Esprinet S.p.A.

Good morning. This is the Chorus Call Conference Operator. Welcome and thank you for joining the SBREnet First Quarter 2021 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on the telephone. At this time, I would like to turn the conference over to Ms. Giulia Perfetti, Investor Relations Manager of EspritNet. Please go ahead, madam.

Good morning and welcome, everyone. I'm Giulia Perfetti, Investor Relations Manager of EspritNet, and with me is Alessandro Cattani, CEO of the group. Today, we are pleased to comment with you on the results of Q1 2021. I would like to remind everyone that the press release, the presentation that we will use shortly and the podcast of today's call will be available on the Alperent website in the investor section. Before starting, just a reminder of the regulation note on page two of the presentation. Now I let Alessandro start the call and present the Q1 2021 results. Alessandro, over to you.

Well, thanks everybody and welcome to our Q1 2021 presentation. I hope you're all fine. Well, let's dive immediately into our quarter. And I would say that I'm very pleased to report very, very good numbers. which in the end reward the group strategy once again. As a brief recap, we have had a very solid P&L performance, double digit growth and even more on all the metrics with sales up 28% year on year and a bit adjusted up 70%. We outperformed the markets everywhere We grew 23% in Italy, 36% in Spain, and 50% in Portugal, 28% combined against slightly less than 20% as overall market growth in the area. And that's why we got this new record in terms of market share. What's even more important for us is that gross profit margins are improving and improving more or less on all business lines. They stood at 481% against 463% of last year, despite the growing weight of PCs and smartphones, which, as you well know, are the lowest margin products that we sell. overall margins grew. It's a good signal of the capacity of the group to deliver on this key metric. Balance sheet is very strong and supporting our growth strategy. The four quarter moving average cash cycle closes at five days. The three days better sequentially against the Q4 20 and 15 days better than Q1 20. The net financial position, therefore, is negative for 71 million euros, against a negative of 127 of March 2020, and down against the seasonal performance, the exceptional performance of December, where we were positive for 300. And return on capital employed, which is a key metric for our group, stood at 19.7%. That's both the result of the sufficient management of cash conversion cycles, but of an increased operating profitability. We have also had room to work on capital allocation. We paid our dividend for a total of 26.8 million euros. That's a payout ratio of 50% on both 2020 as well as 2019 results as you might recall we suspended in the peak of pandemic dividend pay payout last year and we recovered it this year and we have executed part of the authorization received by the AGM on April 7th, where we got the authorization to repurchase up to 5% of the share capital. We repurchased 2.88%, bringing the total own shares, treasury shares, up to 3% of the share capital, with a cash disbursement of almost 20 million. Now, all numbers, as you can see here, are progressing, and what's particularly nice is the fact that we have had performance on all metrics. Very good performance in terms of revenues and market share, but even better, strict control of gross profit margin, control of costs, And also tax rate has been down compared to last year, slightly down and more aligned with the nominal tax rates. It's worth noting that we were cash positive pre-IFRS 16 impact for 46 million euros against the negative of 20 million euros as of March 31st last year. And that turns out in a very, very solid financial structure which highlights the consistent discipline that we have been keeping in managing our balance sheet with the cash conversion cycle at five days, our NFP and the return on capital employed, which stands now more than twice the weighted average cost of capital. If we dig more into the working capital metrics, as you can see on slide seven, on our moving average, four quarter moving average, we are down to five days. Five days is the best performance ever. That's the result of improvements in inventory days as well as longer payment terms from suppliers. We have a strong seasonality as you can see in the following slide. And as we mentioned many times, although now being at five days, we do think that more in brackets normal figure is probably low double digit. And as you can see, our group as most of the industry features a very strong seasonality in Q4, which is always a quarter of very low levels of inventory and high payment terms, longer DPOs, because normally you have lots of sales, lots of purchases, and you have not yet paid all the products that you sold in Q4, and so you end up having a very, very strong performance. That's why we always suggest our investors to look at an average, which is probably a better indication of our average working capital absorption. Nevertheless, We still are trading at, in Q4, we're still trading at 40 days in inventory, which is still above our targets, whilst the payment terms stood at 66 days, not bad and in line with our expectations. Slightly above average DSOs, but that's also the result of lower than average recourse to factoring and securitization. That ended up in a stronger evolution of return on capital employed. Here for the first time, we report our return on capital employed since Q1 2019 with the double metric pre-IFRS 16 impact and post-IFRS 16 impact. In the annexes you will find two slides with the two detailed calculations for both numbers. As you can see, even accounting for the IFRS 16 impact, we're still standing at double digit ROSI, Return on Capital Employed performance, and it's really a pretty good performance if we think of the industry we're dealing with. But after this quick analysis of our numbers, let's dig a little bit more into our strategy what's happening in the market, what are we doing within this market. On slide 11, you can find our Roche-driven strategy. For those of you that have followed us, this is what we have been discussing for the last two years. We have been very disciplined in managing this strategy, first and foremost by addressing the needs of capital employed reduction with the results that we have outlined before with our cash cycle reduction. So we are now in a world that we call the capital employed optimization world. As I mentioned before, we still see some room of improvement in inventory days where we'd love to go down from 40 days to the low 30s, keeping the ESOS stable and keeping DPOs stable. That's basically where we see our future moving forward in this area. But all the focus since almost two, I would say almost three quarters is on profitability improvement. And the strategy is getting some nice traction, I would say. As we mentioned many times, we're splitting our efforts in two areas. One regarding core business activities, the traditional transactional business of our group. That means essentially buying boxes and selling boxes. And on the other side, the evolutionary trend of our group. Moving towards more a consumption model with the cloud and devices as service or managed print services, which is essentially buying right of use of devices or services and selling right of use of devices and services. And last but not least, a push towards outsourcing of logistics as well as digital marketing services, digital servization as it is called now. where we believe we could in time squeeze some added value which is lying in the tech value chain without necessarily working in a downstream or upstream integration. How did we execute on this strategy? First and foremost on the product mix as well as on the satisfaction programs that led us to improve margins without any direct impact on the cost structure. So by geography, we outgrew the market as we said before. But what's more important, the market was growing more than us in terms of IT clients. Those are PCs and printers and all the related accessories. What's interesting is that we didn't focus so much on these PCs, even if we obviously grabbed all opportunities. We beat the market slightly on consumer electronics, but the real focus was on tremendous growth on advanced solution, both by means of the acquisitions that we made, but also by organic growth. and here the market was still struggling and we outgrew the market significantly with the significant market share growth. And even better, you can see by customer type that we slightly outgrew the market in terms of retailer and retailer sales where we normally enjoy lower profitability, but we definitely outgrew the market in the IT reseller customer segment where historically we enjoy better profitability compared to the giants of distribution such as Amazon or MediaMarkt, Uniero, Euronics and the others. So let's drill down on business sector sales. Generally speaking, business sector sales, so both from a customer segment as well as from the product segment, As we mentioned, a significant boost of profitability arise from higher sales in the high gross profit margin advanced solution business lines. Here we grew by 48%. What's interesting here is that if we split our advanced solution sales motion between hardware sales, so server storage, networking, and other appliances, and the intangibles software services cloud. Hardware grew 32% and in software services and cloud, we grew by 82%. And if we specifically drill down on everything as a service, we grew by 384%, including the acquisitions of GTI, the contribution of the acquisition of GTI in Spain and Portugal. Without the contribution of GTI, nevertheless, we would have grown in everything as a service. So mostly, almost not exclusively on cloud, organically by 68%. So we definitely are on a roll on this high growth opportunity. If we look at the contribution of the acquisitions, they are all in the advanced solution market. and they have provided us 42.8 million euros of additional sales and 2.1 million euros of EBIT adjusted. The two acquisitions combined in Q1, the three acquisitions combined in Q1 reported a consolidated 4.91% EBIT margin. And ROCE of these acquisitions is well above weighted average cost of capital. It's around the weighted average cost of capital of the group because they absorb a little bit more working capital than average. In terms of our landmark customer satisfaction program, Together is Better, which kicked off two years ago, well, I'm pleased to say that we're steadily progressing and we have massively retrained our entire workforce. We changed the compensation scheme and we are in the middle of a major redesign of our internal procedures in order to build further more customer-centric opportunities and procedures. So to accelerate in this differentiation process that is standing us apart from our competitors more and more. Well, the net result of this activity can be tracked especially in the IT reseller segment, which is the one mostly affected by this customer satisfaction program. In this segment, we grew by 39% in a market that, as we mentioned before, grew by 18%. Again, accelerating in a higher margin customer segment. And all of this turned out in having practically all lines of business having stable or increased gross profit margins. And even in a quarter in which the PCs and smartphones grew more than the average of the group, we were able to grow our gross profit margin exactly for this reason, because all lines of businesses were growing in terms of profitability. The interesting point in our results is also linked to the execution of the second level of our a ROSI-driven strategy, that means operating leverage on PCs and smartphones. Here we grew, but with almost no additional face costs, and therefore those lines have contributed to the bottom line exploiting, in this sense, the operating leverage. You can see it in the operating cost and revenues that went down to 337% compared to 3.69% in Q1 2020. Even if the cost in absolute terms grew, they grew mostly because of the consolidation of the additional cost structure of the three acquired companies, GTI Group, DACOM, and ED Mind. If we look at below EBITDA, and it's worth noting that EBITDA and EBIT adjusted are equal to EBITDA as well as EBITDA as reported, no one-off charges measured. If we look at below EBITDA, we see that the balance between financial income and expenses is negative by 2.5 million euros. That's in line with the Q1 2020. The balance includes 800K of IFRS 16 related lease cost, as well as 1.1 million of losses on exchange rates. The remaining are essentially a cost of carry. We have more than 140 million euros of long-term financing. We stand routinely with cash at hand. which is not compensated by banks and investments. So we bear the cost of the long-term financing, but we don't have any profit on the cash that we keep on our balance sheet. We're working on projects to improve this situation, but still we reward this situation as an opportunity for the group because it gives us flexibility and the capability of grabbing opportunities in the market whenever they might arise. If you look at tax rate, it's down for a couple of combined effects. One, the higher incidence of the results of Spain, which has a slightly lower tax rate compared to Italy. And also because in Q1 2020, we had some permanent differences, non-tax deductible, which were not replicated in this quarter. So this quarter is in line with the nominal tax rates of the countries where the group is active. So let's look eventually at our guidance. We expect the first half of 2021 to be a very strong quarter in terms of revenues because we have a favorable comparison against the previous year. especially April and to a lesser extent May last year were very weak month at the onset of the pandemic. We do expect a stronger quarter because of this favorable comparison. The second half open up to multiple scenarios in reality, and these scenarios are related to the uncertainty still linked to the pandemic. We model essentially two scenarios, a conservative one, which still implies a certain level of growth in the coming quarters, I mean Q3 and Q4, even if we expect a slowdown, especially in the demand of mobile products, PCs particularly. which we do believe, especially in the consumer segment, might be partially replaced by the purchase of goods and services, which were particularly pressured by the pandemic. We're talking about consumers moving back to buying apparel, travel, outdoor eating, theaters, cinemas, and whatever. that should eat up on the growth of PCs, which we don't deem in this scenario as sustainable, definitely not with the growth rate that we have been experiencing so far. We are also discounting in this conservative scenario a prolonged level of shortage of products as the one that we have been experiencing so far since, I would say, February last year. There's been no easing up of the shortage so far, and in this conservative scenario, we forecast this shortage to go on till at least the end of the year. There's also, obviously, another optimistic scenario, in which you might expect more robust growth based on the improvement in the shortage of products, not very likely for what we hear from our suppliers, but a still sustained demand for consumer products, that's potentially more likely. We have had certain encouraging messages coming from UK and US, where the level of vaccination is well ahead of us, so the reopening is in a more advanced stage. And apparently, even in a situation in which people are again free to move much more than what's still happening in Italy and to a lesser extent in Spain, Apparently, the demand for consumer products and PCs has not dropped significantly. It's more or less stable. That would be a very good piece of news for our top line and potentially for our bottom line as well. In this optimistic scenario, you might discount this kind of effect in Italy, Spain, and Portugal as well. And you could also expect a further acceleration on top of the one already embedded in the conservative scenario in IT infrastructure spending by companies. That on top of the demand for products linked to the strengthening of digital infrastructures for the government led by the next-gen EU program. If this will be implemented quickly, there are good vibes around Italy being on a good trajectory to start having the first purchases in the second half this year and apparently the same happens with Spain. We will in this environment push on our programs to help both our customers as well as our suppliers in this digital transformation journey. So our strategic guidelines forecast a strong development of our consumption model, cloud, where we are already having strong traction, but we want to kickstart our device as a service program in this upcoming weeks and we'll deliver news on this hopefully in the next weeks as I said. And then obviously we are accelerating on the evaluation of all the opportunities around outsourcing of logistics and the digital services. look at the digital serviciation and logistics as an interesting opportunity of beefing up our bottom line whilst while providing added values to our customers and in a sense securing more loyalty for them. So it's both an action item within our customer satisfaction programs as well as separate the line of business. Based on these premises and on the conservative scenario, having witnessed and being more and more confident on the centrality of IT distribution industry, we are out with the guidance for the year. with sales exceeding 5 billion and adjusted EBITDA of more than 80 million euros, pending having greater visibility on the trend in consumer demand and the other points listed in the optimistic scenario that we mentioned before. And that's basically all for our guidance. Since the onset of our Rossi-driven strategy, the market has rewarded our efforts and our results pretty well, as you can see here in the comparison between our share performance and the FTSE Italian Store Index. And we keep on having an open channel of communication with all of our investors. um here on this last slide you can find a list of events where we'll be participating and commenting our numbers and hope to see you during some of these events or in one one course in case you think that might be helpful we are all available

and with this it's over and thanks everybody for your continuous support and i handed over to the operator for the q a session thank you thank you sir excuse me this is the chorus call conference operator we will now begin the question and answer session anyone who wishes to ask a question may press star and one on their touchtone telephone to remove your question please press star and two please pick up the receiver when asking questions The first question is from Nicolo Storer of Kepler. Please go ahead, sir.

Yes, good morning. Thanks for taking my questions, actually. The first one on your guidance, if I strip out the contribution from acquisitions, probably guidance, at least at the low part of it, is not implying any growth in revenues and probably a decline in profitability so could also seem to be below your conservative scenario so if you can elaborate a bit on that and confirm if my estimates are correct the second one on the contribution that we have seen in Q1 from acquisition. If I'm not wrong, you have highlighted the contribution at revenues and ABDA level. Can you share with us the contribution at gross profit level from the acquisitions? And the last one, I've seen on your balance sheet the sharp increase in these liabilities in Q1 and also in this case if you can comment about what's behind that thank you okay well on the on the guidance we have still some how could I say

impaired vision on the future. We do believe the first part of the year should be particularly strong. We have a question mark on the performance of the PCE and generally speaking the consumer market in the second half of the year. And so we have designed two scenarios, one conservative as we have outlined in the presentation and one more optimistic. And we have guided on the conservative side. In the next we will see if we have been too conservative. I hope so. There are good messages coming from other countries where the reopening has been already active. And there's a bunch of good things that are happening in the group. But we just wanted to create the right level of expectations given the tremendous growth that we experienced in Q1. It's obvious that if the optimistic scenario kicks in, even just to a certain percentage, numbers could be different. That's definitely a fact. On the contribution to gross profit, if you look at the, not the presentation, but the Q1 relation, the documents that we have published, On page 12 of the Italian version, you can find the split down of the gross profit, the total gross profit and the contribution of the acquisitions. And on page, that's for Italy, and on page 14, you can find the contribution of the GTI group in Spain. at revenues, gross profit, EBITDA, EBITDA margin level. So you have there all the data. In terms of lease liabilities, well, we have integrated the acquisitions and they had some lease on their offices. And we have signed a new lease contract for an additional 13,000 square meters of warehouse in Italy. Those are the two big areas where lease liabilities enter into the game.

Thank you.

You're welcome.

The next question is from Andrea Randone of Intermonte. Please go ahead, sir.

Thank you, and good morning to everybody. Just a couple of small questions. The first one is about your gross margin in Q1. I wonder if you can comment if the CHIP shortage has had any impact on this number. And again, about the gross margin, if you can If you can elaborate about your full year guidance also in terms of gross margin even at the qualitative point of view. And then the last question is about M&A. I mean, the deals that you signed were very successful. You mentioned you are still working on this side. I wonder if you can comment on what you see in terms of market conditions and multiples.

uh currently thank you well yes obviously in in a world in shortage it's it's easier to defend your gross profit margins but here i would say that we had a very good performance partially by a little bit less of product availability less pressure driven by less than average product availability. But one of the key drivers behind this performance has been a progressive shift towards more business sales with resellers being stronger contributors of our top line growth enhanced product by product performance. So those have been significant numbers. As per the gross profit margin at the end of the year, we have been tracking stability or even improvement of gross profit margins year on year for almost three quarters in a row. And essentially we are pushing hard in our strategy to go on with stability or improvement. It will all go down to the level of mix that we will achieve by the end of the year. In the conservative scenario, probably the growth of low margin businesses should be more muted and hence the gross profit margin should be higher. In the, let's say, more aggressive scenario, we might expect some further contribution in terms of volumes by PCs, so gross profit margin could be a little bit lower. But obviously, with more volumes, we could have, in absolute terms, more gross profit value. We'll see at the end of the year the final mix. And in terms of M&A, yes, the market conditions are favorable in the sense that there's quite a lot of potential small targets interested and available for discussion. We are looking at the niche deals, as you all know. not big ones. Generally speaking, companies are on sale. We'll see if we will be able to find the right agreement on pricing that we consider acceptable. But yes, I can confirm that there's quite some availability in the market among small players.

Thank you very much, Mr. Patan.

Thanks to you.

As a reminder, if you wish to register for a question, please press star and one on your touchtone telephone. Once again, please press star and one for questions. The next question is from Marco Vitale of Mediobanca. Please go ahead, sir.

Yes, thank you. Good morning, all. Just a clarification on your guidance. I was wondering on which scenario is it 100% based on the conservative one or is factoring also part of the more optimist? Thank you.

It's the conservative one.

Okay, thank you. You're welcome.

For any further questions on the conference call, please press star and 1 on your telephone. The next question is from Claudia De Ranieri of Albemarle Asset Management. Please go ahead, sir.

Hi. Thanks for taking my question. Congratulations for the very strong results. I have a couple of questions, please. The first one is on your guidance. I mean, you commented that that in a conservative scenario you will end up doing more than 80 million euros of ABTDA. What could be the figure in case of the optimistic scenario materializes? Could it be 90, 95, 100 million euros? The second question would be on the improvement in profitability that you are registering the first quarter at all levels despite the increased weight of PC and smartphones. I mean, it looks like that the margin pressure has finally bottomed out and you are now on a way up, on an upward trend. Is it reasonable to assume, despite all the mixed issues which could affect the number, that you will anyway able to hold on this plus 20 basis point improvement in the gross margin on a full year basis, or even improving it? And the third and final question will be on the buyback. I mean, if you can share a little bit the reasons why you decided to speed it up over the last few weeks. Thank you.

Okay. Well, we decided to guide on the conservative. We had... we had long discussions within the board. There's so many unknowns that we decided not to venture into a range. Definitely and obviously, if especially infrastructure spending accelerates, infrastructure spending turns to be mostly advanced solution for us, so it's high margin. And so it could be a significant contributor in terms of bottom line. And I wouldn't discount also the effects on PC and smartphone sales. In the conservative scenario, the overall top line of the group in the last two quarters of the year is expected to grow. but definitely not a lot because we expect a lot of pressure and a very unfavorable year-on-year comparison on PC sales especially. Even if they are not providing a lot of margin, they still are a contributor in absolute terms. If we add stability or even slight growth here, um that could turn out to to be a significant contributor i remember everybody 100 million euros of pcs provide 2.5 million roughly or more depending on the kind of customers of additional bottom line so yes numbers could be materially higher than 80 but we really don't have a clear visibility on this and so we don't we prefer not to provide any any upper limit in terms of the margin pressure yes it has been managed and managed well i would say on an annual basis we are within our strategy we are targeting all activities that should improve the like for like margin performance. And those activities are under the broader umbrella of customer satisfaction programs. So far, the customer satisfaction program has been particularly effective, both at the market share gain level as well as in terms of improvement or stability of profitability line by line. And as I mentioned before, yes, we aim at continuing with these programs and hopefully to reap further rewards out of this strategy. So we'll see during the year if we will be able to sustain line by line, product by product line, gross profit margin stability, or even possibly improvement. That's the target. Then again, the end number will be the result of the product mix. And here we go back to your first question and my answer, what is within the What will happen in terms of final scenario? Will it be more than conservative with higher than expected volumes of infrastructure, higher than expected volumes of PCs and smartphones, or both of them? Depending on that, we will have the final number. And in terms of buyback, well, basically we, as a, as a standard when whenever every three year we execute we we finish the long-term incentive plan and we launch a new one we typically try to buy the shares that will be needed to service this long-term incentive plan as soon as possible so that we don't have too much difference between the value of the share the day we granted the shares for the new plan and the cost of acquisition. And then we rounded them up so that we have now a 3% total treasury shares and some of them a smaller portion as a matter of fact. I think roughly half a million will be probably canceled. That's why we did it. And then we stopped and from now on we will wait and see if there will be other moments in which the board will see buybacks as an intelligent and efficient way to deploy capital Thank you.

If I may, I have just a final question. Can you share with us some market data regarding how the market has developed in April and how it's been developing in May so far?

We have some information. I can tell you that the market overall in April, we have just very preliminary figures, but the market in April performed pretty well, obviously, but simply because last year was so horrible. And so April has been a good year on an year-on-year comparison. and and that's what we we have witnessed so far it's uh too early to to have better figures in this moment um as we mentioned anyhow we do expect to have a very solid first half of the year because of this poorer comparison especially of april and partially of may last year the the The new scenario will be probably better understandable in early September. Probably at the beginning of September, I assume that in this call in September for our Q2 figures, we'll probably be able to have a better view on whether we are heading towards a conservative scenario or a more positive one.

Okay, thank you very much. You're welcome.

Mr. Katani, at this time, there are no questions registered, sir.

All right.

Well, thank you, everybody. Thank you for your support, and we'll keep pushing hard to deliver on our ROCE-driven strategy. The market, as we said, looks favorable, and we will do our best to keep on progressing on these activities and looking forward to meeting you in one of the events or talking to you in one of the future upcoming course. Thank you everybody and have a nice day and stay safe.