half, with margin at 23.5%, only 80 basis points lower than previous year. In Q2, EBITDA amounted to EUR 52.3 million, with margin at 29.2%, up 280 basis points compared -- versus the previous year, thanks to the impressive results from the action implemented on costs.

Moving to Slide #8. We have a look at America's performance. In H1, revenues were down 20.9% in local currency, with organic performance at around minus 21% and M&A contribution positive at plus 2.4%. While in Q2, the quarter more affected by COVID outbreak, revenues were down 41% in local currency. The impact of COVID-19 materialized at the end of March in the United States, becoming significantly worse in April and shortly thereafter also in Canada and Latin America. As the lockdown measure eased, the U.S. reported the fastest pace of recovery with Miracle-Ear posting a good performance and positive growth already in June with strong market share gains. In H1, EBITDA amounted to EUR 22.7 million, with margin at 21.7%, only 3 basis points lower than previous year. While in Q2, amounted to EUR 10.8 million, with margin at 26.9%, posting a strong increase of 300 basis points versus previous year thanks to the result of the implementation of the mitigation actions.

Moving to Slide #9. We have a look at APAC performance, which showed an outstanding operating leverage. In H1, revenues were down 21% in local currency, with organic performance at minus 23%, impacted by bushfires in Australia in January and COVID-19 emergence in all the markets thereafter. M&A contributed by around plus 5.7%, thanks to the Attune acquisition.

Currency had a negative contribution by around minus 3.3%. In Q2, revenues were down 33.6% in local currency, with organic performance at minus 36% and the M&A contribution at around plus 5%. The performance in Australia was better than in other countries due to the less restricted containment measures. New Zealand was penalized by the total lockdown from the end of March to mid-May with the closure of our entire distribution network, but posted a strong recovery as measures eased. China, the first market affected by COVID-19, was back to growth in the second quarter. Also in Asia Pacific, the measure implemented to mitigate the impact of the crisis delivered excellent results. EBITDA was EUR 12.6 million in the second quarter and EUR 22.7 million in the first half, with margin reaching 40.5% in the quarter, posting an improvement of 12 percentage points versus previous year and 31.5% in the first half, posting an increase of 150 basis versus previous year.

Moving to Slide #10, we can appreciate the Q2 profit-and-loss evolution as a consequence of the extraordinary commitment team impact on the business. Total revenues decreased by 43% to EUR 250 million. A strong set of measures implemented during the quarter drove EBITDA margin to an outstanding 26.5%, with an improvement of 200 basis points versus '19. Absolute EBITDA ended up at EUR 66.4 million versus EUR 107 million last year. Following the important increase of investment and acquisitions made during the past quarters, G&A increased by around EUR 3 million, leading EBIT to EUR 17 million versus EUR 61 million last year. Net financial expenses increased by EUR 0.6 million to EUR 6.8 million, following the strong program of debt refinancing, which led Amplifon to over EUR 650 million financial headroom. Tax rate posted a 28% leading net result of plus EUR 7.4 million versus EUR 40 million last year.

Moving to Slide 11. We have a look at profit-and-loss evolution in H1. Total revenues decreased by 26% to EUR 615 million. EBITDA return came in at EUR 131 million versus EUR 187 million last year, posting a very limited 100 basis point margin decrease, ending at 21.4% versus 22.4% last year, thanks to the action plan implemented starting from April. G&A increased by around EUR 8.5 million, leading EBIT to EUR 31.5 million versus EUR 95 million last year. Net financial expenses, up EUR 13.7 million versus EUR 12.8 million last year. Tax rate of 29.9% versus 28.1% in '19, led net profit at plus EUR 12.6 million versus EUR 59 million last year.

Moving to the following chart, we can appreciate the cash flow evolution. Operating cash flow was in the period equal to EUR 93.9 million versus EUR 99.8 million in H1 '19, with a very limited decrease amounting to around EUR 6 million, thanks to a tight control of operating and nonoperating working capital. Net CapEx decreased by around EUR 20 million to EUR 21.8 million, leading free cash flow at EUR 72 million, posting an outstanding growth of around EUR 14 million or 25% versus previous year. M&A activity assorted around EUR 42 million after the Attune acquisition completed at the beginning of the year versus EUR 28 million in '19. Net cash flow was around EUR 22.6 million versus EUR 0.4 million last year, leading NFP at EUR 765 million versus EUR 786 million at the end of '19 and EUR 841 million in H1 last year, driving a net financial position improvement of around EUR 75 million versus June '19.

Moving to Slide 13. We have a look at the debt profile trend and the key financial ratios. As mentioned in the previous chart, the net financial debt closed at an excellent level of EUR 765 million, improving both versus December '19 and March '20, which decrease the accounting for positive EUR 427 million, short-term debt were around EUR 66 million and the medium long-term debt accounted for around EUR 1.1 billion. Following IFRS 16 application, lease liabilities amounted to EUR 443 million, leading to sum of financial debt and the lease liability to EUR 1.2 billion. Equity was at EUR 700 million. Looking at financial ratios. Net debt over EBITDA ended at 2.18x and net debt over equity at 1.09x.

Finally, let me add that during the last month, we completed our refinancing program, extending the maturities for around EUR 240 million as well as increasing the amount of the committed lines by around EUR 370 million. Thus allowing us to close the first half of 2020 with a strong liquidity position of over EUR 650 million including cash and balance sheet and undrawn committed revolving facilities. I would now hand over to Enrico for 2020 outlook.

[Enrico Vita, executive]

Thank you, Gabriele. So we are at the end of today's presentation, and I would like to conclude with some key messages. So the first one is that worst should be behind us. I use the conditional should because, of course, in everything that I'm going to say, I'm not taking into consideration any further major, major disruption due to the virus in the near future, which is something, I believe, impossible to predict by anyone at the moment. What I can tell you for sure today is that in the most recent months, we have seen an impressive speed of recovery, which was beyond our expectations. Another very important remark to be made is that we have not seen any significant change in consumer behaviors because of the pandemic. However, I strongly believe that during times of uncertainty, like the current ones, strong and the trusted brands like Amplifon will be the most preferred ones by consumers.

As said at the beginning, another very good news is that July is confirming a strong trend. We are currently trading above previous year, so that we now see the opportunity to come back to a level of business similar to the previous year already in this quarter, so in quarter 3. Consequently, we also look positively and with real confidence, I would say, to 2021 as we continue our strategic journey.

The last main remark I would like to deliver to you is also an important one. We are on the right track to turn this crisis into an opportunity for our company. And in fact, thanks to the work done by our people to support our customers even during the lockdowns. And thanks to the huge work done on our cost base, making our company even more efficient and leaner, we expect to emerge from this crisis even stronger than before. With this, I leave back the floor to Francesca.

[Francesca Rambaudi, executive]

Thanks, Enrico. [Operator Instructions] Now I turn the call over to Sherry in order to open the Q&A session. Thank you.

[Operator]

[Operator Instructions] The first question comes from Niccolò Storer of Kepler Cheuvreux.

[Niccolò Guido Storer, analyst]

Yes. I would like to return for a moment on your cost-cutting measures implemented. So if you can gently quantify in euro million, the savings you had from labor force and savings you had from marketing, in euro million? And what should we expect in terms of carryover in the second part of the year on such cost savings, in particular, on rents, for which I don't understand the accounting treatment given they should now be below the EBITDA line with IFRS 16? Second question, maybe on M&A. Considering that the picture is probably much better than initially thought, do you expect to restart the M&A activity soon or you prefer to wait for the situation to be even clearer?

[Enrico Vita, executive]

Thank you, Niccolò, for the questions. I will answer to the second one, and then I will leave to Gabriele the first one. So with regards to M&A, we are now planning to restart soon. Of course, maybe we will wait just another month or 2 in order to confirm the trend that we are experiencing in July, but the plan now is to restart our M&A activity certainly before, if nothing, of course, major happens before the end of the year. With regards instead to the cost -- actions on costs, I would leave it to Gabriele.

[Gabriele Galli, executive]

Thank you. So I'm going to answer in percentages and not in absolute value for the labor cost and for the marketing. But I mean, from percentage, you can easily quantify the million. So starting from labor cost, which is the most important item in our P&L, accounting for around 40%. We basically implemented 2 kind of measures, so social tool and government support. But also, we implemented some measure improving the productivity of our labor force. And the 2 effects combined, out of which, of course, the social tool are much more important for the quarter, accounted for around 40% saving of the labor cost compared to last year.

[Niccolò Guido Storer, analyst]

In the Q or in the half?

[Gabriele Galli, executive]

Sorry?

[Niccolò Guido Storer, analyst]

In the Q or in the half?

[Gabriele Galli, executive]

It was in the Q, of course. In the Q, because the first 3 months were, say, almost normal operation. In the Q2, 40% saving. Moving to marketing. The marketing is around 10%, 9% in our P&L, as you know. And during the quarter, on average, we have been able to cut a lot of activity, especially in the first month, achieving an average saving of around 65%. But of course, the saving was much higher during the April month where our operation were, I mean, partially performing because of the very restrictive lockdown measures. And progressively, we started reactivating the investment in May and in June, and that's probably driving our much faster than the market recovery in terms of sales. Going to rent.

So basically, we applied the practical expedient, which means that if you are able to renegotiate due to the COVID emergency, some lease reduction from now up to the end of June next year, this kind of saving since it represents a reduction in the debt for the lease can be accounted into the profit-and-loss as an income. So at the EBITDA level, we have been renegotiating around 3,000 contract, the benefit of the contract that we already closed and is fully accounted in the quarter. As I mean, IFRS 16, practically expedient sales, is around EUR 7 million, and we still have some activities to be performed during the next 2, 3 months to close some other contracts but the vast majority of the benefit is there and can be seen in our P&L.

Now moving to how much of these savings can be also projected for the future. As Enrico was mentioning, COVID taught us a lot of different -- I mean, is in order to be more productive. So for sure, most of the activity that we have been able to carry out can be applicable also for the future. And Amplifon is going to be more efficient and also more profitable. Of course, as we did in the past, as I mean, thanks to our scale effect, we could have delivered a much higher EBITDA improvement on a quarterly basis, but we decided just to deliver a limited portion, 40 basis point typically in the past because we wanted to overinvest to create a competitive gap versus competition. This is also the intention in the next quarter. So we will be profitable. The improvement, of course, is going to be much higher than in the past, but also our investment to create the gap versus the competition will continue.

[Niccolò Guido Storer, analyst]

Okay. Maybe a quick follow-up. But on the largest cost items, so labor and marketing, should we expect anything else in the second part of the year? Or the cut is done and now we return to normal level as the turnover returns to a normal level?

[Gabriele Galli, executive]

As I was mentioning, so for labor cost, of course, since we do not expect further lockdown, I wouldn't consider any kind of social tool. But of course, we are going to implement the measure of productivity that we have been learning during the Q2. So some higher productivity, meaning that the labor cost ratio over sales can be reduced in the future, can be achieved also on normal activities. While on marketing, basically, we made a couple of different activities. The first activity was to a better -- I mean, implement a plan for achieving a higher productivity of marketing. So we believe that we can be more productive in the sense that we can focus on China giving higher return on investment on the one side. And on the other side, we are being -- renegotiating in marketing and in other OpEx, a lot of different contracts. So the average purchase price for different item, also marketing can be lower. So in this sense, you can expect this kind of measure also from now on.

[Operator]

The next question comes from Catherine Tennyson of Bank of America.

[Catherine Tennyson, analyst]

I have two, if I may. My first one, we've started to see a very slight uptick in infection cases in part of Europe, like Spain and certainly in Texas and other parts of the U.S. Firstly, have you seen a change in recent weeks in the footfall that you've seen in some of these regions? And secondly, what is your contingency plan or what measures are you putting in place so that if we do have a second wave in the back end of the year, will you be able to sort of keep your stores opened or indeed, have a greater level of selling that you can do online or remotely? And then just secondly, as you said, you've already seen recovery in July. Could you help us understand what portion of those patients are new leads as opposed to those that perhaps you had started to communicate with pre-lockdown and was just really finishing up the backlog of sales?

[Enrico Vita, executive]

Okay. Thank you for the questions. So I think that, as I said, it is very -- it is almost impossible to predict any second wave of lockdown in the future. For sure, we have recently seen some new cases actually in different countries. You mentioned Spain, for sure, in Catalonia. You mentioned the U.S. Also in Australia, in the Melbourne region. However, what, in my opinion, is important to highlight is that these measures are not full lockdowns like the ones that we have experienced in April, which means that people are allowed to go to work, business activities are open.

In general, only recreational activities like restaurant, bars, et cetera, et cetera, have been limited in those countries. So in all the cases that I mentioned, actually, all our shops are now open and in reality, the impact on traffic and therefore, on sales, is basically negligible, very, very limited, actually. So despite of some new areas where we have seen some cases increases. Actually, we have not experienced any significant change on the top line. With regards to the second question and therefore, July, of course, during the month of April and May, the majority of our sales were related to old customers, let's call in this way. And the mix of old customers was certainly disproportional to new customers. But since the restart of our advertising activity, since the beginning of June, we have been on air on TV in many, many core countries like Italy, like Spain, like France, like the U.S. as well.

Actually, the balance between and the mix between new and old customers, basically returned, came back to pre-COVID percentages. And actually, what we have seen is that maybe because of some pent-up demand, we have seen also a return on the investments of our marketing activities, which was very, very strong. Actually, in some cases, even stronger than pre-COVID. So today, I would say that the mix between old and new customers is more or less in line with the situation. Let's say, pre-COVID, which also is confirming what I was saying during the presentation about the fact that we have not seen any significant change in the consumer habits. We have not seen any significant change -- actually any at all change in the consumer behaviors.

[Operator]

Our next question comes from Veronika Dubajova of Goldman Sachs.

[Veronika Dubajova, analyst]

I will keep it to 2, please. My first one is just a follow-up on some of the questions that have been asked around the cost-control measures. I guess, Gabriele, can you give us a sense for when you look either at the end of June or July so far, if you kind of index your cost base to 100 in January pre-COVID, what are the numbers either June or July? Where is that OpEx running at? Because I'm still not entirely sure I have a great sense for how much of that activity has returned and what's temporary and what's permanent on the cost measures. It'd be really helpful if you can quantify that. And I'll ask a follow-up after that, if that's all right.

[Gabriele Galli, executive]

So I mean, again, the productivity is significant, but as we were mentioning, part of this productivity can be and is going to be reinvested in the business. So you cannot expect that this productivity should be all in the Q3 EBITDA. So giving a number is not very easy because, I mean, it depends a lot on the level of sales that we are going to have. But I mean what we proved during Q2 is that we have been able to be very, very flexible on cost. And on top of that, we have been able to renegotiate a lot of contracts, making the cost of external supply much cheaper.

I'm not talking about, I mean, only hearing aid, but also talking about other factors, external costs, which are more or less similar in total amount to the cost that we have for hearing aid. As well as we learned a lot about how to optimize different items. So how to optimize, I mean, work with people, how to optimize marketing channel, how to optimize also the discretionary expenses because, I mean, we made an important analysis about return of different items. And I mean, we have been able to define what is priority.

[Enrico Vita, executive]

In general terms, Veronika, even if it is not easy to give an index now from 100 in January to now and then to the next quarter, what we can tell you today is that if I say again, nothing major is going to happen thanks to all the different cost-saving activities that we have put in place, thanks to all the efficiencies, thanks to all the renegotiations that we have completed Q2, we can expect that in Q3, we could -- we can expect -- we could have a profit -- a good profitability at least in line with previous year, if not above.

[Veronika Dubajova, analyst]

Okay. I guess I mean, that's the sort of -- what I'm trying to get at is if I look at your second quarter margins, they're actually up year-on-year in spite of your revenues being down, which frankly, I think -- I mean it's the first I've seen so far this reporting season. So I think we're all sitting here and trying to understand the magnitude of the permanent savings that you have generated in the business, right? And so I guess, what would be helpful to understand -- if you look at the 40% reduction in your labor costs, what do you think is the permanent reduction or the productivity improvement that you see? Is it 20% of that 40%? Is it 30% of that 40%, what is that? And I guess the same question applies to the rent reduction of the $7 million. Is this something we should be extrapolating for the remainder of the year and into 2021? And is there more that you can do on that front? If you can maybe share some color around that?

[Enrico Vita, executive]

Well, of course, I mean, in Q2, we also benefit from, let me say, some one-off related to the social schemes. And which are not going to, of course, be repeated in the next quarters because, of course, now we have got basically all our workforce in place. So you cannot really project the kind of savings that we had in Q2 to Q3 and then to Q4. Also, I think that what you have to take into consideration is the fact that in Q2, of course, we have also, let's say, foot on all the -- many of our investments, we can call or OpEx, like some of the marketing activities or some other OpEx, et cetera, because, of course, of the situation.

But as Gabriele was saying, of course, given the current situation, which is certainly even better -- much better actually than we were envisaging just a few months ago, just some time ago, we are going to reactivate some of these investments, some of these OpEx also in consideration that we see an opportunity really to leverage on our strengths, to leverage on our skill in this situation where we see many of our competitors struggling. So we will definitely try to get an advantage as we did in the recent weeks. Because in the recent weeks, we believe that our performance has been better, much better than the market, also because the speed of implementation and the reactivation of our marketing investments. So also on the cost side, there will be a reactivation of some of our investments.

So very difficult to say how much you can project going forward. I would limit my answer by saying that -- and I think that this is still a very remarkable result. I would say that we are now quite confident that also in Q3, like in Q2, we can have a profitability, which is higher than previous year.

[Veronika Dubajova, analyst]

Okay. That's very helpful. And if I can just a quick follow-up to the comment you've just made, Enrico, when you think you're outperforming the market. What's your best guess for where the market is? So I appreciate you and July are growing year-on-year. But if you kind of look at the major geographies that you operate in, what's your sense for where the market is in July?

[Enrico Vita, executive]

About July, the month is not finished yet. So to give you a number on the market, which is already something very difficult to estimate because of the lack of official data, et cetera, et cetera, is very difficult. What I can tell you is that our estimation for Q3 is that the market was down about 55% -- Q2 -- for Q2, of course, not Q3, sorry. For Q2 was down about 55%. This is a rough number that is -- came from our estimations.

[Operator]

The next question comes from Oliver Metzger of Commerzbank.

[Oliver Metzger, analyst]

The first one is on your comments of the July performance when you said it was positive as well as the guidance for Q3. So if I look for the previous month, there was a sequential improvement month-over-month. And now July, even in the positive territory. Nevertheless, do you still say that for Q3, it's as you expect, more or less, a flat quarter, which would mean even that this upward trend will be broken? Or is it just more, I would say, more conservative view? That's my first question.

My second question is on the math. Within your stores, April was down 65% with only 35% of the stores being opened that's congruent. In May, it was minus 45% with 50% of stores. And in June, basically marked down minus 20%, with only 70% of the stores. So it seems that there's a trend towards higher number of hearing aids per store. Is it more related to a catch-up effect? Or is it part of your selection that you focus the reopenings of stores -- of more productive stores? And in addition to that, does this leave more room for discussions about your store network structure in the future?

[Enrico Vita, executive]

Okay. Thank you for the questions. So with regards to the first question, yes, if you want. I mean we -- I mean, July, we are trading above previous year. Q3, we expect it to be at least flat, what I mean is that if nothing is going to change. The kind of trajectory that we are now seeing would leave even to be positive already in Q3. But given the current situation and given also the uncertainties about many things at the moment, we prefer to be, if you want, a bit conservative on this. But for sure, I mean I'm very -- I'm very positive about our Q3 sales. With regards to the second -- with regards to the second question, you are absolutely right.

For sure, we have increased the productivity of our store network. This is, in my opinion, as you mentioned, partly due to the catch-up of the pent-up demand. Partly is also due to the fact that I was mentioning before in relation to the fact that we think. I say, we think because there are no official data, but we think that we are gaining significant market share in most of the countries in which we operate, which leads, as you mentioned, to a higher number of hearing aids sold per store. This is something that, of course, we are also targeting to be carried on also in the next month and in the next quarters.

So certainly, we aim to be to -- actually to leverage on the learnings of this month in order to make our stores more productive, which does not mean that we are planning to reduce the number of stores or things like that. Not at all, actually. We wanted to be more productive, increasing the number of customers that we see in our stores.

[Operator]

The next question comes from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

The first is a follow-up on the market share gain. Particularly, trying to understand if your feeling is a meter timing. So you restarted first than competitors. You are restarting also the marketing in a more aggressive way. Or there is also something more in -- or something different that you did compared to your peers, to your competitors? And the second question is on the net debt level. I'm trying to understand -- so the free cash flow was quite impressive in the first half compared to the seasonal pattern. So I'm trying to understand, if you can, say, help us and understand the free cash flow, it's right before the full year. So there is any shift in payment that was helping the first half and will be reverted in the second half?

[Enrico Vita, executive]

I can answer to the first one. I can also answer to the second one, but then I will give Gabriele to give more color. So with regards to the first question, and therefore, the reasons for our market share gains. I think that there are 3 main reasons. The first one is related to what I was saying before about the fact that I think that we have been maybe the quickest to reactivate our marketing investments. And for sure, this helped us starting basically from the end of May, beginning of July. I also believe, as I said during -- as I said also during the presentation, we have taken a very cautious -- conscious decision in our core markets to keep, of course, a limited part of the network.

But anyway, a part of the network to keep our stores open to serve -- to continue to serve our customers that needed our services, which is, as you know very well, I think not the same -- which was not the same decision of many of our competitors. Many of our competitors in many markets actually decided to close because not financially convenient. We decided to stay open and to continue to serve our customers. And I think that this was a decision that is paying good, very strong dividends already in these days. And I also believe that in these times of uncertainties, to -- there is an opportunity for brands, which act in a responsible way and the brands which are the most trusted by consumers.

The third reason why I believe that we are gaining share is that I believe that there are, as we discussed also our -- during our last conference call, there are some of our competitors, maybe in particular, the smaller ones, which, of course, are suffering and are struggling. And therefore, I think, that they will continue to struggle. So we have also taken some share from them. With regards to the second question, no, we have not delayed the payment to suppliers. But on this, I will leave to Gabriele.

[Gabriele Galli, executive]

Absolutely, absolutely. So basically, if you look at our cash flow generation, I mean, the key items of course so the ability to extract EBITDA, the ability to work on working capital and then the investment plan in terms of CapEx. So this quarter, of course, I mean, EBITDA since revenues were down, was very good at the percentage level, but in absolute term, we lost something in the range of EUR 40 million. And we have been able to unlock some potentiality from working capital, which allowed us to improve the generation of the operating cash flow level And limit the operating cash flow loss just EUR 6 million.

So on the working capital, we implemented a tighter control on accounts receivable, a tighter control on inventory, some also enlargement in terms of payment terms with the supplier. So it's a process that already started some quarters ago, had a lot of results this quarter, still has some potentialities for the future. So it's not money that we took as a loan from the future. But I mean, it is real measure that we implemented. Of course, we had some opportunities, for example, opportunities given from government in terms of -- I mean, possibility maybe to postpone some payment of taxes or social security. And since we wanted to maximize our performance, we try to take all of them but this is something that, I mean, 1 quarter, you have an opportunity, another quarter, you have a different opportunity.

What the path we are, I mean, taking and going on with success is to have a much stricter control on working capital. CapEx and M&A is a choice. So we decided at the beginning of April to reduce, for a quarter, CapEx, to cancel M&A. These are very important items in terms of giving Amplifon a much higher growth than our competitor. So we will start, of course, enlarging a little bit the number of projects in terms of M&A, in terms of CapEx and also in the next month, we will start looking back at M&A. But we are very positive about the cash flow generation. Since -- as Enrico was mentioning, Amplifon is going to have sales at least as last year, EBITDA better than last year. So in terms of EBITDA, we should have some improvement. Net working capital is under control. And then really, the number at the end of the year will depend on our willingness to start sooner or later the CapEx and M&A.

[Domenico Ghilotti, analyst]

Okay. And if I may, just a last question on the recovery that you are seeing in July and Q3, if it is broad-based or there is any exception in the trend?

[Enrico Vita, executive]

It is almost everywhere with a few exceptions. I would say, the main one, maybe the only one is related to the U.K., where we see the market still being very, very down. As you know, in this case, fortunately, the U.K. is not representing currently a large part of our business. So very limited impact on us. But on the rest of the market, more or less, it's same kind of trajectory.

[Operator]

The next question is from Kit Lee of Jefferies.

[Nyeok Lee, analyst]

I have 2, please. I guess firstly, just to come back on your cost reduction actions. Just on supplier contract and some of the latest contracts that you have renegotiated, how long are these in place for? Is that just a Q2 thing? Or do the new contracts last until this year or maybe through next year as well? And then secondly, just on your M&A agenda. Just wondering whether you're seeing some independents were having more financial difficulties? And so maybe some of the assets, are they more attractive now? Or maybe you're thinking about accelerating some of the M&A activities that you had planned for?

[Enrico Vita, executive]

Yes. Thank you for your questions. So I will answer to the second one, and then I will leave to Gabriele the first one. So yes, absolutely. We see some of our competitors. And I think the independence are a part of them. Definitely not performing particularly well in this period. We expect actually to see some reduction in the multiples in the future for our M&A activities. As I said thereon, actually, we now wait to see the current trend confirmed in the month of July, August. In -- if everything goes like it is going at the moment, starting from September, for sure, we will restart our activities, and maybe we can also accelerate in order to take advantage actually of the current situation in terms of multiples and in terms of prices. With regards to the first question, Gabriele?

[Gabriele Galli, executive]

Okay. So just to be clear on rents. So on rent, you can do 2 different kind of action. So you can renegotiate the contract for the next 10 years or you can renegotiate with the landlord a special discount for the COVID period. In the first case, you cannot take any positive impact at the EBITDA level, but you have to simply recalculate all the capitalization of right of use, and then you can have an impact, a positive impact at the P&L level in terms of depreciation and financial expenses over the life of the contract.

In the second case, if you are renegotiating 1 quarter, 2 quarter, 3 quarter, and in our case, most of the advantage was for Q2 when our shops were closed, you can take the advantage following this tactically expedient published by IASB at the EBITDA level. So the EUR 7 million, you can see, is a one-off that is already taken in the P&L. There will be some other, I mean, benefit in Q3, but the amount is going to be lower than the EUR 7 million you saw today. On the other hand, we also renegotiated some contract on a much longer term. So for some, I mean, shops and for some other assets. And in this case, you can have some sort of reduction of depreciation charges and financial interest linked to the capitalization of the lease agreement. The EUR 7 million is one shot, there will be another one shot in Q3 when we are going to close some other contracts and the amount of the second shot is going to be lower than the first one.

[Nyeok Lee, analyst]

Great. And on supplier contract, were you able to do Q2 as well? Or have you done some of the longer-term renegotiations?

[Enrico Vita, executive]

Yes. On supplier contracts, which means both direct but also indirect. In particular, I wanted to stress again the fact that our amount of purchases are much more on the indirect ones, so marketing like consultancies, like many other stuff, actually. So on our renegotiation, actually, we have achieved some results, which are, let's say, for the long term. So not just for a quarter or so. So are more, let's say, for long term.

[Operator]

The next question is from Niels Leth of Carnegie.

[Niels Granholm-Leth, analyst]

So in order to understand your cost structure a bit better, you mentioned that labor cost accounts for 40% of your cost base. So that would be your cost base, excluding depreciation and amortization, I assume? That's my first question.

[Gabriele Galli, executive]

Yes. Labor, if you look at our P&L, normal P&L, you have 100, revenues, 20, cost of goods sold, 40, labor cost, then you have 10% marketing, 10% other costs, say, around 20% EBITDA. So it's without including the depreciation and the financial charges.

[Niels Granholm-Leth, analyst]

Okay. In that case, it would provide you with a cost saving in quarter 2 of somewhere between EUR 50 million and EUR 60 million from labor cost savings? But from that amount, some of that will have to come from government rescue plans. So was that like half of this amount? Or is it like 80% of this amount because that would have to be a onetime effect, I presume.

[Enrico Vita, executive]

Of course, sorry, the percentage of saving related to social tools is much higher than 50%. I mean when you talk about productivity in a normal company, you think about 3% per year or something like that. So if you take 3% out of 40% of the full labor cost, this can represent on a normal company an EBITDA improvement of 100 basis points. So here we are talking about 20 basis points -- 50% of the 40 basis point of total costs. So of course, the one-off given by social tool is the vast majority. But what we are saying is that there is also some productivity that can be in the order or percentage point, not 20 basis -- not 20 but percent of the revenues, of course.

[Francesca Rambaudi, executive]

I think we have time only for one last question. So I would like if anybody has a last question. Otherwise, I give the word to the operator.

[Operator]

I apologize, madam. [Operator Instructions]

[Francesca Rambaudi, executive]

Okay. So I think we have no more questions. So many thanks to all of you for taking part to our call. This concludes today's call. Thanks again for your interest and attendance. We kindly ask Sherry to disconnect. Thank you.

[Enrico Vita, executive]

Thank you. Thank you, everyone, and stay safe.