Esprinet S.p.A.

Good afternoon and thank you for joining us for the ESPRENET Fiscal Year 2022 results presentation. Before starting I remind everyone that the webinar is being recorded and after the call the podcast will be posted on the ESPRENET 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. Please note again that this presentation contains forward-looking statements, so I would like to draw your attention to the regulation note on page 2, which provides all the details. I'm Giulia Perfetti, Investor Relations Manager of Esprit, and with me is Alessandro Cattani, CEO of EspritNet. Now I leave the floor to Alessandro to present and comment with you the fiscal year 2022 results. Alessandro, over to you.

Thank you. Giulia, thanks everybody, and we welcome you to our fiscal year 2022 result presentation. Without further ado, I would skip to the first slide and start with the first comment. For us, this could be considered a year of overtaking. We were born and we have long been considered an Italian IT volume distributor. With these results, we can safely say that we have successfully moved into an international value-added tech enabler. What do we mean with this? Well, first and foremost, we are no longer depending on Italy only. The domestic market accounts for 55% of our total profitability and 45% of it is now coming out of Italy. Spain, Portugal, North Africa, and other regions of the world. Secondly, we are now a value-added distributor. No longer our PC and smartphone business represent the core of our profitability. 42% of the total profitability is now out of the solutions and services. And last but not least, we are now more dependent on the business performance rather than the consumer performance in the market. That means that 62% of our total sales are out of IT reseller sales, which typically address the business segment, the corporate market, and only 38% on retailers that are driven by consumer spending. So more and more, we are we have diversified our coverage of geographies. We are more and more value-added oriented and more and more our dependency is on the behavior of companies rather than of individuals. So now, if we move to the results at a glance in terms of revenues, we could say that we keep on focusing our activities on high margin product lines and higher margin customer segments. And you can see it in this initial chart, screens were down in line with the market for the entire full year. We overgrew the market in the devices segment, which boasts a higher profitability and even more in the solution and services market, where we grew 19% against the 16% growth of the market. In terms of customers, as I mentioned before, IT resellers now account for roughly 62% of our total revenues, and they grew 16% against the market, up 9%. Whilst in a declining retailer and e-tailer market, which was down 9%, we were down 16%. So a clear focus on higher margin customers and higher margin businesses. Italy was down 4% in a flattish market. Spain was in line with the market and Portugal outgrew the market, 18% against the 10%. So if we look at the results at a glance, we had further improvements in profitability, recording results which were better than the record results of 2021. So gross profit was up 5%, but what's more important, it was 5.22% on sales compared to 4.96% on sales in 2021. And even stronger performance in Q4 with gross profit up 14%, that 5.22% on sales against 5.53% of 2021. A bit adjusted up 5%, now close to 2% on sales, 194 against 184 of the previous year, with very, very strong performance in Q4, up 29% against last year, and 248% on sales, against less than 2% in 2021. Cash conversion cycle is the sore area. We closed at 26 days, 13 days more compared to Q4 2021 and five days more sequentially against the first nine months of 2022. As a result, the net financial position was negative for 83 million, strongly better than on September when it was negative by 380 million. but worse than December last year, positive by 220. And last but not least, return on capital employed was therefore stood at 13.3% compared to 11% in Q3 2021. And that's the result of higher levels of working capital. As you might know, since a few quarters, we split our business into five pillars. Screens, PCs, smartphones, devices, everything else except solutions. Solutions, everything that stands in a data center plus vertical solution, added value solution. Services made by or sold with aspirant brands. and our own brands, Nilox and Celli. It's a clear shift towards the solutions with solutions up 19% and screens down 6%. Nevertheless, the EBIT adjusted for screens was up 5% with a margin that stood at 114%. against 1.01% in 2021. Having shared businesses which were particularly unprofitable on certain customers led us to improve, increase our profitability whilst recording lower sales. It's, of course, always tough for our salespeople to understand that you can do more profit having even less revenues. It's a harder job, but it's what we are in a mission for, what our salespeople more and more are learning to execute in the market. Devices were up 3% with a nice increase in EBITDA margin as well. But what's more impressive is the performance in solutions, up 19% in sales and 28% in revenues in EBITDA margin. If we sum solutions plus services, we end up having a combined net result of 4.2% EBITDA margin with, and that's worth noting, for the first time ever, solutions which account for less than a third than screens revenues, providing more EBITDA in absolute terms. So a real change and marked evolution away from being a purely volume distributor and more and more into being an added value one. performance in Q4 was particularly good in terms of profitability. What's worth noting is not only an improvement in EBITDA margin driven by mix, but more or less on all product lines, a good performance in terms of EBITDA line by line, with the only notable exception of devices, which being a mix of different typology of product lines was driven mostly by mix. That's for the profitability. As long as we said that we have more and more experienced growth and focus on solutions plus services, Let me dig a little bit more into our V-Valley business, which sums up all our activities in the solution business, plus the 17 million euros in revenues of services. The revenues that you see here are gross revenues before the application of IFRS 15 that mostly impacts the software and Cloud, where because of the IFRS 15, we record just the gross profit, not the revenues. But this is the historical performance, and you may see here that although service storage and networking still provided a nice growth, in spite of a market where more and more data centers are moving into Cloud, if we sum it up with the Cloud performance that we had, we see that we really had a spectacular performance. On Cloud business, we have better margins. Software is an area where we still miss a number of key vendors, but we really are on a mission to bring them on board with us. and our performance in this area will probably provide us an easier path to these acquisitions of new contracts. Cybersecurity proved a really strong contributor to our performance, worth noting that basically in two years from 2020 to 2022, we doubled our volumes on cybersecurity and we're pushing furthermore. Professional services embeds both vendor provided services and the 17 million euros services made by aspirant with exceedingly high EBITDA margin contribution and last but not least industrial solutions where we report a mixed band of product lines the biggest one being data capture so barcode readers and printers excellent performance of DACOM, the acquisition that we made in January 2021, but we had very good performance in cabling, in video surveillance, and also in the solar business as well. Okay, so that's for the Vivelli solution. A total of 4.2%, a bit of margin, expect us to keep on having a special focus on this area that is driving disproportionately higher margins. Okay, now a very quick check on the overall P&L evolution. We already discussed the top line and gross profit. As G&A wise, we saw an increase of the weight of G&A on revenues That was mostly driven by the mix of utility costs, the cost of personnel indemnities, And then we had the cost of running warehouses launched in 2021. We had a 2022 where we went back fully to normal mobility after two years of restrictions. So extra costs in people's charges, cars, travel. We also spend more in promotional and communication activities. We had higher financial expenses, mostly because of the higher absorption of working capital during the year, but we had better performance in foreign exchange gains and losses. Tax rate was down mostly because of the higher weight of the Iberian Peninsula, where we experienced a slightly lower tax rate. And the difference between EBITDA adjusted and EBITDA is mostly related to the costs incurred during the attempted acquisition of a cellular line later on during 2022. If we go to the balance sheet, In balance sheet, we see further strengthening of our equity with net equity now up to close to 410 million. Right of use of assets and the lease liabilities are more or less stable. We had a growth in fixed assets linked, among other things, to the acquisitions and some investments that we made in our warehouse. What's driving the entire difference on our net financial position is a worsening of our working capital. We had a very complicated 2021, 2022 in terms of working capital, especially inventory. That's not S-Prinit specific. It's something that was experienced across the board with most of the players in the distribution industry at the wholesaling level, as well as reseller, but especially retailer level. Collectively, the industry has been plagued by the sudden reopening of the supply chain in China with subsequent flooding in brackets of products coming from previous orders, which was combined by a sharp slowdown in sales, especially of PCs and to a lesser standard smartphones during the second half of last year. That drove inventory sharply up and we can see it in the following slide. Here is our four quarter average and we see in the dark blue column the spike in inventory. We have had very good support from vendors you can see it in in the increasing in the light gray column as well the payables but not enough to cover for the increase in in inventory the situation is getting better but still when we we looked at 2022 we were under under stress you can see it better on the following chart where we report not the moving average, but the quarter by quarter performance. Although there's been a marked improvement from Q3 to Q4, that's mostly seasonal. And you can see the big difference against the previous years, minus two, minus 11, minus 10, minus eight days in 18, 19, 20, and 21 respectively. plus 12 in Q4, and it's mostly the results of having more than 10 days of inventory, more than average. Although we experienced very good, as always, very good contribution from vendors, we really were not able to compensate for this higher level of inventory, which is luckily, and not only luckily, the result of a lot of hard work from our teams going down, it will take some time more, but things are improving there. And it's a clear, clear focus for us for this year. And that's connected to the performance in terms of return on capital employed, which bounced back in Q4. But this trend from Q4 2020 downwards and now slightly up in Q4 2022 is not driven by a decrease in profitability, which, as a matter of fact, grew significantly, recording two years in a row of records. the decline is a function of any worsening of our working capital. And that's a key priority for us, even more so because weighted average cost of capital is growing because of the increase of the free risk rate, consequent to the increase of the interest rates by the central banks. So that's a quick highlight for our performance. Very strong ESG performance as well. We're now more than 1,800 employees. We got once more the certifications, great place to work and top employer. We keep on pushing hard on our initiatives in the territory. And we have a constant focus on environmental performance. I would skip now to the last part of this presentation. So the outlook for 2023. So looking forward, well, first and foremost, we'll be, we'll, give, as always, profitability guidance for 2023 during the presentation of the results for the first quarter of this year, which are expected by mid-May. But let's look as a whole. We see an economic outlook, which you know better than us, probably, is among the weakest in many years. The fallout of the Russia's invasion in Ukraine, inflation, the increased risk in borrowing costs, rising borrowing costs. Let's add this last two crises of confidence in the banking sector. They all conjure to create a weak outlook from a macro standpoint. But still, there are some sources of optimism as well. We have probably and unexpectedly avoided recession in late 2022. And we're still experiencing largely resilient performance into 2023. Apparently, inflation is cooling down a little bit, definitely on the energy side. There are also voices around that speak for a slightly better performance, all things considered. If we look at the tech forecast, here we have a much more optimistic picture. First and foremost, the issues that we experienced during the COVID emergency around the supply chain are completely fixed, basically on all product lines. We still have minor glitches on, for example, on networking and very few other things. So this could and should be considered a done thing. The long-term demand for digital solutions is anyhow expected by all analysts to grow sharply in the future. That's because of product innovation, but one of the key drivers across the world is the increased adoption of IT technologies by all people and all companies governance as well. as a result of the pandemic shock and the adoption of digital solutions during that shock. It's worth noting that we are mostly exposed to Italy, Spain and Portugal so far, and the next-gen EU funds provided by Europe for an amount of roughly 55% will be allocated in our regions. And over 20% of this huge amount of money will be spent in digital innovation. So the net result is a very favorable long-term scenario for the tech world as a whole and for the tech world in Southern Europe more specifically. Historically, the increase in IT spending is a multiple of the GDP growth rate. Given the uncertainties on GDP, it's hard to predict the short-term trend. On top of that, we must witness a very, very tough year for PCs. Revenue-wise, especially the first part of the year, will definitely be impacted by the very poor performance of PCs, which went through an incredible spike during the pandemic, and they are now returning to normal level. They are expected to grow in the future more than what would have been the expected growth pre-pandemic, but we are now absorbing the extra that were experienced during the pandemic itself. If we go to the Esperance specifics, we have a clear path. We are a value-add international tech enabler. So PCs and smartphones are important, but our group is more focused is now driving more than 40% of its profitability out of the solution and services. So expect us to have a growing presence and activity also in terms of M&A in this segment. We are looking at expansion in this specific area of solutions and services in Western Europe. We are looking in services into the Esperant businesses or the operating leasing that we have launched last year. And we are still active in and will keep on being active in the smartphone and PC business, what we call screens. only and only in case of optimal management of working capital levels and profitability. Frankly speaking, this is driving strong discussions with our vendors and with customers, and I would say also with some of our former or historical employees, because it's really a change in behavior. But the growth of the interest rates the impact that we experience on return on capital employed and the opportunities that lies in higher margin areas are more and more setting a clear direction. There's value for our suppliers, for our customers, and for us when we sell PCs, smartphones, and other volume businesses, but there's value only only when working capital are managed properly and and margins are in line with the possibility of generating the right coverage of the of especially the increased interest rates and shipping costs we face face it short-term uncertainty volumes of low margin businesses, especially PCs, are under pressure. But I think we have shown it in Q4 last year, where with a minus 1% in revenues, we posted 29% growth in profitability against a Q4 21 and a 21 fiscal year that was our record year so far. So we believe that we have a good ability to execute, we have excellent relationship with the ecosystem of our customers and suppliers. And that's also seen in our customer satisfaction index, which is really at the top level results. We are facing a long-term scenario, which is definitely favorable. So we believe that in 2023 as well, we'll be able to achieve satisfactory economic results. And this will be made, this will be achieved together with our desired strong improvement in the levels of networking capital absorption. And that would guarantee excellent returns on invested capital as we did in this last year. So that's what we see looking forward and meeting with the financial community will be mid of May with our Q1 results announcements where we'll give the guidance for 2023. And I close with one last slide with a summary of what we have delivered in these last years. We have designed a strategy that says we want to be an international added value tech provider and tech enabler. And we have already made a lot of this journey. Sales were up from 2018 to 2022 with a nice CAGR of 7%. But what's more important, we have basically doubled our EBITDA adjusted from 45 to 91 million euros from 2018 to 2022 with a very, very nice improvement in our EBITDA margin from 128 to 194. Net profit was up with a quarter of 35% and now stands at 47 million. And we have called the AGM with a proposal of the board for a dividend of 54 cents per share equal to the one paid in 2021 and the one paid in 2020. That is a 56% payout ratio. Our policy is a 50% payout ratio, trying if possible to keep the level of 54 cents, at least 54 cents. That's a total, if the AGM will approve this dividend, of roughly 80 million euros of dividend paid in three years. In this 22 years since the year Esperant went public, the group has paid 180 million euros of dividends. 80 of these 180 in the last three years. We are standing here with a dividend yield in this moment of close to 7.3%, 7.4%. So a really good proposition. So a lot of execution on a clear plan. Really excited to have witnessed the overtaking of solutions and international to volume and national. So looking forward to further improvements in the future. That's our strategy. That's our execution. Thanks for being with us today. And now it's time for the Q&A session. Thank you, everybody.

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

Can you hear me?

Yes.

Ciao, good afternoon, everybody. I have three questions. The first one is on your gross margin reported in 2022. You mentioned in the press release that it was somewhat affected also by higher transportation costs and higher factory costs. And can you please quantify this effect? It was meaningful and which would have been the performance barring these two effects and also what should we expect for next year. The second one is related to the underperformance you reported in the consumer business, minus 16% versus the market minus 9%. I was wondering whether this was entirely a voluntary choice in selecting your counterparties and the most profitable businesses or behind that we have something else. The last question is on debt. We were all expecting probably a faster reabsorption of working capital in the course of 2022, which is now the path for going back to more physiological level that you can anticipate for 2023. Thank you. Okay.

Thank you, Nicola. We don't give full details on the components of gross margin, but on transportation, we have said that the net increase of the freight cost from December 21 to December 22 has been 12 basis points. Barring this effect, gross profit margin would have improved by 12 basis points. Factoring across the year was up seven basis points, and during Q4 alone, it was up 17 basis points. So, If I look at the year, more than, let's say, roughly 20 basis points of gross profit were eaten in brackets by inflation or the net result of inflation in higher interest rates. Nevertheless, because of our capability of driving a mix in a better direction, as well as the capability of improving our performance on specific lines of business, and I come to your second question, led us to an improvement of the margin almost on all specific product lines. The consumer business has been mostly a voluntary choice. We walked away from a number of truly unprofitable deals, especially in smartphones, but in PCs as well. And we keep on walking away from these businesses. I tell you, it's a painful, painful activity, but the focus is on improving our return on capital employed and on driving our teams into the acceptance of the fact that our group will more and more perform only in truly profitable areas, letting smaller players if they have credit lines to swallow the worst part of the market. So a lot of it has been voluntary. That's basically the story. Now and then we face also moments in which customers would love to buy from other distributors and we lose because of the customer choice and not because of our willingness to do so. Or from a vendor perspective, sometimes they go direct on certain low margin businesses. But that's basically what we have done. As per the reduction in the debit, I would say we had a tremendous 2022, really good performance. But on the, especially the inventory side, we underperformed. We underperformed and unfortunately the weakness in, especially in the PC market, did not help at all in driving the reduction of this level of inventory faster. If you recall in November when we announced our Q3 results, we said that October sales were up 13%, and then we closed the quarter down 1%. Well, if you do a little bit of math, you can imagine what happened in November and December. Really, really tough couple of months, especially on PCs where the performance were, smartphones as well to a certain extent, sales were down high double digit. If we had stable sales, we would have reduced our inventory much faster. But we have to face, in this case, an issue with this stocking of retailers, especially, that made a decent, if not a good, Black Friday and Christmas season. But they, I would say wisely, decided to reduce the level of inventory that they run with. And so we were not able to restock them. It's now our turn to reduce this level of inventory. So we are really accelerating. It's tough for vendors. It's tough for us. Big discussions, but no way we can and we will accept going forward this way. By the way, it's turning into an opportunity for us as well because we have a certain amount of money that we are allocating on purchases, and vendors are really offering good opportunities to us to be the ones that take this money. There are vendors that are helping, others not. And those that are helping with margins are those that are the beneficiary of a little bit more of purchases. Others are not, and that's what's happening.

A question from Mr. Nargi. Mr. Nagy, please remember to activate your microphone.

Hi, good afternoon, everyone. Thanks for taking my question. I have a couple of questions. The first one is on the profitability side. If we look at the single contribution at the EBDA level in Q4, there was a sharp fall in EBDA from the own brands business segment. if you could provide a bit more color on such figure and in particular the year on year difference if compared to the 2021 and the second question is on the if you can provide a trading update on the on the first two months of the year. So you talk about still still a difficult period for the PC and smartphone business. So if we might expect at least in the first part of the year still declining year on year growth rate for such business. Thanks.

Okay, start. Thank you. Thank you, Mr. Nagy. Well, we have not released the specific figures, but it's on your second question. Analysts are clearly depicting a grim picture on PC sales for the first, definitely for the first quarter, with a double-digit decline. So we are normally performing more or less in line with the market. So I don't expect that this, the screen portion of our business, at least in terms of revenues, at least in terms of revenues, to be positive. And that's the most that I can say in this area. I would say that the market on the solution side is still pretty good. And we have, recently, definitely last year, outperformed the market. So I'm much more optimistic in that area. As per the own brands, that's a very interesting question. We have two own brands, one which we acquired, Celli, it's the smartphone accessory business, and one which we developed in-house, Nelux, that's PC accessories and electrical mobility, so e-bikes and electrical scooters. The margins of NILOX, the EBITDA margin of NILOX is more or less half the one of CHELI for a number of reasons, typology of products, where we do source the products from level of investments. So a first point in this own brands performance is the mix between one line and the other. The own brands are very sensitive to volumes. It's the only area of business we have where the operating leverage is particularly high. We do have millions of investments in advertising and product development. We are talking of truly few million euros of investments. So it's an area where as long as the gross profit margin is high double digit, any loss in revenues has an immediate impact on the EBITDA line. In 2021, we had a spectacular year because we won some contracts, promotional contracts with retailers and in the Shelley area, and we had a very healthy performance revenue-wise. That drove very high profitability. In 2022, we have not had this kind of extra revenues. The mix has been skewed towards the NILOX with lower margins. We did well in Q4 in terms of volumes, and you see that we almost closed breakeven at the bid adjusted level because of these higher volumes. but definitely it's an area where we still have a lot of work to do in improving our volumes first and foremost. In a sense, the Cellular Line attempted acquisition was going in this direction. This is a business which is mostly reliant on volumes. And if you have scale, you have better purchase power on one side and possibility of spreading your cost base on higher volumes. we're involved in this journey towards improvement of volumes as well as the product mix. And we will keep on pushing till we will turn this into a potentially, not only a potentially, but a real contributor to our profitability as it was in 2021, when we add the desired volumes with the right mix. And it provided an FT roughly 7% EBITDA margin, which is not bad.

Other questions? There are no more questions, so we can end the call. Thank you for participating. And of course, we remain at your disposal. Thanks again and see you next time.

Thanks, everybody. Have a nice day. Bye.