El En SpA

MIL:ELN

Earnings Call Analysis

Revenue Decline and Growth Predictions for EL.En.

For the first quarter of 2024, EL.En. reported a 7% decline in consolidated revenues to EUR 149.5 million. Both the industrial and medical sectors saw decreased sales, down 10% and 5% respectively. The EBIT fell 15.7% to EUR 14.3 million due to increased marketing and sales expenses. Despite these setbacks, the company experienced an improved gross margin of 41.7%. EL.En. confirms its yearly guidance, expecting revenue and EBIT growth for 2024, but acknowledges that achieving these targets is now more challenging due to persistent macroeconomic factors.

Summary of Q1 2024 Financial Performance

In the first quarter of 2024, EL.En. reported consolidated revenues of approximately EUR 149 million, which reflects a decline of 7% compared to EUR 161.4 million in the same period last year. EBIT stood at EUR 14.3 million, down 15.7% year-over-year, translating to an EBIT margin of 9.6%. The downturn was attributed to softer sales across both the industrial and medical sectors, leading to a decrease in overall sales volume. Despite the decline in revenue, the company's gross margin improved marginally by 2.1% to EUR 62.4 million, largely due to changes in the sales mix, which benefited from a shift towards higher-margin products.

Outlook and Guidance for 2024

Looking ahead, the management has reiterated its commitment to achieving both revenue and EBIT growth for the full year, albeit with caution. Initial expectations for a recovery post-Q1 are now considered more challenging due to persistent macroeconomic factors like high interest rates and geopolitical tensions. Although the company had initially aimed for a significant rebound in revenue through 2024, the targets have become harder to achieve, with guidance now reflecting a need for consistent improvement in Q2 and beyond.

Market Dynamics in Key Sectors

The industrial sector experienced the most marked decline, with a 15% decrease in revenue attributed to ongoing economic uncertainties and reduced investment confidence. In contrast, while sales in the medical sector only saw a 5% decrease, the growth in surgical applications, particularly urology, continued, demonstrating resilience in specific niches. However, the medical aesthetic segment declined significantly, indicating challenges in customer demand in North America, a key market for these products.

Geographical Sales Performance

Geographically, the performance was mixed. In Italy and China, revenues were flat, with Italy suffering from weak sales attributed to lacking fiscal support for technology investments following the expiration of the Industry 4.0 tax cuts. Conversely, international markets, including Brazil and the U.S., saw notable sales increases, indicating a shift towards foreign markets potentially offsetting losses experienced domestically.

Challenges and Opportunities Ahead

Management discussed several challenges that could impact future performance, including ongoing uncertainty regarding investment incentives in Italy and a competitive landscape posed by emerging firms from China and Turkey. As the market adapts to these changes, the company remains focused on expanding its service revenue, which grew by 24.3% in Q1. This suggests a potential avenue for improved margins and stable cash flow in the coming quarters.

Operational Efficiencies and Cost Management

Operating expenses increased as a result of heightened sales and marketing investments aimed at sustaining market presence. The operating expenses as a percentage of revenue grew from 8.7% to 10.6%, primarily driven by the increased costs associated with attending international trade fairs. This investment reflects the management's strategy to bolster sales efforts globally despite the domestic downturn.

Cash Flow and Financial Position

The net financial position of the company remained robust at EUR 46.2 million, although it decreased from EUR 54.6 million due to increased net working capital demands. Cash flow management continues to be a focus, with the company highlighting the seasonal trends of cash absorption in the first half, typically counterbalanced by stronger cash generation in the latter half of the fiscal year.

Earnings Call Transcript 2024-Q1

[Bianca Fersini Mastelloni]

Good afternoon or good morning to everyone, and welcome to EL.En.'s First Q 2024 financial results conference call. Today's call will be recorded, and so will be an opportunity for questions at the end of the conference call.

With me on the call, Andrea Cangioli, EL.En.'s CEO; and Enrico Romagnoli, EL.En.'s, Chief Financial Officer and Investor Relator.

Before we begin, please note that there is remarks management makes on the conference call about future expectations, plans and prospects and forward-looking statements. Certain statements in this call, including those addressing to the company beliefs, plans, objectives, estimates or expectations of possible future results or events are forward-looking statements. Forward-looking statements involve known or unknown risks, including general economic and the business conditions and the conditions in the industry we operate and may be affected should our assumptions turn out to be inaccurate.

Consequently, no forward-looking statements can be guaranteed and actual future results, performance or achievements may vary materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation about the content nor to update the forward-looking statements to reflect events or circumstances that may arise after the date thereof. [Operator Instructions] At this time, I want to give the floor to Andrea Cangioli. Please go ahead, Andrea.

[Andrea Cangioli, executive]

Thank you Bianca. Good morning, everybody. Thank you for joining us in this earnings call after the release of the first quarter 2024 financials. Enrico Romagnoli is on the call with me, and we'll, as usual, provide the details on the financial reporting. The financial results released yesterday for the first quarter of 2024 are in line with the expectations, reflecting the trend that's starting from the demand peak of mid-2022, slowly normalized progressively losing momentum during 2023.

Consolidated revenues were roughly EUR 149 million, down 7% on 2023. EBIT was EUR 14.3 million, down 15.7% on 2023 and equal to 9.6% on revenues. The essential summary is that in the quarter, we experienced softer sales volume in both industrial and medical markets, that sales mix changes provided for increased gross margin and that increased expense in absolute terms for sales and marketing and in relevant terms as an effect of reduced leverage, led to a decrease in EBIT margin and EBIT.

Enrico will provide soon the details of certain nonrecurrent entries which improved gross margin and increased expense and accruals. In fact, at the EBIT level, there's a wash between onetime revenue and onetime expenses. As you might remember, we were off to a brilliant start in 2023 and then experienced a progressive slowdown in the subsequent quarters. The expectation for 2023 -- excuse me, for 2024 included in our delivered yearly guidance were and still are to recover the initially slower start with a progressive improvement over 2024.

Before giving you some more color and details on the trend of our main market areas, I'd like to make a few remarks about the general economic environment in which we are working today. It wouldn't be fair to state that we are facing adverse market conditions, but it's evident that certain events and situations that have been casting a shadow on the brightness of the economic trend are proving to be much more persistent than we were expecting.

I'm talking at first place of the interest rates level. It was given for granted that rates were going to be cut in the U.S. and Europe, but the event that investors are waiting in order to see a reduction in their lending cost is being procrastinated over and over. And in second place, the wars, the Ukrainian ones still very uncertain in its results and the subsequent effects of the relations between the involved parties and their allies, of which we are really [indiscernible] and the same for the Middle East war, which is impacting on an area which is very important as well for our medical business.

And of course, since for the market capital equipment, high confidence in the -- excuse me, since for the market of capital equipment, high confidence in the future and low interest rates are helping a lot the investment decisions. We are not experiencing a phase where the general trend is encouraging investments. This said, in general terms, let's see the various businesses that operate with sensibly different market drivers and therefore, market conditions. In laser cutting, the international markets continue to offer interesting sales opportunities for our products, while our 2 domestic markets, Italy and China are struggling.

We experienced a quarter, which was flat in sales in China, where structural cost reduction allowed us to improve the bottom line, sharply decreasing in revenue and earnings on the Italian market. And finally, rapidly expanding of international markets where our offer and experience a softer competitive pressure and therefore, achieve higher sales margin levels. In Italy, we are suffering the awkward situation of the fiscal policies set forth by our government in support of investments in technologies. We knew that the so-called industry 4.0 tax cuts were expiring after the reduction in 2023. And we were expecting a subsequent slowdown in sales. But we could not expect that the next fiscal support package was going to be announced, promised, but not put in place, or better, put in place without the needed information on scope amounts and eligibility procedures.

In the short term, this is constituting an additional reason for procrastinating investment decisions waiting for the clear definition of the policy. Good news in this different geographic sales mix is that marginal sales improved. I'm still talking of laser cutting business. Net of the effects of the flood damages reimbursement proceeds, of which you will see the deep in the middle of April that improve the division's gross margin by 2.8 percentage points, laser cutting division's gross margins on sales was up 3 points from 21.1% to 24.1% compared to Q1 2023.

The laser marking business for identification and traceability is continuing to undergo a very positive phase due to the general market demand. But I would also like to say, mostly for the very consistent approach selected by Lasit, our car company in charge of this segment to approach the market. The project of internationalizing the distribution is paying its dividends, exploiting the strategic goal of being closer to the customers in order to be able to identify their specific needs and take advantage of the very structured and flexible facility of Torre Annunziata to provide them with the most effective customized solutions. Lasit and its subsidiaries were up 17% in revenue in the quarter and are being accretive to consolidated margins on sales and margins as well.

To complete the picture on the industrial sector, a few words about the current stages of our Chinese activities. Financial results have been poor in 2023 and are improving in this early 2024, still with the red bottom line, but with the expectation to meet breakeven in the next quarters as the effect of reduced fixed cost basis, and the progressive increase of higher-margin bearing international revenue...

[ technical difficulties ]

The IPO, we had for a long time worked for is currently suspended, pending the return of more favorable circumstances. The financial results currently do not meet the standards, both under a Chinese regulatory and business perspective to file a successful IPO. The private equity fund that had invested in Penta Laser Zhejiang, the mother company of laser cutting division with the aim of accompanying the company to the IPO, are exercising the withdrawal option reserved for them within the [indiscernible] release agreements.

Negotiations are underway with the current private equity investors and with other investors potentially able to replace them in supporting the company's ambitions.

Turning to our medical business. Overall revenue was down 5%, mainly due to a soft performance on the aesthetic market, in turn, mainly due to the soft performance of the hair removal business. In other aesthetic segments like toning with Q-switched and picosecond lasers, medi plated anti-aging, the sales volume was in line with the last year. Most of the sales decline in hair removal is attributable to a weak demand from the United States. Two more comments about this trend.

The first is that overall gross margin improved since hair removal is the most competitive and lowest margin bearing application in the segment. The second relates to our offer in the segment and to product range expansion and renewal, which is our main competitive weapon. This period has been fruitful for product launches, the most significant being the completion of the PRO line of the Deka systems for medical aesthetics. The PRO line provides to our customers a palet of systems based on various technologies with improved performances and usability for body shaping, anti-aging and hair removal.

More products have been specifically designed for the U.S. customers and already they earned the FDA clearance. I'm talking of improved performance hair removal devices and a new revolutionary body contouring system. All these new systems are undergoing their initial phase in production following or correspondently to their commercial launch. We have a very interesting backlog that will support the sales in the next months as soon as production volume for these models ramps up.

Surgical laser sales once again beat the corresponding quarter of the previous year, driven especially by sales in urology. In this segment as well, a new product launch took place in the quarter with Quanta System announcing at the European Urological -- Urology Association Congress, the launch of the Cyber Ho Magneto which will enable the most effective power delivery in the stone management devices. The closing comment about sales is related to a trend which is common to both industrial and medical sectors. The increase of what we call service sales, which includes all cost system sales revenues. We're talking of technical maintenance service, either billed on a time and material basis or on a service contract basis.

And the sales of consumables where the system uses quartz mainly optical fibers for urological surgery but also lamps and refurbishing for hair removal devices and laser mix gas bottles for the SEMISEALED CO2 laser sources for industrial applications. It is also notable that service revenues increased much more in the industrial business than in America as an effect of the rapid increase of the installed base in the last years, with a number of systems reaching the end of the warranty period. The onetime expense depleting our performance in Q1 2024 is the accrual posted in Withus, the Japanese company dedicated to the local professional aesthetic market. This market and this company has been one of the most significant revenue and margin drivers for the group, but not in the recent past. The accrual takes into account the financial downturn of our most significant customer, a chain of beauty salons dedicated to hair removal. This circumstance is undermining our residual activity on the professional aesthetic market in Japan, an activity that due to competitive pressure on the specific segment was currently limited to the servicing of the base -- installed base on.

We're examining the downsizing options. The effects on a consolidated basis of this event and of its foreseeable today consequences will not materially affect the business trend and the guidance. Cash flows have been a topic for El.En. during last year with a strong cash absorption trend in the first half of the year, that was then partially absorbed by the excellent cash generation of the second half.

Cash absorption in the first half and generation in the second half is a seasonal trend for our organization and 2024 is no exception. The net financial position decreased by EUR 8.5 million in the quarter, mainly due to the dynamics of working capital, namely inventory increase in preparation of the stronger second quarter and also of down payments received from customers and paid to banks. Capital expenditure was also a little above the quarterly average expected in the year. Also due to contingent IFRS 16 effect connected with renewable of a building rental counter. We consider this trend physiologic and not concerning.

We are not expecting the net financial position to improve in the second quarter as well. It's the quarter when we pay dividends to our shareholders and taxes to our government, while we expect the improvement in the second half of the year. I'd also like to briefly report about the activities we are carrying out in the field of sustainability. The 2023-2027 five years plan was drawn up identifying specific and measurable sustainability activities and objectives in the fight against climate change, circular economy, promotion of a responsible supply chain, modernization of people and contribution to the community. Confirming the commitment to sustainable development and environmental and social responsibility are becoming an integral part of the group's business model.

We also launched the projects that will allow us to align with the reporting regulatory requirements by the end of this financial year.

At this moment, we're done with my introduction, I'd like to give the word to Enrico for the financial report.

[Enrico Romagnoli, executive]

Thank you, Andrea. Good morning, everybody. And as usual, I'm going to provide some details on our last financials. The group achieved in the Q1 2024, a total turnover of EUR 149.5 million, down 7% compared to the EUR 161.4 million of the Q1 2023. The slowdown in sales in the period was more marked in the industrial sector, as we can see in this slide, minus 10% and in the medical sector, minus 5%. The impact on sales of the 2 sectors remain the same as for the last year.

In 2024, the weakness of foreign currency, mainly U.S. dollar, remain [indiscernible], again, euro had a cumulative impact on the growth of approximately minus 1.2%, minus EUR 1.8 million in absolute value. Gross margin stood at EUR 62.4 million, up 2.1% compared to the EUR 61.1 million as Q1 and with an impact on sales of 41.7%. The gross margin, as already mentioned by Andrea, for the period includes the other proceeds the reimbursement obtained in relation to the damages suffered from [indiscernible] flood in November 2023 for an amount of EUR 1.9 million equal to 1.3% of consolidation revenues.

Even net of this not repeatable income, the mix of products sold lead to an improvement in sales margin from 37.9% to 40.4%. In fact, hair removal, the most consolidated application but with the lowest sales margin in aesthetics, decreased its relative weight compared to the other applications just as surgery, which has better margin that increased its rate.

In the industrial sector, the share of cutting, bearing a lower margin compared to the marking system and large sources, which performed better in the period decreased. At the same time, the margin in the sales, in the laser cutting sector, however, improved to the greater incidence of sales outside Italy and China.

Operating expenses increased in the impact on sales, up from 8.7% to 10.6%. And the main reasons are the sales and marketing expenses for Trade first and congress incurred by both medical and industrial companies. The number of international trade first and conference in which the group participated in the first month of the year was significant and above average. Staff cost increase of EUR 1.1 million plus 4.4%, up as impact on sales from 16.2% to 18.2% due to the lower turnover recorded in the period. As for 1.4 percentage point, the increase in personnel cost is determined by the increase in national cost for stock option plans for employees, equal to EUR 856,000 in the period compared to the EUR 453,000 in the first quarter 2023.

In terms of EBITDA, the EBITDA was positive for EUR 19.2 million decreasing by 8.2% compared to EUR 20 million of Q1 2023, and the EBIT margin in the first quarter was 12.9%, in line with the 13% of the Q1 2023. EBIT for the quarter showed a positive balance of EUR 14.3 million, down compared to the EUR 17 million of Q1 2023. It's 9.6% margin on revenues was a slight decrease compared to the previous year when the margin was 10.6%. The provision of EUR 1.6 million for credit risk set aside by Withus, our Japanese subsidiary following the financial crisis mentioned by Andrea, of its most important customer had a significant impact on the quarterly EBIT and, in fact, offsetting the proceeding -- the positive effect coming from the reimbursement received for the flood.

The impact of these accruals is 1.1% on EBIT margin. We recorded in net financial income, EUR 187,000 income compared to a loss of EUR 459,000 reported in the same period of last financial year, an improvement essentially due to the more favorable effect of currency exchange rates in the period. Income before taxes showed a positive balance of EUR 14.4 million and recorded a 13.3% decrease compared to the EUR 60.6 million of Q1 2023.

In terms of cash flow. The group net financial position remained widely positive for EUR 46.2 million compared to EUR 54.6 million, as of December 2023, decreasing by EUR 8.4 million. The increase in net working capital absorbed EUR 9 million, while EUR 10 million were absorbed by the change in other short-term assets and liabilities, including the increase in advanced pay to supplier, the decrease in advanced receipt from customer and the increase in VAT credits to the Italian -- due to the VAT credits to the Italian treasury due to the increase in exports. CapEx in the period were EUR 5 million. EUR 1.5 million were related to expansion of reorganization works at the manufacturing plants and the same amount for equipment, vehicles and other assets.

As for EUR 1.5 million, the booking of new investment derived from the accounting of rental fees according to the IFRS 16 standard, with an effect on the net financial position, but not on the liquid position. Revenue by business. In the medical sector, the positive phase of surgical application continued, plus 4% in the quarter, with EUR 20 million of revenue due above all to urologic systems. Esthetics with a turnover of EUR 48.4 million compared to the EUR 55.6 million in Q1, 2023, marked a decline of 13%, which is reduced to 10%, including service revenue pertaining to the esthetics itself.

The turnover of after-sales services and consumables was once again growing by 7% tied to the use of laser system in urology, optical fibers contributed to the positive trend in revenue in the medical service, which reported sales for EUR 19.1 million versus EUR 17.8 million in Q1 2023. The therapy segment managed by ASA of Vicenza with revenue of EUR 3.7 million marked a slight decline in revenues in the quarter, minus 5% compared to EUR 3.9 million of Q1 of 2023.

In the industrial sector, the laser cutting sector, which in the recent years reported a long series of growth quarters showed in the most market decline, minus 15% with revenues at EUR 44 million compared to the EUR 51.7 million in 2023. The business unit of laser cutting, including the pertaining part of service revenue showed a total turnover of EUR 47.8 million compared to the EUR 54.3 million in Q1, 2022 -- 2023, minus 12% and an EBITDA of plus EUR 1.2 million compared to the minus EUR 1 million of Q1 2023. The EBIT of Q1 2024 include EUR 1.2 million as nonrecurring proceed a part of the EUR 1.9 million reimbursement for the flood mentioned before.

The turnover of the Chinese activities remain substantially in line with the 2023 levels, limiting the loss, thanks to a reduction of structural costs and to the improvement of margin for the increases since -- outside China. The marking sector with a turnover of EUR 6.4 million compared to EUR 6.7 million in the same period 2023, recorded a decline with a weak quarter in decoration application, also for the widespread difficulty in the period in the fashion system. And a growth for the business unit of identification and traceability system by LASIT of Florence. After-sales service revenues show noteworthy acceleration plus 24.3% with sales for EUR 6 million compared to the EUR 4.8 million in 2023, which depends directly on the rapid increase in the installed base.

The trend in the sale of medium power lasers was very satisfying, growing by 4%. Sales by area, the sales trend by macro geographical area for the 2 sector confirms a better performance in foreign markets than the Italian market. In fact, the sales trend in medical sector shows a decline of 5%, mainly due to a marked decline in the Italian market. Sales in the industrial sector were affected all by the weakness of the Italian market, and to a lesser extent, by the European one, recording instead a recovery in the countries of the rest of the world, thanks to the stable trend of the Chinese market, the excellent performance of the Brazilian subsidiaries and the rapid acceleration of the U.S. market.

Andrea, please go ahead for the guidance.

[Andrea Cangioli, executive]

Okay. Thank you. Now to summarize everything with the guidance. As you have read in our press release, after the first quarter, we are in essence confirming the yearly guidance, which points to increase both revenues and EBIT compared to 2023. The initial remarks, we're already today, 2 months later, the initial issuing of the guidance takes into account what we have seen changing in these 2 months. We are still confident in the recovery against 2023 in the remaining quarters of this year, but certain macro trends that were supposed to support such recovery, namely the decrease in interest rates and the smoothing of the international arrangement unrest, stemming from the wars are taking more time than expected to take place.

It's exactly for this reason and because of this and not because of the slower results registered in the first quarter, that hitting the guidance target becomes now more challenging than we were thinking 2 months ago.

Bianca, I'm done with the prepared presentation and ready for the Q&A session.

[Bianca Fersini Mastelloni]

Okay. Okay. We have received 3 proposals in the list. Giovanni Selvetti is the first one from Berenberg Bank.

[Giovanni Selvetti, analyst]

So I have a few. The first one is on the Chinese market. In your press release, you talked about sales substantially in line to last year with losses that were limited. I seem to recall that in the last quarter, excluding the impact of the legal cost, that China was back to a positive EBIT, so I'm trying to get a sense of operating leverage here. So what is the target amount of sales you need to do in China to break even basically, right?

Staying on China, you say that the balance of bank and postal deposit of Chinese company includes roughly EUR 7.5 million of deposits backing the issuance of bank bills for payments. I mean what does that mean exactly.

The third one is maybe Enrico said it before, I didn't get it, if you can please quantify the expense for exhibition on shares in the first quarter. And then I think that the other one is more about the guidance. So I guess that today's performance is really about what consensus interpreted a slow start of the year. So in order to avoid confusion, what I was speaking about the rebound in Q2 is a rebound of 3%, 4%, 5% in terms of sales, just to have a sense of what you can -- you can expect in the second quarter of the year and so for the first half.

And the last -- really last one is more of a general of one, if maybe we can also explain the reason for the weakness in Italy. Recently, there are some speculation that Prima Industrie and Salvagnini would like to be an Italian main player in laser cutting. So here, the questions are, two, do you see any increased competition there. And three, if they really want to build a national player, would you be considering selling? With that I'm done with the questions.

[Andrea Cangioli, executive]

Okay. Question number one. China, we were close to breakeven in Q4, but we had the accrual that brought us below breakeven in Q4 -- excuse me, 2023. Q1 is seasonally a small quarter especially China, where you have the New Year's festivity hit in China. And therefore, typically, you have the lowest leverage effect on sales. For this reason, the effect of having improved but not met -- we not met the breakeven level in China, of course, it's not satisfying, but confirms that we are on the way of meeting the breakeven on a yearly basis because what we have in the first quarter is reduced revenues.

Give me a second, I'll try to give you a more detailed answer. Basically, in China, the revenues for the quarter were just over EUR 20 million. I believe that we need about 20% more, 20% to 25% more, I mean, closer to between EUR 25 million and EUR 30 million in revenue to get to breakeven, given the current margins. Of course, the level of breakeven lowers with an increase of sales of the international markets, which are as I mentioned, bearing higher margins. This is question #1.

Question number 2 is basically maybe -- I'll try to explain then Enrico, if I'm wrong, you will get it better. But -- since we are losing certain notes to pay the suppliers, the bank is holding somehow in escrow, some of our bank deposits unless -- until those notes are paid.

Exhibition cost, exhibition cost

[Enrico Romagnoli, executive]

The exhibition if you want the sales and marketing in general in the Q1 2024 was including Congress fair traveling expenses and so on, we are talking about more than EUR 5 million or EUR 5.1 million compared to EUR 4.5 million of Q1 2023.

[Andrea Cangioli, executive]

Concerning the short-term guidance, it's hard for me to give you a sense because I am confirming our midterm guidance. I cannot tell you. I'm sure we will see an improvement of the Q2 financial results of 2024 against Q1 -- Q2 2023, but I'm not in the position of giving you a figure on that. About Italy, the reason of the strong slowdown in Italy is mainly driven by the industrial market, but we slowed down in medical market as well. Basically, the believe I gave quite an extensive description of the situation of the Italian market for manufacturing investments in early 2024.

We were expecting a slowdown because the 4.0 is closing its effect. We have several customers procrastinating investment decisions, waiting for the rules for the 5.0 new tax cuts to be finally disclosed in details. As you know, the 5.0 is in place, but the details on how you file and how to get the money and what you have actually to do are still uncertain. This in a situation in which the market is not strong because we are not in a situation of strong market, has slowed down the investment decision.

What concerns the medical market in Italy, we are in a situation, which is normal. We had a slowdown, especially in the esthetics world -- in the esthetics. We feel fairly comfortable that the situation anyway can keep at good revenue levels with good margins and good profitability of the activity in Italy as well. Concerning the Prima and Salvagnini deal, we know the 2 subjects involved in this potential deal. And we believe that they have good reasons for merging since they are complementary on several of the business they work on. I mean they -- if the deal is confirmed, they will generate a single entity of the dimension of roughly EUR 1 billion in revenues, considering also the revenues generated by Prima with its Finnish structure.

They are not a threat for us in terms of competition for what they are doing today because the land group is widely complementary to both Prima Industrie and Salvagnini since we compete mainly on the 2 dimension laser cutting systems, whereas Prima is mainly active in the 3-dimensional cutting and has a very, very weak presence in the 2-dimensional cutting and we are complementary because we have a significant production base in the Chinese territory, which is something lacking for both Prima, they tried to, but never actually succeeded to create a real stronghold in China and to Salvagnini.

And Salvagnini doesn't have any facility in China. By the way, it is important to mention that we are complementary, especially to Salvagnini and in the trend that we are pursuing of integrating our 2D laser systems within manufacturing sales, or larger manufacturing factories, which include not only as a cutting, but also the movement of the cut pieces, the storage, the nesting of the parts, in one word, automation. We have on the Chinese territory cooperated with Salvagnini on a few very good deals.

[Bianca Fersini Mastelloni]

Andrea, we have 1 more question from Carlo Maritano from Intermonte

[Carlo Maritano, analyst]

I just have a couple of questions. The first one is on guidance, a clarification on guidance. So -- you said that the current situation makes it difficult to maybe achieve the initial targets. But do you expect any way to grow in terms of EBIT this year? Or do you expect a flattish or negative EBIT compared to last year? This is the first question.

The second one is on the industrial business, especially in Italy. You already answered partly my question. So the delay in [indiscernible], do you expect will last for at least a couple of quarters and to see some revenues by the end of the year. Or do you expect a longer term before starting to see revenues from these incentives.

And the final one is on the services business. So as you mentioned during the presentation, this is growing, thanks to the increased installed base. So do we have to expect in the future the incidence of services to grow given that the installed base is growing? So do you expect to account for more than 10%, 13% of revenues in the future?

[Andrea Cangioli, executive]

Okay. Let's start from personnel guidance. So we confirm that our guidance is to beat 2023, both in revenue and in EBIT. We add that it's harder today as an objective than it looked like 2 months ago. About the expectation on the Italian market, we are positive in general, but this is completely detached from the 5.0. What I wanted to mention is that while, of course, we can attribute part of the success, especially in year 2022 of the sales of manufacturing devices to the existence of Industry 4.0, today, the fact that nothing is clear about Industry 5.0 is simply procrastinating the investment decision to the point that I'm saying that today, it would have been better if there was no expectation for such a tax cut because if there were no expectation to have future tax cuts, people would have invested because there was no reason to wait. And in this moment, they wait for something which could be also quite complex, especially for smaller investments to watch it because as you might know, the 5.0 includes adding to the 4.0 requirements, also the power supply, reduction -- the power consumption reduction, which is complex, not only in achieving it technically, but also in documenting it. So it will cost to the investor to prove that the investment is leading to saving in power consumption. And this -- by this means the incentive, which will be provided by the 4.0, 5.0 will be lower due to the costs which are connected to the proofing of this.

And the third question, the service business. The service business, yes, generally speaking -- and we see this in an evident way in industrial business where the installed base has been increasing very rapidly in the last 2 years and we see it with a little delay with the increase of the installed base because they are covered for -- by warranty for a certain period. Now the system exit the warranty period and they start generating revenue. So the statement is correct for the general trend of technical service. So if the service line was technical service only, the answer would be definitely, yes, it will increase, and it will increase its share.

The point is that in our service aggregate, we do not have service -- technical service revenue only, but we have also consumable revenue and consumable is quite an important share of this service revenues. On this point, the trend is not necessarily tied to the installed base, but it's also tied to the usage of the installed base for the specific application for which the consumable is needed. And by the availability on the market of alternatives to the consumables that are provided by our group.

Not necessarily we can lock up the customers to the use of the consumable that we provide, but under certain circumstances, certain customers can purchase their consumables by themselves. So generally speaking, the answer to your question is yes. But there are certain considerations to take place to take considering the actual composition of the sales aggregate we call service.

[Bianca Fersini Mastelloni]

Andrea. The third question comes from Andrea Bonfa from Banca Akros.

[Andrea Bonfa, analyst]

I got a couple of questions. One is related to the growth of the industrial laser in the rest of the world. If you can elaborate a little bit more on the, let's say, 30%-plus increase. Is that China to the rest of the world? In which countries? Or if it is Italy to the rest of the world and again, in which countries. And I'm wondering what's the contribution in the area of Brazil and in U.S., which is a market that you target in the past.

And the second one, if you can just repeat the EBIT performance of the Industrial business, which I'm not sure I caught very well. It was minus 1.2% or plus 1.2%? And what was the component there of the nonrecurring if I understood correctly?

[Andrea Cangioli, executive]

Yes. First. So outside -- nondomestic sales, meaning domestic is Italy and China, increased rapidly in Brazil. We had record sales in Brazil. In the U.S. and here, the markets worked -- we did very well for the Western markets. And then we did well in Korea and Australia for the markets served by China.

For the second question, I don't think I gave any EBIT information. I think I gave you some gross margin information.

[Enrico Romagnoli, executive]

Yes. Okay. I'm talking about the business unit of cutting say that compared to the Q1 2023, that was -- we had in Q1 2024 we had a positive EBIT of EUR 1.2 million. And this EUR 1.2 million is the contribution to this EBIT, is due to $1.2 million of nonrecurring proceeds. So excluding the nonrecurring proceeds reimbursement of the damages of the flood in the November 2023, the EBIT of the business unit was 0, compared to minus EUR 1 million of last -- of Q1 2023.

[Bianca Fersini Mastelloni]

[Foreign Language] Next question comes from Andrew Lawford from Fund Scouting.

[Unknown Analyst]

Just a quick follow-up question about the service revenue which you've already commented on. I noticed that it has expanded as a percentage of sales if we compare it in the first quarter to what you did in 2023. Is that a trend? I mean, can it get towards, say, 20% of revenue do you think? And just if you could maybe comment on the margin dynamics of the service revenue is -- do we generally expect higher margin from service revenue? Or does it again depend on the distinction you made between technical service and the consumables?

[Andrea Cangioli, executive]

Okay. I -- we will have an increasing, let's say, impact of service revenues on boxes or on systems revenues if we maintain the same ratio of consumables revenue. It could increase. I believe we are already at a fairly high level. Concerning the margin, it is more or less comparable to the margin we have in system sales. So we don't have much difference because as I mentioned to you -- as I mentioned, when talking about, for instance, optical fiber sales, we are not necessarily allowed. So the customers are not captive.

So we are not able to freely set the prices at whatever margin we want, but we have to keep market prices and therefore, market margins in order to avoid to lose the revenue to alternative suppliers that might be entering our customer base for selling their consumable devices.

[Bianca Fersini Mastelloni]

And the last one comes from [ Lorenzo Capeloto ] from a Crowd Asset Management.

[Unknown Analyst]

I have a couple actually. The first one is, as far as I understand, you said that mostly the slowdown that was in the first quarter was due to the problem with incentives, in particular, the 4.0 ended and the unclear picture regarding the 5.0. But if so, why, all your sectors across the board, including the medical went down in the first quarter. If you can explain a bit better what was the driver that made performing poorly also the medical segment?

Second question is I see that the labor costs are going up quite substantially. And so I was wondering, are you having troubles to hire new people and attract new talents. And so if you can give a bit of explanation on this front. And finally, the worst performance in the Q1 was, of course, the cutting segment. And on this front, is it the slowdown due only to market factors or a weakness in the sector? Or are you experiencing higher competition from other competitors like Chinese, Turkish, which as far as we know, are -- they are -- are they keeping growing and they are putting pressure on you? And this is all from my end.

[Andrea Cangioli, executive]

Okay. I'll start answering your first question, which answers also the third question. When I mentioned that the slow ending of 4.0 and the slow entrance of 5.0 is slowing down our sales, I'm mentioning exactly one market only, the Italian market for industrial applications. 4.0 is not applicable to medical applications and is not applicable our approach. So I'm just saying that the area in which we have the strongest slowdown, which is Italy cutting business, was also affected by this situation with incentives. And this is specific.

The rest of the slowdown, I mean, I described it as a progressive slowdown that we experienced beginning from the initial months of 2023, which basically normalized the demand pressure after a peak of demand, which we experienced in 2022. The first months of 2023 performed well also with the momentum of the exceptional demand, which was the rebound after the COVID period that we had in 2022. Then the situation normalized, and we have seen this normalization affecting our sales volume in a slow relative reduction to the previous years in the various quarters. And we have seen that order bookings would have lagged to a reduced amount of revenues in the first quarter of 2024 over the board, in more or less all the segments.

Of course, there are exceptions, but as the envelope of all the revenues, we had noted it. We had also noted that order booking had, at least for our company, touched, let's say, a bottom at the end of 2023, and order bookings started again, being stronger at the beginning of 2024, allowing us to forecast the revenue growth over the whole 2024 as an effect of this increased volume in order bookings and also in the fact that in the following quarters, we will face a less challenging benchmark in the 2023 results.

Concerning the increase in the expense for staff or employees, of course, we were planning, we are always planning a midterm increase of our volumes of sales and production. In order to support them, we have to hire people in R&D, in production, in all the functions. And after 3 years -- 2 years of increasing revenues, we also increased the number of employees apart certain exceptions. And therefore, once we increase the employees over a year, when you at the beginning of the following year, compare the expenses for employees with the initial expense of the year, you always have, how you say, a comparison, which shows up an increase. This is also due to what you are mentioning. We have to take great attention to the general welfare of several categories of employees because the market, especially for certain kind of employee is becoming more competitive.

It makes our employees cost more and it makes also -- imposes a pressure on the general welfare of the employees, for which we have to provide them also some, let's say, environmental support to make the job that they are taking in our group more attractive. So the problem that you're mentioning is there. I'd like to say that we have this problem quite clear and we believe that we have the appropriate policies to be able to provide and to effect that the appropriate quality of personnel stays into the group, which relies on the quality of its technicians, of its designers, of its engineers in order to continuously improve its product range and to be able to grow due to its ability to innovate.

[Unknown Analyst]

And if I can follow regarding competition from China, Turkey and -- can you add a bit of flavor to that, please?

[Andrea Cangioli, executive]

Sure. Competition of China is, of course, a theme, a topic. We all read newspapers when we read that Fiat is going to sell Chinese cars -- or better Stellantis is going to sell Chinese cars, it means that the local production, they don't feel they can compete with local production. And the competition coming from the far East countries has always been a theme in our market. The competition of Chinese manufacturers is very strong in China as well. I mean we are Chinese manufacturers for the industrial market, but we are struggling in China as well. But international markets are typically more articulated.

We are, especially in industrial, dealing with a fairly large market on which we can compete in certain niches where we are able to maintain certain margins. In a way, our very, very fast growth in the past was accomplished, also due to the fact that our product was somehow commoditizing and we took advantage in being part of a business where the product was commoditizing and becoming cheaper because the market was becoming much larger.

When the market becomes too commoditized, a manufacturer, a small manufacturer compared to the larger size of certain competitors loses competitive advantage unless it concentrates on certain niches in where it can maintain the advantage of providing products that have superior characteristics both in technical specification and in service provided to the customer, compared to the low-cost various competitors.

[Unknown Analyst]

And do you find other countries where -- that are competing with you like Turkey, as I mentioned or they are not part of the equation.

[Andrea Cangioli, executive]

No, the Chinese manufacturers of laser cutting systems are present worldwide. We, as Chinese manufacturer of laser system are also selling worldwide. The point is that typically, Chinese manufacturers compete on a lower price level, on a lower market area. We compete on a higher price level and higher market area. The same applies when we sell on the same geographical market, products that we manufacture in China and products that we manufacture in Italy.

They, let's say, theoretically compete, but in fact, they are not competing on the same market segment because who wants to buy an Italian manufactured laser system with Italian cost and Italian performance, Italian services, typically is not interested in buying a Chinese manufactured laser

system.

[Unknown Analyst]

Yes, yes, I understand. But what I meant is, are there any other countries which is as competitive as Chinese that are entering the market like I don't know, Turkey or Poland.

[Andrea Cangioli, executive]

Yes. You mentioned it. Today, the most competitive markets are China, Italy, and I believe probably Turkey. Also because each of these markets has local competitors, which have done a good job in opening up the market and now have also Chinese competitors entering the market.

[Bianca Fersini Mastelloni]

Andrea. We have one more question from [ Ludovico Lasmiral ] from Samita Investing. I will read it for the question for him for a technical problem with his microphone. Then the question is, can you please comment also on the evolution of cash flow for the full year? Should we expect a reversal of working capital from the current level?

[Andrea Cangioli, executive]

Yes, I can comment, and I can confirm that -- for the full year, the forecast is to generate cash for our internal programming reason and for the dynamics, the seasonal dynamics. Typically, the first and the second quarter are the top cash absorbers in the year. There are reasons, which are lower sales volume in Q1, payout of dividends in Q2, higher record sales, let's say, on the year in Q4, which allocate most of the cash generation in the second half.

For this reason, we note the cash consumption of the first quarter, but we are confident that given the trend that we expect on the year, we will return to cash generation in the next quarters, not in the second, but in the third and in the fourth quarter and for the full year.

[Bianca Fersini Mastelloni]

Just a moment, Andrea, I'm asking to Lorenzo for -- Ludovico if it's everything he needs on this answer. Okay. It's okay for him.

[Unknown Analyst]

[Foreign Language]

[Bianca Fersini Mastelloni]

So at the moment, we have no more questions. I just want to ask from the floor if there are more questions. Any other questions?

[Andrea Cangioli, executive]

Thank you.

[Bianca Fersini Mastelloni]

Thank you. Thank you so much.

[Andrea Cangioli, executive]

Thank you so much. -- thank you, and we will wait for everybody on the thirtieth here in Florence. Maybe Bianca, you could recall.

[Bianca Fersini Mastelloni]

Yes. Maybe, Christopher, do you have a question?

[Unknown Analyst]

No, I'm fine. I'm going to come and see you soon anyway.

[Bianca Fersini Mastelloni]

So Okay. Okay. Thank you so much to everybody for attending the conference. Bye.

[Andrea Cangioli, executive]

Bye.

[Enrico Romagnoli, executive]

Bye.