Esprinet S.p.A.

Good morning everyone and thank you for joining the Esperanto Q1 2024 results conference call. Please note this 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. For the duration of the call, your lines will be on listen-only mode. However, you will have an opportunity to ask questions at the end of the call. Please note again that this presentation contains forward-looking statements So I would like to draw your attention to the regulation note on page two regarding the information contained within this document. I'm Giulia Perfetti, Investor Relations and Sustainability Manager of Espernet and with me is Alessandro Cattani, CEO of Espernet. I will now turn the call over to Alessandro to present and comment with you the Q1 2024 results. Alessandro, over to you.

Thank you, Giulia. Hi, everybody, and welcome to this Q1 2024 investor call. Hope you're all well. And here we kick off 2024 where we believe the year should turn as a market, hopefully in a much better way than the really tough 2023 that we left behind. If we look at the highlights of our results, we are on our path to recovery after a challenging year. We have witnessed a growth in our market share in Italy after having lost some of it last year, and we have stabilized our market share in Spain. We have as well improved furthermore our gross profit margins and even more importantly, we have improved our working capital in line with the plan that we drew last year. So if we look at the profitability indicators, what happened in terms of P&L, what we would like to highlight is the fact that the end result of the quarter has been affected by a particularly bad performance of the Spanish market. The Italian market was bad as well, not as much. And we won market share. Spain was down 12%. Most of last year we had a particularly good performance in Spain and then at the end of the year Spain began to slow down and this reduction in the performance moved into the first quarter. If we had not witnessed such a tough market in Spain, the numbers would have been really, really good compared to last year. And what is really important is that we have normalized our market share. Last year, we have walked away from a number of businesses which held the structural inadequate return on capital employed, and that impacted the last year's revenue performance. we are getting back some of those businesses, which meanwhile we think could be turned into structurally adequate return on capital employed. And so we are on a good path, we think here. The positive results of this strategy is witnessed by the progressive growth in our gross profit margin. We stood at 574% against the 534% of Q1 last year and 20 basis points up sequentially against the Q4 23. So 40 basis points year on year and 20 basis points sequentially. So this is now a winning streak of multiple quarters. The shift progressively to higher margin businesses is keeps on happening, notwithstanding a significant impact of the higher interest rates on our gross profit margins. I recall to everybody that within our gross profit margin lies the cost of the factoring, at least the financial cost of factoring. And that grew significantly because of the higher interest rates, the tens of basis points. And notwithstanding this situation, we were able to grow our gross profit margin, hopefully paving the way in the moment market will grow up to a significant acceleration of our profitability. If you look at the financial structure, we keep on stabilizing and reducing our net debt acting on our cash conversion cycle. Cash conversion cycle measured as the moving average of the last four quarters was down at 24 days, eight days less than Q1 23 and four days less sequentially. So we are on a good path. I recall to everybody that our group, when running at around 18 to 20 days of cash conversion cycle, is cash neutral, excluding the impact of IFRS 16. And that's a sort of target that we have always declared in these last years. Net financial position is negative, 188 million euros, of which more than 120, roughly 120, represented by the impact of IFRS. And so, a significant improvement compared to Q123, where debt stood at 341. Even more remarkably, this has been achieved with a significantly lower utilization of factoring. let's say, the stabilization of our market share on one side, the improvement of gross profit margins on the other side, the improvement of the working capital based on choices made in terms of combinations of products and customers to address is paying off. The moment market will start to rebound, which we expect together with all the analysts in the second part of the year, numbers should hopefully take off and give a better picture. If we look at our sales evolution, here we can see for the first time we have introduced the concept of gross sales. We report according to the IFRS standards. And as long as we keep on growing our sales of software and cloud, the impact of the IFRS accounting principal agent is getting bigger. So more and more of our revenues are stripped off. So as long as the market analysts, the context, the GFK report the gross sales, we decided to provide our market share in an homogeneous way. And therefore, the difference between gross sales and net sales as reported is basically The portion of our sales represented by mostly software and part of cloud and minor portion of cybersecurity sales, which are stripped off because of the IFRS 15 accounting. There are other minor adjustments, mostly revenue recognition, which is small numbers. And as you can see, The gross sales in Italy were up 3% against the market, down 3%. Spain was down 12% against the market, down 12%. Basically, we kept our market share. Portugal was flat as a market. We were down 58% because we quit the selling smartphones in Portugal and that accounted for roughly 50% of our sales over there. We are rebuilding the strategy in Portugal. And as a matter of fact, we're pleased to see that we are gaining share in the SME market. But of course, Portugal is still very small and undergoing a major restructuring. It generated tons of cash because having quit selling these highly working capital absorbing businesses, we released a lot of cash. And Morocco is doing great, up 48%. As you can see, lots of the Morocco sales are software and cloud. As a matter of fact, we don't sell hardware in Morocco. We don't have a warehouse. We sell something imported from Spain, and margins are pretty good. Morocco is a good contributor, although still small. If you look at sales by product category, Screens were down 9% against the market down 5%. We recover shares on PCs and we lost the share, mostly because of the impact in Portugal and Spain of having quit the major Chinese vendor of smartphones. But on PCs, we're back on track. And in Italy, we're doing great. Solution and services, that's a really interesting point that we want to share big time. Up 7% against the market, down 6%. We're doing great here, and we're participating to a number of tenders to open new distribution contracts. We don't know if we will win at least some of these tenders, but we are on a good path here, and years of investments are paying off. And then devices were down 7% against the market, down 11%. Again, here, mostly affected by the consumer market, which you see in the following chart, where we were down 20% on retailers and retailers against the market, down 11%. Whilst on resellers, we were up 3%. against the market down 4%, the devices were mostly impacted in the TVs and white goods space, again, because of the softness of the consumer market on one side and our decisions to optimize margins and working capital. We picked off 2024 in terms of market share, in terms of a mix of products, as well as the customer type, in a good way. We are working hard to recover share wherever it makes sense, but things are getting better. and we start seeing the light. It will really mostly depend on what will happen in the market. Italy apparently is doing very well recovering. Spain, quite surprisingly, being the GDP of Spain particularly good, is really one of the toughest markets. As a matter of fact, in Q1, it was by far the toughest market together with Germany. And so, we are in this situation. All right, that's for the sales evolution. If we look at profitability, well, here, we have already commented most of the numbers this year. I want just to highlight the fact that we were able to contain the cost structure so that the impact of lower sales was partly offsetted by a higher gross profit margin, as well as by a very good cost management. On cash conversion cycle and net financial position, I already spoke. Return on capital employed is still low. We are using a moving average here. But if the performance on working capital as well as the recovery that we expect on profitability will happen in the next quarters, return on capital employed should bounce back significantly. So if we look at the usual picture on what we call the five pillars, Screens devices and home brands together are managed under the Esprit brand and solution and services are managed under the V-Valley brand. And as you can see, we had, here we are talking about net revenues and not gross revenues. We had a slight decrease in the EBITDA margin of the Esprit area. mostly because of screens. But if you look at the, and you will see it in the following chart, if you look at the cost absorption, the impact is mostly driven by a lower absorption of fixed cost because of the reduction of the revenues. But the gross profit margins were up more or less across the line. And if we look at the V-Valley, again, the performance of the services keeps on adding value with an FT 52% EBITDA margin. And we are down 10 basis points, but again, our gross profit margins were really good. And hence, EBITDA margin is up by four basis points. So our strategy of moving towards higher margin businesses keeps on happening. As you can see, with 1 third roughly of our total sales, we generate 2 thirds of our EBITDA. And the moment market should accelerate. We believe that the volume business should help, again, absorbing costs and driving profitability up. The P&L in detail, as I said before, is showing up on SG&A in absolute terms. So we were able to keep them stable, actually, 200K less than previous year. And that despite the impact of acquisitions of CIFAR Group in Italy and Lidero Network in Spain, both signed August last year. And the impact that we have seen before on the EBITDA margins of different lines is driven mostly by the impact of SG&A on sales, which was up close to 40 basis points, even if the costs were flat. But it was offset by the significantly higher gross profit margins. If we look at the financial expenses, it's worth noting that the impact is mostly driven by the foreign exchange gains losses, all generated, actually almost entirely generated in January. We had almost flat-ish performance in February and March. We have a few percentage points of our sales in US dollars. And we book the sales and we book the purchases with the exchange rate of the day of the purchase. And whenever we pay, we record the difference between the exchange rate, the day of the purchase, and the exchange rate of the day of the settlement. In general, we had a major impact because of the devaluation of the Euro against the US dollar. If you look at the other financial income expenses, Although we are significantly down in terms of average debt utilization, but we do have a significant impact from the interest rates. Beginning of last year, we still had a good level of interest rates which grew during the course of the year. We forecast these numbers theoretically to decrease in the second half of the year, mostly because we expect net debt, average net debt to keep on decreasing, but we also expect a reduction in the interest rates applied by the banks. And on tax rates, that's essentially unchanged. If you look at the balance sheet, well, as always, the key figures are all around our operating networking capital. Networking capital was down from 500 million euros of Q1-23 to the 317 of Q1-24. That's the end period and quarter periods. Then in the next graphs, we will have the comparison also on the moving average. As I said, we are having a very good performance in terms of cash. Also, notwithstanding the fact that our factoring programs for retailers mostly were down, down close to 60 million, 50 plus, because we had 341 million euros of factoring as of March 23, and we were down to roughly 290 as of March 24. So, notwithstanding an impact of roughly 50 million euros on the receivables, if we had applied the same level of factoring, we would have had roughly 560 million of trade receivables, so roughly 100 million euros less than last year. Notwithstanding this, the performance has been pretty good. Trade payables are up, not so much because of further improvement in the payment terms, but simply because, as some of you might recall, I mentioned a technical aspect. During most of the second half of 2022 and 2023, we decreased aggressively our level of inventory. By doing so, we reduced the level of purchases. And so even if the nominal payment terms were high, but we had lower amounts of purchases and hence lower amounts of debt in absolute terms. As we have sort of stabilized the level, of inventory, we are on a more standard course of purchases and that reflects given standard payment terms on higher levels of trade payables. That's for the balance sheet comments. The graph speaks by itself. We went through, this is the moving average of the previous four quarters. We went through a tough series of quarters, ending up with Q1 last year, topping 32 days of cash cycle. The last four quarters have been devoted, as you have heard me say more than once, to improvement in our level of inventory and working capital, generally speaking, and we're down to 24 days. If we look at the end quarter figures, you see that even in the best years, we ended up having 15 and 16 days Average year, such as 2019, 25 days. In 2018, as well as in 2023, we were at 39 and 41 days. They were bad numbers, very bad numbers. We are getting back to more reasonable ones. vendors keep on contributing to the sustainability of our business. This is something that happened in light of the growth of the financial costs, the interest rates. Some of them contributed with margins, some with payment terms. Here we are with this much, much better situation. Okay, and for the return on capital employed, this is the picture. This is an average of five quarters. We do believe that pending an improvement that we expect in profitability and the continuous reduction of the working capital, the cash cycle days that we have witnessed in these last quarters, the numbers should start turning up in the next quarters. Okay, that's for the numbers. What's happening looking forward? And, well, the market, as always, is full of challenges, but opportunities as well. The outlook for our industry is, broadly speaking, positive. What is really still hanging on the performance of the market and hence of the players of the markets, including ourselves, is the geopolitical and the macro scenarios, which represent the greatest headwind for the ICT market in this moment. All industry analysts agree that the return to growth is nearing. As a matter of fact, there's expectations for Growth for the Italian market this quarter, we'll see what will happen. Spain is still expected to be down, even though not so much as it happened in Q1. Definitely, in the second half of the year, there should be an average low single-digit growth rate across the board. Of course, there's this looming tension all around macroeconomics, geopolitical tension, and in Europe, the upcoming European elections. If we look more specifically at what's happening in the in the different customer categories. Indeed, large corporate IT budgets have been slightly muted in terms of performance, but what really happened was that the share of wallet of competition from other industries for consumers has been very strong. Still, we face consumers spending more on, well, on the Mortgages on one side and still travel and outdoor spending, but everybody agrees on the fact that the ICT spending in Europe is projected to grow in the coming years. And as a matter of fact, in the coming quarters, especially in Q3 and Q4, but with the first signs of improvement in Q2. I can only add that April has been a good quarter. um sorry a good month uh for the market and in terms of sales for us as well it's not yet significant because eastern last year was in march and sorry it was in in april and this year was in march so we had the different uh working days we'll see if may will confirm the resilience and expansion that we have seen, the expansion we have seen in Italy and the resilience of the Spanish market, even if the analysts are more cautious, especially about Spain. In terms of product categories, software services, and to a slightly lesser extent, cybersecurity solutions will keep on being the star performance in terms of growth. Slower growth for the infrastructure, hardware segment, even if, so server storage and networking, even if still it represents a an essential component for the digital transformation. The devices market is supposed to regain momentum. We are already seeing PCs rebounding. Smartphones, TVs, and consumer electronics in general is still softer, but it should bounce back during this year, and especially in the next years. Key drivers keep on being an aging portfolio of devices out there. We are now into the fourth year since the pandemic. and the growth that we witnessed in terms of sales during that period. And the other point is the growing integration of AI capabilities into processes and therefore into devices. This will happen especially into PCs with the new AI PCs. Probably second half of the year, especially initially for enterprises, and later on consumers will come. But definitely in the next year, this should be an interesting driver. One last comment around the... government spending in spain government spending first quarter last year was particularly strong there has been quite a slow down especially in education this year and so probably it impacted the performance in that area italy is is doing fine but the government spending slow down a bit and it's supposed to bounce back hopefully in the next quarters. That's for the market performance as a whole and I wrap up with our group priorities and our guidance. real big news here. We expected to consolidate our market share in the countries in which we are. We are recovering share, and we do expect that we might recover further more. Anyhow, looking only for areas of business that can provide structurally good levels of return on capital employed. um we are focused as always on our gross profit margin we will keep on investing and expanding our business in advanced technologies advanced solutions and we are trying as much as possible to push on digital transformation removing the complexities in the market for our customers and our suppliers. Services are an interesting area. They keep on growing and we are investing a lot in that area. We will keep as a priority the optimization of the levels of invested capital. So again, our return on capital employed strategy will move forward with the solutions as a contributor to the profitability and the growth in the volume business with low working capital absorption contributing to the fixed cost absorption on one side and the optimization of capital invested average invested capital levels on the other side. We will keep a keen eye on our cost structure. We are investing on the growth of strategic business areas. We keep investigating the possibilities of M&A in the usual areas. Nothing happened during Q1. I don't think given the status of the discussions that we have with the potential targets that A lot could happen in Q2, but you never know. Again, we are looking at the niche players such as the Lidera, Seafar, Vludis, Dacom of the last two, three years. We keep on looking at expansion in other regions, but again, and over there, it would be more of a transformational business, bigger companies, but we have not yet found anything really worth the move. As to the group estimates for our EBITDA adjusted during 2024, we estimate a range between 66 and 71 million against the 64.1 of last year. So far, we don't estimate adjustments. The big one last year was the tax settlement that we closed. The big question mark here is mostly the macroeconomic backdrop. If the macro environment will stay in terms of performance as it is forecasted so far, with a slight decrease of interest rates in the second half of the year, stable or decreasing inflation, we do expect to be on the upper part of the range. If the market turns nastier, we might be on the lower part of the estimate. But we see a better year moving forward. And that's for the presentation. And I thank everybody for joining us. And I turn it over to Giulia.

Thank you, Alessandro. We can start with the Q&A session. Let me remind that to ask questions, you should kindly book your speech and then unmute your microphone. Okay.

We have the first question.

Yes, from Federico Belluati. Federico, please go ahead.

Good morning. Thank you for taking my question. My question is on the Spanish market. So if you can give us more color on the trends behind this decrease, is it only related to the government or there's also something else? That's it for me.

Okay, so if I look at the context figures for the Spanish market, the Spanish market was down 12%. Screens, PCs, and smartphones were down 18% in the market. The solutions were down 9.5%, and we were up. We grew 2% in the market. And then there's devices and mostly consumer-related devices that were down overall 7%. If we look at the performance of the business panel, In Spain, it was down 11%, and the consumer segment was down more than 13%. So it was more or less across the board. And two factors impacted the situation. One, consumer spending. The Spaniards were the last one to slow down IT spending and turn over to travel and entertainment and being impacted by higher mortgages as well. And we are probably seeing now what we witnessed last year in other markets, Italy included. The second impact was related to the performance of the government. Government is particularly important for the for the Spanish IT market, education was particularly tough. And we had, as a market, an impact over there. And that's basically what happened in this area. Last quarter, in particular, Q1 last year was particularly strong, especially in the government. And so we have this Lastly, there's a technical aspect that I mentioned before. January and February were tough, but not so tough. In February, forecasts were still of a market down 4-5%. March was horrible, minus 20%. And that was partly linked to the Semana Santa, as they call them, Eastern, which fell in April last year and fell in March this year. And during Semana Santa, Spaniards do have a much longer period of vacation compared to the Italian market. And that was really hard on the numbers. So there's a mix of different things. Analysts forecast low single digit decrease for Q2 and low single digit growth in Q3 and Q4 for the Spanish market. which they expect a flattish Q2 for the Italian market and mid single digit growth in Q3 and Q4 for Italy. Just to give an idea of where we stand on the analyst projections, which we measured with discussions with vendors, as well as with our top customers. Order taking in the market apparently is healthier than the volume of sales. So there's a number of deals brewing, but not yet ready to be delivered in the corporate space. So that's the picture.

Another question from Mr. Nargi. Mr. Nargi, please go ahead.

Good morning, and thanks for taking my question. Just a quick question on the guidance. You just released the NBDA guidance for the 24, pointing at around 7% increase on the midpoint of the guidance. So I was wondering what are your main assumptions underlying the guidance in terms of market recovery. So what could be a reasonable expectation in terms of revenue growth and also in terms of revenue mix. So if the improvement in the revenue mix we saw in the first quarter could be a good proxy also for the full year 24. Thank you.

Yeah. Well, we didn't provide so many details, but broadly speaking, when we look at our budget compared to last year, We expect growth in Italy of our top line based on a market which is expected to have some kind of growth, meet the single digit, and then we are winning market share, as you have witnessed in the first quarter. We expect the Iberica Peninsula, so Spain, Portugal, well, we had Morocco, for what it matters, it's a very small portion, our business, which would probably suffer still a little bit during this year in terms of revenues. In terms of profitability, we forecast an improvement. We witnessed 40 basis points of gross profit margin growth in Q1. We have factored a good resilience in terms of gross profit margin growth during the course of the year. Then we have netted the one-off impact of the transaction we had last year in our budget, and then we have added some costs to our projection. Last year, we bought CIFAR and Lidera, and we have consolidated them just for a portion of the year, just for four months. And you have to think of at least close to 3 million euros of operating costs that will be added on a 12-month basis this year, because last year, seven months were not consolidated. We have factored some inflation on personnel costs. As well, especially in Italy, we had a change in the collective bargaining contract, which has a significant impact. And then some adjustments on some investments that we are doing to propel growth in the longer period, especially in services. As per the net financial charges, as I said before, we forecast a lower weight of the average indebtedness during the year, but last year, beginning of the year, we still had lower interest rates, given the mix of sources that we have. This part of the year, we are therefore bearing a higher cost because of this reason, even if we are using significantly less cash. Second part of the year, we expect the combination of an expected reduction of interest rate from the ECB as well as continuing and sustain the reduction of the average net debt to contribute to a reduction of the interest charges. And we are forecasting a sort of stabilization of the losses and gains on on the exchange rate. We are hedging a good chunk of our purchases, but not all of them. It's too complicated to hedge all of them, and sometimes we take an extraordinary profit out of these transactions. This year, as I said, close to a million was generated, 950, something like that, were generated in January alone. And then it was more or less stable during the rest of the quarter. So those are the key assumptions that we were seeing. Depending on the performance of the market, and especially if the market recovers more than expected, things could turn for the better, because on average, we have a contribution to fixed cost equal to Mix of products of roughly 5%, so any 100 million euros of additional volumes is roughly 5 million euros. of contribution to the EBITDA. Obviously, it depends. If you add 100 million euros of smartphones, you contribute probably a couple of million. If you add 100 million euros of services, I will no longer participate to this call because I will be super rich. Of course, it will be 50 million euros of EBITDA. And that's basically what's happening. So, those are the assumptions.

Mr. Ribondi, a question from you. Please go ahead. Remember to open the microphone.

Okay, sorry, I deactivated the microphone. Ciao Alessandro, thank you for the call. Congratulations on the good results, especially producing working capital days. Just a quick question about solutions and services, which have been growing a lot and now represents about one third of the total sales. Do you expect the contribution of solutions and services to grow also in the future more than 30% of total sales, even if we have a recovery of the hardware Components or any of which kind and you expect solutions to grow. So in not easy. No, let's suppose that it's very difficult to say what kind of market knowledge everybody will have next 12, 18 months, but in this. More similar to now, macroeconomic value, do you expect solutions and services anyway to grow? Because we're going to see a lot of P&R and expenditure from the government on the digital transformation and so on. So, do you expect the sector to grow more anyway than the hardware sector in the next 12-18 months or not?

Yes, thanks for the question. Well, the overall weight will depend on the acceleration of the recovery in the PC, especially in the devices. If the devices bounce back, they provide immediately big volumes, not not as much in terms of profitability, but definitely in terms of volumes. What is the fact is that we kept on investing a lot on solution and services, and we are seeing us getting more and more momentum in this market. As I mentioned briefly during the call, during the presentation, We are in this very moment participating to a number of tenders with a number of some smaller but some also significant vendors that are reshaping their distribution network in Southern Europe. Some of them in Italy, some of them in Spain. And more and more, we are visible. We were not in the past. We were not perceived as a solution distributor. And more and more, we are perceived as a solution distributor. The strategy of separating Vivaldi from Esprunet and pushing on the double brand. And of course, the volumes that we have achieved. We are now with gross sales north of 1.1 billion. We are one of the biggest players in the solution space in Europe and definitely in Southern Europe. So this is paying off. And we are more and more attractive for the right kind of skilled people that you need to grow in this area. So we are positive here in terms of our performance, whatever the market will be. As per the market, well, the expectations, as I briefly mentioned before, are that software and cybersecurity to a lesser stand cloud, but also services will remain the fastest growing segments. This gen AI hype is driving a lot of investments. And so there's a bunch of interesting opportunities over there, which will turn into opportunities. As you have seen, we had to start introducing the concept of gross sales because the weight of software and cloud is getting so high that it starts to impact so significantly our as reported figures that we need to make them comparable to the gross sales and which the market analysts report to the performance of the market. And that is a good sign. It means that we're moving in the right direction. The big question mark here is all around the hardware infrastructure. Lots of investments under the next gen EU funds, Pianarara in Italy. And the question is always, what will be the speed and capability of the government to turn theoretical tenders into real deals? And, of course, how many of those tenders will be won by us in conjunction with our customers. That's Spain, which has slowed down, Italy that apparently is accelerating. There are opportunities. The analysts believe that the infrastructure segment will continue to grow, although with a lower grow rate than in the recent past. So all in all, solutions are supposed to grow in the market. And hopefully, we expected to keep on outgrowing the market because of the momentum that I described before. So I think in terms of contribution, in terms of a bidda margin, our solutions should keep on being the star performance within our group. Unless the, probably it will be more next year, unless the wave of AI-enabled PC will turn into a tsunami. If that will happen, as lots of analysts expect, more in the next years rather than in this 2024, then, of course, screens should grow. But on those PCs, AI-enabled PCs, margins are higher because they are more complex technologies. And we'll see. We'll see what happens.

Great. Thank you, Alessandro.

Thanks to you. Ciao.

OK, since 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.