Westwing Group Se

Good morning everyone and thank you for joining us. I'm glad to be speaking to all of you. Today we will review our half-year and Q2 2022 results and provide some information on what we plan for the full year and going forward. Joining me on this call is our Chief Financial Officer Sebastian Solberg. As a quick reminder, Westpring's mission is to inspire and make every home a beautiful home. Before I share the agenda for our call today, I want to introduce myself to those of you who don't know me. My main name is Andrea Törning. I've been the CEO of Westling since the 1st of July of this year. I joined Westling over seven years ago and during this time I held a few roles across the business including founder of the Westling Collection and more recently Chief Commercial Officer. I'm very pleased to now be leading Westling as CEO. West Wing has achieved a lot in a very short period of time by building something very unique and I'm truly excited about the opportunity ahead as we're still at the very beginning of what is possible for West Wing. With that, let's get to the agenda for today. I will begin by providing key updates on our business, after which Sebastian will be sharing the details of West Wing's financial performance in Q2 2022 and the half year. I will then provide a quick update on our strategy after which Sebastian and I will be happy to take your questions. So I'll briefly walk you through the five key points of the business update and then dive a bit deeper to provide some more details. First, our top line for Q2 2022 is significantly below previous year. We are confronted with an especially challenging macro environment with very low consumer sentiment and demand for home and living, plus a lower online share versus a year ago. We're still significantly up versus 2019, though. Second, we are fighting for top land, but our main focus lies on preserving unit economics and restoring profitability. This is because A lower top line in combination with investment decisions taken last year resulted in an adjusted EBITDA loss for Q2 2022. This is far off our ambition, and we are working decisively to adjust our cost base. Third, regarding our supply chain, disruptions have eased, but we have a lot of work ahead of us in terms of managing the high inventory levels we have built up in the aftermath of the situation and the overall lower top line. We're confident that this will be resolved over the course of 2023. Fourth, the fundamentals of our business model are intact. Loyalty, inspiration, and focus on sustainability. Our much loved and highly profitable Western collection, along with the best design brand, will be at the forefront of the next stage in our evolution. I will be going into more detail on this in the strategy update section. Fifth, it goes without saying, our liquidity profile and capital structure is top of mind. While we are very focused on getting back to a state of at least neutral free cash flow, we have ample liquidity to navigate through the current challenging market environment, which is fundamental to outlasting this dynamic. Sebastian will cover this point in the financial section in detail. Let's now dive into some details on points one to four. Regarding top line. I'm not telling you anything new here, I guess. On the chart which depicts consumer sentiment in Germany, you can clearly see that it began to drop sharply in the first half of 2022, worsening quite dramatically in Q2. Just to put this into perspective, the level recorded in Q2 was even lower than at the onset of COVID-19 pandemic. This highlights the extent to which the current macro volatility Driven by rising costs, the war in Ukraine and fears of a looming recession have contributed towards a lower consumer sentiment and weak demand, obviously together with spending and other categories such as travel. It's expected to last short-term at least. What you see in the next slide is Q2 Group GMB since 2019, and the same for active customers on the right-hand side. While the year-over-year result was severely impacted by the aforementioned macro factors, Comparing our current performance against the pre-pandemic quarter of Q2 2019 reveals a strong compound annual GMB growth of 19% per year and active customer growth of 18% on a three-year basis. I believe it's quite important to take a step back in this period of uncertainty and have a look at the long-term structural growth of Westing. In spite of the acute headwinds, we find ourselves today to be a company of a whole different scale and size compared to back then. Moving on to the second topic, profitability. As mentioned, we are focused on steering West Wing in a financially responsible manner through this period and have identified robust measures to mitigate against the lower top line. Our focus here is twofold. One, retaining our unit economics, and two, adjusting our cost base to the current top line level. To retain our unit economics, we have used a combination of tactics including general price increases to account for inflation, managing our high inventory levels only via selective and reasonable discounting events, but not just at any cost, in addition to an increasingly high-margin Western Collection share through category and portfolio expansion, but also through closing the expensive short-term warehousing capacity we required last year prior to the opening of our new warehouse in Q1 of this year. So that's on unit economics. In order to adjust the cost base to the current top-line level, We are implementing an annual benefit in P&L savings of about €15 million, achieved through a combination of significantly lower paid marketing and reduced organic marketing investments to increase our ROIs, in addition to operational savings gained through a review of our overall investments and organizational cost structure. Moreover, we have shelved eminent CapEx investment into further warehousing, which will remain on hold as long as the demand environment does not show signs of improvement. On top, we are continuing to review the cost base beyond the 15 million euro savings as we speak. Third topic is supply chain. As you can see from the chart here, inventory significantly increased over the last quarters, which is a result of orders placed six to nine months earlier, respectively, for an entirely different demand environment that we simply got wrong in our forecasting. Supply chain disruptions further added to this scenario with delays of orders. We've implemented correctional actions and we are confident about solving this issue over the course of 2023 as we have enough warehousing space and inventory that can be sold over time at good margins with limited right of impact. That's because most of it does not have an out of fashion risk. Beyond stock levels, the global supply chain situation for us has normalized with no immediate risk to business operations. Freight rates have started to come down, but they are still significantly higher compared to pre-pandemic levels, which we partially offset through retail price increases. Fourth point on the fundamentals of our business that all remain intact. I'm very excited to share the success of our two beautiful, exclusively co-created Western Collection collaborations with fashion icon and influencer Alex Riviere, and the artist Donald Robertson. What's special about these launches is that this was the first time we collaborated with design artists to exclusively create a Western Collection collaboration. Both campaigns were highly successful and well received by our customers, also gaining media attention and coverage from the likes of Vogue Italy and Elle Decor. These collaborations are testament to the power and versatility of Western Collection and our brand, which we have only just begun to untap. In light of the overwhelming response, we will continue to explore similar collaborations and partnerships with designers, influencers, celebrities, and other brands in the future. Underscored by the success we have had with the Westin Collection over the last years, all of which at over 10 percentage points margin upside versus third-party products, and the incredible brand we have built, we now recognize the need to offer customers multiple touch points to our brand and our products. Therefore, it's my pleasure to announce that we will be launching our first permanent store in Hamburg later this year, providing our customers with an opportunity to experience our brand firsthand. We've rented retail space for this first store in Hamburg's prime Jungfernstieg district, which will cover 530 square meters in retail space. Our store opening is planned for Q4. We believe that our permanent store will enable us to offer our customers new aspects of the customer experience. Physical stores offer our customers many aspects that they don't get now, such as live interaction with our brand and products, which leads to further strengthening the Westing Collection product brand, therefore reaching and entertaining even more existing and new customers, making Westing Experience a full, rounded experience. For now, this is the only store we've planned to gather learnings and then decide on subsequent investments. To close off, The Business Update section of our presentation, I'm proud to announce that our sustainability strategy continues to pick up pace with three special initiatives underpinning our commitment to pursue a more sustainable future. Westing is now a member of the United Nations Global Compact, which is one of the world's largest corporate sustainability initiatives. Our 2030 sustainability strategy is based on many of the same principles that UNGC is an advocate for, and our membership reconfirms our deep commitment. we've committed to the science-based targets initiative to help limit global warming in line with the Paris Climate Agreement. Another achievement in our climate efforts is that we continue to be climate neutral in our own operations since last year, which means that we have estimated our greenhouse gas emissions and compensate for them by investing in carbon offsetting projects. Furthermore, we believe providing our customers with sustainable options is fundamental to driving a sustainable future. In our sustainability strategy, we have committed to using long-lasting materials from sustainable sources and being as resource efficient as possible along our supply chain. In this respect, we have joined the Better Cotton Initiative to support responsible cotton production and are committed to sourcing 90% of our cotton as more sustainable cotton by 2026. Additionally, we are certified to the Global Organic Textile Standard, GOTS, by sourcing GOTS-certified products we ensure that high-level environmental and social criteria have been respected along the entire supply chain. At the same time, we continue our efforts to source other materials sustainably. For example, we are constantly increasing our product portfolio made from FSC-certified wood. With that, I will now pass on over to Sebastian, who will take you through the details of West Wing's financial performance in Q2 2022 and cover the fifth point I mentioned at the beginning, our cash position and Outlook.

Yes, thank you, Andreas, and good morning, everyone. Before we go into the details of our Q2 results, let me quickly summarize where we stand financially in these very volatile times. As Andreas shared earlier, in the first half of 2022, we faced tremendous macro headwinds, which overall led to a very low consumer sentiment and subsequently put pressure on our top line. The lower top line in combination with investments we took in 2021, back then in anticipation of a much stronger top line development, resulted in an adjusted EBITDA loss for the first half of 2022. To be very clear, a negative profitability is far off our ambition, and we are working decisively on adjusting our cost base accordingly. We are committed to returning to positive profitability and have a clear game plan on how to get there through efficiency gains and cost management measures. Next to the negative profitability, our high inventory levels weigh heavily on our cash flows. While this might seem rather alarming from the outside, I can assure you that we are proactively addressing this and are confident about solving it over the course of 2023. We will be able to sell most of this inventory over time at good margins and expect only limited write-off impact, as our inventory is not subject to out of fashion risk. While we will continue to focus on navigating the current turmoil, remain very confident in the long-term success of our business the home and living e-commerce market potential remains massive our loyalty and inspirational driven business model is fully intact we have a clear strategy to work towards and last but not least we are equipped with a very strong net cash position of 64 million euro per the end of q2 which provides the basis to emerge even stronger from this downturn with that i will now walk you through the details of West Wing's financial performance for Q2, followed by our expectations for the current year and the priorities for 2023. Starting with our top line. In terms of top line, it's important to take a step back to grasp the bigger picture in these volatile times. The underlying structural growth can be explained best by comparing with the pre-pandemic size of West Wing. In comparison to this baseline, West Wing's top line performed strongly, growing 21% on a three-year CAGR since Q2 2019. On a year-over-year basis, though, revenue for Q2 decreased by 22%, which is clearly impacted by the very low consumer sentiment we have already discussed in detail. The Dutch segment generated revenues of €59 million, while the international segment generated €45 million, both growing comparably since 2019. Coming to the P&L for Q2. Up first, our gross margin for Q2 is at 48.6%, which is only 0.9 percentage points lower than Q2 2021. We have been able to adequately maintain our healthy gross margin levels despite inflationary headwinds and cost pressure faced by the business, mostly by passing through price increases and a shift towards West Wing Collection products. Fulfillment ratio for the period increased by 3 percentage points. mostly due to less scale in our operations, some cost increases in the workforce due to inflation, and additional warehouse capacity that went online, which, however, now gives us the benefit of releasing the expensive temporary warehousing space that we were renting in H1. Overall, the effect on our gross margin with rising fulfillment costs resulted in a contribution margin of 25.2%, which is down by 3.8% compared to last year. In terms of marketing, we maintained our marketing expenses in line with our target range of 9-11%. We decidedly reacted already in Q1 and cut down our performance marketing investments as these investments didn't provide attractive ROIs. Based on these cost management measures, we were able to keep our target margin in Q2 despite less scale on organic marketing investments, which are mostly rather fixed personal costs. We also reviewed our organic marketing organization and implemented selected headcount reductions, as well as putting further investments on hold. Coming to SG&A. Our investment decisions from 2021, in combination with the lower top line, increased the SG&A ratio for this period by 7.9 percentage points versus last year. It is important to note that our second quarter and our third quarter are our seasonally weak quarters, so the G&A ratio of 21.5 for Q2 is not representative of the full year's G&A ratio. Having said that, similar to our marketing investments, we are also constantly reviewing our SG&A cost base and have already implemented headcount reductions as well as OPEC savings. We will continue to review our past investments into SG&A and remain extremely cost-cautious for the foreseeable future. Overall, the described developments resulted in a negative adjusted EBDA profitability of minus 2.3% for the second quarter. Please note that we decided to adjust our EBDA for non-operating restructuring costs caused by the workforce reduction in the amount of 1.1 million euro this quarter. Taking a closer look at profitability on segment level, is a similar picture, does continue to be profitable at 2.2% adjusted EBTA for the quarter, while internationally reported a minus 7.4 adjusted EBTA margin for the same period. Moving on to cash flows. Our net working capital position at the end of Q2 stood at positive 24 million euro, much higher than our ambition of being neutral in working capital. Our net working capital has increased a lot over the last few quarters, and I will share some more on this on the next slide. While we expect net working capital to remain significantly positive for the remainder of the year, we are confident that we will begin to see an improving net working capital coming back down to the single digit millions by the end of 2023. Our capex ratio is 3.4% of revenue for Q2, representing an increase in capex spending versus previous year. This increase is mainly driven by one-time investments into equipment for our recently opened warehouse and ongoing investments in our growing technology function, with its focus on enhancing the customer journey. Looking into the networking capital development in more detail, the Q2 increase is mainly driven by higher inventory levels related to lower top line. Fortunately, the obsolescence risk is rather low in our industry, and we have ample storage space in our warehouse at present, so this is primarily a cash flow timing issue, not a structural issue. although certainly vital to maintaining healthy liquidity in the current environment. On top, we can see that trade and other payables as well as contract liabilities are reduced in Q2 driven by the lower size of the business. Networking capital is expected to increase further in Q3 and then decrease towards Q4 2022 before returning to single digit millions by the end of 2023. Our net cash position stands at a strong €64 million per end of Q2, which provides us with reassuring strategic optionality in the current challenging landscape. Our financial debt-free balance sheet remains a great asset, as we have ample liquidity to navigate the currently challenging market conditions. Based on our expectations of an increased net working capital level still in the third quarter and seasonally lower profitability, we do expect a lower net cash position by the end of Q3 2022, though, before it then increases significantly in the fourth quarter again. With that, I move on to the details of our outlook for the remainder of 2022 that we published yesterday night. On the current challenging demand environment, we lowered our revenue guidance for this year to 410 to 450 million euro at a minus 22 to minus 14 year-over-year growth rate. For adjusted EBTA, we now expect minus 15 million to break even at minus 4 to 0% adjusted EBTA margin. The updated guidance reflects the extremely low consumer sentiment observed across all segments, especially over the last two months, with no improvements beside normal seasonality expected in H2. The updated adjusted EBDA guidance factors in our updated growth expectations, some margin investments in H2 to reduce inventory levels, and already implemented cost reductions. We strongly believe that we are well positioned to navigate back to growth and profitability. Yet, as stated in the beginning, our current profitability levels as well as cash flows are not meeting our own ambition, and we are committed to steering West Wing back into financially stable territory. Therefore, we have set a clear short-term priority for 2023. In 2023, we expect a neutral to positive free cash flow again. This will be mainly driven by an improving profitability and a lower single-digit networking capital position. While we may remain very confident in the long-term home and living e-commerce market potential and our strategy, we can at the moment, given the potential longer-lasting macroeconomic challenges, not provide a reliable timeframe by when to achieve the communicated mid-term targets of €1 billion in revenues and more than €100 million adjusted EBITDA that we so far wanted to achieve by 2026. But what we are certain of is that With returning growth and hence size, we can achieve a very attractive long-term target P&L with an adjusted EBITDA margin of 10% to 15%, combined with a strong cash conversion. We have proven that our model works immensely well at scale, and the long-term target reflects this through a combination of greater operating leverage, as well as continued expansion of the highly profitable West Wing collection, driving our contribution margins. With that, I will pass back to Andreas to walk you through an update on our strategy before we jointly address your questions at the end of this call.

In this last section, I would like to share a brief update on strategy. Nothing that fundamentally changes the way we work. It's about putting our permanent assortment and our Western collection more to the forefront of what we do. Let me start by listing the core assets we've built over the past years. Firstly, we created a consumer love brand with creativity, daily inspiration, and loyalty at the very core that attracts both new and existing customers to engage with us again and again. Secondly, our unique Western collection is loved by our customers and also helps us to generate superior margins because it's at 10 percentage points higher versus third-party products. Thirdly, we have gained a huge organically built audience with more than 10 million followers across our social media channels. We deliver an outstanding customer experience with best-in-class customer service, unique propositions such as Westling Studio and Westling Delivery Service, setting the next level of post-order experience. As a result of these assets, we achieved best-in-class repeat order shares of 80%. From the time of first purchase, we see the lifetime value of our customers rise, resulting in €1,500 GMB after eight years, which continues to increase. 85% of our sales come from customers who visit us on average more than 100 times per year. This is the strength of our business model, and we continue delivering upon the trust placed in us by new and existing customers, or two new and existing customers alike. To mark the next phase of profitable growth for West Wing, we will further evolve our commercial model and unleash West Wing's full potential by bringing the West Wing collection to the forefront. What we will be doing is the following. 1. Enhancing our product assortment through the rapid build-up of Western Collection to get to more than 50% group GMB share as fast as possible. We will also increase the offering of the best design brands across both daily themes and permanent assortment. 2. Offering a seamless, personalized digital customer experience with world-class shoppable content with heightened visibility for permanent assortment and Western Collection to drive growth and margins. 3. optimizing our marketing and sales model to be more product focused, delivering high margins and superior traffic. As also shared earlier, we will be showcasing Western Collection in our first offline store, and we are working on offering the collection through selected external channels also, which will serve as brand and volume driver. And so, the highly profitable Western Collection will be at the core of our next growth phase, building a clear differentiator. It has unique and sustainable in-house designs. It has very high margins, over 10 percentage points margin upside versus third-party product. It's loved by our customers with lower than average returns. It has great design quality price proposition and therefore superior value for money. As I now end the strategy update, let me summarize the key takeaways. Westing lies at the interface between digitalization of home and living and lifestyle consumer brands. What makes us unique versus the competition is our love brand, daily inspiration and content, a unique Western collection and the best third-party brand in one place. And altogether, that's a one-stop shop for home enthusiasts. Before we move to Q&A, a quick summary on our investment highlights. The opportunity ahead of us is massive. The European home and living market has a size of 120 billion euros and is still very clearly in an early e-commerce state, which provides exciting growth momentum based on dynamic online adoption for years to come. We target about 70% of the overall market by converting more and more customers into home enthusiasts. Customer loyalty is at the core of our business, And we combine this changing dynamic with our unique loyalty-driven business model. We create superior loyalty based on our differentiating inspirational core. As a result, we achieve best-in-class repeat order shares of 80%. Our Western Collection then perfectly leverages the loyalty to our love brand at over 10 percentage points margin upside, and our strategic target is to bring Western Collection to more than 50% share of our GME. We have a strong cash profile. Our financial debt-free balance sheet allows us ample liquidity and strategic optionality to navigate through the current challenging market environment. And lastly, based on this highly profitable consumer law brand strategy, we have an attractive long-term profitability target of 10% to 15% adjusted every year. With that, Sebastian and I are now happy to take your questions. Operator, please open the line. Thank you.