Esprinet S.p.A.

Good afternoon, welcome everyone, and thank you once again for joining us. I'm Giulia Perfetti, Investor Relations Manager of Espernet, and with me is Alessandro Cartani, CEO of Espernet. Today, we are pleased to present the results of Q3 2021 and proudly announce our strategic plan to 2024 and beyond. I would like to remind everyone that the press release, the presentation that we will show, and the podcast of today's call will be available on the S-PRED website in the investor section. Before starting, I would like to draw your attention to the regulation note on page two of the presentation. Moving to the agenda, we will start from our Q3 results and our guidance for 2021. Then we will present our strategic plan to 2024, the new journey to value, the backdrop, and our estimate will be in 2024. Now I let Alessandro start. Thanks, everybody.

Welcome. Hope you are all well. Today is a particularly important day for us. It's a really major step forward in the evolution of our group. something similar to what happened back in 2005 when we became a multinational. Today marks really the beginning of a new journey into a different space for our group. We have been working on this for quite a long time, and it's really exciting to be here and presenting this. But let's start with our Q3 numbers. This year has been so far a very good year for the group. We have experienced growth in terms of sales, profitability, and we kept our market share in Italy and Spain and grew it significantly in Portugal. If I dig into 2021 Q3 numbers, there's a bunch of things that went very well and a couple of things that we were not pleased with. First and foremost, we experienced very, very good order taking from customers. Our market has been excellent, and we have performed pretty well in terms of order taking. But on the other side, what was not good was what we had in terms of shipment from our suppliers, both in terms of quantity, quality, and timing. We had less than expected. We had it at the wrong time. and some of it came into our warehouses at the very last moment of the month. So, effectively, we were not able to sell them in time, and we sold them at the beginning of October. And we also had a sort of wrong mix. We got excessively high levels of premium products and less than desired consumer or low-end ones. And that draw the higher level of stock than what we expected. But a lot of other things went very well. Our gross profit margin in line with our expectations and probably above them was significantly up. Mix was very good. And if we turn to the Q3 sales mix, which we can see, in this slide, you can see that we had very good performance on IT resellers, where we gained the share, whilst more or less in line with our targets. We were not so aggressive in the retailer space. And all this joined with a very good product mix, Altas, in in improving significantly our gross profit margin. We had extraordinary performance in the advanced solution, higher margin space, where we really got share, and in the cloud space specifically, where numbers were pretty much, I would say, outstanding. 400 and plus percent, also thanks to the acquisitions, but we crossed the threshold of 100 million euros of cloud sales in nine months and in the quarter we were really strong again. Portugal was very good. We keep on gaining market share and the acquisitions performed spectacularly. adding value to the overall results that we achieved since the beginning of the year. We grew our EBITDA adjusted by 39 percent and 11 million 26% year-on-year growth came from organic growth in our profitability, but 5.3 million came out of the acquisition. So we were really pleased. So a bunch of things were really positive, but essentially our strategy aimed at gross profit as well as a bid improvement. probably was executed a little bit to the extreme in front of certain fulfillment deals in the consumer space where we were probably a tad too aggressive. And on the other side, we were suffering from a bad backdrop in terms of shipments from suppliers. But I commend this a little bit more in the following presentation during the guidance explanation. Well, in terms of financials, P&L was up to, as I said, 57.9 million in terms of a bit adjusted, 1.8% a bit adjusted. We had extraordinary charges of roughly 800K linked to the one-off establishment, cost linked to the establishment of an addition of roughly 13,000 square meters of warehousing capability in Italy to help with our growth existing and forecasted in the wide goods space. But apart from this, all indicators are in really good shape. What was not good, as I said, was a little bit of excess in inventory levels, which we have already rained in October, and so we forecast a much better performance in the upcoming months. You can see it in our working capital metrics that bounced back to 13 days average. I remember everybody that we said that something between 10 to 15 days is probably a more stable and normal level for us. We were trading off a bit too excessively on the working capital optimization, sometimes losing some interesting margin opportunity. We're trying to balance this situation. and will do even more in the future. But on the other side, and you can see it in the following slide, we definitely had an above than average misperformance in inventory. The seasonality in Q3 is always negative because we always count inventory at the end of September, which is always a little bit loaded, so to get ready for the upcoming Q4. And you divide by sales in Q3, which is always the weakest, especially in terms of oversales. Still, this was more than what we liked and expected. But as I said, there was a lot of turbulence in the shipment space, and that affected us. But luckily, it has been fixed in October, so we are much more positive for Q4, where we expect a really good performance. So this reflected in our return on capital employed evolution, seasonally down, but always high double digits. The trajectory is well in place, and even if we're sailing a bit rougher seas than we would have liked, especially because of the problems with the global supply chains. Nevertheless, the group is in excellent shape, and we are heading into, well, we are already into our Q4 with a good perspective. which we have summed up in a guidance, which can be summed up like this. October and early November, we have recorded extraordinary levels of orders from customers, well above budget and 2020 levels. It's really great. Unfortunately, we continue to face serious difficulties in goods supply, especially on some consumer product categories, such as low-end PCs or smartphones. So we are balancing. We are working on a tightrope here. We have on one side a lot of excitement in the market in terms of demand, and a lot of it is being grabbed by us. But on the other side, vendors are really struggling to provide us with the goods we need. Not that the situation is desperate, obviously, quite the opposite, by the way. This is the result of excessive success. But still, we could have done a tremendously better year. And still, we just, in brackets, have a fantastic one with very, very good growth in terms of profitability. What is really remarkable is that the levels of gross profit margins remain very positive, and so does the SG&A discipline, even if seasonally Q4 always bears more costs than Q3. And at the end of September, as I said, we had more than what we liked in terms of stock, but that improved already. And so we forecast good working capital performance by the end of the year, and hence also a very good net financial debt position. All this said, especially in light of the exceptional levels of order taking from customers and in light of the information, although sometimes not so reliable in terms of shipping dates from suppliers. We are pleased to say that we are ready to and we raise the profitability estimates for 2021 raising our a bit adjusted level to higher than 83 million euros against the previous higher than 80 million euros with an overall revenue volume that will be higher than 4.6 billion euros. And this, I think, speaks a lot about the enormous opportunities that lie ahead of us if we only add more products. And as a matter of fact, Given the level of profit margins, we have tried to be cautious in our forecast. If we had just a little bit more of shipments than what we forecasted, I hope it could be a really good year above, I wouldn't say significantly, but definitely above 83 million euros of adjusted EBITDA. Well, that's for 2021, but let's move to our future. And our future is definitely a new journey to value. We have worked hard and thought a lot about the future of our group in terms of value creation, in terms of opportunities lying in the industrial market, in our market, that might be grabbed and must be grabbed and in terms of the overall repositioning of the overall distribution industry in light of the evolution of the industry itself. So, the first pillar of our future strategy and existing strategy is the fact that we have framed in a clear and loud way our group as ESG-centric. The new journey to value is strongly rooted in our ESG purpose for five main reasons. The first one is, well, ethical motivation. ESG purposes are consistent with the value systems of our board of directors, nature holders, the management team, and myself. We feel good in having ESG purposes among the guiding lights of our daily and strategic activities. So it's easier to work in an ESG-centric framework. But there are four big reasons behind our strategy and our willingness to have this ESG-centric framework. The first is the fact that we recognize enormous business opportunities On the environmentally friendly product lines, I just remind everybody that we signed agreements already in the car charge product lines. Think of in Italy, for instance, for the recharging stations for electrical cars, but also e-bikes and other electrical mobility lines. And that's an example. but there's a lot of untapped value into the next-gen EU-funded projects. We'll come on this later on. The second, and I would say that part of this innovation that we introduced to you today is the result of the out-thinking that stemmed from having new constraints coming from ESG compliance. If you do business with an ESG commitment, Well, you put constraints in your freedom. It's easier to do business when you don't care about the laws, when you don't pay taxes, when you pollute the environment, when you mistreat your employees, when you don't care about diversity and other terms. But as long as you put this complexity into your system, reacted by thinking harder and that brings innovation. And innovation is the driver for medium- and long-term value generation. And that's what happened with us. Renting space has a tremendous, tremendous purpose connected to the opportunity of reducing the planet pollution and on the other side, enabling the opportunity of using technology also to companies that have less money than the ones that are able to purchase new equipment. There's a lot of new finance coming into the market, both in terms of lenders as well as investors, and they all require strong ESG strategy, and we want to be there for them and with them. Last but not least, it's just a pure matter of reduction of risk profile. If you look at the outcome of COP26 and of the recent G20, it's clear to everybody that in the future, definitely governments, perhaps by means of regulations or taxes, or even worse, consumers, would punish the companies that do not have a strong ESG strategy. And we don't want to be punished. We don't want to have this risk profile. Quite the opposite, we want to leverage on these tremendous opportunities. And by doing so, we thought hard, and here we come with our journey, new journey to Valium. Well, as I said, it was 20 years since the birth of Experinet, since we really launched a structural change. Well, probably in 2005, we made one when we moved from being an Italian IT client, so PC printer distributor, to Italian and Spanish distributor with also consumer electronics. In 2011, we moved into value-add distribution with the establishment of the Valley with the Advanced Solution, and we opened up an Elixir and Shelly own brand. But today, we really launched a structural change of our big business model. Siding distribution which will evolve in a higher added value version against the traditional volume distribution model. Siding it with initially the entrance into the renting space and the aim is by 2024 to have side by side with distribution a full service provider environment serving the ecosystem of vendors and resellers and retailers. We talked about the possible areas of growth in our strategy. We could move into new countries, we could move into new products and services, and we'll do, obviously. Today, we also announced that ONCE will be even stronger in Portugal we'll start investigating and opening up our presence in other European countries and possibly in North Africa as well, where we're already present in Morocco with a small entity, because we do think that there's certain product lines that do have European markets of reference and not a national one. If you think of PCs and smartphones, they typically are managed at country level. But if you think of advanced solutions or accessories or even toner and ink cartridges, they do have normally a European-wide coverage. So we'll look at new countries. And obviously, we'll keep on looking at new products and services. But that's one side. of the equation, there's another possibility. We can change our distribution model, our business model. And we have witnessed some of our competitors either running an upstream integration, becoming vendors, or a downstream integration, becoming competitors of their own customers, our own customers. We have decided to double up on being at the service of the ecosystem of our existing vendors and customers, providing them renting solutions and in future full service provider means providing them added value services in the area of demand generation, advanced logistics, and generally speaking, everything that will let these entities do better their job. So we're doubling down and becoming something aside from a pure volume distributor, an added value distributor, but initially a renting actor as well. And this translates into revamping of our return on capital employed driven strategy, which will be focused on profitability improvement, as we announced since almost a year, being capital employed optimization a prerequisite. Let me focus on capital employed control. If you work the numbers, you see that with the cash conversion cycle roughly below 18 days, you can see that our group will be cash neutral before IFRS 16 impact. And so we aim at keeping our cash conversion cycle below the threshold to provide financial flexibility to fund a generous dividend policy, to fund our organic growth, and to keep on giving out the ammunition to go on in the M&A activity, which has played a significant role into our recent year growth. If we come to profitability, we'll definitely split the next three years in two main operational areas. The first will be evolving our traditional volume distribution into more value-add distribution. So customer satisfaction will double down on it because customer satisfaction for us means more differentiation, better margins. We'll focus our product mix more and more on advanced solutions and on our own brands. Our own brands, Nilox and Celli, were a tough spot. We had to go a steep learning curve, but we think we have learned a lot and they are already providing good margins and we want to keep on pushing on them in the future. But then definitely exploiting the cloud. Margins, recurring saves, that's where the market is moving. We want to be there with our proprietary cloud provisioning platform where we have already invested time and money for the development, which is becoming more and more a differentiator against lots of our competitors. and then providing more marketing services to our vendor and reseller community, never, never competing with them, but quite the other way around, helping them and doing better their job. On the other side, we entered the ranking space. Well, here we'll leverage some global cross-industry market trends. get this way a bigger portion of the value that lies in the IT value chain. Historically, a traditional distributor, such as B&S so far, grabs just the portion of value that lies into logistics and credit management and some minor marketing activities. In the value-add distribution, we work harder on selling more complex products and exploiting the cloud with the cloud provisioning platform, so leveraging our IT development capabilities. And with renting space, we'll get a significant amount of value now lying both in financing as well as in the management of the end of life. And we'll draw this way new competition boundaries. In this space, we'll compete against the leasing companies or financial companies rather than against our traditional distributors or competitors. And we're building a more resilient model because we are more and more converting our sales into recurring sales. But how this will translate into numbers? We expect 2021 to close at more than 4.6 billion in revenues and more than 83 million in adjusted EBITDA. And we do expect the group to close 2024 with a billion more organic growth in terms of revenues and 125 million euros plus of adjusted EBITDA with a CAGR of 15%. 120 million out of these 125 coming still from the optimization of our distribution business and five initially coming from the renting space. But the real revolution is not so much in the 5 million euros that we'll see in 2024. The real revolution lies in the fact that given the accounting, the treatment of rental contracts of three years, And the way you extract value out of this, for example, managing the value of the end of life, the real value kicks in from 2025 onwards, so from the end of the contract onwards. And we have worked the math, and it's massive. Massive future profitability improvements, clearly depending on the level of contracts that we'll be able to sign. And when I say massive, I mean tens of millions. So that's why we're so excited. That's why we consider it really in brackets a revolution. The capital employed optimization being a prerequisite means, as I said before, less than 18 days of cash cycle with the solid cash generation will support the generous dividend policy and the new acquisitions that I mentioned before. So, the backdrop, how these numbers might be even possible. Well, if we focus on the first part of the equation, so the optimization of the traditional, well, the evolutionary role of distribution, moving from volume distribution more and more to added value distribution, We see a bunch of areas that create a magical environment that to a favorable moment, which we have not witnessed since probably 20 years. I remember something similar in 2000 when we were in the middle of the dot-com craziness. The first point is linked to a very good macro environment. Just after the COVID situation is sort of stabilizing, there are very good forecasts at macro level. The ICT industry is in a secular improvement trend, and it will be one of the few sectors emerging stronger than pre-COVID, both because of the continuous innovation, but definitely COVID accelerated the perceived centrality of innovation ICT into everybody's life and every company's life. And then we have, here in Southern Europe, the tremendous boost provided by the next-gen EU recovery and resilience plans. We'll come to them in a moment. And for distributors, well, distributors are evolving. We are evolving our business model collectively. There's a bunch of new opportunities in cloud distribution, digital marketing, advanced logistics. And this is reshaping the role, actual and perceived, of distributors within the tech value chain with lots of opportunities for all of us. Let's dig into these numbers. Macro forecast. Well, you know probably damn better than me, this is international monetary fund expectations. The incredible number that the incredible picture that we see in Southern Europe is that the forecast for 2021 and 2022 in terms of GDP growth looks like those of China a few years ago. And I would have never, ever believed this 10 years ago when we were in the middle of the massive crisis of the euro. So, very good macro backdrop. ICT spending in Southern Europe historically is lagging behind that of the Nordic regions. These are Eurostat figures, the latest available back to 2018. That's the ICT spending on GDP in Italy, Spain, against France, Germany, and UK. And you can see Italy and Spain trade roughly 20% less than France and Germany, and almost 50% less than UK. Governments have recognized this lack of IT literacy as an investment, as one, not the only one, obviously, but one of the reasons behind... the historical gap in terms of overall country productivity against their peers. And the NextGen EU plans are really addressing this issue. Now, we have tried to give a picture that I don't know if everybody has really perceived so far. These are the amounts of the NextGen EU funds, RRF resources, allocated to the digital transition in Italy, Spain, and Portugal. Italy has a total of $190 billion between loans and grants. Then there's an additional $30 billion out of the Italian budget. Spain, so far, has just asked for grants, $70 billion. And they will decide later on whether to add loans as well. And Portugal is $16 billion. Now, if you take those percentages that you see in the circle, that's the amount stated by the government around the direct government spending in digital transition. And you sum them up. you get a huge, huge figure. Now, we made the assumption that at least 50% of that figure will be spending that won't be addressable by a distributor, because it will be services. It will be, for instance, broadband, so something more in line with telco. And then we have multiplied the number by the existing rate of distributor on the total go-to-market routes of vendors, roughly 60%. That comes out with a staggering 17.6 billion euros of cumulative theoretical opportunity for Southern European distributors in the next six years. That's an average of close to 3 billion euros per year of potential additional volumes. On a market that I remind you all, last year was roughly 17.5 billion. So it's a huge opportunity, aspirated as a bit less than 30% of the opportunity. So where does that billion euro of additional volumes between 4.6 forecasted for 2021 and the 5.6 forecasted forecasted for 2024 comes from. Well, this is just the government spending. This is just the government spending. And then on top of that, you have the additional money that will come from the investments of the private sector. So we see an unprecedented opportunity in terms of direct ICT spending. Distributors will remain at the center stage of future vendor go-to-market strategy. Not only we are still as an industry the fastest growing go-to-market strategy for tech vendors, but the multi-cloud solution adoption means that you need even more somebody able, as distributors are, to create a platform for efficient multi-cloud provisioning. And that has and gives us a further opportunity not only of additional recurring revenues, but also of improving our role in the market, moving collectively the distributors that will enter this space, as Esperant did, in a higher added value area. And the role of distributors in buffering stock in a world that has proved that too tight, just-in-time strategies, supply chain are risky, will probably be more crucial in the future. We act as a buffer with our stock, and probably our stock in future will be valued more by vendors. So we think it will be even more important for the market and for vendors as well. That's for the macro opportunity. But let's dig into why are we moving into the rental space. Here we're talking about the subscription economy. There's two global and cross-industry macro trends, the subscription economy and green transition. The subscription economy addresses the macro theme of consumption, consumption against ownership. CapEx moved into OpEx. On the other side, when you go into subscription, you are also addressing the green transition. Because the green transition calls for recycling, for recycling and reuse of second-hand products. And if you are into a subscription model, as we are with our new rental agreement project, we'll contractually get back the end-of-life products. which we will be able to refurbish and resale. This way, reducing the waste generation and creating a massive, massive ERG opportunity for us and for the end industry as a whole. And I said this is a cross-industry macro trend. Multiple industries are moving to rent, and that's a big advantage because end users, companies, will see this as just another step into their move towards subscription. They are leasing cars instead of buying cars. If you are a consumer, you are no longer buying a DVD. You are streaming your music or your TV. And even in furniture, you have IKEA or Muji that are offering rental programs, again, to reduce waste in this fast furniture business. And not to mention the traditional real estate. Think of Regus and similar shared and rented office space. Companies are more and more embracing a variable, flexible, OPEX-driven rather than CAPEX-driven world. And the opportunity is massive for our industry. The Italian Association of Leasing Companies states that 18% of all kinds of industrial goods are leased or rented. So, we are working on the overall size of this industry. Apparently, it is a billion in Southern Europe, Italy and Spain, the ICT industry rental market as of today. But we are here with our new project with different things that we have put into this program. to accelerate the growth of this market, to expand it, and create opportunity for everybody. So the impact of all these market trends on our strategy. The macro forecast should drive our top line. The ICT spending and the GDP opportunity connected, well, the ICT spending on GDP, again, a top line opportunity. The next GEMEU. As long as it's mostly focused on government purchases of high-end technologies, there's also low-end ones, I think, of PCs for schools, but there's a lot of digital innovation in the government. Not only should it boost our top line, but change the mix towards better margin products as well. And the future of distribution will lead us to exploit the cloud platform and the sale of added value products. And that means not real change in the top line, but a strong improvement in our potential profitability. So, let's look at the two strategic priorities for 2024. The first one is evolving to value-add distribution. What do we plan? We plan to move from 83 to 120 million euros of EBITDA. What do we see as the key drivers? Well, definitely we'll have operational leverage because we'll have lots of additional volumes coming from the GDP outlook and the government stimulus. But we will improve our traditional distribution services. We have been working hard to provide new information and digital enabling services to both resellers and vendors. And we want to leverage even more this know-how that we have developed that locks in customers with us and offers us further opportunities. Join with the customer satisfaction program, which we have been invested in for times and which we have seen delivering results as you have witnessed in the constant growth of our gross profit margin. But definitely one key area will be investment in high margin product lines. Two focus areas, advanced solutions and our own brands. And last but not least, exploiting the cloud. Last year, we invested almost 40 million in acquiring the cloud distribution leader in Spain. We have crossed the threshold of 100 million euros in nine months. On Advanced Solutions, we crossed the threshold of 600 million euros. It's already close to 19% of our total volumes with very high, close to double-digit gross profit margin. So we're really... accelerating in this area, teaming up product mix, especially in advanced solution and home brands and cloud, with a focus on customer satisfaction and services, but not forgetting our historical capability of managing opportunities in terms of operating leverage whenever they come due. In terms of sales evolution, Well, Italy and Spain will not look so much at market share gains. And as you can see, in terms of products, we'll try to just follow the market in terms of IT clients' growth, so PCs and printers. We'll do probably more in consumer electronics, but not so much in smartphones. which should grow, but we plan to double our volumes, for instance, in white goods, which offer very good margins. But the real kick-in will be in roughly 50% growth in advanced solutions and almost 50% growth of volumes in Portugal. And with a cargo of 7%, we aim at crossing the 2% EBITDA margin on threshold in the upcoming years. But that's a value-added distribution. Let's talk about the renting space. The rationale is, as I said, a visionary journey, a structural repositioning to grab a further piece of the enormous value embedded in the overall tech value chain, which so far has been mostly the realm of vendors and system integrators or other providers of services. Think of the financial entities. So, our idea is to move Esprunet Group into a significantly higher long-term earnings space. What are the key drivers of this program? Well, the first one is we are innovating. We have prepared a new operating leasing model based on a proprietary software platform. We spend almost half a million euro in software development in this last year and a half, and we have already expensed it totally. And we have designed contractual agreements that will enable resellers and end customers to have easy access to renting and will help resellers to bundle their services in a comprehensive offer, crossing the boundaries which are now posed by other captive vendor financial entities that rely mostly on the vendor offering on one side or financial entities that do put lots of constraints which we think can be overridden by running with us. We're riding a global market trend so theoretically sales should be also enabled by the fact that we go and talk to resellers so that they talk to the end customers, but we all collectively speak a language that the end users are listening from the car industry, they are listening from the real estate industry, from many other industries as well. New boundaries will open up to competition and cooperation with new players, leasing companies, specialty lenders, banks, so on and so forth. But there's a new piece of information coming in. We'll get more customer knowledge and user knowledge. Historically, we have been dealing with resellers or retailers. Now, we'll sign contracts with the end user. We will not sell directly without the reseller. The contract will be originated by the reseller and executed by us on behalf of the reseller. But we'll get the knowledge, the strategic intelligence of the end user, which will enable us in a synergic way to help our traditional distribution business because we'll have more information and we will be able to supply vendor and resellers with more info and the opportunity of providing them with better digital marketing campaign to get new sales. Last but not least, we'll do so with responsible innovation because we will be able to get the end-of-life product with the possibility of total hardware lifecycle management, refurbishing and reselling the second-hand product. The transacted volumes, which are part of the fight We expect them to top 200 million by 2024. This is an important point. We're making a diversification, but in brackets, a light one, because we will keep on selling the same products provided by the same vendors through the same resellers. So we will change the way we sell because we'll try to sign... rental agreements instead of executing a transaction, a traditional transaction. And by doing so, we will grab additional volume. Let me highlight a little bit more what does entering the renting space means. The model is an operating lease agreement. Operating lease, not financial lease. We will not be regulated by the Bank of Italy, Bank of Spain, or central bank whatsoever. And they will be signed, this agreement, by EspritNet with the end user. The contract will be originated, will be found by the reseller. The products will be procured by the reseller. So we will sell to the reseller and then buy from the reseller the products with the installation and additional products that the reseller might add. Once the contract is in place, the idea is to sell it to a financial entity, to retain on our books just for a few weeks. Yes, of course, it might well be that some contracts will stay for the entire lifespan of the contract on our books, but that should be residual, and we aim at having this number close to zero. It might be something, so a few million euros of fixed assets might appear on our books. balance sheet, but it should be the exception and not the rule. The real point is that the customer is made up of end-user private companies. We are excluding government entities because they still have complex laws that rule out very often the possibility of an easy rent, and definitely consumer. We are not into consumer financing. And we'll sell, therefore, through IT resellers, VARs, and system integration. Products will be mostly the IT clients, so PC printers, advanced solutions and services, the latter mainly provided by the resellers themselves. It's a nice value proposition for both the reseller for Esplanade and the financial entity which will buy the contract originated by Esplanade. For the reseller, there's an instant collection of the margin and no issue of revenue recognition. uh sell back to us the products they recognize the entire margin and they're happy they sign a side agreement with the end user for maintenance but the installation contracts or setup activities are invoiced and cashed at t0 and will basically give and put no constraints to the product mix in the offer with the possibility to set the boundary service. For us, there's instant collection of the margin on the initial products because we will initiate the transaction with a traditional transaction sale that will be then converted into a rent. So it will be canceled and converted into a rent. There will be no revenue recognition issues because we will sell the contract at the net present value of the future cash flows in the, say, 36 subsequent months. Flexibility in defining the residual value of the products, which are one key point in the value creation, and the possibility of refurbishing and reselling at the end of life products, apart from the end user knowledge, as I mentioned before, which will stem further opportunities of selling information. And for the financial entity, yes, we compete initially, but then we sell the contract to them. So that's an expansion of the database of end users that they can access by leveraging the sales network of resellers. And they are converting their go-to-market into variable cost model. Investments for us, mostly done, and essentially all at the cost level. You need an IT platform to run the process entirely online. And as I said before, done and already expensed. No further money to spend apart from normal maintenance. Agreements with the financial companies, done. Obviously, we're expanding the portfolio of financial companies that we are adding to this program. For instance, we are now planning to move into Spain in... Q1 next year we are negotiating with the Spanish financial entities the organization of the credit department for the initial checks because we need to give a check on the end user at the beginning with a high level of credit standard because then we will have to sell them to a financial entity and then we'll need and that is done for the support only if needed and then we are hiring pool of specialized salespeople siding our existing sales teams, and this is in progress. Where does the profit come from? Part of it from the financial margin, as this is not a financial lease, it's an operating lease, and no need to openly disclose the financial rate applied to the deal. And there's a lot of profit coming also from the end-of-life management. Well, it's mostly linked to the pool of specialized salespeople and the credit risk residing on the residual and tentatively zero portion of contracts retained on our account. We expect 5 million of EBITDA. Theoretically, it could be much more in 2024 because the A bid margin in this area can go from 2% to 4%, 5%. We have positioned ourselves on the low side because the real big value kicks in from the following year. When you have these contracts and these are prolonged, every prolongment of the contract is essentially 100% profit. Based on the amount of contracts that will be prolonged, we can add potentially tens of millions of additional profitability. That's why it's a journey to a new space. In the next years, we'll see if this evolves well. We already have a first checkpoint next year, seeing if we will have significant volumes of contractual agreements signed. If this happens, boy, we'll have a lot of opportunities in front of us in the future, a complete redefinition of the profitability profile of our group. So, and this is the last slide, and we can move on with the Q&A session. We are sitting in a very favorable environment, historically the best one probably, providing significant room for organic growth, which we can side with further M&A activity, by the way, which we always did and we want to continue pursuing. We have a strong ESG sphere. And this is providing us a strong push for innovation and is also allowing us to grab opportunities around the green transition. We are today commencing the journey to a new value creation paradigm. The first contract, by the way, was signed yesterday. So we're live with the first contract. Not a big one, but €28,000 a sign. And we are accelerating in this new journey. We are accelerating the migration from volume to value-add distribution on one side, and we are diversifying our business entry in the renting space. EBITDA growth of 50%, up to 125 million euros in 2024, 2.2% EBITDA margin forecasted. Next three years' targets will still heavily rely on distribution, $120 million out of $125. But since 2025, the full value of renting model should kick in if we will succeed with massive bid expansion opportunity. The long-term journey will take us to become a full service provider with significantly higher bid margin profile. But we'll talk about that once the renting program is in place and we are working on this second acceleration in the meantime. And last but not least, very strong working capital discipline will stay as a prerequisite to provide funds for generous dividend policy and all the M&A flexibility that we'll need both to strengthen our transition into value-add distribution in Italy, Spain, and Portugal, to enter new regions of Europe and potentially North Africa, and to accelerate the growth also in the renting space, because there's some acquisition that could be made in that space as well. Well, that's all. Thank you, everybody, for the attention. And now I hand it over to you all for the Q&A session.

Excuse me. 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 1 on their touchtone telephone. To remove your question, please press star and 2. Please pick up the receiver when asking questions. The first question is from Niccolo Storer of Kepler. Please go ahead, sir.

Yes, thank you. Thank you for taking my question. Thanks, Alessandro, for your thorough presentation. I have a few questions, actually. The first one is on how we imagine this road to 2024 in the sense that Also in light of the strange situation we are living in with high demand but no supply, should we imagine to recover the 400 million revenues lost in this 2021 already in 2022? Or should we maybe imagine a smoother evolution towards your 5.6 billion target? anticipated for 2024. The second one is just a clarification. Unfortunately, I don't have the presentation in front of me because apparently it's not uploaded on your website, and so if you can clarify whether your targets are X M&A and Which are your assumptions related to the contribution from the EU Next Generation Plan? So how many euro million in revenues you have assumed from the EU Next Generation Plan? And which could have been the picture if this had not happened? The other question is related to the new rental business model. It is not clear to me which are the revenues associated with the 5 million EBITDA you are forecasting for 2024, and also the mechanism by which following the first renewal, so after the third year, you should turn the business into a much more profitable one. So if you can return a bit on that, probably understand that the margin that you mentioned, which would be 4%, 5%, is associated with the transacted volume that you mentioned, the 200 million, but I'm not sure of that. And the very last question is on Q3 results. If you can elaborate a bit on your gross margin figure in the sense that It's good, but still is a bit below Q2s in a context of a better mix. So what has driven this dilution? Thank you.

Okay. Thanks. So on the 2024 road, are we going to recover the 400 million euros missing in 2022? Well, first... If I look at the order taking, we, as I said, are above budget, above budget. So we are sitting on a massive backlog of orders. The question mark is two-folded. The question is two-folded. Are we getting the products? Will the orders still be valid when the products will come? On the second point, while we are discussing with customers, they place the orders because they think they need the product. So, apparently, that should be the case. In terms of shipments, the situation is tough. It has worsened during the summer. It looks like stable on a bad side in this moment. We spoke to vendors and do not expect significant improvement before summer next year. It's partly an issue with chips, but there's a lot of issues with logistics as well. So logistics probably could be fixed before that time. So all in all, we are not yet in a position where we can say if we will recover fully the 400 million euros. Probably, but it's still a guess. Probably Q1, perhaps part of Q2, could still be tough in terms of product availability, which is mostly missed opportunity, I would say. Sometimes it's really... it's really lost the business, but it's mostly missed opportunity or postponed one. Theoretically, we should have very, as an industry, as an aspirant as well, I think, a very good second half of next year because apparently the situation should be much better in terms of supply. So we'll see. It's not yet clear, but probably a part of it could be recovered. I don't know if 100% of it. As for the targets, that's without M&A, that's without M&A, so organic growth. Yes, definitely the next-gen EU is a significant contributor to the overall health of the sector. We mentioned €2.9 billion per year of theoretical additional opportunity. We have not really made a clear separation of what comes from the next gen and what if we were without it. We made our forecast based on overall dynamic of the microenvironment as well as the evolution of the industry. We have not forecasted significant market share growth in Italy and Spain, quite the other way around, as a matter of fact, rather stable. which we have forecasted some growth in Portugal. As for the rental business, well, I try to say it again, we expect in 2024 to reach a total of €200 million out of €5.6 billion, which will be executed not as a transactional sales to resellers, but as rental sales initially originated on our books and sold to a financial entity. The EBITDA that we are planning of 5 million euros is the additional EBITDA that we are expecting from this 200 million euros transaction. In that area, you get the normal margins that you do when you sell a product. And on top of it, you are rewarded with extra margins because you do something more. And I come to where does the profit come from. And the two areas which are rewarded are definitely the value of... providing money. In our case, we won't provide money. We will initiate a contract, and we will sell it to a financial entity, which will give us a cut on their profitability, which is mostly out of selling money. And they will give us a percentage of this profitability because we originated the sale. The second part of the value comes from the fact that we, originating the contract, we have the right to get back the product at the end of the contract, also thanks to the structure of the contract that we have signed with the financial entity that buys the contract. At the end of the contract, the financial entity gives the product back to us at zero. From there, you have an opportunity to resell with the product something that you have on your books essentially at zero. Or if you gave part of the value in the pricing at that value that you deducted from the overall cost of the initial transaction. But there's additional value that you can generate from the fourth year onwards. I make an easy example. If you have a contract of, let's say, 300,000 euros, 100,000 euros per year, and you postpone the contract by one year, you prolong the contract by one year, you are charging potentially 100,000 euros of additional fourth-year installments. And that is all profit. That's where part of it comes. Obviously, we don't expect to have everybody expanding, prolonging the contract by one year, perhaps only a part of the customers, only for a few months. Some of this margin will be shared with the reseller potentially. We might give a discount. But if you do the math, think of 200 million divided by 3, 60, 70 million per year, 70 million of additional profit that can be managed. Some of it will stay in our books. We don't yet know how much. But we are talking about this order of magnitude. And on Q3, well, I think I didn't... I didn't get rightly the question. Probably, I assume, we are talking about the fact that in Q1 and Q2, we had gross profit margins that were, well, in Q1, in reality, the gross profit margin was lower than in Q3. In Q2, it was higher. It was in Q2 we had a very favorable product mix with a lot also of added value products and lots also of high margin consumer products. But 495% gross profit margin in Q3 is particularly good in our view. What I can say is the fact that we had very good performance more or less on all product lines in Q3 and we had also a very good product mix because as you have probably seen the volumes of advanced solution were significantly higher proportionally because we grew 66% against IT clients and consumer electronics being down roughly 20%, 21% IT clients and 19% consumer electronics. So we had a good mix. All line of businesses were excellent. In Q2, we had an even better mix with some companies Really good performance also in the accessory space. So that's the reason for the gross profit margin evolution. But I would say that the gross profit margin, well, it moved from 407% of Q3 2020 to 495% this year. So it's definitely a very good improvement. In a challenge quarter, I would say challenge quarters because we had issues with delivery and we probably overly accepted the idea of losing certain low margin deals. We have adjusted a little bit the track EA in this period of time. Okay, thank you. You're welcome.

The next question is from Francois Robilliard of Intermonte. Please go ahead.

Hi, good afternoon, everyone. Thank you for taking my question. Most of my questions have been asked by Niccolo just before. No, it's just coming back on your expectations for end of life of the rental contracts going forward. Won't these kind of contracts usually also include some kind of automatic renewal, but also automatic upgrade in some cases? What I mean is that maybe at the end of the three years, to keep on paying the same annual fee, you might ask for an upgrade in advance at that kind of point. And that was my first question.

Yeah. Well, it all depends on how the contract is framed. I said that we have designed... a proprietary contractor with lots of innovation inside. One of the innovations is obviously aimed at letting us be as flexible as possible. So, the idea is that not only we can obviously offer upgrades to customers, but we can offer the flexibility of downgrading the offer And the idea is always to have all of these changes paid by the customer. And as much as you introduce levels of flexibility in the structure of the contract, the more the contract is difficult to compare to other operational renting contracts and definitely less comparable to a traditional financing option as financial lease normally is. So that's what we are doing. And we wanted to extract value for ourselves and offer value to resellers and to the end customers. So the management of the renewal at the end is a key point, also in terms of ESG compliance. We want to have the possibility, yes, of selling new products, but as much as possible to extend the life cycle of the product, and also the possibility of getting back a second-hand product, refurbish it, and offer contracts in which no specific brand is defined, but contracts in which we define the typology of service that the product can provide, whether it's new or refurbished. In that case, it's the same. And obviously, if you have a good pool of customers refurbished products coming out of traditional new contracts, you have the opportunity of building extremely lucrative new contracts in which you are not selling a specific model or brand. You are selling an outcome, in a sense. You are renting something that provides an outcome. a premium seat for a mobility worker. Don't ask me which kind of product I will give you. It would be a premium mobility worker seat, either with new or refurbished products. It's our problem what we give you. You will get a premium mobility seat. Those are the subtleties of this structure. We have been working a year and a half to study it. And in time, hopefully, we will be able to show you that there is a tremendous amount of profitability possible behind these kind of agreements.

Thank you. Thank you very much. You also mentioned earlier that although you have so record order book levels, that the solidity of such orders might be hard to read. How hard is it to cancel an order with you? I mean, how likely is it that in the future, should the products not arrive on time or arrive late, the customers can cancel his order in the meantime? And my last question is, have you already witnessed directly or indirectly the next-gen EU impact that you described in your presentation in the second half since most of the projects have kicked in pretty recently. Thank you very much.

Yeah, well, cancelling orders is a standard procedure in all industries. It really depends on the product and the customer. Some are easier to cancel, others are locked in. All in all, once you have an order, well, canceling is not so easy, I would say. Of course, it's mostly a commercial feeling. If you really want to keep a long-term relationship with the customer, you might allow them to cancel the order. Normally this comes with a price in brackets, not that you charge something, but you gain in a commercial relationship a set of, let's say, favors of things that the customer is sort of entitled to give you. So I'm not so worried about this point. The order taking is... The backlog is solid, so it's just a matter of seeing when we'll get this product. On the NextGen EU, in Spain we have already witnessed some projects around the education. We're seeing some others being published, some tenders being published now in Italy as well, but so far not a big amount. not a big amount, but the pipeline of projects that are being discussed is pretty important. It's pretty important. Okay, thank you. We have a question. on operating leasing from Roberto Casoni, who runs the risk of missed payments estimate of the leasing company. And the answer is the leasing company. Where is the asset sitting if the contract is prolonged by 12 months? Well, the asset is sitting with us, and it sits with us being a residual value of zero. So it's sitting with us, but it's worth zero. And those are the answers, I hope are clear enough.

Mr. Katani, at this time, there are no questions registered in the conference call.

Sorry, can you say it again?

There are no questions registered in the conference call, Mr. Katani.

Okay, good. Okay, thanks. Thanks, everybody. Perhaps is there another question from Mr. Nicola Storer?

Yes, sir. Excuse me. We have a follow-up question from Nicola Storer of Kepler. Please go ahead.

Yes.

Thank you. Can you hear me? Yes. Yes. Just a clarification, again, on your leasing model. You said basically that at the end of the contract, you have back the product. Is this possible in light of an agreement or pre-agreement with the leasing company? Because at the end of the day, Yes, as I understand, basically, you are not carrying the good and the product on your books. You transfer the product to the leasing company, and then you have, I assume, an agreement with them to have the product back, right?

Yes, that is right. It's one of the parts of the... complexity of running this program, which is definitely not easy to copy because we had to develop, and it was roughly half a million of IT investment, this IT platform to let resellers get the right quote in a competitive and easy way. Second, we had to design a compelling offer for the end user with our contract. And then we had to negotiate with financial entities the way to transfer the product, the contract to them, not retaining the financial risk, but having the possibility of getting the product back. to run the end of life and potentially the prolongment of the contract, obviously. So, yes. Please, please. So, that's definitely part of the agreements that, custom agreements that we have signed with the financial entities. And not all of them have accepted to do so. Some of them, yes. And so, we are working in this way.

And another question that I have is the following. Is three-year a long enough horizon to amortize the purchase of the product in the sense that I would have assumed longer-term contracts? Because if I have to buy a PC and it's costing to me I mean, if I had to rent it, maybe I'm not willing to pay 300 euro per year, but rather lower amount.

Yes. It really depends. Three year is the average in our experience, the average time span. but we have sometimes slightly shorter or slightly longer contracts. Sometimes we have four-year contracts, sometimes two and a half. Normally, it's three years, but then there might be specific products or solutions where perhaps the contract is a four-year contract. It's normally... difficult to see five years. It's really hard to see them because these are IP products, so they normally have a matter of obsolescence. Sometimes you can find them in data center solutions, but those are more financial leases rather than operating leases. The key point behind this contract is the fact that we are providing flexibility for seats, for, I don't know, video conferencing rooms, meeting rooms, for printing, obviously. Sometimes they are used also for data centers, but more for data centers, as those used in IoT solutions or the so-called edge solutions. But normally are for flexible kind of arrangements where you need 30 seats, you want to have the flexibility to add two, three more or reduce by two, three the existing ones.

Okay, okay. Thank you. Maybe very last question. If I understand well, your 5 million BDA targets for 2024 are basically the sum of contracts started in 22, 23, and 24. No, no.

Oh, well, yes. You're right. We are assuming normally... All the profit is generated on contracts of the year if you assume to sell to a financial entity 100% of the contracts. As long as we are cautiously assuming that a very small percentage is not sold, is retained on our books, in that case we have a little bit of carryover from year one and year two. But that's residual because we forecast to have... Possibly 100% of the contracts are sold and hence realized in the year of generation of the contract itself. Okay, perfect. Thank you. We have, I think, a question from Mr. Marco Vitale.

Yes, sir. Mediobanca. Please go ahead, sir.

Yes, thank you. Just a quick follow-up. Probably you already answered in the previous question. Just a clarification on this rental business model. As long as you are going to sell the whole contract to a financial institution at zero, let's say, does the revenue attached to this contract get recognized for the whole amount in the same year? So there are no element of recurrence in this revenue. Is it correct or not?

Yes. If you have, say, 300,000 euro contract or 30,000 euro contract, the three year, it's three, let's say, yearly installments. It should be recognized 10,000 euros on year one, on year two, and year three. But if you sell the contract, you recognize the net present value of the three installments in the year of sale of the contract. Tentatively, we assume that almost all of the contracts will be sold within a month from generation of the contract itself. So theoretically, everything should be recognized as revenues in the year of the generation of the contract itself. Then, as I said before, it might be that some contracts, a residual part, are not sold or are sold after two, three, four months. And so you have a certain carryover from the previous period. But that would be really the exception.

Okay, clear. And just a follow-up. Does the profitability of this leasing contract depend on the product sold? I mean, is there any kind of product mix effect, or is it just the same for every kind of product?

No, in general, it's the same. You have the profit on the product. If you sell a PC, you have 3% or 3.5% of the product profitability. And then on top, you have the margin for executing a rental agreement. If you sell a 10% server, you have 10% plus the same percentage for having leased it instead of sold transactionally. So it's independent from the kind of product that you sell. Essentially, it's a non-top-margin flat on the amount of revenues that you generate, regardless of the typology of product within that revenues. Okay, thank you. We have another question from Roberto Casoni. Operating leasing, what portion of $200 million annual fees will be retained by Esplanade to then generate $5 million EBITDA? Close to 100% in our assumption. A little bit less than 100%, but close to 100%.

Sir, Katani, on the conference call you do not have any questions at this time, sir.

Well, thanks everybody for the patience and the interest. We really are excited about this journey that is starting now. We have ambitious goals to reach, but I think we have a major opportunity to transform our group from a volume distributor into a value-added one and a new entity with a completely different EBITDA margin, risk profile, and opportunity. So stay tuned. Thanks, everybody, and hope you're all well, and see you at the next call. Thanks, everybody.

Thank you.