Esprinet (Milan:PRT) Q3 2020 Earnings Call

0:00 Good afternoon and welcome, everyone. Thanks again for joining us. As anticipated, I'm Giulia Perfetti, Investor Relations Manager of Esprinit. I would like to remind everyone that the press release of the results of Q3 and nine months 2020 published yesterday is available on the Esprinit website, as well as the presentation that we will use shortly. On the website, you will also find the podcast of today's call. With me is Alessandro Cattani, CEO of EspritNet. I give him the floor to start the call and present our results. Alessandro, up to you.

0:40 Okay, well, thanks, Giulia. Thanks, everybody, for joining us today. Hope you're all safe. And so I would immediately jump into our presentation. And after the usual introduction, statement on forward-looking issues, I would go straight to our agenda for today. We'll kick off with our nine-month results. In the first slide, we have A short summary of the key numbers that we achieved during the quarter and in the first nine months. Well, the key message is that more and more we are the market leader in the strategic IT supply chain for Italy and Spain. I will dig later on more in the numbers, but very quickly, sales in the first nine months came in at almost $3 billion.

1:45 a strong 13% year-on-year growth, with Q3 up 26%. We have been enjoying the opportunity of having a full range of products, strong availability. and more and more requests from customers and well as a request of support from suppliers who are seeing us as a key player in the industry, solid, reliable, and capable of delivering even in these complex times. The 26% growth in Q3 compares sequentially with the 9% growth of Q2 and 4% growth of Q1. So we're really accelerating. And what's even more interesting is that we grew across all three geographies with a very strong Italy up 10%, Spain almost 19%. But interestingly enough, Portugal is really kicking off after a few years of investment up 70% and with a strong market share growth.

2:56 Market share is another leading point of our results because we posted the best market share results in recent years. Very, very strong performance here as a recognition of our capability of outgrowing the market. Pretty solid cost control, very tight, which enabled to transfer to bottom line the strong sales performance. And that came in with an EBITDA adjusted in the quarter, up 76% and 36% against the nine months of 2019. Money sheet items are very good as well. With our cash cycle average of the last four quarters down at eight days, we have the best performance ever. with a net financial position negative for 14.5 million euros, including more than 100 million euros of right of use of assets.

4:00 So, these liabilities arising from the application of IFRS 16 accounting principle. 183 million euros of negative financial position as of the previous September of previous year. And if I look also, if we look also at what's happening below the EBIT line, continuous reduction of interest charges. We are witnessing constant improvement in our results over there as a result of a very strong net financial position improvement, and also a tax rate in line with expectations against 2019, which was burdened by a couple of one-off items. Now, if we go deeper into our P&L and balance sheet, let's keep sales for a moment.

5:01 I will comment them in the next slide. What's really interesting and important for us is our gross profit margin performance. Although declining in percentage, the really good news is it's only mixed. If you look at our Q3 growth, it's essentially all deriving from PCs and telephones for the vast majority. And if you account for the lower gross profit margin of these two high-volume product lines, and you make some calculations, you will see that the rest of the lines of businesses are have enjoyed, on average, an improvement in terms of gross profit margin.

5:49 And on top of that, PCs and smartphones as a whole had a slight increase as well. After a few years of reduction of the gross profit margin of the different lines of businesses, we're witnessing eventually a stabilization and even a slight recovery. Obviously, the mix is changing towards the lower margin businesses in this quarter especially, but the very strong cost of discipline that we applied translated into a stronger improvement in our EBITDA margin. Costs came in at roughly half a million more than previous year in the quarter, so very small increase against the huge growth of our top line. As I mentioned, the net financial charges are going down. We are cash positive, and there's a couple of comments around our net financial charges. First one is, last year we had the anticipated closure of a long-term financing scheme that we had in place, which we replaced with a revolving credit facility, which is more suitable to fund our working capital needs. And

7:22 the cost, one-off charge of roughly $900K, is a number that we are not bearing this year. But on top of that, we also experienced last year exchange rate losses, which was thanks to the different dynamic of the dollar-to-euro exchange rate this year turned into a positive number. But what's more important? We are now cash positive structurally, and as such, we have a total of more than 130 million euros of midterm debt, long-term debt, which has a cost.

8:08 And we bear a cost of carry because the... Cash at hand available on our bank accounts has a remuneration which is zero. And not below zero, as sometimes in these times you can witness, but definitely zero. So the cost is essentially a cost of carry. And that's, in a sense, good news. It gives flexibility to our very strong financial system. structure, which will help us in driving further growth in the future, hopefully. Last but not least, the net income benefited also from, especially in this quarter, from a particularly positive tax rate, which indeed is more or less our average tax rate, which goes around 26% to 27%.

9:07 Whereas last year, we had a few one-off items. The balance sheet stands with a very solid performance because our operating net working capital was down against last year, more than 140 million euros of reduction. The fixed assets are more or less in line. And as you can see, the net invested capital and IFRS 16 application is now down to €290 million against the net equity of €375 million.

9:58 Everything else is coming from the right of use of assets arising from the IFRS 16 application. And this is the result, essentially, of our strong working capital performance, which we'll discuss a little bit further in a moment. Now, if we move to our sales evolution, a couple of comments here. We are gaining market share in all regions, both at quarter level as well as year-to-date level. If we look at the regions, Portugal is particularly growing.

10:45 As you probably recall, we initiated a few years ago a greenfield operation in this nation. We are now above 5% market share. In September, we hit an historical record of 6% market share and growing. And we're still missing a lot of vendors over there. We're not yet having the right customer base, but we're really making progress in Portugal. We're pretty pleased with what's happening there. Obviously, Italy and Spain are having spectacular traction. In the quarter, Italy was particularly strong, but Spain overperformed during the first part of the year, so pretty good news from a geographical standpoint.

11:34 Excellent news also in terms of product line performance in IT clients and consumer electronics. They're both broadly outperforming the market. The only black spot in all this good news is our performance in advanced solution, which has been below our expectations, recovering in Q3, but still below the market. Here we have a bunch of activities that are going on. Definitely the The performance of our portfolio of advanced solution is not yet optimal because we, at the closing of Q3, we had not yet consolidated GTI, so we still were a little bit underweighted on average in software as well as in cloud solutions.

12:36 From Q4 onwards, we'll have a further boost in this area thanks to this acquisition. And moving forward, we want to grow more and more in this area where we are putting a lot of attention. And lastly, if we look at the customer base, pretty solid performance in IT resellers with a slight decrease against the market in Q3, mostly driven by our sub-depart performance in advanced solution. Whilst in retailers, we are winning market share and outgrowing the market quarter after quarter. Now, let's move to what's happening in the market as a whole.

13:23 In general, one comment here is that the market looks pretty solid. Especially Spain sort of surprised us because when we budgeted our guidance for the year, We were having warnings from our Spanish management team about the lockdowns that were going around the Spanish and Portuguese area. And so they were pretty scared of the reduction of traffic into the stores, especially in the consumer area. So we were a bit conservative. But still, the volumes increased. in the market and then the volumes through us kicked in pretty well. And that has been a good piece of information also for our focus in the Italian market, which is now experiencing the same topology of regional lockdowns that Spain experienced a few weeks before us.

14:32 And so that drove a certain degree of confidence. And what is really interesting The issue in this moment is more the supply of products from our vendors. Not so much because they are in trouble in manufacturing. Sometimes, yes, they have a shortage of certain key components, mostly driven by the really strong demand. demand across the world arising from this pandemic and the general push of families, governments, and industries towards a higher level of tech adoption. But also, and especially their issue looks like a logistic issue with lots of troubles in finding reasonable ways to ship the products from the China, especially Far East in general, to Europe or to other markets for what it matters.

15:34 There's a shortage of airplanes, and in general, the supply chain is a little bit disrupted. So lots of uncertainty over there. Order-taking is particularly strong, but we could have performed, and we could perform much better if we had the products. So we have guided, but we'll come a little bit later on this, we have guided above our previous guidance because we're seeing demand higher than expected, but we're still a little bit cautious because we are witnessing constraints in the level of supply that we're getting from our vendors. Okay, that's for the market and sales. Let's dig into our cash cycle. And here we have our four-quarter average, which is, in our view, a better indication of what's happening as a trend in our performance in the market. For your convenience, we have also added, we'll see later, a slide with the quarter-by-quarter performance.

16:47 which is a short-term gauge of what's happening. But in general, you see that our strategy of ROSI improvement, mostly driven by working capital optimization, is paying off big time. We have hit in Q3 our historical record in terms of cash cycle, down to eight days, thanks to very strong bonds. DPOs, so payment terms with vendors, and solid performance at credit collection with 36 days, sequentially declining against Q2, as well as against Q3 2019.

17:37 But we are also witnessing a very, very strong improvement in our inventory days. Best result since 2015. And moving forward, we are more and more optimistic on what's happening in terms of inventory days. So this is really a key driver of our return on capital employed improvement. If we look at what happened in the following slide at quarter, you see the fluctuations which we have discussed time and again with Q4 as a month of average very low inventory because most of the sales happened before Christmas with Black Friday and Christmas sales, and in business sales, the end-year closing time for budgets for companies.

18:47 But if we look at what happened, you can see that we, quarter by quarter, we moved our DPOs in a range around 60 days, which, as we said, is the industry standard. We, if you probably remember, we mentioned Q2 as an extraordinary quarter where suppliers provided us with extra support in order to address the peak of the emergency. And we said that during Q3, numbers were getting back to essentially to normality, which is indeed happening. But as you can see, inventory days compared to Q3 last year are sharply down. And hence, we see our target of a strong reduction of the average cash cycle strongly far below the historical 23, 28 days in the teens in terms of numbers being really achievable.

20:03 So that's for the comments on our past. Let's move into the future. And so let's look at the return on capital employed. That's the key point in our strategy. Pretty excited with 15.7% return on capital employed driven by both cash cycle reduction and so on. capital employed reduction, as well as a strong improvement in our profitability. We're witnessing the best return on capital employed on record.

20:51 And compared to an 80% weighted average cost of capital for our company, I think we are on track to look the right way into our future. which is again linked to return on capital employed. And so please, if we, Julia, if we can skip to our strategy. Our strategy is driven by return on capital employed, and we really have witnessed an improvement, mostly driven by capital employed optimization. And moving forward, we really see this area as an area of optimization rather than strong improvement.

21:44 We think moving forward of a cash conversion cycle optimization with a Industry standard levels in inventory days is our target. That means moving from 40 days to low 30s as our midterm goal. Keeping the ESOs stable at the existing level and EPOs stable on the on the industry standard level that we have more or less achieved. There's still some room of improvement on faster credit notes collection times and some opportunistic extra payment terms, but overall we are more thinking about optimization rather than further improvement moving forward.

22:29 And definitely, here we are trying to grow businesses which imply low working capital absorption. Well, definitely, and we'll go back in a second to this, the consumption models, cloud devices, series, and so forth, outsourcing, which is mostly services, but definitely PCs and smartphones are low cost to serve, low working capital product lines, with low margins, obviously, but they really are giving us a strong boost in terms of optimization of our capital employed. But moving forward, our strategy is really centered around profitability improvement. What we are doing now, definitely pushing more and more on customer satisfaction. The growth of our market share and the stabilization and more than one area improvements of our gross profit margin we believe is a function also of the improvements that we are having in our customer satisfaction levels. Customers and vendors alike are seeing us more and more as a reliable partner, one of the most, if not the most reliable partner.

23:44 So we want to turn this as a way to improve our profitability. PC's and smartphones should bring in volumes without additional fixed costs. And so they should help in terms of activating the operating leverage. But definitely our focus will be moving forward on advanced solution as well as consumer electronics high margin niches, both organic and with inorganic growth. Those are the areas. The acquisition of GTI, the recent acquisition of the remaining stake in all going in the direction of pushing more and more on the pedal to accelerate in the growth of these areas, which are of paramount importance for our strategy moving forward.

24:42 Looking a little bit more in perspective, the consumption model with the cloud devices service and managed print services to grow profitability are areas where in the future we'll put more and more investments and attention, as well as in the outsourcing, logistic, and marketing activity on behalf of big customers as well as vendors. because there's a lot of added value in the tech sector, and we think we could get a slice of that pie without necessarily playing the game of downstream or upstream integration, becoming a system integrator or a retailer competing with our customers, or becoming necessarily a manufacturer, a full-fledged manufacturer.

25:34 And that's for our strategy moving forward. So let's go to our final remarks and our outlook. While we revised upwards the guidance, revenues above $4.4 billion. As I said, we are witnessing demand above expectations, and some of it is really kicking into our top line pretty well. On the other side, we still have some concerns on the product availability, especially on PCs and smartphones. We have very high levels of demand, and so that is not coupled with enough product coming in from vendors.

26:28 That's why we have kept a $4.4 billion revenue target as the minimum threshold. If products will kick in above our expectation, we could have better numbers than these ones. On a technical note, this $4.4 billion is now including the GTI Q4 figures. Please consider that because of IFRS 15 application, a significant portion of GTI sales are cloud sales, and for the IFRS 15, they will be reported only as margin and not as revenues.

27:19 So the... Goods shipped or contracts generated could be higher, but then a portion of it will disappear because only the margin will be posted in our gross profit margin. A bid adjusted jumps above €62 million, again with good expectations in terms of demand and a question mark on our top line. We're also witnessing good traction in our mix of products so far, but we have to see if really the products will come in and will help us drive EBITDA above our minimum threshold of 62 million euros.

28:06 As I said, in these numbers, we are factoring more and more the customer satisfaction projects implementation, which are delivering the good results that I spoke about a moment ago. And hence, we really believe this will and should sustain our long-term profitability. Cost control. Cost structure is well under control. Obviously, with the lockdowns, situation is tough on one side, but costs are lower on the other side. But we have really had a nice performance in terms of keeping a lead on costs. And we keep on working on multiple projects to optimize our performance, also driven by the experience of having this extreme work-at-home behavior. Well, in terms of demand, one comment, the The second wave of COVID and the partial lockdowns that we are witnessing could theoretically impact the consumer demand.

29:19 But so far, we are not really witnessing such a problem. What we do believe could theoretically impact the infrastructure sales in Q4. with businesses to delay investments, not because they don't want to invest, but simply because they have constraints in getting the projects delivered. But on the other side, we think that this should be a further boost to our cloud services and subscription models sales, leveraging web across the industry, the workloads in on-premise infrastructures linked to other workloads moved in cloud. And thanks to the acquisition of GTI, we do believe that we could really profit from this possibility.

30:19 I already spoke at length about the availability of PCs and supply and smartphones. One last comment on M&A. The M&A we already did with GTI already consolidated since October 1st. The integration is moving smoothly ahead. We really are looking into the opportunities of leveraging the market polar marketing and sales opportunities that we are developing with our new colleagues of GTI. But we see opportunities of further consolidation in the future, so we keep an open eye on M&A Driven also by our very, very strong balance sheet and the momentum that we have in the market.

31:21 Midterm, the ICT market looks very strong with lots of further growth. tech adoption across all nations and especially in governments that need to revamp their digital infrastructure as well as families and industries. So the mid-term environment is particularly attractive. More and more products driven through distributors are We are in a very strong position over there, so very good mid-term expectations out of this strong quarter. And let me thank all of our team and all our partners, customers and vendors.

32:11 who helped us achieve these strong results. Believe me, it has not been easy dealing with this huge growth in such a complex environment, but the team has been truly fantastic, and I'm honored and humbled to represent them in front of the investor community. Well, that's it for our presentation. I turn now the floor to a course call for the questions coming from you. Thank you very much. Thank you, sir. Excuse me, this is the course call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchscreen telephone.

33:01 To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Nicola Storer with Tetler. Please go ahead, sir.

33:20 Yes, good afternoon. Good afternoon, everyone. I have three questions. The first one is on... pricing on PCs we are hearing from retailers that they have cut promotional activities and discounts clearly given the very strong demand and I was wondering I missed the first part of the call so maybe you already answered this question I was wondering if you as part of the chain also have kind of benefited from this trend that we've seen at retailers.

34:07 The second question is on the performance of advanced solution in the third quarter specifically. I see that, for instance, the trend in software services and cloud as kind of inverted versus H1 from plus 21 to minus 7. And so I was wondering if you can a little bit comment on that. And the third question relates to your gross debt and cash position. And so I was asking if you have a sort of threshold in mind above which you might think about reducing your gross debt and gross cash. Thank you.

35:07 Okay. Thank you for the questions. Well, on the first point, pricing on PCs, yes, indeed, we are witnessing an excessive demand coupled with lack of enough supply. This is probably beneficial to retailers especially. On average, we are on, especially on larger PC sales through retailers, we have sort of fixed gross profit margins, fixed or more or less stable gross profit margin. So we are not benefiting too much of this area, of this opportunity. But on the other side, it is indeed true that in this situation, being the strongest partner in the market with the highest level of availability gives us a little bit of further opportunities in terms of higher margin in reseller sales because sometimes we are able to skip aggressive competitive pricing to get demand in.

36:29 So, in general terms, we had stable to slightly improving margins on PCs, but this is a trend that we have witnessed for the last quarters. As for the advanced solutions, it's the only spot where we didn't perform as likely. The market inverted its position Its trend was up 3% in the quarter, and we were up only 1%.

37:19 Sorry, the market was up 6%, we were down 7%. It was not as we expected. We do miss the level of know-how on cloud solutions that we are bringing home through the acquisition of GTI. What is interesting is that we are launching a bunch of new initiatives which are due in the next days in the market, commencing from Italy, and there's a lot of focus here. But definitely this is an area where we have to improve.

38:07 As for the gross debt, yes, indeed, we begin witnessing an increase We are far questioning among ourselves if our capital structure is excessively cautious, because with 375 million euros of net equity and with an average operating net working capital, which is still below this amount, significantly below this amount. Having an excessively high cushion of a median long-term debt, which entails a cost of carry which is is north of a million euro per year is an interesting question. It is true on the other side that there are multiple ways in which we can operate.

39:13 One is definitely we always want to keep a good level of security in our numbers so that we can We can profit from opportunities in the market on one side and weather storms that sooner or later always happen on the other side. We have been growing at accelerated pace in these last years, and so we want to also have the right level of support to keep everybody happy about our possibility of driving growth. Also, through acquisitions, last but not least, we have an historical dividend policy which we interrupted this year because of the pandemic, and there's always an opportunity of rebalancing the situation in that area. So, yes, it's something that we're looking into, but so far we think we still have a reasonable opportunity and cautious situation that is giving us a lot of leverage also with our vendor partners which feel secure that the company is spending a little bit more but has the liquidity to cover all the needs without any problem.

40:40 Brilliant. Thank you. Thanks to you. The next question is from Gabriele Berti with Intesa San Paolo. Please go ahead, sir.

40:51 Good afternoon, everybody. Thank you for the presentation, and congrats for the very strong quarter. I would like to understand a little bit better your expectations for the last quarter of the year. Your updated guidance, considering the threshold you mentioned before, implies a growth of about 7% in terms of top line in 4Q, while it implies a decrease in BTDA. I mean, if I understand correctly, you expect a 4Q EBITDA of about 20.4, 21 million to reach that threshold dimension of 62 million, compared to an EBITDA of around 25 million posted last year in 4Q. What I would like to understand is if your guidance is just very conservative or if you are experiencing some decline in profitability in this month in FUQ. And second question, if you can provide an update on SEDRI performance. Thank you.

41:58 Yes. Well, on Q4 expectation, in top-line performance, I think I commented quite broadly, the performance could be much better if we had the products. But that's not in our hands. We see and we work on demand generation and in... getting the right share in the market, but then it's a matter of having the product, which we are having, obviously, because we plan growth, but it could be theoretically more if we look at the market conditions, but we have a big question mark on availability.

42:44 As per the profitability, well, there's always a little bit of... staying on the safe side, especially because every year we have at the year end our calculation on the credit notes. that were accrued years before and we have to release and each year we have always to calculate how much of this additional extraordinary profit that derives from our accounting policies is. can kick in, and we don't know it until the end of the year.

43:32 On average, it's always 1, 2, 3 million, and it could change year by year, and it could impact 1 or 2 million easily on the final results. And last but not least, you mentioned Shelley. Chely is the only area of the business, not so much Chely in itself, the business entailed by Chely, which is under really, really tough pressure. It's the only area that we're witnessing still far below previous year because the market is really constrained. It's a very tough market. If you look at pure players here, they're all struggling here. And Celli is a very, very profitable entity when it drives good sales. So we are playing a little bit on the safe side also because we don't expect Celli to perform particularly well also in Q4, the Celli division. And then from next year, it will be merging into Esperanto.

44:39 It will become, at all means, a division of Esperanto. But... Those are the reasons behind the expectations and the performance expected by Celli. Thank you. As a reminder, if you wish to register for a question, please press star and 1 on your telephone. For any further questions, please press star followed by 1. Gentlemen, there are no more questions from the call.

45:32 I think there's a question from the web. from Mr. De Ranieri of Aldemarle. Could you please give us some favourable numbers on October sales? First and second, is there any reason, special effect, why EBITDA adjusting Q4 should be lower compared to before 2019. Well, on the second question, I think I gave a feeling of how we guided for the year, for the last quarter. And on the October sales, well, the demand has been better than expected. So...

46:24 We are guiding an increase in volumes for the full year. That means that we expect the quarter to run at least single digit. And that's the most that I can say on October sales, unfortunately. For any further questions, please press star and 1 on your telephone. Mr. Caccani, Mr. Fetti, there are no more questions registered at this time.

47:11 Well, thanks, Ben, everybody, for joining us today in this call, and hope you stay well and safe, and Let's speak again at the next presentation. Thank you. Thank you, everybody, and bye-bye.

47:34 Thanks to all. Bye-bye.