Esprinet S.p.A.

Good afternoon. This is the Coral School Conference operator. Welcome and thank you for joining the EspritNet full year 2021 results presentation. 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, I am manager of EspritNet. Please go ahead madam.

Good afternoon and welcome everyone. Today we are presenting fiscal year 2021 results and we are sharing the business outlook for 2022. I would like to remind everyone that the press release, the presentation, and the podcast of today's call will be available on the Esprit website in the investor section. Before starting, I would like to draw your attention to the regulation notes on page 2 of the presentation. I am Giulia Perfetti, investor relations manager of EspritNet, and with me is Alessandro Pertanisi of EspritNet. Now I let Alessandro start the call and present the fiscal year 2021 results. Alessandro, over to you.

Thanks, Giulia, and welcome, everybody. Thank you for joining us in today's call. So today we'll firstly dig into the 2021 performance and slide number four of the presentation. I'm glad to say that for us this marks an historical record in terms of profitability. We have also exceeded our targets both with the guidance and I would say also the consensus. Sales during this fiscal year were up 4% at roughly 4.7 billion against 4.5 of last year. with a very strong first half and then Q3 was plagued by a very tough supply situation with vendors or suppliers having big problems in supplying the goods to be sold in light of the worldwide shortage of components that everybody probably has read about. Q4 took off on a still complex way, but then December was particularly good and we ended up with just the 3%. reduction against Q4 2020. So all in all, an excellent year. Even more so if we look at the profitability results with gross profit up 20% year-on-year and bid adjusted up 25% and the net income up 39%, net income attributable to shareholders stands at the historical record for our group. Cash conversion cycle stable at 13 days below the 18 days that we marked as our threshold, optimal threshold. Return on capital employed at 20.5%. It's more than a year and a half that we run a double digit. and net financial position positive more than 220 million euros. Now, if we dig into the P&L, I will comment later on sales. Let me give some color around the other lines of the P&L. Gross profit grew 20%, but what's more interesting, it grew percentage-wise from 4.33% to 4.96%. Almost all line of business were either with stable or growing profitability. We also enjoyed a better product mix. We'll see it in a moment. And we grew in Q4 as well with gross profit margins up from 429 to 453%. And that's even more remarkable because during the first three quarters of 2021, we consolidated GTI, which is a creative in terms of gross profit. But in Q4, we were having... year-on-year stable comparison because we began consolidating GTI in Q4 the previous year. So it's even more remarkable that we're growing. In terms of gross profit margins, both Italy and Spain grew. Italy grew 44 basis points from 472 to 516%, and Spain grew 92 basis points from 363 to 445. If we go to SG&A, As GMA grew from 125 to 146 million euros, most of this growth, roughly 15 million euros, came out of higher employee costs and was majority linked to the acquisitions. It's important to point that the employee cost is more than 57% of our total SG&A. We'll come back and comment this when we'll discuss about the inflation effects. We had more technology expenses because of the acquisitions and we had less cost of that debt because we had very good performance and then we had minor changes more or less on all other lines. If we look at the interest charges, 2.2 million euros of delta comes out of the interest of the exchange rate charges. Last year, 2020, we had positive effects of the foreign exchange conversion of half a million euro roughly, and in 2021 that was a negative by 1.7 million. Interest charges stood more or less stable at 2.7 million, And they represent mostly the cost of carry because we have cash at hand and roughly 140 million euros of mid-term financing. Most of the time we are cash positive. and this cash is not compensated by banks, which we keep on paying the interest on the mid-term financing. IFRS 16 lease charges stand at roughly 3 million euros. The last point on the tax rate is slightly higher, both for a slightly different mix between Italy and Spain. They have different tax rates. I remind you that we also paid $800,000 of settlement of a very, very old tax dispute that dates back to 2002, so roughly 20 years ago, and we paid it in Q3. So that's for the P&L results, an excellent Q4 as well. Very pleased to have enjoyed a strong quarter as well, and this gives us a good momentum into 2022, but we'll comment it later on. Okay, now if we look at the sales, we can see that our strategy of focusing on higher margin businesses and higher margin customers is paying off and is being executed. By geography, Italy was flat on the growth of the market, so we grew 5% as well as the market. We lost a little bit of share in Spain, 1% growth against 5% share against market growth. And we definitely grew aggressively in Portugal, 59% growth against 10% of the market. Spain, in particular, walked away from a number of very low margin deals in the retailer space. That's the reason of losing a little bit of market share. If you look by product category, IT clients and mainly PCs were down 1% against the market up 3%. Consumer electronics was up 2% against the market of 8%. And what's really remarkable, we grew the high margin business of advanced solution 46% against the market growing 6%. If we look by customer type, again, we focused on the professional market with IT resellers up 12% against the market top five. And retailers, we were down 1% mostly in Spain against a market up to 6%. So all in all here, the comment is a good year. But more and more our strategy of focusing on higher margin businesses has been executed consistently during the year, quarter by quarter. And you can see in the following slide when we look at by specific product line, we have compared the weight and the volumes of the different product lines year on year And you can see that PCs and smartphones, which were collectively roughly 66% of our total business, went down to roughly 4% in terms of weight, and they are now standing at 62%. Significant increase in the advanced solution space that is now representing 18% of our business against 14% last year. Very interesting performance in other IT products where we have accessories with margins even higher than the advanced solution space. And we're starting really to get some traction on white goods as well. It's small, but we are now close to the psychological threshold of 100 million e-horses. Now, if we look into the balance sheet, the key message here is that we have a very sound balance sheet as we have analyzed time and again. Net invested capital at the end of the year was 158.9 million against the previous year where we had 86.2. But that's mostly linked to net working capital. Well, I always remind investors that the end period figures enjoy very favorable seasonality, so we always urge our investors and analysts to look at the moving average that we report in the following slides when we dig into the working capital. We have proposed a dividend of 54 euros per share. So roughly a total distribution of 27 million euros. That's stable against the 2020 dividend, but we remind that the 2020 was the sum of 2019 plus 2020. as 2019 dividend payment was suspended in the spring of 2020 in light of the pandemic. And when we approved in spring 2021 the dividend for fiscal year 2020, we paid the dividend implicitly on 2019 as well. So it's even more remarkable that we are paying the same amount of last year. Payout stands at 60%. We have a standard policy of 50% but in the board we discussed about the possibility of keeping the dividend stable. We think that this is absolutely not impairing the capability of our group to achieve the growth targets that we have outlined in November when we introduced to the financial community our investment plan. Now if you look at the working capital performance, as you can see this is the dynamic with the four quarter moving average. We are stable at 13 days and the situation is stabilizing. We have achieved almost a steady state condition in our vendor payment terms that run steely between 60 to 70 days. We have experienced as a moving average some growth in the inventory but if we will look at Q4 only inventory that was consistently down as stated in a previous course we were expecting it to be despite of Q3 to be reabsorbed. and DSOs are almost stable. You can see better in the following slide where we give quarterly numbers and you see that compared to Q4 numbers of the previous year, we are more or less stable between 8 to 10 days negative in this case. That's for the working capital. All of this translates in a very healthy 20.5% return on capital applied pre-IFRS 16. For those of you that want to use a post-IFRS 16 metrics, that stands anyhow at 14.4% and we're stable in double digit on both kind of metrics. One last word before looking into 2022 to our ESG performance. Our ESG plans are moving forward pretty well. We have this ESG-centric strategy. We have introduced ESG targets in our remuneration policy. We are committed to climate neutrality with the direct energy emissions by 2023. We have launched 100% recyclable packaging program and we are well into this. Two out of the three biggest offices of the group are LEED Platinum certified and the second one is LEED Silver. and we are participating in different compensation projects in different geographies on the world. We are now up to more than 1,700 employees. We have achieved a Great Place to Work certification not only in Italy but this year in Spain and Portugal as well. And we have also achieved in Italy for the first time the top employer performance. And we have all of a series of local initiatives to address the relationship with our community. Well, moving into 2022, we have prepared a couple of slides, one that is focusing on what's happening in the environment and the market, and one about our performance. Let me start with what's happening in terms of supply. Well, H1 last year enjoyed high product availability whilst H2 experienced strong tensions. In this moment, according to all market analysts and also from the conversation that we had with the major IT manufacturers, the availability still challenged during this quarter. Partially in the second quarter we are already having clear signals of strong improvement in certain areas. PCs are getting better, not across the board but they are starting to get better. Definitely smartphones are not really back to normality. really, really better than before. We still are experiencing issues in certain product categories such as printers and networking and to a lesser standard service. But all in all, we expect to have most of the product categories back to more or less full normal situation by third quarter onwards. So all in all, analysts, vendors, and ourselves expect better 2022 than 2021 in terms of total shipments. So that's a very important point. As we entered 2022 with our historical record in terms of customer backlog, We're here forecasting collectively as an industry a 2022 that should receive more products than the products received in 2021. Let's talk about consumer and the business demand and then a few words about inflation. In terms of consumer demand, well, we all agree on the fact that the first part of the year, the consumer demand should be impaired by the mostly energy driven inflation. We are now also experiencing this Russian invasion of Ukraine, which could potentially drive a further reduction of consumer sentiment. We are not experiencing it yet. We have had talks with big retailers. Store traffic was tough in January, then it began recovering. Especially in Italy that was the case. Spain much better, much better. But so far the impact of Ukraine invasion on the sentiment has not been really perceived, at least that's what we have been told. There's more worry on the spending capability linked to the inflation. We all agree that as this factor is up, probably we expect that this might happen approaching the summer season. We should have the capability of winning the excessive savings, which is really massive, that has been piled up by investors during the pandemic. And this should provide support for demand. Different story for business and government demand. Here the dynamic of the business segment is really expected to be much more positive and we are experiencing a very lively market in this moment. And a further acceleration should be expected during the year as the public administration projects, those financed by next gen EU programs, becomes fully operational. A bunch of tenders are up and running both in Italy as well as in Spain and Portugal. But a lot more is in working and so we expect the market to be even better than what is now in the upcoming months. Inflation is an hot topic for everybody. Well, first and foremost, inflation is embedded into end-user list prices and normally the This is totally transferred downstream to our customers. So normally this has no impact on our P&L. As a matter of fact, theoretically, there could be even opportunities here because if quantities stay the same, revenues might grow because of the higher price tag of certain products. We'll see what happens in this sense, but definitely gross profit margin should not be impacted by inflation. potentially in a positive way. We are on the other side of course experiencing rising energy prices, but the overall energy bill of the group is very limited. Even more because the Spanish business had secured a two-year contract with fixed pricing of energy just a few months before the end of the year, of the previous year. So we are experiencing growth in freight costs to customers, which we are partially transferring to customers. So again, there might be an impact, but we don't expect it to be really significant. The real potential area of attention could be in the area of wages. As I said before, roughly 57-58% of our total cost, total SG&A, is employee cost. If governments, especially in Spain where they have more contractual opportunities in this sense, would raise minimum wages, we might have some kind of impact. Nothing has been even discussed by governments so far, so it's more of a theoretical long-term threat. But just to mention it, that's the area where, in case this happened, we would have to raise prices, well, to raise margins by reducing the discounts. So that's for what's happening in the environment around us. I close with the execution. January and February were not as January and February last year, but Spain is performing much better than Italy, and February was definitely better than January. All in all, since the beginning of the year, we are experiencing a tad less of revenues But the gross profit margins are particularly happy. The booming consumer sales that we experienced in Q1 last year makes the comparison in this year in terms of revenue is challenging. But on the other side, the business segment is in good shape. Product mix is excellent. So we have a good traction on gross profit side. And we began the year. with record levels of customer backlogs. And as long as we are experiencing constant improvement in vendor shipments, we do expect that this might help offset part of the tough year-on-year comparison. Over our renting program, the organization, the one that we announced in our November presentation, the organization in Italy is fully set up. Reseller recruitment is ongoing. We have very promising acceptance rates. Resellers are buying into the program. We have already a good pipeline of opportunities, few million users, and we have already a few hundred thousand users of contract one. Beginning of Q2 this year, the program will also be launched in Spain. And hopefully we'll start to add volumes from Spain as well. Advanced solution, as you know, is one of the key areas of strategic focus for us. Well, I'm pleased to say that not only thanks to acquisitions, but by organic growth as well, We grew 46% in a market that grew 6%, and our sales topped 870 million euros. It's quite an achievement, I would say, as we launched this program back in 2011. So in 10 years, we moved from 114 million euros to 870. Pretty remarkable, I would say, is our cloud solution sales performance. We were up 183%, significantly driven by acquisitions here. But we have closed the year with 141 million euros of sales. So really, really good performance. And we keep on focusing on revenue growth in this area. We want to increase the weight of these business lines with higher added value on the total revenues of the group. I can say that the performance of the first two months of 2022 is very, very good. So we are really happy and this is 100% organic growth. High double digit, really happy about the performance of the team. One last word about M&A activity. As we announced with our industrial plan presentation, We began the preliminary analysis aimed at entering other geographies of Western Europe. We will just focus on the advanced solution segment. Don't expect us to enter broad liners selling PCs, printers, or smartphones. We are also looking at opportunities in Southern Europe. In this case we are looking at niche players in the advanced solutions segment. But if we end up encountering high margin meeting, high margin businesses in peripherals as well, accessories, white goods or peripherals, that is an area that we might look as well. Of course, Portugal is always an area where we are interested to enter to grow our share even if our business is growing pretty healthily and we have done a hell of a job I would say. Our team there has been really amazing. We were across the 100 million euro threshold and we keep on growing during this first month of the year again a lot. Outlook 2022, well, I can say that even if we have still some challenges, even if progressively easing up in terms of supply, the first two months of the year confirm the effectiveness of our business model. Therefore, we expect to obtain in 2022 a further growth in our profitability in line with the provisions of our strategic plan, the one that introduced the financial community in November. However, as long as we always say we are living in an uncertain world and we want to go to the effects of the macroeconomic scenarios. exactly when the product supply will be stable. We prefer to present the guidance in terms of revenue and profitability for 2022 in the next month of May, on May 10, when we will present the first quarter results. Still, we are pretty positive about the growth that we might experience this year in terms of profitability. Well, let me just say that we are committed to the implementation of the industry plan, which stands, of course, confirmed with all its components. Generally speaking, the group is more and more focused on increasing the weight of the higher value-added business lines on our total revenues, so that solution on one side, services, accessories, white goods, and that rather than conquering further market share at any cost of less profitable customers and products. Not that we are walking away from this, but we definitely are no longer chasing growth in that area. Stability is more than enough. All focus is on the other side. And I think you have seen, we have been saying this for many quarters, and you have seen quarter by quarter this happening in the numbers. So we're pretty pleased with the performance of the group. Well, that's it. We have a number of upcoming events and shareholder meeting will be April 14. We'll bring to the attention of the AGM the cancellation of roughly half the median shares, treasury shares. And we'll ask for the authorization for a new buyback. We'll, as always, measure the market and see what are the best ways to allocate capital, organic or acquisition, organic growth or acquisitions. Definitely our dividend policy that we commit to a very generous 50% payout ratio and then If perceived by the board useful or interesting, we might, if the AGM will allow us to have the possibility to run a buyback, we'll investigate also in the future 12-month opportunities in buyback as well. Border director for the Q1 information will be on May 10 and will provide our guidance. That's all, and I let Coruscall to take back the lead. Thank you, everybody.