Westwing Group Se

Good morning, everyone, and thank you for joining us this morning. I'm very pleased to be sharing details of West Wing's Q3 results with you today. West Wing's mission to inspire and make every home a beautiful home continues to resonate with our ever-growing community of customers across all our markets. And we consistently inspire our customers, both old and new. With our mission in mind, let's walk through the business highlights and financials for the third quarter of 2021. I will begin by providing key updates of our business operations, followed by details of West Wing's financial performance in Q3. After a brief summary, we will then move to Q&A. From a strategic perspective, West Wing has been delivering exceptional growth over the previous years and has come quite far in establishing itself as the leading inspiration-based home and living e-commerce player in Europe. The success of our business has continued over the last quarters, and we have also seen a fair amount of change in the macro environment over the summer quarter. We have seen an impact from the ease of social distancing restrictions across our markets, as well as continued challenges resulting from supply chain disruptions. At the same time, we have remained agile in response to these changing conditions and have successfully navigated these turmoils by continuing to grow our business. Revenue for the third quarter of 2021 grew on top of a strong baseline to €103 million, a 5% growth compared to P3 2020 lockdown levels. This increase, on top of an already high baseline from last year, is a testament to our unique position, as well as the ongoing shift in consumer spending habits towards online channels, particularly in home and living e-commerce. The global supply chain disruptions and higher container sea freight costs have had an impact on West Wing's profitability in Q3. Additionally, growth investments into our West Wing collection, marketing, and technology resulted in short-term and planned impact on overall profitability during the seasonally weak quarter. Adjusted EBTA, therefore, for the third quarter amounts to minus 0.4 million euro at a corresponding adjusted EBTA margin of minus 0.3%. The mounting costs associated with supply chain issues also had a subsequent impact on the free cash flow, which stands at minus 0.5 million Euro year to date. We have fought against the supply chain volatility caused by the supply chain issues by investing into buffer stock, which has a temporary effect on our network and capital assets. We believe these measures were warranted to continue to provide our customers with our great Western Collection products in sufficient quantities and to prepare for the important fourth quarter. We continue to have a strong base of loyal active customers, which stands at 1.7 million for the last 12 months, a jump of 36% compared to Q3 of last year. The loyalty of our active customers is the backbone of our business, and this growth is indicative of West Wing's love brand that attracts both new and old customers to engage with us again and again. Supply chain disruptions have had a cascading effect on many global markets, and naturally we have also seen an impact on Western's business. The ripple effects from the disruptions and the associated rise of sea freight container costs are expected to last for the remainder of 2021 and at least into the first half of 2022. While we had factored some of these effects into our profitability guidance for the full year, there is, to be very transparent, Currently, a risk of further profitability compression caused by continued disruptions in the coming weeks and months. Important to highlight that we consider this a temporary external effect with no impact on long-term profitability levels. But also, it has been a graver impact than we had predicted initially and even till just a few months ago. The strategically important and high-margin investment collection continues to gain momentum. and we are proud to be at 38% share of Group GMB in Q3 2021. That's 12 percentage points up from Q3 last year. With this development, we are well on track towards our strategic long-term target share of 50% of Group GMB. Our West Wing collection leveraged the loyalty to our last brand with best sellers tailored to the taste of our customers at good prices and high quality. We also generate superior margins in our West Wing collection range So the success of this strategic initiative is a key driver of our continued profitable growth. We are very pleased with the progress we have made so far. Lastly, we confirm the previously stated guidance for 2021. We expect revenue in the range of 510 to 550 million euro, and we are firmly firm on this guidance. The guidance for adjusted EBITDA margin for 2021 is expected to be at the very lower end of the 8% to 10% guided range. with, as stated before, a risk for downward revision as we navigate the remainder of this year. As some of you might have realized on our social media channels, West Wing turned 10 years old this summer. As you can see on the chart, this has been a truly exceptional growth journey, reaching our current size of 595 million euros in GMV on a last 12-month basis. We have grown our business by more than 100% since our IPO in October 2018 and are committed to our ambitious target of being a €1 billion revenue and very profitable business by 2024-25. With that, let me come to the details of the Q3 results. GMV for Q3 is up 5% compared to the previous year and stands at €118 million. Sorry. Q3 is usually a weaker quarter across home and living in Britain and e-commerce in general. Consumers tend to enjoy the summer months, engaging more in offline activities such as travel and leisure. So West Wing's top-line level shift against last year's extraordinary baseline is in fact truly notable. Compared to 2019, we see an uplift of 66%. Our growing GMV is complemented by a sizable increase of 36% in our active customer base compared to Q3 of last year, which makes us 1.7 million active customers strong. The global supply chain disruptions remain challenging. Here I would like to provide you with more color on the impact we are seeing on our business. The global cargo disruptions have materially pushed up global and maritime transport rates. There has also been a correlated increase in the price of some raw materials, which has led to further cost inflation. These challenges are affecting our business just like many others across the globe, and we expect them to last at least into the first half of 2022. Resulting from these disruptions were several challenges that West Wing actively mitigated again. Firstly, the supply volatility caused bulk deliveries peaks from suppliers who deliver purchase orders in bulk, leading to a significant rise in inventory, warehouse handling, and storage costs. Order backlogs from the first quarter from several suppliers as an example arrived all at once in the summer, and our teams had to work very quickly to manage this large influx of inventory, incurring additional expenses, including renting short-term storage capacity. Secondly, sell-off of inventory at lower margins to create storage space for our very best sellers and to optimize warehouse capacity also contributed towards lower profitability. Furthermore, our teams were taking away from core activities towards remediating actions such as renting additional short-term warehouse space and managing container schedules, which had an impact on overall profitability. The good news is West Wing was able to take the right actions at the right time. We preemptively invested into inventory to create enough buffer stock to ensure good availability for our seasonally strongest fourth quarters. At a time of supply volatility, I am very happy to report that we expect to have very good product availability for the ongoing Q4. Additionally, through closer collaboration with suppliers and enhanced data sharing between our warehouse and supply teams, we are continuously improving our forecasting, reservation, and capacity metrics, ensuring that we are stocking the right products at the right time. Still, the last month also showed that we must improve further here over the coming quarters. Lastly, we were able to pass on some of the cost inflation from container rates and raw materials to consumers through further price increases, as we already did in H1. These external challenges are likely to remain for the rest of the year and at least into the first half of 2022 and are expected to have an adverse effect on our gross and contribution margins through this duration. Consequently, we also predict a temporary increase in our structurally negative net working capital over the next quarters. as we look to deliver upon the West Wing customer experience by securing stock and ensuring supply through additional inventory buffers and higher prepayments. Let me provide you some details on the very positive development of our West Wing collection business in Q3. Last year was clearly an extraordinary year with an unprecedented market environment, sudden surge in demand, also for our uniquely created West Wing collection products. As a result, we actually had not been able to increase our West Wing Collection share in Q3 of the last year, as our West Wing Collection product availability could not keep up with the sudden increase in demand at that time. This year, we were able to improve our product availability significantly again, and were able to deliver tremendous growth in the West Wing Collection share, which now stands at 38% of overall Group GMV. Our long-term target is to get this figure towards the 50% mark, which will be done through a combination of increased customer reach and awareness, as well as expansion into further product categories. The DAF segment, like on many other metrics, is leading the way in West Wing Collection share adoption, showcasing the potential at 42% GMB share in Q3. Our focus remains on providing a great customer experience. by ensuring good product availability at short delivery times during these uncertain times of stress supply chains. And we are well prepared with adequate inventory levels for the seasonally strongest fourth quarter. With that, I would like to close the business update and move on to the financial update section, where I will share some further details on the financial performance of our business. No doubt that the lockdown conditions of the last year greatly benefited our top-line figures. The good news is that it was not a temporary phenomenon, but a permanent effect that is leading to even further growth. We see the trend of top-line growth continuing even during this more normal period of Q3 2021, while consumer spend is again increasingly being shared with offline stores and activities such as travel. Still, West Wing's top-line level shift has continued. Revenue for Q3 2021 was €103 million, that is 5% growth on top of last year's baseline. Growth was seen across both our segments in Q3, with DAF generating revenue of €56 million and international generating revenue of €47 million. On a group level, Q3 brings us to €373 million in revenue for the first nine months of 2021. This is a 35% growth compared to the same period of 2020. Let's look closer at the P&L for Q3 2021. Our gross margin for the third quarter came in at 49%, 0.2 percentage points behind Q3 2020. We have been able to adequately maintain our healthy gross margin levels despite higher sea freight costs and general cost inflation of raw materials. On top of passing on cost increases to our customers, the highly profitable 38% GMV share of our Westling collection greatly assisted us with upholding this figure at attractive levels. At the same time, our fulfillment cost increased by 2.8 percentage points versus the previous Q3, which was mainly driven by higher warehousing costs arising from the distressed supply chains. As described earlier, we added inventory buffers, as well experienced the high number of bulk deliveries from our suppliers, leading to increased inventory handling and warehousing costs. Such events also led to remediating actions such as the rental of additional short-term warehousing space. Overall, the collective effect of a stable gross margin coupled with the rising fulfillment costs resulted in a contribution margin of 26.2% for Q3 2021, which is down 3 percentage points compared to last year. But compared to Q3 2019, we are still six percentage points better in contribution margin, despite the current supply chain issues. So not only are we able to confirm a level shift of top line, but also our unit economics continue to be significantly better than at any other time in our history, apart from the exceptionally strong 2020 peaks. In terms of marketing, we remain committed to investing significantly into our organic marketing model and support this through investments in brand awareness and attractive performance marketing channels. Earlier this year at our Capital Markets Day, we committed to a marketing ratio of 9 to 11% over the next few years. And we remain confident that this focus on organic marketing investments will enable West Wing's ambitions of becoming a 1 billion euro revenue company by 2425. Our targeted growth investments are also now visible in our G&A ratio. We can observe that our growth investments, especially in technology and West Wing collection, heavily contribute towards the G&A ratio of 18%, which is 4.8 percentage points higher than last year. We believe by investing at this decisive time, we can truly take advantage of the pace we have gathered over the last several quarters to help deliver the ambitious targets we have set up for ourselves. Overall, this brings us to an adjusted EBITDA margin of minus 0.3% in Q3 2021. Important to note is that the third quarter is generally our seasonally weakest quarter, so the low profitability is not unexpected, although it is a bit lower than we had initially projected. As absolute revenues ramp up again in Q4, we will also return to good adjusted EBTA profitability in the final quarter of the financial year 2021. Our vision of our business remains unaffected by these short-term headwinds, and we continue to remain long-term oriented. Taking a closer look at profitability, we can see that year-to-date Group Adjusted EBTA is €30 million, and hence €6 million ahead of previous year, with an adjusted EVDA margin of 8% for the first nine months, driven by the very strong H1 results. DAF continues to be profitable at 13.4% year-to-date, while International reports a positive adjusted EVDA of 1.3% year-to-date. Also on EVDA profitability, you can see the level shift versus 2019 results, both on a quarterly view as well as year-to-date. Moving on to cash flows. As predicted and communicated in our last call, Networking Capital increased over the Q3 period and currently stands at positive €6 million, which is 1.1% of LTM revenue. The investments we made in ensuring product availability in response to supply volatility remain to be the key reason that our structurally negative Networking Capital has temporarily tipped into the positive territory. While we expect the network and capital to remain in the slightly positive range over the next quarters, as the effects from supply chain disruptions dissipate, we are confident that we will return to our structurally negative network and capital position in 2022. Our CapEx ratio remains low at 3.6% of revenue, whereas the increase versus Q3 last year is mainly driven by investments into equipment for our new warehouse and our growing technology function, with a focus on the development of proprietary software. Let me guide you along our free cash flow bridge to give you some color to the individual elements. As said, we're starting with an adjusted EBITDA of €30 million. We then have firstly seen a significant impact of minus €9.7 million from an increasing net working capital. As described earlier, the cash flow impact from net working capital is mainly driven by the higher investments into inventory and supplier prepayments to mitigate against supply chain disruption. Alongside this, we have also had significant tax payments in the first nine months of 2021. In total, we have so far paid 9.2 million in income tax, but it's important to note that this includes tax payments for the fiscal year 2020 and mandatory prepayments for the fiscal year 2021. So basically, as 2020 was our first year being tax profitable, we are paying for two years in 2021. For next year, we expect the tax payment to reduce again substantially. The investing cash flow of 9.5 million euro in the first nine months is in line with our expectation. Overall, this results in a free cash flow of minus 0.5 million euro year to date, which we expect to turn positive again for the full year during our seasonally strongest fourth quarter. Based on the combination of those effects, our net cash position, as you can find on the next slide, stands at a strong 97 million euro, which provides us with reassuring strategic optionality during these highly volatile times. With that, we move on to our revenue and profitability guidance for the full year. Revenue guidance for 2021 is confirmed in the guidance range of 510 to €550 million. While Q4 to date growth is in line with our expectations, it is important to note that the critical upcoming weeks in Q4, especially around the Black Friday weekend, will mainly drive the overall growth results for the fourth quarter. And keep in mind that Q4 last year was a quarter with heavy lockdowns, so it's a very strong baseline. Coming to profitability. At present, we confirm our profitability guidance but expect profitability at the very lower end of the previously guided range of €42 million to €55 million and a corresponding adjusted EBITDA management of 8% to 10% due to the ongoing supply chain disruption. I would like to highlight that the ongoing global supply chain challenges may put the current profitability guidance at risk of revision in the coming weeks and months. The high level of volatility makes planning even for the short and mid-term quite difficult. Despite the discussed short-term challenges, our strategic targets for 2024-25 remain unchanged. As shared during our Capital Markets Day earlier this year, we are targeting €1 billion of revenue by 2024-25. We plan to be highly profitable with more than €100 million in adjusted EBITDA by 2024-25 and maintain our best-in-class cash conversions. which will enable strong cash flows. We believe we are well positioned to achieve these targets led by our very clear brand ambition. We aim to be the most desirable consumer home branding brand for home enthusiasts. Today, I also want to take the opportunity to provide some more details how the path towards our targets will look like. I would like to emphasize here that These forward-looking statements and figures do not represent official guidance for 2022 but are an indicative view and are subject to change over the coming months while we are working on our business planning and continue to learn about Q4. We have deployed significant growth investments in 2021 to deliver upon the targets we have set for 2024-25. We believe by investing into key areas of our business at this time we can take advantage of the size that we have gained and scale our business further to the next stage of our evolution to become a 1 billion euro business with attractive adjusted EBITDA margins of 10% to 12% by 2024-2025. For 2022, this means that we will continue to prioritize growth investments over profitability to lay the foundations for our 2024-2025 targets. As an offer of transparency, not guidance, let me also share in some more detail how we currently think of 2022 financially. In terms of revenue growth, we expect the growth rate in the first half of 2022 will be similar to the growth rates we currently see in the second half of 2021, as relative growth will still be significantly impacted by COVID-related baseline effects of H1 2021. For the second half of 2022, we expect much stronger growth rates again in line with the long-term growth targets we have set out, as we leave the extraordinary baseline effects behind us. In terms of profitability, we remain committed to a positive adjusted EBDA result and a positive free cash flow in 2022. However, due to our prioritization of growth investments and the expectation of ongoing supply chain challenges, the adjusted EBDA margin will be lower compared to 2021. As we have promised, we remain long-term focused on the achievement of our 24-25 targets of €1 billion in revenue and more than €100 million in adjusted EBDA. and we will see steady improvement from 2023 onwards towards that goal. Before I now move to Q&A session, I would like to summarize the key takeaways from our Q3 results. West Wing realized 529 million euros in revenue over the last 12 months at a strong 45% growth rate year-over-year. More importantly, we continued the top-line level shift we achieved in 2020 a testament to the quality and value proposition of the business we run. Based on the strong top-line development, we have so far generated 56 million of adjusted EBTA and an adjusted EBTA margin of 10.5% on an LTM basis. As per end of Q3 2021, we served 1.7 million active customers and delivered 4.6 million orders across Europe in the last 12 months. Strategically important West Wing collection share came to an all-time high of 38% in Q3 2021. Now, zooming out of Q3, let me give you the broader view of West Wing. The opportunity ahead of us remains massive. The home and living market has a size of €120 billion and is still very early in e-commerce. We create superior loyalty based on our differentiating and inspirational core. Our Western Collection perfectly leveraged this loyalty and attractive margin upside. Based on this highly profitable consumer last-print strategy, we target a long-term profitability of 15% adjusted to BTA. And lastly, our structurally negative networking capital and low CapEx ratio helps us convert these profits into very strong cash flows. With that, I would like to thank you for your attention, and I'm happy to take your questions.

And the first question is from Volker Bosse, Baader Bank. Your line is now open.

Yeah, hello, gentlemen. Volker Bosse, Baader Bank. Thanks for the provided information and thanks for the open words also related to 22 already. I would have three concrete questions. First one would be on freight cost expenses. I think that affects especially freight from Asia to Europe. So to give us an indication, freight costs for your products are doubling, tripling, or an idea here, and how much of your procurement volume is affected, especially affected by these tremendous freight cost increase. Second question would be the supply chain constraints. My question would be, are the products not produced or not shipped due to container shortage or not produced because perhaps production facilities are closed or materials are not available? So what exactly causes the supply chain constraints here, not produced or not shipped? And the last one would be on the fourth quarter, 21, I mean, your full year guidance is still right. Wide range, which means, which leaves the door open for the fourth quarter double digit decrease or double digit increase to reach the upper or lower end of the guidance range. However, looking at the more previous years levels, is it fair to assume that this is most likely that the sales momentum in the fourth quarter could decline again versus the third quarter? So that growth in the fourth quarter should come in below 4% sales growth as a best guess assumption. Thanks.