Esprinet S.p.A.

Good afternoon and welcome everyone to the Esperenet Q2 2022 results presentation. Before starting, I remind everyone that the webinar is mere recorded and after the call, the podcast will be posted on the Esperenet website in the investor section together with the presentation. All cameras and microphones are currently disabled. During the Q&A session, we will proceed to reactivate the microphone of those who, by raising hands and using the button, At the top, represented by the hand, will want to ask questions. Please note again that this presentation contains a forward-looking statement, so I would like to draw your attention to the regulation note on page two of the presentation, which provides all the details. I'm Giulia Perfetti, Investor Relations Manager of EspritNet, and with me is Alessandro Cattani, CEO of EspritNet. Now I pass the call to Alessandro to present and comment with you the Q3 2022 results. Alessandro, over to you.

Thanks, Giulia. Welcome, everybody. This is our first test with Teams presentation instead of a Chorus Call 1. So here we are with our Q3 2022 results, and I would jump in immediately to our slide number four with a summary of what happened in the first nine months in Q3 of our fiscal year. Well, we had very solid revenue growth during the third quarter, and this is supporting cautious optimism for year-end. We had the first part of the year with the minus two in Q1 and minus three in Q2, but in Q3, we had 7% growth, and it could have been even higher and we'll comment it a little bit later, if we had not had an anomalous concentration of sales in the last two days of the quarter. And because of the revenue recognition methodology, we had significantly more than an average revenue recognition. So quite a significant chunk of sales were pushed over to Q4. Italy during the first nine months of the year performed on minus 4% against the previous year. Spain and Portugal at 6% growth. EBITDA stood at 54.4 million euros, minus 6% compared to previous year. It's worth noting that The vast majority of this impact is linked to a specific Q2, not issue, but tougher comparison year on year, because last year we had in Q2 a very significant deal on our own brands, which were not replicated this year. And in terms of a bid adjusted as well as net income, these of course were translated down because of the lack of the initial gross profit of this deal. What is anyhow interesting is that the gross profit of the company grew to 522% against the 516% of the nine months of 2021. Even if we were missing this year, This is a particularly rich deal. And even if we have been suffering higher freight costs during the especially the second and third quarter, because of inflation. Return on capital employed at 11% is heavily impacted by the cash cycle, which has been at 21 days, eight days more than last year and four days more sequentially. As we mentioned in previous calls, we are through a spike in inventory, mostly of consumer-related screens, PCs and smartphones, especially PCs. We are slowly but constantly absorbing the success of inventory, but still this has been waiting on our return on capital employed. Generally speaking on the capital employed, And you can see it also in our net financial position, which has been negative for 3.82 against a negative of 200 million in September last year. If we dig into the five pillars, this is the second quarter where we report our business lines in our new definition. So I remember quickly screens, RPCs, and smartphones, devices, everything else that is not sitting into essentially a data center. Solutions is everything that is in a data center, plus the software, cybersecurity, cloud, and vertical solutions, for instance, barcode readers and printers. Services are internally provided services, and home brands are NILOX and Challenge. Well, we can see that revenues were flat overall, but with a very different dynamic in the first nine months of the year, minus 5% on screens, plus 6% on devices, solutions growing 14%, services 25%, and home brands affected by the lack of this special deal, 17%. Profitability was a bit adjusted, was down 2% on screens, with a bit of margin slightly growing to basis points. Devices have been performing spectacularly within our group, with a very strong growth in sales. EBITDA margin as well as in EBITDA in absolute terms. And then solutions that were down from a percentage standpoint, but up 5% in absolute terms. We had a drag on our performance in terms of EBITDA, mostly because of the own brands, seven plus million that we mentioned in the opening. and we add lower margins in the services, mostly due to a different mix. If we look at the quarter, we have then a bunch of comments in the following slide, and let me just go quickly through this. If we look at the own brands, during Q2, as we said, we had this big deal, which was not replicated this year. In Q3, the own brands were down in terms of EBITDA, and that was... Mostly driven by higher weight or lower margin product lines. So we have more margins on celli rather than NILOX. So more margin on smartphone lines, smartphone accessories rather than on PC accessories and mobility. But we also had the lower on average, lower gross profit margins. Here I remind everybody we buy from China in dollar and we ship from China. So we are the manufacturer here. And we were heavily impacted by inflation on freight from China as well as by an impoverable exchange rate dynamic. So here we had a certain pressure. We do expect some of this pressure to continue in the months coming forward, even if the volumes are performing relatively well. The screen pillars were down in terms of a bit adjusted, but entirely because of the volumes. In reality, the margins were better, and we were able to pass down all the inflation on PCs and smartphones, least prices. and even recover a good chunk of the additional freight costs charged by freight forwarders for shipping to customers. What is worth noting is that during the third quarter, consumer demand exceeded expectations by a big amount. We do expect that probably this was supported by aggressive investments in promotional activities by the major PC vendors that are trying to reduce inventory levels across the industry. And all these promotional activities are in a sense of setting the inflationary impacts on consumers. Solutions and services. as a whole grew to 587 against the 501 of 3 million in the first nine months. So a good increase and their total weight on sales grew to 18% against the 16% of the first nine months of 2021 in line with our strategy of growing our margin business lines. The solution business is still confirmed as the business line that makes the most of the adjusted absolute value. During the Q3, we had a sharp reduction in EBITDA margin on solutions. And that's been driven by a lower gross profit margin, which was driven by a mixed skew towards hardware. We have significantly higher margins on cloud cybersecurity and software against the traditional hardware products. especially service and storage. And we had during the quarter a lot of additional business, but with lower margins. We do believe that the situation should improve in Q4. There were some, let's say, one-off events during the quarter. All in all, as mentioned, the gross profit margin grew. from 5.16 to 5.22 in the first nine months of the year against previous year. Within this growth, you have to discount the basis points of additional growth of additional freight costs, transport costs. So all in all, I think we have been doing a very good, very good job in moving inflation downstream, as well as addressing the higher margin business areas. You can see it also from a customer point of view, the weight of IT resellers, which typically provide better profit grew and it's now 63 in the first nine months, 63% of total sales against 58% of 2021. the weight of EBITDA adjusted on revenues was down anyhow 169 compared to 180, mostly because of the operating costs that were up to 353 against the 336. And that was mostly linked to the investments that we're doing in people to progressively push volumes towards higher margin business lines. If you look at the volumes, the sales by geography, market was up 1% in Italy and we lost the share there, mostly because we walked away from the lower margin businesses in consumer. We grew share in Spain and we lost a little bit of share in Portugal, even though we grew pretty well. If you look at the main pillars screens, although we decreased our volumes by 5%, we decreased less than the market, which was down 7%. We outgrew the market in devices with a very good performance, 6% against 4% of the market. And we were in line with the market with solution and services. We don't yet have a market data, official market data available for the on-brands market. We're working with GFK. We're trying to see if we can replicate what we have on the other business lines with Context and GFK as well. By customer type, market on retailers was down 7%. We were down 10%. Again, losing share in the lowest margin businesses in line with our strategy and trying to retain the best deals possible uh whilst we outgrew the market on it resellers where we were up 11 against the nine percent of of the market so all in all execution of the strategy is in line with our expectations If we look at the quarter, the picture is a little bit different. Again, we lost the share in Italy, five against 11 in line in Spain, and we lost the share in Portugal. We are walking away from certain deals as well as not having the complete portfolio as we have in Italy and Spain. There were certain market areas which were growing significantly, and we were not there to profit from those areas. We lost a bit of shares in screens. We outgrew the market in devices once more, and we were in line with the market in solutions and services. And young brands kept growing again. Significant drop in retailers against the market and significant growth in resellers. So all in all, we are really moving the market, the mix in the way we think is an healthy growth trajectory. A couple of comments on the overall P&L. We already commented at length the gross profit performance on SG&A. They grew on sales to 17 basis points. Seven are linked to the running costs of new warehouses that we rented in 2021 for certain projects, especially in the devices business, where we are growing pretty fast and we do expect to grow further more in the future. And another 11 business points are linked to the increase in the ad count, which I mentioned before, which we are doing to follow the expansion of the higher margin business lines, device, solution, services, and on-brands. In the financial expenses, we still have most of the debt at the fixed interest rate, so no real... there, apart from a higher absorption of capital linked to the excessive inventory. But we had quite an impact on foreign exchange losses because of the US dollar exchange rate. We shield some of the risk, we edge some of it, but not all of it. And although those are small, overall small volumes for us, those in dollars, but still the impact in the exchange rate was so big that we had this impact. Given the recent dynamic, we do expect this theoretically to improve and possibly turnover as well. Tax rate is essentially unchanged. If we look at the balance sheet, it all boils down to the operating and networking capital. And you can see it in the inventory. It basically stopped growing. And we're seeing the first impacts of reduction in this very moment, eventually. um there's a bit more of trade receivables against last year linked partially to higher volumes and partially to the fact that we are walking away from retailers and retailers typically are eventually providing less trade receivables because we sell receivables to factoring But there's been a significant impact on trade payables because we quit the purchasing. We got longer payment terms. But now we are in the phase in which the new arrivals are drying out and we're selling the inventory, turning them into trade receivables. And then we will start again the virtuous cycle with the financing from vendors. It will probably take all of this quarter and perhaps a part of Q1, but the momentum is there. We have already basically fixed the situation with a couple of vendors. Some others have very aggressive plans that are executed week by week. So we are more positive than before. Luckily, the market is performing better than expected. So this should help in improving this spike. Of course, this is reflected on into our working capital metrics. We have this. This is the four quarter average, which is growing significantly at inventory as well as DPO level. And You see it even more dramatically in the Q3 only numbers, which have been really heavily impacted. It's the worst quarter ever since 2018 because of this huge impact on inventory. uh hopefully in the next and what we see in the next quarters the situation should improve significantly and go back to our expected targets that i as i remember everybody is to perform below 18 days moving average so previous slide we are above our targets in this moment and As long as this is a moving average, probably we will have one or two quarters at least where this will drag on our numbers. And of course, this was reflected in our return on capital employed evolution, which has been impacted by this worsening of our working capital. Now, heading into the M&A before moving to the outlook, we have both recently, last week, Bluedis, and this way we have strengthened our solution segment in Italy once more. Bluedis is a company... which has been established under the Italian law by the company Spin SRL, which in July this year received the branch of business in software solution distribution and communication cybersecurity and IT management. The business we acquired was roughly 13 million euros in revenues with an FT 2.2 million. right about the 17% bid margin. So a really rich business. Value of the acquisition 8.7 million, seven paying cash based on a provisional balance sheet. And we had zero, basically zero net financial position. So equity value and enterprise value were essentially the same. There's an appealing implicit multiple of about four times EBITDA. This is particularly interesting for us because we, not only is in line with our strategy, but we see a growing number of high value emerging vendors, especially in software and cloud, but in cybersecurity and sometimes in in hardware as well. We have an organization which is mostly focused on bigger vendors. So this will act as our incubator for these smaller emerging vendors. They have an historical capability of scouting emerging entities with small volumes but high margins. they were plagued by the fact that when these vendors, or if these vendors were getting bigger, they typically lost the distribution contract in favor of larger entities, sometimes entities such as Exprinet or V-Valley, our value distribution, our solution distribution arm. And with this acquisition, we will be able to retain these contracts in time, even if the vendor moves from a merging to an incumbent. It will be operated, therefore, as a separate legal entity within our group, specifically within Vivaldi, and it will be kept in Rome as a separate entity. Synergies here will lie mostly in the possibility of leveraging the capability of Esprunet or being the Esprunet group and more attractive entities vehicle for more emerging vendors, therefore enabling Bluedis to sign more contracts and therefore grow them even faster. Let's wrap up with the outlook for 2022. As we have been saying in these last presentations with this first deep down on the environment in which we are performing, supply chain issues are mostly solved. We are now even on an oversupply issue on consumer entry level products. Of course, we're still cautious because sometimes here and there, especially in China, there's these lockdowns that have a potential impact on niche specific portions in our business. But all in all, supply is no longer a problem. Inflation and exchange rate, although exchange rate is apparently stabilizing now and potentially turning over, they had a significant impact during the first nine months of the year, and I speak about exchange rate. As per inflation, mostly we measured it on the shipping costs. We do have certain impact on energy and renting, but so far the impact has been rather small and not really so material. And as you have seen in the numbers, we have been pretty good at moving inflation downstream so far. Big question mark for us as for everybody, what will happen with the wages if the situation will change in the future and we'll stand and see what happens. Consumer demand, this is the big surprise for us as well. It's really exceeding expectations. We had a good feeling when we were budgeting this year. We had a good feeling for business demand, and you can see it has been performing in line with our expectations, our budget, And even the worries that we had with the Italian government after the elections so far have not turned into reality. Private companies keep on investing. Government keeps on investing. There's a good revenue momentum in corporate demand. On consumer demand, we had a budget which was much more conservative for the second part of the year and a little bit more bullish in the first part of the year. We are sort of experiencing something upside down with lower than expected volumes, especially in the screens in the first half and better than expected volumes in the second half. I do remember that we have, and that's for the environment. I do remember that in October, our revenues grew 13% without counting the revenue recognition extra level of revenue recognition that we measured in september those are on top we always have revenue recognition we mentioned it because this year the impact was really material against what has been the what is the average value as you know revenue recognition is theoretically should be something quite neutral. You get volumes from the previous quarter, you move volumes to the following one. Historically, it's not so relevant, but we had an anomalous level of sales in the last two days of September. So we could have made a very, very good or much better Q3. We will have it in Q4. But without counting this extra level of revenue recognition, let's say management figures on revenues were up 13%. And in the solutions area, we were up 22%. So momentum really, really strong. And consumer demand is exceeding expectations, and this is helping us to drive an improvement in inventory levels in the fourth quarter. That's what we are seeing, what we are expecting. So we are... cautiously optimistic, because volumes are much better than what we would have expected. Yes, of course, there's growth in lower margin areas as well, but all in all, we should be due to make a very, very strong Q4. Advanced solution is growing. Total Volume on sales is up to 18% against 16% in the first nine months of the previous year. And we see us keeping our position in line with market growth and even slightly outgrowing the market in some areas. We are experiencing a very good momentum also in terms of negotiations with potential new vendors. And we do have a pretty strong pipeline of potential deals, M&A deals that we are starting in this moment in the advanced solution space as well. Well, I already spoke at length about the revenue recognition and renting. Renting is eventually accelerating. After three years, let's say two and a half tough quarters where we were building the the right kind of service. And we had around 1 million of revenues. We have witnessed in the last month's volumes that were almost three times the volumes achieved since the beginning of the year. So sequentially, we're really growing quickly. We plan to close 2022 with a value of around 4 million euros, which is less than what we initially expected. But there's a very strong acceleration. So we're happy about what we're seeing in this area. And so based on the results, guidance is essentially with all the caution and the correct understanding that we are serving a very challenging environment, but we feel that the profitability growth expectations for this year should be met. We have currently a target of around 93 million euros, so roughly 8% growth against the previous year, when, I remember, the group set the record net profitability of its history. So, of course, it all depends on volumes and gross profit margins. But given the very strong performance of October, what we're seeing in November, And a number of other signs. We think that we are bound to have a very, very, very strong Q4. Some numbers we have outlined, 15% total top line growth. We have a carryover above expectations from previous quarter, 22% growth in solutions. So all in all, a pretty good forecast. uh as always uh we are now in the it's no longer uh black friday is uh black friday month and and then there will be december last year december was particularly strong we need to see if the performance will be in line but all in all we we see opportunities of uh delivering a very, very solid 2022 as we forecasted at the beginning of the year. But frankly speaking, the expectations in terms of macro economy were better than what we then lived during these months. And that's for the presentation. I hand over to Giulia Perfetti so that she can manage the Q&A session. Thanks, everybody.

Well, we can start with the Q&A session. I remind you that to ask questions, you will have to book by clicking on the button at the top representing the end. The first question comes from Mr. Storer. Mr. Storer, I give you the floor. Please remember to activate your microphone.