Esprinet S.p.A.

Good morning everyone and thank you for joining us for today's H1 2023 result presentation. Before we continue, let me remind that the webinar is being recorded and after the call, the podcast will be posted on the S-PRED 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 a forward-looking statement So I would like to draw your attention to the regulation note on page two, which provides all the details. I'm Giulia Perfetti, Investor Relations and Sustainability Manager of EspritNet, and as always with me is Alessandro Cattani, CEO of EspritNet. I will now turn the call over to Alessandro to present a comment with you, DH1 2023's results. Alessandro.

Thanks, Giulia. Hi, everybody, and welcome to this presentation. We are here together for the H1 2023 results. Let's start with some highlights on the evolution of our strategy. As you probably remember, the group strategy speaks about the progressive shift of our company towards high value-added business lines. More specifically, solutions and services and some niche areas in the devices business. And the execution of this strategy once again boosted the gross profit margins, which is the first indicator that we are tracking as a gauge of the performance of this strategy. The solution and services, which accounted for 23% of our total sales in H1, are now represented roughly 62% of our total profitability. What's more interesting is the sustained gross profit margin evolution. Gross profit grew 19 bps sequentially against the Q1 23 and 26 bps against the 527% of H1 22, up to 553%. We have solutions once again as the business line that is generating the the biggest amount of a bit adjusted in absolute value worth noting that with sales equally to roughly 40 percent of the the screens sales so pc and so they provide more than twice the profitability of this category In terms of customer segments, the commercial area, the business customer segment is now representing 69% of our total sales against the 63% in 2022 and 59% in 2021. So we are gradually reducing the weight of the retailers which represent the channel with the greatest pressure on discounts. Particular focus has been placed recently on our financial structure and we are pleased to see a strong progress in the inventory level reduction. we have progressed once more in the inventory reduction process that began last year. And our working capital, as of end of June 23, went down in the quarter to 29 days as cash cycle. It's not where we historically were and where we want to go back to. so well below 20 days, but we're getting closer to our group targets. The actions to contain the level of net invested capital and specifically working capital were effective and we were seeing our net financial position down to 207 million euros against 257 roughly as of last year, this time, and 341 million as of March. So more than roughly 140 million euros of working capital, well, of net financial position improvement in the quarter sequentially. Okay, now if we move to the sales evolution, we recorded a solid demand for solution and services in the market driven by, well, the acceleration of infrastructure, upgrade acceleration. And unfortunately, it's only partially offset the decline in the overall PC ecosystem, which is seriously down. As you can see by product category, the market in screens and in devices is down 7%, 8% against the growth of 16% in solution services. We lost the share here as the result of a gradual reduction of the product and customer combination that we believe are structurally with inadequate return on capital employed. We have areas where return on capital employed is not well above the weighted average cost of capital as we expect. But that is mostly linked to this spike in inventory, which we are gradually reducing. There's, on the other side, a bunch of combinations of products and customers where we think that it will be very hard, if not possible at all, to achieve levels of return on capital employed that we consider adequate. And therefore, we have progressively in this last three quarters, shared the businesses with the lowest margin. Not surprisingly, we have a significant loss of share in the retailer and retailer business, which was down in the half by 27% against the market, which was down by 9%. It's mostly in the screens, business which was down 21% as a product category and partially in the devices business where we suffered especially in TVs especially in Italy against the very strong 2022 driven by incentives by the Italian government for the switch switch off of of the digital TVs to new standards and and It's mostly the retailer and retailer business where we think that it's harder to achieve the right kind of structural return on capital employed. There are areas where this is possible, not so much because of high profitability, rather because of good working capital. Some of them are not there yet, but we think they can go there. but others we do believe are not structurally profitable enough, or well, with structural return on capital employed high enough to justify investments in that area. So that's for the sales evolution. If we move to the profitability, well, the gross profit margin growth helped to offset the part of the decline in sales, but it was not enough. Gross profit was down 8% compared to first half last year against sales which were down significantly more. But that's because The percentage, the gross profit margin, as I said, grew from 527 to 553%, but not enough to offset this decline. A bit adjusted suffered consequently. Part of it is the result of this decline in the gross profit in absolute terms, driven by the reduction in in volumes. We also experienced more than 6% inflation growth in our SG&A driven by the investments that we have done to grow, especially in the solution business, not offsetted enough by the reduction that we are having in the cost structure related to the screens and devices. Cash conversion cycle, the moving average of the last four quarters is up to 31 days, one day less compared to Q1 23 and 14 days compared to last year. But if we look at the Q2 alone, numbers are in clear improvement, 29 days, 12 days less than Q1 this year and two days less than Q2 last year. Net financial position is negative for 207 million, sharp improvement against March this year, where it was negative for 341 million. A return on capital employed at 8% compared to 12.9% last year, driven mostly by the average net invested capital. we look at the following slide, we can see the five pillars. So we have reported since a few quarters our business split into five lines of businesses. Screens, devices and non-brands could be dubbed the volume business traded under the Espernet brand. Solutions and services are the added value business trading under the V-Valley brand. The EBITDA margin was down 43 basis points, mostly driven by up because of the growth of the gross profit margin, but down because of the higher incidence of SG&A on sales because of lower volumes. But if we look at the EBITDA margin, we can see that the solutions and services which represent roughly 20% of our total revenues in H1 with 3.52% EBITDA margin contributed to roughly 60% of the overall profitability of the group. whilst the rest of the business ran at 65 basis points of EBITDA margin, not so much because of the reduction of the gross profit, which as a matter of fact grew, but because of the reduction, because of the lowest contribution deriving from the LOWER LEVEL OF REVENUES AGAINST SLIGHTLY GROWING SG&A, WHICH, THEREFORE, HAS A PERCENTAGE ON REVENUES. BUT ALL IN ALL, THE STRATEGY IS CLEARER AND CLEARER, EVEN IN A TOUGH HALF AS THIS HALF HAS BEEN. SOLUTIONS ARE PROVIDING A HEALTHY AMOUNT OF PROFITABILITY WITH 3.5% OF THE MARGIN, WHICH IS a number that clearly shows the way of where we want to be in the future with our company, more and more in these higher margin businesses and less and less in the other area, unless the other area is able to provide really attractive return on capital employed because of lower working capital absorption. Let's have a quick look at the P&L summary. 5% growth in SG&A. So the weight of this G&A on revenues grew by roughly 70 basis points, and that's explaining the reduction of the EBITDA margin on the other side. partially offset by the growth in the gross profit margin. We are experiencing operating costs, which are growing mostly as the result of inflation. And a lot of this is the result of inflation linked to the adjustment of national collective bargaining agreements, both in Italy as well as in Spain, made, say, December last year. And that has driven an increase of personnel cost during the year. There's been also new hiring for people involved in projects into the solution business and the impact of Bluedis acquisition. Interest expenses. Well, IFRS 16 is stable. We had a better performance than last year in foreign exchange. There's a sharp increase in interest costs. That's the result of the sharp increase in the interest rates by the European Central Bank on one side. Last year, we were running with a new repo that could be said roughly zero as long as most of the cases we had a flow of zero on our debt. This year, we are already running well above 3%, so a sharp increase in debt range. And on top of that, we have been experiencing a quite significant amount of higher average working capital absorption, hence of net financial, average net financial position. Tax rates essentially unchanged. We announced before summer that we had reached a final agreement with Italian tax authorities settling the VAT claims. in relation to tax periods of 2013 to 2017. It's a total of 33.3 million, of which 26.4 in taxes and penalties and 6.9 in interest. For the sake of clarity, we are reporting them here as a separate plan to reconcile with the as reported net income. I refer to previous calls for all the details of this transaction. I just remember that this 33.3 million will be paid in five years, equal installments in five years. So from a financial standpoint, the impact is roughly 6.5 million per year. And that's for the P&L. If we look at our balance sheet, well, worth noting, first of all, the evolution of the operating net working capital. We have here the evolution since June last year, till June this year. You can see as we experienced the sharp increase in operating net working capital, Since Q1 2022, it went up to 540 million in September last year, down to 260 average seasonality and the period of any given year, up again to 500 and down 334. So if you look at this chart, you see that we have been doing quite the job over there. I point the attention of the evolution of inventory in absolute terms, apart from the stock terms, number of inventory days, we have shed more than 250 million euros of inventory since September last year with cross-profit margins that went up and not down. And that's a noteworthy achievement, especially in such a complex environment. We have bought less and we have sold less and sold less trade receivables and trade payables. Especially trade payables were affected by the fact that we bought significantly less than what we sold because we were using the excessive inventory, we do expect the trade payables dynamics to get back to normality by the end of the year. So we have the good expectations on networking capital evolution. No particular other relevant indications. So we had a growth in our fixed assets mostly linked to the acquisitions that we made and some few million euros of assets acquired for the automation of part of the Italian, one of the Italian warehouses. The rest is working capital and the right of use of assets is more or less stable and and the net equities down, both because of the loss linked to the accounting loss linked to the transaction with the tax authorities, as well as the distribution of 27 million euros of dividend made in May. And that's for the balance sheet. Working capital, we report, as always, the four quarter average And you see the deep blue column, which stands for the inventory days that went up and began its journey downwards, as we hope we'll be able to keep it. There will be, as always, probably in terms of working days, of inventory days, a potential spike in Q3 because of the combined effect of lower sales because of August and the pile up of inventory in preparation of the stronger Q4 quarter, but the path is clearly marked. And if we look at the following slide where we see the quarter by quarter, we see that DPOs have sort of stabilized north of 70 days. If we go back to 2018, when we were experiencing very high cash cycles, we have grown structurally our DPOs by roughly 20 days. And we achieved that with increased, sharply increased gross profit margins, almost one percentage, 100 bps, one percentage point of increase of our cross-profit margin in these last couple of years. A remarkable achievement, I would say. The inventory, you can see the spike in 2022, and we see a progressive decline. We are way, way far from the right level which should be around 40 days but we are improving in that area and also we had a better performance in terms of DSOs. That's for the working capital metric, which is, of course, affecting significantly our return on capital employed evolution. With the return of our working capital back to the thin area in terms of number of days and not the 20 or 30 days as we are now, we would expect in the next quarters a bounce back of our return on capital employed, hopefully supported also by a good performance and profitability as well in the next years. And that's for the past, for what happened. Let's see what is happening and what most probably will happen from now on. First, a glimpse on the market. Well, the economic backdrop is not particularly positive. The outlook, as you all know, is uncertain, highly volatile environment. There's been a sharp slowdown, which is here probably to stay due to high inflation, rising interest rates, and unstable financial conditions. We have seen the forecast of the European Commission and ECB around GDP growth, which remains fragile at best. Business and consumer confidence is weaker and we're witnessing a cautious approach by companies as well because they could face high cost inflation and reduce access to markets. Consumers are really in trouble but that's not something new. Those have been the culprits of most of the suffering in the market, in the IT market recently, was the companies have been strong supporters and contributors to the good performance of the areas that represent especially the solutions. What should we look Closely, too, is, well, the recessionary risks and the geopolitical tensions. Nothing new. You know this probably better than us. What about our industry? Short term, well, short term, the challenging macro environment had a direct impact on the IT market. And companies are getting more and more prudent in information technology purchases. deferring everything that is unnecessary in the short term was keeping long-term strategic projects active. The consumer demand is the one that has been impacted and is impacted the most by high inflation and rising interest rates. Opportunities. Opportunities are still there and probably even more so the recovery is forecasted. What has been the news of this last couple of weeks, having had long discussions with the analysts as well as with our biggest customers and vendors, is that this recovery forecasted for the second half is postponed to H1 next year. Q3 is supposed to be a tough quarter for the market. And of course, in terms of sales, and of course, we are a stronger, a big portion of this market. And so the short term market is more challenging than what we expected, even though Q4 is still perceived as probably a better quarter than Q4 last year in terms of market. However, both the analysts and ourselves remain very confident in long-term growth and projections in the IT sector and in the capability of the distribution to intercept, to grab larger chunks of these opportunities. In the next three years, everybody agrees on the fact that the digital transformation trend will continue to drive strong growth in IT spending. Apparently, artificial intelligence, which we thought would have had an impact mostly on software, will have an impact on hardware as well, because there's a wave of new software technologies that will need stronger capabilities in terms of processing power. And this will most probably turn into the launch of not only service and storage, but the clients as well, PCs, printers, smartphones, that will have higher compute power, therefore driving the need, especially in corporations, but to a certain extent probably in consumers as well, for refresh and accelerated refresh process of existing technology. So good vibes about the next three years. More muted perception definitely of Q3 and to a certain extent Q4 as well. And that's the reason why we have revised our guidance in the range between 70 to 80 million. We do expect the second half of this year to be around the numbers of last year in terms of profitability, potentially a little bit less depending on the performance of the fourth quarter. The thing worth noting is that we also expect the first signs of slowdown in the growth rate of solutions. Solutions grew at a torrid rate for the last two years. It's hard to sustain such a high double-digit growth rate. Analysts are forecasting and we are witnessing a reduction in this growth. The performance of the client market, so PCs, smartphones, TVs, consumer electronics, printing, has been, especially in the consumer segment, particularly bad recently. We expect that to stay muted, especially in the consumer segment, and probably it could turn into a driver of growth instead next year. That's the focus. Price increase of the products, which has been here for quite some time, and probably will stay a little bit longer, will not compensate for the reduction in unit sales of PCs, which have been one of the biggest culprits of the reduction in the volumes in the market. So all in all, this is the summary of what happened and what we see. As a final remarks, we want to highlight once more our four priorities. Value added distribution. We are pushing hard on our definitive transformation of our model into a value added distribution model, focusing more and more on combinations of product customers with higher margins, and on the progressive improvements of the gross profit margins overall of the company. Second point, optimal management working capital. Not only we have to bring back the working capital to the, let's say, steady state conditions, cash cycle below 20 days, which we deem as the normality. But we are looking at opportunities in lower profitability lines such as smartphones or PCs only, and I stress once more, only when optimal management working capital levels is structurally achievable. Whenever this will not be achievable, we will trim our presence in that market and we will trim the cost structure accordingly. New growth opportunities through M&A. We have been particularly active in niche, very high margin M&A deals recently. I just recall the acquisition of Bluedis last year, of Lidera and of CIFAR this year. And we will keep on looking at the new growth opportunities mostly in the solution and services segments. But whenever there's a good opportunity also in devices, we might give a keen eye on them as well. And no longer in Southern Europe only, but the Western European countries as well. a number of targets that we have looked into, that we are looking into, and we hope sooner or later to be able to expand our reach, beefing up our capabilities in the especially solution and services segments. And last but not least, the activity aimed at reducing the level of networking capital absorption will be a key driver to bring back our return on capital employed to higher levels. So that's the strategy and that's what's happening in the market. I thank you everybody for your attention and as always we are available for our Q&A session. I turn the word back to Giulia.

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