Esprinet S.p.A. (PRT) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to the Esprinet Group H1 2025 Results Presentation. Today's call is being recorded, and the podcast will be posted on the Esprinet website in the Investors section together with the presentation. [Operator Instructions] 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 this document. I'm Giulia Perfetti, Investor Relations and Sustainability Manager of Esprinet. With me is Alessandro Cattani, CEO of the Group. I will now pass the call over to Alessandro to present and comment with you the H1 2025 results. Alessandro, up to you.

Thank you, Giulia, and welcome, everybody, to our H1 2025 results presentation. It's a pleasure to be here. There are some calls in which numbers are okay, somewhere, unfortunately, numbers are subpar. And then you have calls like this one where we are proud to introduce to the financial community what we consider an excellent Q2 with very good forward-looking indications on Q3. So let's jump straight on, on the highlights. As you can see, Q2 continued with the strong revenue growth path that we recorded in Q1, so roughly 5% year-on-year growth in Q2. What is worth noting is that the Iberia Peninsula distribution market continued to show significant growth in Q2 2025, Italy was more or less flat year-on-year, and we achieved an overall growth as a group of 5% in these 2 regions combined. We had very, very strong Q2 profitability, which offset a rather weaker Q1 and turned H1 2025 back to profitability growth. That's the combined result of good top line performance but especially very, very solid gross profit margins and a very strict control of our cost structure. Cost optimization and as a matter of fact, effective management of the structure are back in place as promised. As you might recall, we suffered in Q1 of a rather unusual spike for our standards in costs, plus 12% against the previous year. But we were able to drive very, very solid cost control in Q2, and we're fairly optimistic moving forward. And that all together drove a very strong Q2 with EBITDA up 38%, EBIT adjusted, which is equal to EBITDA in Q2 '25, driving the semester up 2% compared to the same period of last year, so up to EUR 25.1 million. If we look at sales, as I said, they grew as a whole, 5%. But it's worth noting that the V-Valley division recorded a very strong 12% growth in gross sales in H1 '25. We are winning market share in the solution market hands-on, so we really are happy about what's happening there. And even more so, the Zeliatech division, our division in charge of the green business, solar specifically, more specifically, grew really brilliantly, 26%. Gross profit margins were up significantly, both in absolute terms but what's more important, we have recorded further acceleration of our gross profit margin, which now is close to 6%. I remember that we were in the 4.5% range just a few years ago. So our journey towards higher-margin businesses is really paying off. The only area where we still have work to do is the cash conversion cycle, which on the moving average last 4 quarters is up 7 days. And hence, the net financial position is still negative, slightly better sequentially than in March but as always, much worse than end of year and against last year. And that, of course, drove the return on capital employed still at 6.6%. But we'll dig into this a little bit later. What is really interesting noting is that both July and August saw a very, very strong momentum in our sales, both for the industry, where analysts remain confident of the second half of growth for the ICT distribution market. And by that, much lower rate there. They are talking about 3% to 5% growth rate compared to what we recorded in July and August, and we have seen a very strong start of September as well. That is driving optimism to achieve, let's say, the upper end of the 2025 guidance range that we deliver. So let's go into the numbers, and let's start with the sales evolution. As you might remember, we're now reporting gross sales as well as net sales, the difference being revenue recognition on one side but especially the impact of IFRS 15 accounting, which is particularly significant, almost entirely attributable to the Solution and Services because it's mostly related to sales of software and to a lesser extent, cybersecurity and cloud solutions. You can see it in the second group of figures, screens and devices, gross sales and net sales are almost identical and same goes for green tech. It's mostly solutions and services. So we provide the 2 figures, especially because the market figures are all measured in gross sales by the market analysts. And therefore, the comparison is provided in this form. Italy in Q2, we grew 2%, and we won share against the market, against our competitors. Spain was up 2% against the market up 7%. And here, again, it's mostly a matter of mix. You can see down that we are progressively walking away from the lower-margin business of retailers and e-tailers. Market grew 6%. We were down 9%. But on the other side, market was up 2%. We were up 8% in a much more profitable IT reseller business. Portugal is going on with its strong recovery after the restructuring that basically entailed shutting down the vast majority of low-margin businesses. And Morocco had a weaker quarter in terms of growth but on the half, we're still up a healthy 21%. So that's for countries. As you can see on screens and devices, we keep on underperforming the market because we keep on progressively walking away from lower margin but especially high working capital consumption businesses. With on Solutions and Services and Green Tech, we are outgrowing the market big time. And that's for the sales evolution. As I mentioned before, the market, you can see the distribution trend on the right side. The market is flattish -- is flattish in Italy. It's expected to be slightly up 2%, 3% in the second half, where Spain is still performing much more. The -- if we look at the performance, now we can move to the following slide. If we look at the performance in terms of profitability, we see that the Esprinet division, which is in charge of screens, so PCs, smartphones and devices, consumer electronics, printing and everything else, which is not in a data center, was up in terms of revenues, 3.7% against -- sorry, EUR 3.7 million, up 1% in Q2 and was essentially flat on H2 level. The profitability in the quarter was up 23%, thanks to improved -- significantly improved performance in the screens EBITDA margin and again, struggling profitability in the Devices segment. Devices is the area where you can see we keep on reducing. We're cutting a number of businesses which have proven not profitable enough and especially cost consuming. And on the other side, we see a good recovery in the PC market. I can say that what we were expecting for the second half of the year, so a rebound of the PC market driven by, among other things, the Windows 10 end of life, which is due by November is effectively happening. In Q3, July, August, first days of September, we are seeing high double-digit growth of our PC sales. So really, apparently, the market is moving here. With the performance of AI-enabled PC is not really measurable so far. The V-Valley business, blend of Solutions and Services is really performing brilliantly, both in terms of revenues, up 16%, but even more so in terms of EBITDA margins. Margins are really good. And we grew EUR 3.4 million the EBITDA in Q2 alone. And if we look at first half, we're up 26%, again, with very strong performance in terms of EBITDA margin. The Green Tech market is up 30%. We are struggling to get the products. We -- it's the only area where we have a shortage of products. Otherwise, margins could have been much bigger volumes and margins. The Green Tech business is affected by very strong gross profit margin seasonality linked to purchase volumes targets, which we normally achieve during Q3 or more often in Q4. So profitability here is relevant up to point. But all in all, I would say that our strategy designed and announced now, I would say, 4 years ago of a progressive shift of our focus on accelerated growth in the Solution and Services and since a year, green technology as well is really paying off. As you can see, the Solutions and Services contribution to total EBITDA is now close to 80% in the half -- in the first half. So really an excellent performance. We are working progressively on shedding the low margin and high working capital absorption businesses. It's a slow process because we have to balance the overall cost structure but we are moving in the right direction. And by the way, we think that some of the combinations of products and customers will eventually come to consensus and accept to provide us with better conditions. Otherwise, they will see that we are serious in walking away. Okay. Good. We can move to a couple of words on the P&L. Well, we discussed on the revenues quite extensively, gross profit margin-wise, we moved in the half from EUR 567 million to EUR 574 million. So we keep on growing but there was a very good acceleration in Q2 from EUR 559 million to EUR 583 million. We are also running on a contribution that comes from the financial charges of the nonrecourse factoring programs that we book into the gross profit, partially in the gross profit and then the implicit insurance cost in the SG&A, so this is helping as well. But the product mix as well as the performance like-for-like on other lines of businesses, including PCs, is pretty good. So this focus on selective growth on better lines of businesses is paying off, and we're really happy that this is happening. SG&A-wise, I recall that during Q1, we had a 12% growth in our SG&A. In this quarter, we are up 2%. And if you look at the growth in our personnel cost, actually, there was a decrease of 2%. We have exerted a very strong discipline in hiring. We are reducing the headcount. And we have been able in the quarter to absorb the impact of the carryover into H1 '25, the collective gaming agreements increases that we had since Q2 last year. Other operating costs are impacted by the advertising expenses. We had a spike sort of seasonal shift from Q4 to Q1 in the advertising expenses. That was part of the reason we had a 12% growth in Q1, and we are back to normal seasonality in Q2. We should have an advantage in Q4 because we will book less advertising expenses. And we had the -- in absolute terms, the higher impact of variable cost on sales because of higher volumes, even if the percentage is stable. And we had more tech expenses incurred both to respond to ESG regulations and to finance certain projects in cybersecurity, which we have delivered internally since Q2 this year. EBIT is growing 65% in the quarter and the depreciation is now a flat standard number. We are measuring an impact related to the depreciation of the right of use of the new Italian warehouse in Tortona. From IFRS 16 interest expenses point of view, the EUR 400,000 you see more against last year in the quarter are mostly linked to this Tortona investment. We had some higher income expense -- financial expenses. Although we are measuring lower interest rates, we have begun to see a decrease in our interest expenses. We used more working capital and therefore, more financial resources. We had a very good impact on foreign exchange gains, and they are all related to the roughly 5%, 6% of our purchases that are made in U.S. dollars. The vast majority, 95% roughly is euros. And on income taxes, the tax rate for individual companies is substantially unchanged. There's a different mix at the aggregate level because of the negative taxable income of some subsidiaries that were reporting losses. But all in all, we had a very good quarter. Okay. If you look at the balance sheet, here, it's -- as I mentioned before, we are having an operating net working capital, which is decreasing against March '25 but it's -- and it's flattish on September '24 but it's still higher than June 2024. There's always seasonality against December. So that is not a particular surprise. We are focused, and I want to stress it again on reducing the inventory on one hand, and we're making good progress, I would say, in Q3. And we're working to get longer DPOs on those vendors that are providing us with businesses that are not structurally attractive. We have used factoring programs in June this year for EUR 347 million against EUR 334 million of last year, so essentially unchanged. The key point is as we see traction in 2 main activities, growth in the high-margin businesses, both in terms of revenues and in terms of profitability and hence of EBITDA margin and EBITDA in absolute terms as well as having the cost structure under control, we have more breathing space for being faster and more aggressive in rationalizing our offering, reducing the businesses that are structurally high absorption working capital ones. So the guidance is basically -- when we issued the guidance, it was mostly on the back of extremely uncertain, let's say, backdrop from a macro perspective. This perspective, in a sense, is still there, especially on geopolitical tensions. But on the other side, we have seen the market being more responsive than what we feared. So on this we saw a plus, we have performed better than our budget so far, also in light of what we have seen in July, August. And therefore, we are positive on moving up. We have not raised the guidance, the upper limit because of this willingness to rationalize our offering that might offset the turbo growth that we are seeing in this moment. So, so far, unless the market has problems in the second part of the year and hope not, all signs point to good performance. We were more positive than before. The end result will be a function of what happens in the market and the speed of the rationalization of our offering. And this is linked essentially to what we keep on seeing on our 4-quarter average, which is not what we expect. We have sort of stabilized the payment terms -- sorry, the inventory levels and payment terms from customers. We had a slight decline in DPOs, mostly linked to the mix. But if we look at quarter-by-quarter, you see with these big swings that we still have work to do to improve our working capital. And the first indications of Q3 are positive so far but we have, as I said, lots of work to do, and we are extremely focused on this, having revenues, gross profit margins and cost structure under control with a clear strategy, we're winning market share. So we are pleased on that. Our key focus is here now. And this is driving, obviously, our return on capital employed, which is mostly linked to this working capital performance. Okay. So that's for the performance during the quarter and a half. On our final remarks, let's look at what to expect. In terms of backdrop, mentioned before, the industry analysts are optimistic about an ICT distribution market that should perform between 3% and 5% growth in the second half of the year, with Spain better -- slightly better than Italy. We had a very strong Q2, and I just explained why we sort of gave an upward revision for our full annual forecast. We expect the market analysts expect growth in the PC segment. We are witnessing it in this very moment. As I said, we had really, really high -- high growth. They keep on expecting investment by companies and governments in the digital transformation segment and investment in cybersecurity. And we are playing a strong part here. We are helped by the troubles of some of our competitors, and we are winning market share. We are not seeing neither we have received words from our vendors of changes in the pricing policies as a consequence of the tariff war, unless component costs increase over time. But we have not seen any impact, neither we are expecting them. We have heard of significant growth in costs for the end users in the U.S., for instance. So now 2025 outlook. July and August, we have recorded a significant increase in our revenue growth, much more than what we recorded in H1. And we had this as a result of a high double-digit growth in our Iberia Subgroup revenues and middle single-digit growth in our Italian business. This positive trend that we are experiencing, including the first days of September, combined with a favorable outlook provided by analysts here where we should have a healthy revenue growth in the second half of the year. In terms of product segments, Solutions and Services are showing and confirming their growth trend, which we have witnessed in these last years. And that happened in the first 2 months of Q3 as well. And as I mentioned, the screens show a very, very significant acceleration, mostly in PCs. Smartphones are still close to flattish. We have a clear focused strategy on high-growth segments, which we reconfirm. V-Valley Solutions and Services and Zeliatech's Green Tech are the areas that are already providing close to 80% of our profitability. We keep on investing here, especially on Zeliatech's Green Tech, we are aggressively looking at opportunities of M&A also abroad so that we can hopefully open up our coverage to our other regions of Western Europe. And on the other side, we have worked hard on the consolidation of our cost structure optimization, which we achieved in Q2. So far, numbers are pointing in the right direction also at the beginning of Q3. We want to strengthen our competitiveness, and on the other side, provide, as I mentioned before, the space to help our Esprinet division focus on the highest return on capital employed businesses, which are abundant within that division, but which have been sort of covered in terms of performance by some high volume and high working capital absorbing businesses, which we are progressively shedding. The example of what we did 2 years ago in Portugal over there, we had a small footprint but we cut roughly 50% of revenues, and now we're growing 65% because people focused on higher-margin businesses. So we think that all these points to a future where we are much more optimistic and we have a lot more determination to achieve our numbers. We are bumped up in this moment. We're really happy. Of course, we are still living in a geopolitical and macroeconomic scenario, which is extremely uncertain. But all this said, our guidance of EUR 63 million, EUR 71 million of EBITDA adjusted is confirmed, and we are now focusing more on the upper end of the range. And that's for the numbers. And that's basically it. We're open for Q&A, and we want to thank you all for the interest in our company.

Thank you, Alessandro. Yes, we can start with the Q&A session [Operator Instructions] So the first question comes from Mr. Storer.

We can hear you.

Yes, we can hear you.

Okay. Perfect. So the first question is about cost OpEx. We have seen a sharp decrease in Q2. In absolute terms, should we expect for the remaining 2 quarters a similar increase as that we have seen in Q2 or maybe something in between Q1 and Q2? Second question is about offering rationalization. You have anticipated and mentioned as one of the reasons why you have not increased your guidance. For the second part of the year, do you really have in mind an impact from this rationalization that you can share with us? Or this is going to also depend on the evolution of the business? Third question is about cash flow and the cash flow bridge Q1, Q2. I see that working capital has decreased by around EUR 30 million, while net debt by just EUR 10 million. So if you can help understanding all the building block of this hypothetical bridge that Q1 to Q2. And very last, I missed your explanation about the high tax rate, if you can reiterate the message.

Okay. So on the increase in OpEx, yes, probably it will be something in between. And most probably Q4 will be significantly lower because we had some expenses that were anticipated from Q4 to Q1. That's the high-end take. Then it all depends quarter-by-quarter is difficult to forecast, but it also depends on the amounts of some unpredictable expenses, take, for example, bad debt. If we have higher or lower levels of bad debt, it might impact a bit more or a bit less. But let's say that the impact in Q1 was -- the growth was an extraordinary one. Q2 is more ordinary, and we'll see in Q3 and Q4, perhaps something in between with Q4 probably slightly better theoretically, then again, it all depends on the final impact of this discretionary unpredictable numbers. Consider also that to a certain extent, it depends on the level of growth of the top line because we have variable costs that account for roughly 57 -- sorry, 50 -- let me check here, yes, 57, 58 basis points on revenues. So part of the increase in cost that we report is linked to variable cost. So if we increase revenues by, say, EUR 100 million, you must consider that we have roughly 0.6% of additional expenses. On the offering optimization, we don't have clear forecast because it's the result of ongoing negotiations. We are sitting in front of customers and vendors and say, guys, we can go on this way. Either we find a way to make it more manageable or we will keep selling these kind of products. We have done it with some vendors and with some relevant customers, and we had positive results. With others, we are still in discussion with some. I think in the past, that happened, as an example, in Portugal, we eventually closed a significant chunk of the business. So that is what's happening. And therefore, we don't know really what the end result of these negotiations will be. We are relatively positive. Some of our competitors are struggling, and this pressure is unbearable for more or less everybody. So it should be a positive result, I think. But we'll see in time. And that's why we try to be a little bit more in brackets conservative being aggressive and saying we expect a good second half of the year, barring as always, unpredictable items, markets going south or accidents of any kind. Sorry, but really, it's the result of negotiations. We don't have a figure in this moment. On cash flow, it's a very technical question. I think we have provided the cash flow statement in the press release, and it should be there. Frankly speaking, I'm not able to respond. I need to check in detail and perhaps we can have a chat with our admin manager and provide a better explanation of the number. And on the tax rate, again, it's a bit of a technical aspect. We generally report our calculations of tax rate during the year are mostly made based on a standard tax rate. We make the final adjustments typically at the end of the year. And whenever we have companies that are in red ink, we not necessarily accrue the deferred tax assets. And so it might depend on this. We normally use 27%, 28% as an average tax rate. It can swing during the year, but normally, that is the number. Last year, we had some relief on certain tax items that were freed up because of an opinion. So sometimes it might change because of these reasons. But on average, also in our budgeting process, we calculate this. But the way this P&L is made up, to my knowledge, is based on this assumption. But again, on this, perhaps we can come out with a more specific comment from our admin manager.

Okay. Next question from Ms. Berti.

Congratulations for the positive result. Some of my questions have already been answered. However, once again on guidance, you are guiding for around EUR 71 million EBITDA in full year, which, if I'm not wrong, implies an EBITDA growth of about 2% in the second half, while qualitative indications on the start of the third quarter point to double-digit growth in sales in Spain and also an improving profile in the domestic market. Can you confirm once again that you are taking a cautious approach on guidance or if you have some specific concern regarding the last quarter of the year? And if yes, what can go wrong, which are the possible risks? And then if you can provide some color on how the market dynamics are evolving in relation to the trade policies puzzle.

Okay. We are pointing to the upper range, so from 67% to 71%. The result is a function of what will happen in -- especially in Q4 because Q4 is particularly important for us, as you know, but we have good indications from the market. We are having a very solid Q3 at least so far, but we are already close to the end of the quarter. So the indications are positive so far. What could go wrong is either the market or an excessive acceleration, which we will contain of dumping of unprofitable businesses. And then unexpected events, they always might happen, a bankruptcy or whatever, but let's say that those are out of our control. So Q4, of course, it's super important. Last year, we had a very, very high -- very, very good performance. So it's a challenging comparison. But we think the year should be a good year. Again, there is always unknowns and the geopolitical situation is a big one. But so far, the year is much better than what we expected in terms of environment, and we are performing well. We had a false start, but I hope in time, we will be able to explain better and better what happened in the cost structure. Your second question, if I'm not misunderstood, is what's happening with the impact of these tariffs and -- okay. The -- well, nothing specific in Europe. I recall that the vast majority of our suppliers are American, but none of them is manufacturing anything or close to none of them is manufacturing anything in the U.S. Everything is manufactured outside of the U.S., at least for the other markets. Now some of them are planning to build stuff in the U.S. But the tariffs impact the cost of goods that are imported in the U.S. Take HP, Apple and the others, if they manufacture in China or Indonesia or India or wherever and they invoice to Europe, South America, anywhere out of the U.S., there are no tariffs over there. The only question mark we had was as long as these tariffs are impacting the pricing of U.S. products in the U.S. of products imported in the U.S. And the U.S. market is a big one, we fear that some of the vendors might decide to increase pricing of products in other regions, so to avoid having high increases in the U.S. That is not happening to our understanding. We are witnessing normal dynamics in terms of pricing. And so the real impact is indirect, whether the end users we are serving, especially the companies that we are indirectly serving in Italy, Spain, Portugal, some of them are exporting to the U.S., food, textile, machinery, whatever. And they might experience issues in their revenues and their profitability and thereby, they could decide to reduce their IT spending. So far, this is not really happening. That was our fear. And consumers in Italy, Spain and Portugal are buying even if we are less and less concerned with the consumer market, only those markets where we can make a profit, which are less than in the past. So that's the situation. And that's why we are less concerned now of the macro environment than what we were in April, May after the announcements of those tariffs, not because we expected price hikes here in Europe because of tariffs. But yes, there was the theoretical risk of Europe imposing tariffs, but it was highly improbable. The real question mark was about the resilience of the economy, which up to now has been reasonable. And on the other side, the fact of the potential decision of some vendors to raise prices in Europe, so to not being forced to raise them too much in the U.S. But all these things didn't happen or happen to a very minimal extent. That's why we're a bit more positive. By the way, for Mr. Storer, I think the reason might be the dividend. We paid EUR 20 million of dividend in May, and that probably is the reason why the difference. There has been a decrease in the net equity and for a cash outflow linked to the dividend. I think that's the big difference. But we will check. Thank you, Mr. Berti for your question.

And last question from Mr. Paladino?

Can you hear me?

Yes.

Yes.

Maybe I didn't catch it well but my question was on the devices and screens segment. Overall market seems to have a little bit more growth. And I guess it's linked with the rationalization of the offer, which can explain the gap. I just want to confirm. And maybe can you give us a bit more explanation on the difficulty to get profitable on the devices when last year was contributing, if I'm not wrong, in the slide, I catch it this. And I didn't catch it well also just one detail on the exposition to the foreign exchange. What's the proportion? I don't know if it was 5% but maybe I'm wrong on the acquisition of goods.

Yes. Well, the -- yes, the amount of purchases in dollars, we are practically purchasing only in dollars, if not in euros, is something around 5%, 6%, more or less. I confirm the figure. And it's mostly linked to purchases of some accessories and a few other product lines. The screens are doing fine in terms of PCs. We have walked away from a number of smartphone deals because of the unsustainability of certain propositions. Mostly, the issue is PCs are sold both to resellers as well to retailers. Smartphones are sold almost exclusively to retailers. And whilst the Apple business runs with good working capital because of very low inventory, the working capital associated to certain other smartphone businesses was historically very bad, and we had to walk away from these deals. Devices is a mixed bag. We have certain businesses, especially in the consumer space, where we walked away and we are walking away. We have here a lot, a lot of vendors with small volumes. We try to build a significant business over here, and we have a lot of people, a lot of warehouse space and a lot of costs associated with these businesses. So as we are shedding certain unprofitable and high working capital absorbing businesses, we have, meanwhile, to redirect the people to other businesses, and it takes a bit of time. So here, the impact is also linked to the cost structure that is still associated to these devices, which takes time to be redirected either to be reduced or redirected to other lines of businesses. That's mostly the reason why we're having issues there. And the big pain points are linked to the TV business where we witnessed a significant reduction. We had issues in the white goods space, so refrigerators, washing machines and the like, which are mostly sold in Italy by us. And now things apparently are moving in a better direction, but we had issues there, especially of profitability, not enough margin to cover the working capital absorption and especially the cost structure. And then we had a particularly weak season in gaming. Those are the key areas that were troubling. We have our own businesses there, Nilox and Celly. Celly is doing very well. The Nilox business was under tremendous pressure for the last 1.5 years. And now things are getting better. So in time, we should have an improvement. But again, these are mostly businesses that are sold to retailers, and that's the area where it's more difficult to extract value and run with a reasonable working capital. Apparently, there are no other questions.

Yes. It seems there are no more questions. So we can end the call. So thank you for participating, and see you next time.

Thank you, everybody, and thank you for looking after us, and we will see you at the next time and in stock conference. Have a nice day.