Esprinet S.p.A.

Good morning, everyone, and thank you for joining the Esperant Group Q1 2025 results presentation call. I'm Giulia Perfetti, Investor Relations and Sustainability Manager of Esperant, and with me is Alessandro Cattani, CEO of the group. Before going into the details, please note this webinar is being recorded, and after the call, the podcast will be posted on the Esperant website in the investor section together with the presentation. During the speech, your lines will be on listen-only mode, but at the end there will be a Q&A session. 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 regarding the information contained within the document. I will now turn the call over to Alessandro to present and comment with you the Q1 2025 results.

Thanks Giulia. Hi everybody and welcome to this new presentation for our Q1 2025 results. So let's jump into the numbers. The highlights of the quarter start with one positive piece of news. Sales performance was pretty positive for the group. And this is confirming our positioning in the key markets where we operate. What is even more interesting is the fact that the Q1 data market-wise confirmed that the overall ICT spending environment is in good shape. We have recorded and reconfirmed the recovery in consumer demand, the return of growth of the PC segment, and the excellent performance of the market in the solution segment. Even more noteworthy is the performance of the Iberian Peninsula, where last year we recorded a minus 12 percent market-wise, and this year we have sharp growth, high double-digit. Things are moving on pretty well. We grew in all regions and essentially in all product and customer service. We'd like to draw your attention on V-Valley, our value-added distribution branch, and Zeliatek, our green tech distribution branch. which respectively grew 12% and 16% against the last year. As you probably know, we have embarked into a multi-year transition from a volume distributor into a value-add distributor. And the numbers in this area, both at the revenue as well as profitability level performance are pretty good. transitioning, and therefore, there's still quite a drag on our numbers from the volume numbers, the area distributed under the brand Esperant. So, screens, PCs, smartphones, and devices, more or less everything else, consumer electronics, accessories, and printing devices. Gross profit was up 2% against Q1 24, with the gross profit margin at 5.65. The challenging portion of our numbers is at the bid level. A bid adjusted and a bid are the same, there's no adjustment, 10.8, and that was impacted by the high growth of our GNAs, and I'll come back later on more color on what's happening in the cost section, there's a huge impact on inflation on the EBITDA as well as EBIT margins linked to the on one side collective bargaining agreements that have been raised quite sharply in the second part of last year. This first part of the year, and definitely first quarter, is impacted by this year-on-year inflation on wages that's also indexed costs on our rents that are then converted into both depreciation and financial charges according to the IFRS 16 accounting principle. We are experiencing a lot of pressure in that area. We have also had some seasonality in our cost structure, but I come to that in a moment. Cash conversion cycle is pretty much stable at 24 days, two days compared to Q4 24, but that's mostly seasonal and unchanged compared to Q1 last year. Therefore, there's, as usual, a sharp increase in the net financial position of Q1 against the end of the year. Return on capital employed is unchanged against March last year. Looking forward, data for the market as of April, preliminary data are pretty good. Italy apparently market-wise grew 1.6%, and Spain 4.5%, or 4.6%, and Portugal double-digit. And we have recorded solid growth, really solid growth. And this will be a sort of a theme, a narration that we will have probably during the rest of the presentation in the year. Let's move to the sales evolution and let's comment on this. We continue to execute the business strategy well in terms of volumes as well as growth profit margin. Portugal, after a tough year of restructuring, is back on profitable growth this time. Having shared a portion of low margin and high working capital absorption businesses, Morocco is still outgrowing the market. Italy is flattish in terms of market share, and Spain is down in terms of market share against the market, but essentially, because of the smartphone performance, without smartphones, we would have grown more or less in line with the market. And again, you see down on solution and services and green tech, we then have the market split into the two areas. But as you can see, we are growing in line with the market. And again, what we are seeing in the market is a market that is recovering. Albeit a very, very challenging and confusing macro environment, the expectations for the year are still pretty good in terms of market performance and of our performance within the market. What is challenging is the inflationary environment that we're dealing with and the unpredictability of the market, which is creating a number of extraordinary pressures to our vendors They don't know how to allocate their budgets across the world, so there's a disproportionate pressure on sending products to Europe. We're fighting a hard war to predict the market and keep the working capital at bay. The unpredictability is absolutely outstanding, incredible. Just to give a figure, we recorded high double-digit decline in February revenue-wise, followed by high double-digit growth in March. It's really tough for the channel to forecast what's happening and therefore, manage what is already difficult in normal times to manage our working capital. So that's the thing. That's a bad thing, but also a good thing because having an healthy environment and having a sales and marketing strategy that is performing well is good news. We have to work internally on addressing this inflation and the working capital issues. This is something where we feel more confident that we will be able to do it because it's part of our DNA. But we'll see it in a second. So let's look at the Three pillars or three dimensions, S-Prinate, that means volume distribution, PC and smartphones in the screens area, devices, so consumer electronics and printing and accessories. Then V-Valley, value-add distribution, solutions, server storage, networking, software, cloud, cybersecurity, and services. And then the green technology is distributed by Zelia Tech. Revenue-wise, as you can see, we have pretty solid growth across the line. The EBITDA adjusted is affected mostly by the higher wave of inflation. the fixed cost on revenues, which drag on all product lines. Gross profit wise, all the lines of businesses grew with the only exception of devices, which keep being extremely challenged, especially in the TVs as well as white goods area. But everything else grew in terms of gross profit margin. And even though there was a higher level of cost associated to the business, you can see that there was a pretty, pretty good performance. Take a green tech, for instance, Azalea Tech, they even grew. against the first quarter last year. Zelia Tech has a very peculiar distribution of gross profit performance across the year. There's a lot of so-called back-end margin that is linked to volumes and which is, from accounting principle perspective, accrued only when we have 100% certainty of getting them. That normally happens either in Q3 or in Q4. But like for like, we're growing in terms of gross profit pretty healthily, considering that they had to absorb, as the rest of the business is, quite a big amount of costs. In devices, we also have our own brands. Our own brands run a budget of advertising. And we had a concentration of costs in the first quarter. So, also the Q1 is abandoned with disproportionate amount of cost, advertising cost compared to the rest of the year. What I can say is we are in, as of Q3, we are above budget in terms of performance. because of this seasonality. If we go to the P&L summary, and we dig into the cost structure, we see that the gross profit was down essentially nine basis points, mostly linked to mix and especially to the lower gross profit margin in devices. This is particularly noteworthy because we have been using more factoring, so there were more cost of factoring costs booked into gross profit, even if the factoring Costs percentage-wise were down because of lower interest rates. On the other side, we had another big impact of inflation on freight, especially in Italy. And although we had all these impacts, The big net effect on gross profit margins was essentially related to the different product customer mix. As I said before, all product lines with the only exception of devices and in devices mostly linked to TVs and white goods were up in terms of gross profit. SG&A is impacted mostly by a sharp growth of our personal costs linked to this collective bargaining agreements increases that were active since Q2 last year. We had the advertising expenses on our own brands, which I mentioned before. We had somehow higher impact of variable costs on sales. We grew sales, so there's a little bit of impact also on variable costs. Variable costs account for roughly 50 basis points on revenues. Then we add to bear costs linked to regulations. ESG regulations, and then we also had to beef up our cybersecurity costs. And we're starting to deal with certain artificial intelligence projects, mostly aimed at improving productivity, we're now going live in Q2 with some of these activities, which should bear results, bring results during the course of the year. As you can see, we have roughly 34 basis points of higher GNA on sales, and that is reflected mostly on the lower percentage of EBITDA. In terms of EBITDA, we have the higher depreciation of the right of use of the new warehouse in Tortona, which was fully operational in terms of cost since Q2 last year. We bear also here the higher impact of depreciation linked to the revaluation of the rents that we pay linked to inflation. In terms of net financial expenses, you see the higher impact of IFRS 16. This is partly linked to the cost of the Tortona Logistics Hub in Italy, as well as the level of utilization of... Sorry, the level of... higher rents that I mentioned before, linked to inflation. As per the other financial income and expenses, interest rates started to decrease. We will probably see improvements during the course of the year. We have a positive effect linked to short-term financing, but we have also a bunch of mid- and long-term financing, which aspired and progressively is renewed at higher levels of cost. Here, we add essentially higher cost because we use a bit more of average working capital during the quarter. And then we add gains on foreign exchange against losses of last year. Income taxes are substantially unchanged. As long as there's a different mix and weight of the different companies, the nominal group rate is higher. And that's for the P&L. If we go into a balance sheet, here we can see the performance in terms of working capital. There are basically two effects. One is linked to inventory. We had a higher inventory against the last year. We are facing a monumental pressure from all vendors to ship the products. They are convinced that the market will absorb them. That's an enormous question mark on where exactly and when. In Q1, February was down double digit, March was up high double digit. So it's very difficult to forecast. We're trying to balance the situation with our suppliers. And we are also having a different mix with more sales in the value spaces or value add where we normally run a lower levels of inventory and so lower levels of financing from vendors. Here we are. in the middle of a major and ambitious project to completely redesign our inventory planning methodologies. We have trained all the people in our group, more than 200 people in purchases. We are working with a consulting firm. We're buying new software to work on working capital management. And so we expect working capital management metrics to improve during the year, albeit the variability that we are experiencing in the market. We have grown in volumes, revenues in the retailer space, and so we have increased our factoring programs. If you look at the numbers, we go back to 2018 in terms of a graph, you see clearly the evolution in time, the level of inventory was down during the pandemic years then was up. We're basically back to around 2018 with a very different mix. got a very high support from vendors that moved from 55 to close to 90 days in terms of payment terms. But we had to bear higher DSOs because moving towards value at distribution over there, so far, we're not being able to factor receivables as we did and as we are doing. with the consumer portion of our sales. If you look at the following slide, the quarter end metrics, you see the high variability. We're back to 37 days against the 26 of last year, 41 of Q3. and mostly linked, as you can see, to partly DSOs and lower support from vendors, mostly linked to product mix. And this eventually impacts on our return on capital employed, which is back to the pre-pandemic period. We're working on redesigning, as I said, We began last part of last year. completely the demand planning processes and the interaction with vendors. Because with the new distribution setup, we have more skewed towards value at distribution. We think we need to change the dynamics and this will hopefully bring good results in time. So now let's focus on the what's happening in the future in our view. So first and foremost, the backdrop, we already discussed about what's happening. Even if there's some major uncertainty linked to well-known American policies, both we and the sector analysts look at a future which we think should be good. There's been no fundamental changes in the overall structure of the industry, and we all remain pretty positive for the current year. As a matter of fact, the performance of the market of the first three months and our performance in the market in the first three months, as well as the preliminary figures of April, What we're seeing, by the way, in May, all point in the same direction. Market looks good. Extremely variable, unpredictable. trend line is very positive, and that's driven by the same things which keep on being reconfirmed time and again. We have seen and we keep on expecting good growth in the PC segment, where we have the refresher cycle after the pandemic, and we have also the Windows 10 end of life. We have witnessed a recovery of consumer demand, which for our volume distribution portion, which is still huge, it's a good point. More importantly, investment by companies and governments in the digitalization of their processes, the investments in cybersecurity, the first projects in artificial intelligence They are all running well, and analysts keep on estimating the low or mid single-digit growth for the current year for the market. Things are moving in that direction. What is about pricing policies from vendors? Well, we are not impacted by tariffs. Well, actually, nobody really knows what the heck is happening with tariffs. They keep on going up and down. Anyhow, assuming that there will still be a tariff war, this is not impacting us at all directly. Because almost nothing is really manufactured in the US. There are very, very few exceptions, supercomputers, for example. But the vast majority, if not everything that we distribute, although sold by American companies, is manufactured and shipped by their Far East or Eastern Europe subsidiaries. So no impact on tariffs. And less component costs increases over time. Apple apparently is thinking about a price increase, which is not really linked to tariffs, it's mostly linked to the components costs. The real question mark is whether there will be a recession or not, or a slowdown, if not a recession, a slowdown in growth. And that is an indirect effect of the incredible volatility and uncertainty in the market. So far, consumers are still spending. Most of our customers are telling us that the demand from their end users, companies in this case, is still pretty solid, even if, of course, everybody is extremely worried. And those companies that are either heavily reliant on exports to the US or are invested in the US have no clue whatsoever what to do in the future. And that could be a drag mid-long term on overall demand, but not in a sense, a result of the IT sector as such, but more broadly, an impact on the economy. The data for April, as I mentioned before, are pretty positive, and we have recorded very solid growth. So we're seeing a sort of schizophrenic behavior in our group. We're having a top line and gross profit margins that are performing pretty healthily in a reasonably good environment, which is still forecasted to be pretty solid and growing. Then we have this uncertainty impacting the behavior of the suppliers on demand. demand, and therefore, on working capital planning on one side, and then on the other side, we have inflation that we're addressing. That's what drove our 2025 group guidance. If we split again our activities within the three branches of our group, we have the Esperance segment, so screens and devices, where our focus is on improving first and foremost working capital with all the big projects that we have in place to improve the situation. We are in active discussions also with vendors to have them share the burden of this uncertainty and not trying to push it down the line and therefore on us. Then we keep on working on optimization of our cost structure. It's already streamlined, but we keep redirecting people from Esprit to Vivaldi or Zeletec whenever and wherever it's possible. And there's a number of AI tools that we're delivering into operation, moving into operation that hopefully should address certain activities that are semi-manual and turn them into a more automatic structure. The V-Valley segment, so solution and services, here we are hitting on all cylinders and our focus here is getting new distribution agreements, growing market share, possibly also targeting acquisition in either geographies already covered or new regions. We keep on being engaged in discussions. There's a lot of uncertainty, so we are really cautious on where we move, but we see opportunities of growth. Zeliatek, the green tech segment is advancing in its accelerated growth, we're sizing market opportunities, and we're looking at expansion also through acquisitions. Zeliatek is definitely focused at expansion not only in Italy, but out of Italy, of course, with Spain, Portugal, where we need to move as soon as possible, and hopefully other regions of Europe. The real big point that drove us to issue a guidance, which we consider in brackets prudent, cautious, is the fact that we have this very uncertain geopolitical and macroeconomic scenario. Things are moving well. We don't really understand what's going to happen. It could turn suddenly to an excellent year if worse stop and the tariff wars subside and new agreements are reached and stability is back on the table of decision makers among our suppliers, our customers, and the end user market especially. or it could still be a challenging environment. We are faced with a challenge on absorbing the inflation costs, but here, let's say Cost management is part of our core competence. I think we will be able to do a good job in the coming month. We are redesigning working capital and having also a decrease in interest rates. We should be having improvements during the course of the year. For this reason, we have provided cautious guidance between 63 and 71 million of EBITDA adjusted compared to 69.5 of last year. Within these targets, we have stronger objectives of both cost optimization and definitely improvement of working capital. We really are focused 100% on this area. That's basically where we stand. Thanks, everybody, for listening to this presentation. And let's start with the Q&A session. Giulia, up to you.

Thank you, Alessandro. Yes, 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. First question from Mr. Storer. Mr. Storer, please go ahead.