Esprinet S.p.A.

Good morning and welcome everyone to the Esperanto Q1 2023 result presentation. Before starting, I remind everyone that the webinar is being recorded and after the call, the podcast will be posted on the Esperanto 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 details. I'm Giulia Perfetti, Investor Relations Manager of Espernet, and with me is Alessandro Cattani, CEO of Espernet. Now I leave the floor to Alessandro to present and comment with you the Q1 2023 results. Alessandro, over to you.

Thank you, Giulia, and thanks everybody for joining us today. Well, Giulia introduced the forward-looking statement. Let's jump straight into our Q1 results. Well, of course, it's been a challenge quarter, but what is worth noting is that we keep on moving in our transition to an added value business model. And the growth of gross profit margins on one side and the growth of the weight of business sales is a clear indication of this relentless transition to an added value business model. We are living in times of high inflation and definitely higher interest rates. And we had, I think, a remarkable result in transferring, pushing downstream inflation and to a large extent the interest rates. That can be measured in the growth of our gross profit margins, which stood at 534%, 29 basis points more than the 505% of Q1 2022. and 12 basis points up sequentially against the fiscal year 22. This increase is even higher if we consider the fact that within our gross profit margins, we factored the cost of the financial cost of factoring, which in Q1 23 was 23 basis points higher than in Q1 22, reflecting the higher interest rates that we measured during this last 12 months. So in a stable environment from an interest rate standpoint, our gross profit margin improvement would have been 52 basis points up almost 10%. And that's been made mostly because of our focus on high margin business lines. So solution and services, which now stand at 23% of total sales, 70% in Q1-22. And the business customer segment now 67% of total sales against 60% in Q1 2022. The second highlight is the pressure on rebuilding a standard level of working capital. And we have made good progress in decreasing our inventory levels, which is still a high priority for our group. We went down more than 120 million euros against the Q1 last year and sequentially close to 60 million against the end of the year. But still, there's room to go, and we're working on a strong MedDev reduction with the aim of keeping payments to suppliers almost stable and managing customer terms. We must consider that in our net financial position, we discount the fact that we have reduced the overall level of factoring utilization by more than 120 million euros. resulting from lower sales in the retail segment where we typically factor our receivables. We are adjusting terms to customers in the business segment to reflect the new environment with higher interest rates. And that's part of the ongoing work of bringing back the the overall working capital to manageable levels. In terms of sales, solutions and services outperformed the market, both in terms of product category in the market. The market was down, but the solution and services were sharply up. And we outperformed the market with a notable 23% growth in this area against 18% of the market. There's an ongoing phase of pressure in the market on screens and certain devices, notably consumer electronics. And there's a significant pressure in the market on retailers and retailers. The consumer spending has been under pressure, is still under pressure. And we are, as I said before, relentlessly phasing out those product-customers combinations that generate the low value. We're crossing a very long line a long desert of, in a sense, of shedding lower value combinations and increasing the weight of the product lines and customer combinations as well that provide higher value, managing inflation and managing the pressure on interest rates. And to a certain extent, I think we have done a remarkable job if we consider that our SG&A were up just 3%. But let's have a look at the profitability evolution. As I said, the world has been impacted year on year by high inflation and rising interest rates. And we have reacted with very strict cost control. SG&A are up 3% year on year. And we have been able to pass down most of, not only product inflation, we have moved it to downstream almost entirely, but we have been able to recover also what has been in the gross profit margin in terms of interest rates and grow margins as well. What has not yet happened is the reduction of the working capital, which is still very high for our standards and is up six days compared to Q4 or 19 days compared to Q1 2022. We'll dig a little bit more later into these details. And therefore the net financial position by the impacted by 120 million euros of lower factoring utilization is up because of this and therefore also the interest costs are up both for interest rate increase as well as higher utilization. But we do believe that all the investments in The higher value lines that we have been doing and we keep on doing should pave the way for an accelerated value creation journey. Let's look at this journey. And as you know, since a few quarters, we report our product lines in five pillars, screens, devices, solutions, services, and our own brands. What is remarkable, I think, is that solution and services now represent 23% of total sales and 60% of total with a stronger combined 3.8 EBITDA margin. We have room to go to both improve the EBITDA margin of everything else, which of course has been impacted not so much by the gross profit reduction, but rather by the lower volumes that provided lower absorption of fixed costs. But still, we have a clear path marked ahead with a strong commitment to grow solutions and services on one side and focus our activities in the screens and devices more and more only on those areas where we can squeeze either higher EBITDA margins or better return on capital employed, meaning accepting lower margin products, but with disproportionately lower absorption of working capital. If we look at the P&L summary, I think most of the comments made before have clearly highlighted what is here. I want to stress that even with an acquisition and in a year of high inflation, we grew our GNA by just 3%. We have very aggressive cost control processes in place. What is worth noting is that the variable costs are stable. So we have been able to absorb fully year on year the changes in pricing for the variable costs and fixed costs are under control. despite the acquisition of Bluedis, which brought roughly 700K of additional costs, the overall cost is up 1.1 million. So really, we were able to manage pretty well our cost structure. We had... We had an opportunity in the foreign exchange gain and losses. We had the gains against losses last year. But the weight of the combined absorption of higher working capital as well as higher interest rates brought a significant increase in the other financial income and expenses, well, in the interest costs. income taxes as a proportion, as a percentage of profit before taxes, so the tax rate is essentially unchanged. If we look at the balance sheet, no real big changes from the end of the year in terms of fixed assets. As usual, we We witnessed big swings in our working capital due to seasonality. So it's probably worth looking at what happened in Q1 last year in terms of working capital. And you see that last year we already had absorbed a big hit in terms of inventory growth. End of the year, it was slightly down and further down in Q1. We are, we think, in a good trajectory. Short term, of course, we will have an impact on trade payables because one way of reducing inventory is not buying. And as long as we're not buying, we are not generating trade payables, or at least we are not generating enough trade payables. It's good to know that the terms that we got from vendors are stable and to a certain extent even improving. So once the inventory will be back to normal levels and we will have restored the usual flow of purchases, trade payable days should stay at a healthy level. We have, as I said, witnessed 120 million euros of lower factoring utilization against March last year, and we are not yet measuring a big impact on customer delinquencies. Of course, it's a worry that we see on On all the financial papers and newspapers, it's something that we keep a keen eye on. But so far, the situation is still absolutely manageable and we have not yet had significant credit losses. THE GROUP IS REDUCING ITS EXPOSURE TO CERTAIN CUSTOMERS AS WELL AS GENERALLY SPEAKING HAVING PROGRESSIVELY LOWER EXPOSURE TO THE RETAIL SEGMENT WHICH IN THIS MOMENT IS THE ONE WITHIN SEEING A HIGHER PRESSURE IN TERMS OF IMPACT OF THE DOWNTURN OF THE MARKET. SO, HERE THE forecast is of progressing with our work of inventory reduction. At a certain moment in time, trade payables will start balancing again. And in terms of trade receivables, business customers do have nominal payment terms that are lower, generally speaking, than those of retailers, but we don't typically factor them. So we should in time have a probably a different balance between factoring and trade receivables. So that's for the balance sheet. If we look at the working capital metrics on the four quarter average, Of course, you see a first sign of decline in the inventory after having spiked at 59 days. But the increase in the average DSOs has been driven by the results of the Q1, just the Q1, which we'll see in a second. more or less stable, a little bit down from the peak of Q3 2022, the payment terms of two suppliers, but mostly driven by a technical aspect of lower purchases because we're shedding inventory. But the nominal terms are stable, if not slightly improving. You see better in the following slide where you see not the moving average, but the quarter and the metrics. you see that the payment terms are more or less stable at 72, 73 days. Inventory at 53 days is down against the 57 days of Q1 2022 is still very, very high. But if we go back to pre-pandemic levels, we are trading in line, if not slightly below those levels, and we expect to have a better situation moving forward. We had this spike at the end of Q1 because of mostly this lower utilization of factoring. So Moving forward, we're really keen to have a better picture during the year in terms of working capital metrics, which of course reflect on our return on capital employed, which has been heavily impacted by not so much by the profitability, but rather by the higher level of capital employed linked entirely to the working capital. Now, we had a tax issue. Well, we are discussing a possible tax issue settlement. I expect a lot of questions here. Let me give a little bit more of color. First of all, it has not yet been closed. We're still in discussion with Italian tax authorities. Of course, as long as we have provided numbers, we have a certain level of confidence drawn by the discussions with the authority. that the settlement could be finalized by the end of this month. And if that will eventually happen, we will provide... We will provide... We will inform the market with ad hoc information. What happened is that As described in the annual financial report 2022, at the end of 2022, the Italian tax authorities gave us four tax assessments for the taxable years 2013, 2016, and one for the taxable year 2017. The point is that according to the Italian law, There are customers that are considered usual or habitual exporters. So customers that typically pay VAT on their purchases and as long as they are exporting, they are not collecting VAT. So they generate a huge credit against the financial authorities. The financial authorities, instead of reimbursing this credit, gave options since many years to these habitual exporters to issue a self-declaration to their suppliers claiming them to be habitual exporters and allowing them to purchase without VAT. The Italian tax authorities, we have sold to some of them. It's a really minor portion of our total sales, probably something like 1% of our total sales during those years. And it's a few tens of customers. that were audited, and after longer investigations, the Italian tax authorities claimed that not only they do not qualify as habitual exporters, but some of them even took part in tax evasion. We have never been considered part of this mechanism, but the tax authority said, you should have made the sort of trying to understand if they were really habitual exporters. This is really peculiar because this is not written in the law and it's the result of retroactive decisions made many years after we sold. Luckily, we had performed controls. So we feel confident that we could win. Unfortunately, the Italian tax authorities challenge 77 million euros of VAT, which we think we should win. But given the Italian regulations, the penalties and interest amount to a staggering 140, roughly 140 million euros of additional penalties and interest for a total of more than 220 million euros. That's the standard numbers. Whenever you see a challenge number on VAT, or for what I understand, traditional taxes as well, income taxes as well, penalties and interest very often are two, if not three times the amount of challenge. And what happened under the Italian regulations is that the tax litigation typically goes through three levels of judgment up to the Supreme Court and normally lasts more than 10 years. And so the litigation will start this year. And unfortunately, pending the litigation, there's a chance that the authority may claim these 220 million euros in advance, pending the final decision. So our board had to face the dilemma in terms of risking of potentially freeze up to 220 million euros in the next two, three years, probably, or to start a potential settlement. The idea, after long and painful internal discussions, has been the a risk for the company of having to give an advance to the government of up to 220 million euros and then waiting up to 10 years to get them back after the Supreme Court's judgment, which we have plenty of leading law firms' opinions. that say that clearly this is illegal for many reasons was too high, was deemed too high. And so in order to reduce the risk for the company, we entered the negotiation with the authorities. The authorities, and I think the percentage is a clear indication of the level of confidence the authorities themselves have in the possibility of winning is 14 percent a little bit less than 14 percent of the total claim which we can pay in up to five years so we are talking about 6.2 million euros of taxes per year but for the next five years roughly eight nine percent higher tax rate even if the entire cost will be booked as a non-recurring charge on this year results. Discussions are still open and ongoing. And as I said, if the settlement procedure will be finalized by the end of the current month, as we think it's possible, we will inform the market. And that's for the tax issues settlement. With this, the risks of further payments for taxes up to 2017 for our group on the Italian operations are closed, fully closed. And we have reduced significantly the risk. And that's for the tax settlement. Guidance. Well, The backdrop, we, as everybody, are facing headwinds. There's a geopolitical tension. There's high inflation, interest rate. But forward-looking indicators suggest this inflation in the second half. But negative short-term momentum is still very strong. First half of the year has been very challenging, even if we start seeing hopefully some signs of improvement. Opportunities. Well, short-term public investments in digitalization are still strong. And mid-term, the product refresh on a large installed base of users is a tremendous mid-term opportunity. Not to mention, of course, the overall opportunities given by the overall higher level of IT utilization fueled by innovation on one side, but from the major wave of IT purchases made during the pandemic. What to watch? Of course, the economic outlook, risk of recession or GDP recovery. There's a sort of strong separation between what the numbers apparently are telling us and what is the feeling of people feeling when you talk about What's happening in the market? There's a lot of worry and uncertainty. On the other side, apparently the numbers speak for a much better picture. And then, are we shifting from energy risk to credit financial risk? We have put a lot of attention into reducing our exposure to certain customers and certain segments, especially the consumer one. because we are afraid this pressure might create the troubles in that area. What are our key priorities? Well, first and foremost, moving forward again and again on our transformation into a value-add distribution model will be relentlessly phase out of the lowest value-add combination of products and customers. And so we are accepting some market share losses because we want to improve our gross profit margins and pave the way from an accelerated growth in value creation in the next years. Of course, this will drive the pressure on changing our cost structure and some of our people, of course. And we are telling clearly to our people, to our vendors, and to customers as well, that we are looking for value also in lower profitability lines, such as telephones or PCs, which we call that, what we call screens. but only when optimal management working capital levels is achievable. And I would add in a structural way. And of course, we keep on looking at new growth opportunities also through M&A in the solution and services segment. And we keep on looking at opportunities. We are actively working on some opportunities. We'll see if we will be able to translate them into reality. And last but not least, we have already spoken at length about that. Another key priority is finishing the hard work of bringing back and networking capital absorption to the standard levels, which were severely impaired by the post-COVID changes, especially in the supply chains, and therefore returning to higher levels of policy. All in all, if we look at our guidance, well, digital transformation is driving strong IT spending and will drive strong IT spending. And we have a clear and consistent strategy in the high value add product and customer segments of the industry. We have more than doubled our profitability. We have doubled our profitability and more in these last five years. And our guidance is based on our feeling and the almost unanimous feeling of industry analysts that during the 2023, we should expect in the groups reference countries, a low single digit increase in demand. There's agreement that the strongest growth is expected in software and infrastructure spending, and that consumer demand will continue to be under pressure, albeit less than what we experienced in the first part of the year. So, in consideration of this challenging backdrop, as well as the results obtained in the first quarter, the guidance is of an EBITDA adjusted expected between 85 and 95 million euros. It's all boils down. We are pretty confident on our cost control capabilities as well as on the gross profit performance. It's mostly a matter of understanding market performance will be as analysts and as we as well believe a good recovery, especially in the second half of the year or will still be challenges in demand driven by worsening macro scenario. Numbers speak for a better performance of the market. We, of course, are driving a shift, leaving on the table certain lower value portions of the market. But nevertheless, we expect 85 to 95 at the moment as a reasonable number. Of course, being adjusted, the roughly 31 million euros of the tax settlement, if we will find the agreement with the government, will be adjusted in these numbers. So the end number, the as reported number, will be 31 million less. with the cash disbursement will be spread in five years at 6.2 million plus interest per year, roughly. And that's all. Thanks for the interest. And now I give back the floor to Giulia for the Q&A session.

Yes, we can start with the Q&A session. I remind you that to ask questions, you should kindly book your speech. The first question comes from Mr. Storer. Mr. Storer, I give you the floor.