Esprinet S.p.A.

Good afternoon. This is the Coruscant conference operator. Welcome and thank you for joining the EspritNet First Hop 2022 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 Ms. Giulia Perfetti, IR Manager of EspritNet. Please go ahead, Madam.

Good afternoon and welcome, everyone. I'm Giulia Perfetti, Investor Relations Manager of EspritNet. With me is Alessandro Cattani, CEO of EspritNet, and today we are pleased to comment with you the H1 2022 results. Before we start, please note that this presentation contains a forward-looking statement, so I would like to draw your attention to the regulation note on page 2 of the presentation, which provides all the details. Let me remind that after the call we will post the press release, the presentation, and the podcast on the Esperant website in the investor section. Now I pass the call to Alessandro to present the H1 2022 results. Alessandro, over to you.

Okay. Thanks, Giulia, and thanks, everybody, for joining us today for this presentation of our H1 2022 results. I would start immediately jumping to slide number four with a comment, a high-level comment to our results. I would say, we would say that despite the persistence of a difficult macro environment, the group's business model is solid and resilient. We posted almost 2.2 billion in sales, minus 3% compared to last year. And that was mostly driven by tougher than expected Italian performance, minus 7% versus H1 2021, with Spain was up 4% and Portugal up 21%. Q1 was down 2% and Q2 was down 3%. All in all, relatively small drop in sales, mostly concentrated, as we will see in the consumer segment. As for the EBITDA adjusted, we posted close to 38 million viewers of EBITDA. down 9% against Stage 1 last year. And again, the result of a specific year-on-year comparison on our own brands. Gross profit was standing at $114.8 million. Three basis points, 527% on sales, three basis points up against H1 2021. And the EBITDA adjusted at 37.9 million stood at 174 against 187 of last year. And we posted 18 million euros of net income, 0.83% of sales against the 99 basis points on each one last year. Lastly, our return on capital employed stood at 12.8%, well above our weighted average cost of capital. That is essentially linked to a cash cycle that closed at 17 days. nine days more than last year and four days up sequentially against the Q1. As a consequence, the net financial position was negative for $257 million against $105 million of June last year. To better understand our numbers, I'm pleased to introduce for the first time a new view of our business in line, totally aligned with the strategic plan that we presented to the financial community in November last year. We split our business in five pillars, namely the screens, that means grouping together the low margin business and high volume ones of PCs, tablets and smartphones. We grouped together all the other products that are sitting outside the data center, so printing, monitors, components, accessories, white boots, gaming, and all other consumer electronics and IT products under the pillar called devices. The advanced solutions, we named them solutions for simplicity, It's everything that goes under the umbrella of a data center, broadly speaking. So server storage, networking, cybersecurity, software, cloud, auto ID, so barcode reader and printers, video surveillance, energy and cabling. We have within the solutions also the services that we buy and resell from manufacturers, from vendors. We have a fourth pillar of services made by us. Those are specifically the renting fees of the S3 rent program that we initiated this year. And then logistics services provided by us, marketing services provided by us, maintenance and digital solutions provided by us. Last but not least, our own brand, the group under Nilox and Celli, within which, in case of success of the Cellular Line bid, we would consolidate the Cellular Line acquisition. So what we did is basically split our revenues and our EBITDA adjusted into results for each line. Let me explain a little bit the methodology behind slide 6. In time, all our reporting will be given this way. For revenues, it's easy. It's been split by product line as we described before. As for the EBITDA, apart from the gross profit margin of each product line, we are able to directly attribute to each product line all the related sales and marketing costs. So the amount of time devoted by salespeople, the time and the cost of the marketing people associated to each product line. But we are also able to allocate a number of fixed costs, for example, the credit collection costs of all the customers related to each specific purchase of each line of business, the warehousing costs, and obviously the shipping costs which are into the gross profit margin. We still stand with a few tens of millions, a minority portion of unallocated SG&A, well, general and administrative expenses, to be more precise. We opted to spread the cost, this unallocated and unallocatable cost, proportionally to revenues of each line of business. Therefore, getting an end result with a full EBITDA by product line. As you can see, we are openly disclosing what we have previously stated in a qualitative form and driving our strategy during this year. You can see that our screens business, although in absolute terms by far the biggest business area, more than 50% of the total, in reality is the second area in terms of Adidas contribution in absolute terms, with 12.1 million euros in the first half against the 13.2 million of the solutions and 10.3 of the devices, which although smaller in terms of EBITDA, proportionally is providing twice the EBITDA margin of screens, while the solutions are providing almost 3.5 times the EBITDA margin of the screens. Services are coming out with more than 50% EBITDA margin, and as you can see, This is an area where we do expect in time to consolidate the results of the nascent business of renting that we are developing and where we already consolidate our traditional historical marketing digital as well as logistical services provided to the ecosystem of our customers and our suppliers. are much more volatile in terms of profitability because they have a rather big amount of fixed costs as typical for a manufacturer, and that's the only area, in a sense, together with services where we act as a manufacturer, as a vendor. And in times of high volumes, these fixed costs are absorbed by the overall volumes generated by the line of business. And in times of lesser sales, there's a higher operating leverage, and you can even end up in red ink. What I would like to stress here is that on a full year basis, this is an area with an extremely high potential in terms of EBITDA margin, and it's coherent with the strategy that we outlined with the acquisition of Cellular Aligned. Nevertheless, the area where we have been putting most of our focus in the recent past has been solution and services. And as you can see, those are the two areas with the highest EBITDA margin of our business. If we go to comments to our line of business, Looking at the previous slide, it's easy to get that the EBITDA adjusted reduction that we posted in H1 against previous year of 3.8 million is mostly due to the 6.5 million reduction in the EBITDA of the own brands. With the other line of businesses with the exclusion of the screens, where the reduction of the EBITDA was deriving from lower sales in line with the slowdown of the market demand, were growing. So, to be more precise, the screen pillars had posted a reduction in EBITDA of 8%, sorry, sales of 8%, back to a lesser extent than the market. The market was down 12%. And the reduction is mainly, if not almost exclusively, focused on the consumer area. PCs and smartphones sold in the consumer segment, retailers mainly, were down across the market. And that is the consequence of the realignment of the market demand to values that are more in line with the pre-pandemic results. The devices and solution pillars grew significantly, both in terms of sales as well as profitability. It's worth noting that the devices grew in sales 5.8%, but the EBITDA grew close to 31%, moving from 177% to 2.19% EBITDA margins. And the solutions area where we have focused the most of our acquisitions as well as our investments lately grew in sales short of 11%, but 19.3% in terms of EBITDA, moving from 318 to 343% in the after. It's worth noting that, once more, that the solutions became the business line that in absolute terms is contributing the most in EBITDA to our group and it surpassed by 1 million the contribution of the Screens line which is running with a triple volume of sales. If we focus on the own brands, you can see that in the second quarter of 2021, we posted a significant reduction of sales and EBITDA against the previous year. 4.2 million euros down of EBITDA, 93% and 33% in sales. Well, that is essentially the result of a very strong 2021. In 2021, we got wind of a big promotional, well, more than one as a matter of fact. Some of them, and one namely was particularly big, some promotional projects in the market, which were not replicated in this quarter in the market. Some of them might come in Q4, we expect. And as long as they were not in the market, we could not grab them. So that is the real culprit for the reduction of EBITDA against last year. It's worth noting also that the on-brand line of business suffered in Q1 2022 as well. And in that case, it was both a matter of a worse mix with lower gross profit margins. We do more margins on Shelly rather than on Milox. Lower sales, still a tough market in the consumer segment in Q1, much better in Q2. And higher promotional activities that impacted the gross profit margin and therefore the EBITDA. Worth noting a few other points. The high margin pillars, so everything except the screens, are growing and in line with our strategy and they are now waiting 43% on sales in Q2 up from 40% of last year and 39% sequentially in first quarter so the execution is well in this sense and it's also what highlighting the fact that reseller sales are up in the first half of this year to 63%. It is 59% in 2021 and 55% in the first half of 2020. So we are progressively reducing, underweighting the consumer channels where we feel the greatest level of pressure on discounts from our customers. Not surprisingly, total gross profit margin grew three basis points. This is worth highlighting because not only we grew because of better mix, but also better on average gross profit margin on most of the individual line of businesses. And we have been absorbing significant growth in the transport costs during this quarter. And we have had a very tough comparison on last year because of the huge on-brand sales that we experienced in Q2 2021 that were contributing a lot. Transport costs were only partially transferred downstream to our customers. So even if we absorbed in the first half 12 basis points of higher weight of transport costs to customers, nevertheless, the total gross profit margin grew three basis points, highlighting the resilience of our model and the capability of managing profitability. The EBITDA is at 174 against 187, and that's mostly the result of the increase of weight of operating costs, which in absolute terms were flat in the quarter, but on 3% less, say, so we have experienced some further pressure. If we move to slide number eight, well, in terms of share, we are gaining share on higher profitability business lines and customer segments. We were down by geography 7% in Italy against a market down 4%. So the market was weaker than the market, especially in the mid-20s. in the screens segment, but in Spain we grew 4% against 1% of the market, and in Portugal 21% against 8% of the market. And if we look at the performance by pillar, screens were down 8% against the market, down 12%, devices were up 6% against the market, up 3%, and solutions and services together up 11% against the market up 10%. Our own brand was down 27%. Contax is not tracking this specific area. Hopefully, in the next presentation, we'll be able to provide the GFK data. GFK is monitoring this specific line of business. And by customer type, as I said before, retailers were down 11% in the market, down 12%, and resellers up 6% in the market, up to 6%. So from market share point of view, very good traction on higher profitability business lines and customer segments. So all in line with our declared strategy. If I look at the P&L evolution, apart from the top line and gross profit, which we discussed a lot in the previous slides, I would just say that we exerted a very solid cost control during H1 and Q2. This, even if we have this tough year-on-year comparison in Q2 because of the extraordinarily strong Q2 2021 high marginal grant sales. I mentioned in the gross profit the impact of transport costs. That's the major area of inflation that we are bearing, but we were able to absorb it pretty well. SG&A were down in Q2 against Q2 of last year. Again, thanks to solid cost control and the reduction of variable cost in absolute terms. The increase from H1 21 to 22 In weight of SG&A, which moved from 187 to, sorry, from 338 to 353, those 15 basis points for 10 basis points are linked to lower sales. We made 3% less in sales during the half. And the other five basis points are mostly linked to the increase in the ad count that we had to follow up on the expansion on the higher margin business lines. In terms of net financial expenses, flat in the quarter and in the half, we had higher losses linked to the Euro-US dollar exchange rate. We are edging the part of these dollar exchanges, but not all of them. the valuation of the Euro was very strong and happened very fast. The tax rate is essentially unchanged. So that's for the P&L. If we dig into our balance sheet, Well, let's immediately talk about the elephant in the room. We had a really poor performance in terms of inventory. Even if the vendors brought their payment terms in the quarter to 81 days, so essentially flat issue against the 82 of Q1 last year. Inventory was up from 57 to 68 days. In absolute terms, we moved from 539 million euros of inventory as of 21 to 781. The reason is pretty simple. The supply chain issues were almost completely resolved from day to night almost. And we had a sudden and unexpected extraordinary flow of incoming goods for purchases, especially in the consumer PC and, generally speaking, in the consumer products that were planned a month ago in terms of shortage. And that was combined with the slowdown in demand, especially for consumer PCs, and the net result was an unexpected increase in the working capital. Well, we have cut both new and old purchase orders to suppliers. Vendors are providing additional funding, and that will, in the next four or five months, be a very good piece of news. They funded us for roughly $100 million more from one year ago to this year, but it was not enough. with significantly higher volume of stock that we had. They are giving us longer payment terms and they are increasing the promotional activities to reduce the excess of the stock tentatively before the end. I want to stress that this is not company-specific issue, that's an industry-specific issue for everybody dealing with consumer sales and consumer products in the industry. So we're pretty confident that given the realization that our suppliers had of the complex situation, they put all their distribution channels definitely across Europe, and the extraordinary level of support that they are putting in place, we should, by Iran, reabsorb this higher level of inventory. That's the consequence again and once more of the complexities of dealing with a supply chain that has been stretched and then compressed again and it's moving like a spring bouncing back to normality in a surprisingly fast way. Well, I already commented on the net result The ESOs stayed more or less stable around 39-40 days, but the payment terms grew, but not enough to compensate the weighted average growth of the inventory. You can see it more clearly on slide 12. where you see that we bounced to an astonishing 31 days. It's less than what we were experiencing back in 2018 because in these years we have renegotiated the relationship with all vendors in terms of funding, but still we have felt the pain. And you can see it on our return on capital employed, which is solid, but it has been definitely impacted by the worsening of the condition in this last year in terms of working capital. So that's for the historical performance of this last half and quarter. Let's dig into our outlook and move to slide 15. As we have done in the last course, we have split the outlook with two comments, one on the environment in which we are moving and one around the execution of our company within this environment. In terms of supply chain, with some exceptions, notably in the printing and some solutions, the supply chain is more or less back to normal, even if some lead times are still unpredictable. As I mentioned before, we're quite on the other side. We are experiencing an oversupply in consumer products due to this low down in consumer demand. In a sense, as long as we expect vendors and retailers to increase promotional pressure to reduce as quick as possible this excessive inventory in the channel. We expect that this somehow should be offsetting for the consumer the inflation that we are experiencing across the border on product pricing. China is still a little bit of a question mark. Now and then they shut down areas of China, so we might still have sudden shortages of certain products or more than shortages, delays in delivery, planned delivery. Inflation and geopolitical risk, well, nothing more than what you have heard probably by everybody. There's a reduction in household purchases in power because of deflation, and the macroeconomic consensus is trying to do a slowdown of business and household demand. Of course, due to the war and the possibility of gas rationing during winter months, This is adding issues to issues in terms of the level of consumer confidence. But we would like to strike a positive note around the still strong labor market and high level of savings of households, which is supporting the continuation of the Eurozone recovery. We'll say it again, we were through a very, very strong in July and August, with very strong growth not only in revenues, but even higher and significantly higher growth in terms of gross profit and EBITDA. And as of today, September is posting even higher levels of top-line growth. So that bodes well, hopefully, for the future. So yes, we are feeling a lot of worries in the market, but so far, at least July, August, and the first part of September, numbers are trending strong. Consumer demand is the real question mark. The consumption of goods, consumer goods, has been exposed to the rotation of demand towards outdoor spending, travel, restaurants. On top of that, as we mentioned before, there's a reduction of real income and a deterioration of consumer confidence. There's a lot of savings and this is helping. And as we mentioned before, the oversupply on certain product categories and it's matched and managed by vendors and to a lesser extent by retailers by very huge promotional activities which should have a positive impact on prices. So partially offsetting inflation and hopefully boosting demand. Business in government demand is very strong, and this is not only something short-term driven by the local recovery and resilience plans, but it's really the structural change in business demand that is driving the environment in this moment. Companies as well as individuals and households have incorporated IT within their survival as well as growth strategies. So there's a lot of resilience here. And some areas are even stronger than others. We think of security, for instance. So very positive here and numbers are growing. in this sense, driving this confidence because they are really coming out strong. What are we doing in this environment? As I just mentioned, July and August were really good, really, really good. We had a significant growth in sales, but much more in profitability, both from a percentage as well as a value standpoint. And September, in terms of sales, is showing really, really good progress. Our renting project is getting momentum. We have now signed contracts and pending signatures, close to one million of renting contracts, and it's accelerating pretty fast. We think that our long-term plan is proceeding in a way that we consider satisfactory so far. Our advanced solution strategy keeps on hitting on four cylinders. On all cylinders, we're really focused on increasing the revenue weight of this business line, and it moved up to 21% on our total sales from 18%. in the first half of 2021 and 20% in Q1 of this year. The integration of Vinzeo in Esplanade Tiberica was announced and has been performed as of August 31st. Vinzeo ceased to exist and was integrated in Esplanade Tiberica. Everything within Vinzeo that was dealing with advanced solution has been spun off and put into Vivaldi Advanced Solution España. This is another step in the evolution of our historical transactional distribution model towards a greater focus on value business, added value distribution. We have also managed to strengthen our financial structure before the growth of the interest rates. signed with a pool of Italian banks, and then secured a three-year amortizing loan agreement for up to €155 million, aimed specifically at supporting the public tender on all shares of Cellular Line, not only for the acquisition, but also to take over their debt and providing a buffer in case there's more. And we renewed our longstanding revolving credit facility. It was 150 million. We moved it to a three-year 180 million euro revolving credit facility. It's made up by the same pool of banks of the 155 million euros plus two other banks, a major Italian one and an international one. So also in terms of our financial structure, things have been moving in the right direction. And lastly, on our M&A activity, again, we are scouting opportunities in the solutions business, Italy, Spain, Portugal, but we are actively looking into possibilities in Western Europe as well. On a note on what is public, as you know, we have launched a tender offer on all the shares of Cellular Line, Consob, the Italian Securities and Exchange Commission approved the offer document. Hence, the offer, the acceptance period will kick off on next Monday, September 19, and will end on October 14 at $3.75 per share. We really are confident and hopeful that the market will receive well our offer also in light of the evolution of the market and the numbers provided recently by Challenger Line. Let's close with a quick reminder of our group's strategic priorities and change. Essentially, we keep on focusing the group on organic growth, moving from volume to value-add distribution, so essentially reducing progressively the weight on sales of screens and pushing the weight on sales of devices, but more specifically of solutions, services, as well as the on-brand. The strong focus on profitability improvement, our customer satisfaction programs keep on adding to our capability of driving share and growth in the higher margin product lines and customer segments. The advanced solutions, own brands, renting and services are providing further support to this strategy. Third is strategic priority growth through M&A. And as I mentioned before, Western Europe in the above solution and the high market niches such as all brands. And last but not least, the S2Rent program is a clear example in this. We're growing and innovating, aiming at a sustainable and integrated approach to business. The renting program in time should be an excellent way to provide refurbishing and therefore lowering the overall impact of IP distribution on the overall environment. Let's close with our guidance before handing over to the operator and to you for the Q&A session. Well, there's a lot of uncertainty in the backdrop. There's a lot of volatility in the energy markets. There's geopolitical issues. There's inflation. So the outlook is indeed challenging. There's, in the consumer segment, a reduction, a clear reduction in purchasing power and consumer confidence. So we keep on closely monitoring the evolution of our short-term outlook in this specific area. On the other hand, IT investments, especially for companies, are part of the strategic agenda of governments and companies as well, especially in Southern Europe. Therefore, we see here an area of strength. There's also always a risk of China shutting down again their operations because of some COVID resurgence. Well, despite all of what I said and the well-known issues that are present at both Italian level, let's not forget that Italy still represent 60% of our sales roughly and we are entering a new era with a new government. We'll have to see what the new government will do, how it will be accepted by our international counterparts? What will they do on the PNRR? Will they be market friendly, meaning will they disrupt the good job done by the existing government or not? There's a lot of question marks, but all this said, we're starting this last four months of the year with confidence. We have our strategy, as I hope I have outlined, is doing fine. We are growing in the areas where we have declared we want to grow and we are accelerating in those areas. We have shown very good operational flexibility and capability of absorbing inflation. We have a solid balance sheet and we are out of the very, very good July and August, which contributed to offset quite a good chunk of what we lost against last year in terms of EBITDA. We are already close to the middle of September and numbers look really good. So we are working to take all the actions to support further growth and to address any issue that we might find. That's an issue around inventory, but as long as it's an industry issue, vendors are already at work and we are really confident that by the end of the year we should have a significant improvement in that area. So based on all the above assumptions, and especially based on the fact that, as we mentioned time and again, our budget this year was made up knowing that the first half of this year would have had a very tough QH1 2021 comparison because last year we had demand and we had the products. This year we had no products for many months. But the second half of last year, We had no progress until the end of November. There's been a spike in availability in December. So December last year was very good. But June, July, August, September, October, and November were not good at all. So not surprisingly, we are seeing very good performance now. And we think that because of all of this guidance, so far could still be confirmed at more than 93 million euros of EBITDA adjusted. So to sum up, we expect low single digit revenue growth, which is a minor target in reality. Big focus, we still expect more than 93 million euros of EBITDA adjusted in a very complex environment. We understand that, as I said before, there are a number of positives. Cash conversion cycle below 18 days. Probably Q3 will be tough because of this spike that we are trying to reabsorb. And especially as long as this is a moving average, we will have a couple of quarters that were not good at all. But in time, we see this target achievable. Rossi standing at high double digits and a payout ratio of 50% or more for dividends, a generous dividend policy. So that's it for the presentation and with this I turn it over to the Coruscall operator for the Q&A session. Thanks everybody.

Thank you. This is the Coruscall conference operator and we will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receive of an asking question. Anyone who has a question may press star and 1 at this time.

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Well, looks like we have addressed most of the questions with the presentation. Hopefully it's been enough presentation and press release. If there's no question, we are, of course, available for one-on-ones in the future, and we'll see you during the upcoming stock conference. Well, thanks, everybody, on behalf of the company, and I wish you a good rest of the week.

Ms. Perfetti, I confirm that there are no questions registered at this time. We can close the call then.

Okay, thank you.