Westwing Group Se

Good morning everyone and thank you for joining us for our Q2 2023 earnings call. My name is Andreas Hörning, I'm the CEO of West Wing. Joining me on this call is our new CFO, Sebastian Westbrich, who joined West Wing at the beginning of the month. Looking at today's agenda, after I guide you through our general business update, Sebastian will present the details of West Wing's Q2 financial performance. We'll then be happy to take your questions. Let's take a look at the overall state of West Wing. Firstly, despite an ongoing challenging market environment, we were able to stabilize our top line in terms of GMV and active customers. We continue to expect to return to sustainable growth in the second half of 2023. Secondly, I'm pleased to announce that the second quarter of 2023 marks our third profitable quarter in a row. Our free cash flow performance was 13 million euros better than last year. We continue to make very good progress with our strategic initiatives. Our high-margin West Wing collection reached a Group GMB share of 46% in Q2 2023 and our One West Wing initiative has again reached important milestones in line with plan. Fourthly, we confirm our 2023 guidance and currently expect to achieve revenue and adjusted EBITDA in the upper half of the guidance. Our Q2 results have again confirmed that we are on the right track. Let's proceed with a closer look at our Q2 top line. The second quarter of 2023 was still characterized by a difficult market environment. We successfully stabilized our top line, achieving a GMV of 109 million euros or 0% year-over-year growth. This also represents an increase of almost 70% compared to the pre-pandemic 2019 baseline. We were also able to stabilize the number of our active customers. As this KPI is calculated based on a last 12 months logic, we compare quarter over quarter developments. In Q2 2023, the number of active customers amounted to 1.3 million, which is basically stable compared to the previous quarter, Q1 2023. Overall, our top line is developing well in a difficult market environment. We expect to return to sustainable growth in the second half of 2023. An important top line KPI that I would like to highlight is our GMV per active customer. This KPI reflects how much each of our active customers purchased from us on average in the past 12 months. It is a great testament to our business model that we achieved plus 8% year over year in GMV per active customer in Q2. This substantial increase in share of wallet with our customers is driven by our love brand strategy and the subsequent loyalty of our customers, a strong focus on exciting offerings with our Western collection and our shop and generally a great customer experience. Let's now look at profitability and cash flow. As mentioned beforehand, Q2 2023 marks the third profitable quarter in a row. Returning to financial stability and profitability was a clear priority of ours for 2023, and we are delivering on this commitment. We achieved an adjusted EBITDA of plus €4 million, with an adjusted EBITDA margin of 4.4% in Q2, which marks an improvement of €7 million year over year. The improvement in profitability was accomplished through substantially better unit economics and the successful implementation of cost-saving initiatives across G&A, marketing, and CapEx. The improvement in unit economics was driven by a positive development of the high-margin Western collection and continued efficiency gains and fulfillment. In terms of cost savings, the measures that we initiated last year were successfully completed in the first half of 2023. Yet, it is important to note that we will continue to act cost-consciously going forward. On cash, we continued to successfully manage down overstock and maintained a negative net working capital. The improvement in net working capital combined with the operating profit resulted in strongly improved fee cash flow and a strong cash position of 76 million euros per end of Q2. However, in light of these positive results, I also want to emphasize that this is only the beginning of our upcoming phase of profitable growth. Our strong contribution margins in combination with the proven scalability of our business will enable a target P&L of 10% to 15% adjusted EBITDA in the long run. Hence, while we are pleased with our performance in the second quarter, especially considering the challenging market conditions, we will continue to strive for further improvements in profitability. With regards to unit economics, I just stated that we're continuing to increase the share of our own collection versus the total business. I'm delighted to report that our high margin Western Collection counted for 46% of the Group's GMV in Q2, which marks an 8 percentage point increase versus Q2 2022. With that, we are well on track to achieve our long-term 50% plus share target. In order to get there, we're putting our Western Collection at the forefront of our next growth phase through further assortment expansion and greater visibility across all channels. One example of this enhanced visibility are exclusive Westin Collection events. On the right-hand side of the slide, you can see some impressions of the launch of our new lounge chair called Fleur. I'm extremely proud of the quality that we have reached with these events. We consistently receive great feedback from our customers and influencers, and we generate massive reach across many channels for our Westin Collection. Lastly, A brief update on One West Wing. As a reminder, this strategic initiative aims at creating a seamless customer experience across our business models, shop and club, making our websites more convenient and attractive for customers. Following the successful test phase and rollout of the new web page layout with a unified domain for all our markets, we've now started the rollout of our merged apps. We are already live with our merged Android and iOS apps in one country, and the rollout will happen within the next few weeks. Further steps include merging the cart and checkout for our customers and consolidating the backend technology of Shop and Club, as well as optimizing our traffic and other marketing drivers. Overall, it is great to see the pace at which the team is driving this important change, and we are excited about the potential of One Westing to create a much stronger foundation for our business. I hand over to our CFO Sebastian for more details on our financial results.

Thanks a lot Andreas and hello from my side to everyone. My name is Sebastian Westrich and I'm the new CFO of West Wing. I joined West Wing last week. I have had a great start with a fantastic team. I am very pleased to be able to speak to you today and present our Q2 2023 results. Before we take a closer look at the results of the second quarter of 2023, let me briefly introduce myself. I have now more than 10 years experience working in the e-commerce industry, mostly in finance-related leadership and CFO positions. Before joining West Wing, I spent three years as CFO of the e-commerce division of Huber Bruder Media and was also CFO of Cyberport, a large multi-channel consumer electronics retailer. During my career, I've seen many different business models at different stages of maturity, both online and offline channels, as well as B2C and B2B customers. However, there has always been a strong focus on B2C e-commerce. With my experience and passion for e-commerce, I will contribute to the successful development of the company with a clear focus on effective financial management and driving West Wing's growth and profitability. I'm super excited to start working with Andreas and the entire team as I strongly believe in West Wing's huge potential as a consumer love brand, dividing its loyal customers and creating value for its shareholders. Having said that, let us dive into the review of our Q2 2023 results. First up is top line development. As Andreas has already described, we achieved a stabilization of top line in Q2 2023, despite a continued challenging market environment. Revenues in Q2 2023 developed in line with GMB and amounted to 102 million euros, with only a slight decrease by 1% year over year. In these volatile markets, it remains important to also look at longer time horizons. Compared to Q2 2019, we increased revenues by 75%, which showcases the growth we have realized over the past years. Looking at segment growth, we can see that the international segment has already returned to a growth of 4% year-over-year to 47 million euros in the second quarter of 2023. The DAS segment was down by 5% year-over-year in Q2 2023, but also here we see a positive trend and stabilization of the top line. We can't put the better growth of the international segment down to one specific reason as both segments follow the same strategy. But there are timing effects. For example, we are rolling out our one Western initiatives earlier and some international markets roll out later. In the first half of the year, we achieved revenues of 205 million euros for the Group. This represents a decline by 4% year over year. Now we move on to our income statement. Starting with Q2, our gross margin increased by 1.9 percentage points versus previous year to 15.5% in Q2 2023. We continue to be able to compensate for overstock and inflationary effects with a higher Western collection share and receive the full impact of last year's price increases, which we introduced to compensate for cost inflation. In terms of fulfillment costs, we will realize further efficiency gains in our warehouses. For instance, we closed a smaller warehouse to increase the utilization of our remaining warehouses in Q2 2023. As a result, we improved our fulfillment ratio by 1.7 percentage points year-over-year to 21.7%. The positive development of both gross margin and fulfillment ratio led to a strong improvement in our contribution margin by 3.6 percentage points to 28.8%. Even more notably, we improved our contribution margin by more than 10 percentage points compared to 2019. Such an improvement in unit economics in our extremely competitive retail market extraordinary and showcase the competitive advantages we have built with our West Wing collection and efficient fulfillment platform. Moving down the P&L, our marketing ratio has improved by 0.7 percentage points to 9.4%. The reduction in marketing expenses is mainly driven by a more efficient setup, which resulted in personnel and OPEX cost savings. We continue to optimize our marketing efficiency while setting up West Wing for sustainable future growth. In addition, the G&A ratio improved substantially by 1.8 percentage points for this previous year to 19.7 percentage points. As already mentioned, we have by now completed our cost saving measures and reduced costs in line with our expectations. Going forward, we will reduce the G&A ratio further based on the proven scalability of our business model and the strong cost discipline. This brings us bottom line to the third profitable quarter in a row and a strongly improved adjusted EVDA margin of 4.4% in Q2 2023, an improvement by 6.6 percentage points versus the previous year. Looking at the overall results for the first half of 2023, we see that they are in line with the year-over-year development of the Q2 results. Although here we improved all P&L lines substantially and closed the first half of 2023 with an adjusted EVDA margin of 4.6%, which is an increase percentage points year-over-year. Let's take a closer look at profitability. In absolute numbers, we generated €4 million of adjusted EBITDA in the second quarter of 2023, which is an increase by €7 million compared to last year. The first half of 2023 amounts to €10 million in adjusted EBITDA, which is a €14 million improvement year-over-year. In terms of segments, DAF delivered a very profitable second quarter with an adjusted EBITDA margin of 7.8%, while the international segment crossed an important milestone and achieved a break-even result at 0.4% adjusted EBITDA margin. Let's move on to our cash development, starting with our networking capital position. At the end of Q2 2023, our networking capital was once again negative at minus 5 million euros and 29 million euros lower than at the same time last year. This tremendous reduction in networking capital was mainly driven through a continued reduction of overstock. Overall, we managed to reduce inventory by 23 million euros compared to Q2 2022 without hurting our P&L significantly through aggressive discounting. In addition, we continue to work with a trade funding solution which had an impact of 7 million euros in Q2 2023. At this point, we are reviewing the further utilization of trade financing in the coming quarters. Based on our strong cash position, We may decide to reduce or stop the utilization of trade financing for the time being. For the remainder of 2023, we expect networking capital to remain at healthy levels. However, for Q3 2023, we expect networking capital to increase due to typical seasonal effects, and the development will also depend on the utilization of trade financing going forward. Next is CapEx development. Overall, our capex investments and capex ratio decreased significantly compared to last year. The improvement in the capex ratio was mainly driven by the successful cost reduction in our tech organization as we capitalized a significant part of tech development costs. In addition, we didn't have to take any major investments into our warehouses as we have secured sufficient warehouse capacity in the past years. The capex ratio of 2% in Q2 2023 once again highlights our capex-like business model, which enables a high degree of cash conversion progress going forward. Based on the positive developments in our P&L, networking capital and capex, Q2 2023 was likely free cash flow positive and improved strongly by €13 million worth last year. For the first half of 2023, we generate a strongly positive free cash flow of which is a significant improvement of 40 million euros compared to last year. Based on this development, we were also able to maintain our strong cash balance. We ended the quarter with a healthy cash balance of 76 million euros, which gives us the ability to continue to steer the company with a long-term perspective as the opportunities are at amnesty. Now to the outlook for the remainder of 2023. The results for the first half of 2023 have been consistent with the projections we set forth. This indicates that our strategic planning and execution are on track, even amidst the challenges posed by the current market environment. Our financial priorities for this year have been and still remain to regain profitability and enable a positive free cash flow. We are very confident to achieve these goals on a full year basis in 2023. Looking ahead, we remain confident based on the progress we have made and the positive trajectory we are on. We therefore continue to expect a return to sustainable growth in the second half of 2023. Based on this, we also confirm our full year 2023 guidance for March and expect currently to achieve revenue and adjusted EBITDA in the upper half of the guidance. The guidance from March indicates revenues of 390 to 440 million euros and a positive adjusted EBDA of 4 to 30 million euros. In terms of outlook, please keep in mind that the seasonally weak third quarter is expected to be less profitable than the first half of 2023. With that, let me hand it over to Andreas for a quick summary and Q&A.

Thank you, Sebastian. As always, We are closing the update with a brief summary of our investment highlights before we move on to Q&A. The opportunity ahead of us is massive. The European home and living market has a size of 130 billion euros and is still in the early stages of e-commerce, which provides exciting growth momentum based on dynamic online adoption for years to come. In addition, Westing offers public investors a unique investment opportunity into the very attractive premium segment of this market. Customer loyalty is at the core of our business. We create superior loyalty based on our differentiating and inspirational core. As a result, we achieve best-in-class repeat order shares of over 80%. Our Western Collection then perfectly leverages the loyalty to our love brand at about 10 percentage points margin upside, and our strategic target is to bring our Western Collection share to greater than 50% of GMV. As of Q2 2023, it was already at 46%. We have a strong cash profile, and our strong balance sheet provides us with ample liquidity and strategic optionality to navigate through the current challenging market environment. And finally, based on this highly profitable consumer upfront strategy, our best-in-class contribution margins, and the proven scalability of our business model, we have an attractive long-term profitability target of 10% to 15% adjusted EBITDA. Those were our investment highlights. Before we get to Q&A, let me thank our interim CFO and Director Corporate Finance Max for the support during the transition period and the ongoing smooth handover to Sebastian. With that, Sebastian and I are happy to take your questions.