Esprinet S.p.A.

Good afternoon. This is the course call conference operator. Welcome and thank you for joining the EspritNet first half 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 their telephone. At this time, I would like to turn the conference over to Miss Giulia Perfetti, IR Manager. Please go ahead, Madam.

Good afternoon and welcome everyone. Thank you for joining today's call. I'm Giulia Perfetti, Investor Relations Manager of EspritNet and with me is Alessandro Cattani, CEO of EspritNet. To comment with you on the results of H1 2021 we announced yesterday. I would like to remind everyone that the press release, the presentation and the podcast of today's call will be available on the aspirant website in the investor section. Before starting, I would like to draw your attention to the regulation note on page two of the presentation. Now I let Alessandro start the call and present the H1 2021 results. Alessandro, over to you.

Thank you, Giulia. And hi, everybody. First and foremost, hope you're all well and you enjoyed some well-deserved holidays. Well, today I'm happy to report a very strong set of results, and this is the outcome of a strong activity performed by all the ESPRINET team in these last quarters, and I want to thank all the team for all of this. Numbers which we'll show you in a moment are the result of what we did and we're really happy on the trajectory we have been through. As a matter of fact, I want just to remind everybody that we are strongly committed to our journey from being a transactional district of commoditized low margin products to transactional history of higher margin products, such as advanced solutions, and eventually becoming more and more as a service provider, enjoying higher profitability. So during this journey, we have achieved some landmark results, and today I'm proud and happy to comment on these numbers. So if you dig into our numbers in a snapshot, the group continues in its growth path with very strong P&L results. Sales was up 22%, with Q2 sales up 16%. And what's more remarkable from our standpoint, stressing again the concept of this journey towards higher profitability, is the standing growth, 67% year-on-year in advanced solution. A bid adjusted was up 74%. Here we have two main drivers. Organic growth contributed for more than 14 million euros, 59% year-on-year. and M&A contributed 3.6 million. We outperformed the market in all three countries and grew our market share with also a strong contribution from the latest acquisitions. What's probably more interesting and a testament to the work we have been doing in implementing our ROSI-driven strategy is the growth in gross profit margins. Gross profit grew 42% in absolute terms and moved as a profit margin from 451% of H1 last year to 524% of this year. And this is both the result of a higher weight of high margin business lines, such as advanced solutions, but not only that, and the constant improvement in customer satisfaction indexes that led us to improve margins on more or less all business lines. In terms of the balance sheet, we report once again a very solid financial structure with cash cycle at nine days. three days better than Q2 2020. Net financial position was negative after IFRS 16 effect of 105 million euros. It's down compared to March 2021 where it was negative for 71.6 million euros. Essentially, for the effect of the Treasury shares buyback and the extraordinary dividend distribution to shareholders on top of the ordinary dividend distribution to shareholders. And it's down compared to June last year where it was positive 413 million euros. Essentially on top of the Treasury shares and buyback for two reasons. One, we have added the disbursements for the new acquisitions, GTI Group, as of October 1st last year, and DACOM and ED Mind in Italy acquired in January, as well as the mismatch between DPOs and DSOs that we had during the COVID-19 pandemic, which we said more than once that were a one-off effect support that we got from vendors and gave to customers and the net result was positive in terms of working capital. ROSI stands at 23.2 mostly through an increased operating profitability whilst managing the cash conversion cycle in that optimizing process that we mentioned more than once where after having strongly reduced our cash conversion cycle, we are now trading off a little bit of cash conversion against a higher, proportionally higher profitability. Well, I think the following slides is a comprehensive set of financial highlights. I think the key messages have already been delivered. Let me just stress how our net income grew 187%, a result which is both coming from a better ordinary profitability as well as not having one-off effects this year against last year, as you can see. EBITDA adjusted and EBITDA are the same because we had no one-off effects as of today expected. In terms of the balance sheet worth noting an increase against last year in fixed assets mostly linked to the acquisitions that I mentioned before. And the net equity is more or less equal to last year, notwithstanding the profitability made during the period, but we have to remind the disbursements for the treasury shares as well as the 24 million roughly of dividends paid in this spring. So if we look at the evolution of our working capital, this is, as always, the moving average over the last four quarters. We're up to nine days. What you can see is a progressive reduction of DPOs, stability in our inventory days and ESOs. But if we look at what happened in the last quarter alone, you see that we are experiencing slightly better than expected DPOs. The average industry numbers are a little bit north of 60 days and we have been doing, I think, a good job here with a good vendor mix being around 70 days. The ESOs stand at around 40 days. Here we have a higher incidence, a higher weight of resellers. And as long as resellers are normally not, resellers receivables are not sold without recourse through factoring programs, we are experiencing slightly higher numbers than the 37, 35 days that we experienced some quarters in the past. We had a tad more than expected in terms of inventory. Here again, I remind everybody that we have been trying to trade off a little bit more between working capital and and profitability, so we profited of some opportunities at the end of the quarter to get some extra margins. It is true also on the other side, and this is mostly in Spain, that we had a very good order inflow from consumer customers, retailers, but some of them postponed certain shipments and that caused an excess of inventory in Spain mostly. Nothing without control, but this is an area which we are working hard. And it sounds a bit strange, this happening whilst we are experiencing a worsening of the shortage issues that plagued the industry since February last year and that are, as I said, worsening, but still on some orders that we had in-house, we were not able to deliver in time. Now if we look at ROSI here, as we have been doing for the last presentations, we report ROSI pre and post IFRS 16 effect. The figure that we have used recently has always been the blue line pre IFRS 16 effect, bounced back to 23.2, mostly as a result of better profitability. But still, I'm pleased to say that the performance of the group has been consistent and that the strategy that we have been declaring time and again and on which we have been executing has been so far successful. Let's spend a few moments on strategy and execution, therefore. So let's remind for a moment what ROSI-driven strategy stands for. It's basically our aim at optimizing and improving our return on capital employed. In the first stage of our strategy, we worked hard on capital employed optimization and reduction. Now we are working on the profitability. and we split our business in our traditional transactional business, what we call here as core business on the left side of the slide, and in progress the evolutionary movement of our strategy becoming more and more a consumption model driven or as a service provider and in time also growing our civilization strategy or the concept of selling outsourcing services mostly logistics and digital marketing. Well, the strategy especially in the initial core business activity has been a success by means of organic growth fueled also by the positive market. and on our strong focus on customer satisfaction. And last but not least, the contribution of the advanced solution acquisitions that we made last year. The EBITDA grew 74% and moved from 131% on sales of first half last year to 187%. on revenues of first half this year. So that's what is our strategy. And again and again, this is the guiding light of all our activities. And we have been and we will be executing on this, improving our transactional performance. But what's more important moving forward executing on the consumption model or as a service model and services. So which were the drivers of profitability? Well, we have already commented them. Digital transformation is an ongoing trend which has been accelerated by the pandemic but which we and all industry analysts see more and more as something here to stay with a lot of investments from companies in infrastructures and therefore in high margin business lines. That was one key driver for us. Customer satisfaction index both measured in terms of market share growth but what's more important in profitability, in gross profit margin, gross profit profitability. Very interesting, the performance of the integration of both GTI and as well as the DACOM and EDMA in Italy. It has been very fluid so far and the three companies contributed an additional 3.6 million euros in adjusted EBITDA adjusted EBITDA and EBITDA are the same throughout all this presentation. The EBITDA incidence of revenues grew and that even if we add an increase in the weight of operating costs that move from 321 to 338 percent, the growth in operating cost is almost entirely connected to the acquisitions of GTI, DACOM, and EDMIND. It's their costs that are now into our group. But this growth has been percentage-wise on revenues significantly lower than the over proportionally higher growth in terms of gross profit. That's how the P&L evolved. If you look at the H1 sales evolution, let me draw your attention on product categories. Advanced solution in the first half grew 57%. We grew 57% in a market that was negative in first quarter and growing in second quarter for a total of 4% growth. So we keep on getting and growing market share in this area, which is of paramount importance for us. We kept stable our share in IT clients in line with our strategy of dropping opportunities whenever these opportunities are such only in name and not in numbers. And we were even more aggressive in terms of consumer electronics where we dropped multiple deals in exceedingly low margin smartphone sales. That is measured better in the performance by customer type where the market of retailers and e-tailers grew 26% and we grew only 13%. we willingly dropped a bunch of so-called opportunities with on the other side we focused on higher margin businesses in the reseller area and we grew three times the growth of the market so i think a very consistent execution in line with what we said our strategy should be and in this sense i'm really pleased of what our team was able to deliver. If you look at the second quarter alone, what numbers speak more or less the same language and the same story and even faster growth in the advanced solution. So all in all, I think we have been doing well in terms of our strategy. A couple of drill downs on the advanced solution. They grew by 57% in the first half. Hardware grew 9% and software services and cloud to 2%. The integration of GTI and DarkoMoney in mind contributed 88 million euros of sales. What's very interesting is the growth of the cloud business. So far, everything as a service is mostly cloud. We still have a very small amount of devices as a service, which will be something that we will start tracking in the future, but I'll come to that in a moment. Sales were up to 63 million. We grew 572%, but that's because we acquired the GTI Group. But still, without GTI Group contribution, we were up 128%. So we really are putting our people at work on the areas where we said we should take a specific focus. um the it resellers growth was mostly the result of better customer satisfaction resellers are very sensitive to customer satisfaction and we we really are performing a bunch of activity not only in terms of training and redesigning of compensation schemes but we are in the middle of a transformational effort with the help also of consultancy firms, redesigning completely certain processes in order to speed up the response time to customers' requests, as well as streamlining all the activities linked to the requests of our resellers. A focus on PC demand. Again, here we are talking about first half. We'll speak in a second about the guidance. We had, at the end of second quarter, the first sign of slowdown in PC demand, which was a strong driver of top line performance last year and the first part of this year. The reasons behind this slowdown are, first, obviously, a difficulty in your comparison. Last June, we saw a strong leap in the volume of revenues. We were in the middle of the pandemic, and companies, as households alike, were running to get as much notebooks as possible to run smart working and e-learning We have seen, as expected, with the easing of the pandemic, consumers leaving home and spending more money in leisure and less money on home, including PCs. We had some product availability improvement in Q2 in PCs but they have still been constrained. And in some areas of these species, we had still a complicated situation that, as a matter of fact, worsened from July onwards. And finally, we saw a bunch of price increases that affected sell-through. Very often the price increase is not necessarily a price increase in the specific product. It's mostly not launching low-end business lines or not letting low-end business lines being available so that implicitly you're forcing your customers to go for higher ticket prices. items and that to Contribute it as well to a little bit of headwind on on PC volumes margins, it's They have been good for the industry as a whole Now let's look to the future Well Let's start with the market. In July, the market was down, was down double digit. And the preliminary figures for August hinted a weak market as well. We continue to see uncertainty in the consumer demand. This pressure on volumes is mostly in PCs and smartphones. in the consumer customer segment. Those are the main culprits of this performance in the market. As a matter of fact, we are experiencing what we budgeted as the conservative scenario with a tad of extra pressure coming from the surprisingly challenging shortage of smartphones, specifically and to a lesser extent some other consumer products. We have been in shortage since February last year, and we were quite surprised, especially in July and August, of the increased level of pressure in the shortage of especially smartphones. We all know of the shortage of electronic components that is affecting the availability of a lot of product categories that are not necessarily related to IT, just mentioned car industry. But we thought that the shortage that we have been through since February last year would have been stable. To a certain extent, it has been in PCs and with certain areas of PCs that are under more pressure and in advanced solution. There's been on consumer electronics and mainly in smartphones. And to a lesser extent in printers as well, there has been an increase, an increase the pressure in terms of lack of shipment from vendors. So this is an area that we have to control. As a matter of fact, all the intake has been solid. But this shortage and some shipment postponement that we got from certain retailers, for instance in Spain, commented it also on the inventory as of end of June for the Spanish business. It's something that added a certain amount of uncertainty to the further uncertainty to the consumer shipping. There's very good vibes in the market around the corporate investments. in infrastructure but also in pcs generally speaking in everything related to it and digital solutions but still we need to assess properly the exact positive impact that this massive multi-year government investment plan connected to the next gen eu program program will have There's a lot of negotiations, there's a lot of positive vibes as I said, but it's still difficult to clearly understand how much of this will turn into Q4 or Q1 sales. Those are the main reasons why although we made a very good first quarter, first half above our internal expectations, and although we are having in particular a very very good performance in terms of gross profit margins given this instability especially linked to this surprisingly high shortage in certain areas and given the fact that we don't really know if Some of the business sales that are boiling will become sales in Q4 or in Q1, and I'm referring to the Next Gen EU program. We prefer to reconfirm, as of today, the existing EBITDA target of an adjusted EBITDA exceeding 80 million euros. We want to wait another couple of months and see what really happens with the shipments, with the consumer demand, and especially with these industry investments. And that's mostly the reason behind not having raised the guidance so far. Midterm, and I want to stress this point, we are sitting in an industry where we have a very positive outlook. We are executing well so far, simple and clear and straightforward, and I would say investor-friendly strategy, all aimed at a rosy improvement. We are in this journey that I mentioned more than once, moving from a transactional distributor of low margin businesses to a transactional distributor of higher margin businesses, and that is already in our numbers quarter after quarter. But we want to accelerate the process of transforming our business model towards as a service. So that's where we are all focused and where we see a lot of interesting opportunities midterm apart from what we see in this year that will definitely will close as a very good year for us. And last but not least, I stress once more then don't expect further optimizations of the cash conversion cycle. We're focused on increasing profitability and maintaining it. the best balance between profitability and cash conversion cycle, leveraging all possible opportunities deriving from a very strong balance sheet and from the opportunities that both vendors and customers put on the table whenever you manage properly this trade-off. If we look at the share performance since launch of the ROSI-driven strategy, apparently the investors recognized the activity that we have been doing and apparently were happy with the fact that we were driving a ROSI-driven strategy. In a sense, reaffirming once more in our minds that the road we are going down is the right one. Keep on pushing on investor-friendly strategy, maximizing ROSI. And with this, thanking everybody for looking into our company. I thank everybody once more and turn the button to the operator for the Q&A session. Thanks, everybody.

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Hi everyone. Thank you for taking my question. The first one is on guidance. So you confirmed it despite the quite strong margin uptick in the first half. and confirming this EBITDA target while still assuming revenues of around 5 billions as per your last guidance would imply something like 40 bps decline in growth in margin in the second half compared to the first half which is in sharp contrast to what has been historically seen in your company Can you give us more insight on what is reflected through this EBITDA guidance confirmation and does your EBITDA guidance confirmation in fact reflect a downgrade of your top line expectations for the year? Then on the margin enhancement seen in the second quarter, how sustainable do you think this 5.7 growth margin is going forward? And then can you tell us if you have seen so far the first hints of materialization of P&R investment projects in Italy. Then as well if we expect B2B activities to continue driving your activities in the second half. the mechanical slowdown in B2C activities from the return to outdoor occupations of customers. Isn't that just a bit counterintuitive to have this implied margin downgrade in the second half? And then, finally, on CAPEX, just a quick precision. In the first quarter, you reported outflows for PP&E acquisitions of $18 million, whereas in your first half, 21 data, this figure was a $3 million outflow. Can you just give us some more color on that? Thank you very much.

Okay. Well, on the... margins and revenues, we confirm our guidance on EBITDA, which is the key number. You're right, we are cautious in this moment because we don't yet know if the numbers will be achieved with the profitability will be achieved with the lower revenues but at a higher margin or if we will also have higher revenues and hit or exceed the 5 billion threshold. That's why we are putting a question mark. Revenues in the second half are really dependent on consumer spending. The second half and especially the fourth quarter are really reliant on the retailers' purchases and that's the area which is normally absorbing the biggest amount of almost the entire amount of smartphones as well as, to a lesser extent, PCs. And that's the area where we have a question mark. Not so much on profitability. If profitability given the margins that we are getting, we feel confident that we are in line with our targets. The question mark is, will the volumes in consumer, especially in smartphones and not only there, uh be enough to eat or exceed the five billion and in that case we should raise our our guidance and uh we don't yet know because we have this shortage that is a question mark i would also add that in smartphones we do have apple which is an important contributor to our revenues And it's not yet clear when Apple will launch their new, apparently called iPhone 13 lineup. I say apparently because we don't yet know. That's how the market calls the new line. And there are rumors about end of September, others about end of October. Clearly, one month or more or less of iPhone could make a material impact on our top line. That's what we are forecasting on your first question. On the sustainability of gross profit margins, we have been experiencing a particularly solid first half, also because we had not only very solid advanced solution sales and a good performance in terms of each product line, including PCs and smartphones, which had slightly better cross-profit margins than previous years, but we had also a particularly strong performance in accessories. We have plans for the second quarter as well, but here again we are in a situation in which we don't yet know if these deals will be executed or will be postponed to next year. So generally speaking, yes, we are very confident and we see in the numbers a very good gross profit margin performance. The only question mark as always is in the mix and normally the second half has always a mix historically more weighted on PCs and smartphones. Probably this year it might be that the weight of PC and smartphones hopefully could be less because we are driving proportionally more sales in the other lines, or also because there would be intrinsically less demand in the market, or less product availability more than demand. And that's what we don't yet know. But yes, we are very positive on gross profit margins as well. on pianarara so the next gen eu funds for italy we have seen first activities there's a bunch of public tenders in education in this moment and so something is moving there's a few large tenders in also in infrastructure But I would say that the PNRR, or generally speaking, the Next Gen EU funds, imply two kinds of activities. And I think this is an important comment to give to you all. One is direct government spending, and some of this spending will be potentially available for our customers as well. Some of it is more infrastructural. It's something more for the telcos, for instance. But there's an important bunch of money that will be available to companies, not necessarily IT companies, if they implement a journey towards green or sustainable solutions or improvements in their digitalization. And this will come in the form of tax deduction. So we will have an indirect improvement of our overall available market because the customers of our resellers will probably invest more, not only specifically in IT, but also in green solutions that in certain cases entail the necessity of IT investments. Also in infrastructure. then obviously there will be also government tenders. So we will be able to track the government tenders because it's a clear and evident number. It will be more complex to track the amount of extra sales that in the next years will be probably driven by the investments in infrastructure that common companies will do to cope with the opportunities offered by the next gen EU. Think of the building companies, those companies, even small ones that are profiting from the 110% contribution for the renovation of buildings. The vast majority of these companies sooner or later will invest in IT as well. And so this is an example of these opportunities. in the second half resellers will we grow yes we we do believe resellers should have theoretically a very good performance we are putting a lot of efforts on all areas within the company to push on this customer segment not that we are walking away from retailers but obviously we are looking at at the journey as i said we want to be more and more involved into the as a service business and although there's a chance of providing as a service to households as well we are really focused on solutions for the industry and the industry is normally served by the corporate resellers or system integrators. That's where we are putting all our focus. I think the last question was on CapEx. Frankly, I don't know exactly if I understood the question. It's probably on the amount of fixed assets that we invested during the first quarter. We consolidated the acquisition of EDMind and DACOM. In the second quarter, we basically had the maintenance capex, the ordinary capex. We have a little bit more capex in Spain because we are renovating the new offices in Madrid. We have closed the former Vinzeo and GTI offices in Madrid. We have consolidated all the people in the Madrid area in a new office in a more central location. uh the office was opened a few days a few days ago so i i hope i have answered to your question on capex as well anyhow in case that there's any further requests please let us know and we we can send you some more more details on this very clear thank you very much welcome

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The next question is from Marco Vitale with Mediobanca. Please go ahead.

Yes, good afternoon to all. Thank you for taking my question. Just one clarification on your M&A strategy. We recently read some articles, some interviews with the management highlighting that scouting activities for a post-divis target are ongoing. If you can add some additional information about the potential timing or anything relevant, we would really appreciate this. Thank you.

Well, obviously, I'm not at liberty to give clear indications on which targets we are addressing in this moment, neither on timing. I can generally speak and say that M&A is now part of our strategy. We have been a serial acquirer during these last 20 years. We are targeting Portugal, where we would like to grow significantly our market share, so we are looking at the potential targets in that region. Obviously, given the size of that market, and given our size, there's nothing that is really huge. There are interesting targets over there, but don't expect billions of revenues here. In Italy and Spain, we are selectively looking at small niche targets, again, mostly in the advanced solution area. We are also targeting some opportunities in the consumer electronic, I imagine, niches. um accessories we have been looking at opportunities in in white good goods as well we have this activity going on and it's it's very hard to say if and when some of these deals could could be closed in I don't expect anything short term, but we have multiple targets on the table. As a matter of fact, we always have had in these last years. Then sometimes suddenly you finalize some of these deals. Sometimes it takes more time. But yes, we are looking at these targets and apart from Portugal where we are looking at Broadliners as well in the other areas. We are just looking at the niche players in high margin counter dilutive Distribution opportunities Okay, thank you welcome

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Well, thanks everybody for joining us today and looking forward to talk to you either in one of the multiple conference we will be attending which you can find in the last slide of our presentation or during our conf call which will be held after november 11 date in which we will approve our q3 figures thanks everybody have a nice day speak soon