Westwing Group Se

Good morning, everyone, and thank you for joining us for our Q3 earnings call. My name is Andreas Hörning. I'm the CEO of West Wing. Sebastian Westrich, the CFO of the group, is joining me on the call. Looking at today's agenda, after I guide you through our general business update, Sebastian will be presenting the details of West Wing's Q3 financial performance. Then we will be happy to take your questions. Let's take a look at the overall state of West Wing. Firstly, I'm pleased to report that we have returned to growth with our fourth profitable quarter in a row. Specifically, in the third quarter, Group GMV increased by 5% year over year to 107 million euros. At the same time, there are various indications that the overall and online home and living markets are in decline. Nevertheless, we expect our growth to continue in the fourth quarter. Secondly, Q3 was another profitable quarter for us. In this seasonally weaker period, we still achieved an adjusted EBITDA margin of plus 3%, which is 8 percentage points better than in the third quarter of last year, partially due to a strong contribution margin. What is also very important, we were able to maintain a negative net working capital even in the seasonally weakest quarter, and despite the discontinuation of trade financing. We were able to generate a positive free cash flow of 3 million euros. As a result, the company is in a very strong financial position with net cash of 69 million euros as of the 30th of September. Thirdly, turning to operational metrics, I'm glad to share that the number of active customers returned to slight growth for the first time since the end of the pandemic. In addition, the average GMV per active customer increased by 6% year-over-year in the third quarter. We are also pleased with the performance of the Westing collection. Its share of the Group's GMV increased to an all-time high of 48%. Fourthly, in parallel with these developments, we continue to make progress on our strategic projects and launch new ones. The implementation of our strategic initiative One Westing is completed in DACH and mostly completed in other countries in line with our plan. More recently, we've refreshed our brand and launched a brand awareness campaign in Germany. Also, a project to use a lot more software as a service, or SaaS, versus legacy in-house technology has started. Lastly, our expectations for the remainder of the year are as follows. We raised our full year profitability guidance on the 6th of November. This update is mainly driven by a better outlook for the fourth quarter based on stronger than expected preliminary October results. We now expect to achieve an adjusted EBITDA of 13 to 19 million euros with a margin of 3 to 4%. Previously, 4 to 13 million euros with a margin of 1 to 3%. Let's proceed with a closer look at our Q3 top line. The third quarter was still characterized by a challenging market environment. As you can see in the chart on the left, consumer confidence remained at low levels, which is impacting spending in various retail sectors. Despite this, we were able to grow our GMV by 5% in the third quarter, meeting the expectations we shared with you during our last earnings call. It is also worth noting that our year-over-year performance improved from Q1 to Q3. While we started the year with minus 8%, we are now delivering healthy growth. This growth is quite remarkable when looking at the development of the online home and living market. Germany's Federal Association of E-Commerce and Mail Order estimates that online sales in our category fell by 8% year-over-year in the third quarter. Over the same period, our DAF segment grew by 4%. We seem to be clearly outperforming the market. We see more confirmation by comparing our top line performance to our listed peers that recently published their Q3 numbers. Let's now have a look at our profitability. Even in the seasonally weaker Q3, West Wing was once again clearly profitable in terms of adjusted EBITDA. Our margin improved by almost 8 percentage points year over year. As mentioned earlier, Q3 marks the fourth profitable quarter in a row. Returning to financial stability and profitability was a clear priority of ours in 2023, and we are delivering on this commitment. With GME up year-over-year, profitability is benefiting from operating leverage. Even more importantly, we significantly improved unit economics through further growth of the high-margin Western collection and continued efficiency gains in fulfillment. In terms of G and A cost savings, the measures that we initiated last year were successfully completed in the first half of 2023, and we continue to act cost-consciously with high discipline. In light of these positive results, I would like to emphasize that this is only the beginning of our next phase of profitable growth. Our strong contribution margins, combined with the proven scalability of our business, provide for a solid foundation for our long-term P&L target of 10 to 15%. So while we are pleased with our performance in the third quarter, especially given the challenging market conditions, we will continue to strive for further improvements in profitability. Important business KPIs I would like to highlight are the number of active customers and GMB per active customer. The number of our active customers amounted to 1,262,000 at the end of the third quarter, representing a slight quarter-over-quarter increase for the first time since the end of the pandemic. On the right-hand side of the slide, you can see the GMB per active customer, which improved by 6% year over year. This metric reflects how much each of our active customers purchased from us on average over the last 12 months. I see this increase in our customers' share of wallets despite the low level of consumer confidence as a good illustration of the strength of our premium brand strategy as well as the attractiveness of our Western Collection offering. We measure the attractiveness of our Western Collection offering by the share of our own collection in the total business. I'm delighted to report that it accounted for 48% of the Group's GMV in the third quarter, thus continues to expand. With that, we are well on track to achieve our long-term share target of 50 plus percent. In order to get there, we will continue to expand our assortment and increase visibility across all channels. The Western Collection is at the forefront of our next growth phase. For Q4, we expect a seasonally slightly lower share. Now, a brief update on One West Wing. As a reminder, this strategic initiative aims to create a seamless customer experience across our business models, making our websites and apps more convenient and engaging for customers. Following the rollout of the One Western web page and the Merch app, I'm pleased to announce that one cart and one checkout are now live in Germany, Austria and Switzerland. This means that both shop and club items are added to one single cart and the merged cart leads to a single checkout. First results confirm the strategic rationale of the project. One metric we look at is the app share of total shop visits. It increased significantly after implementation from 33% in July to 56% in October. This is due to the fact that all club app users from the past got the shop offering at their fingertips simply through an update of their already installed app. Future steps include the consolidation of the backend technology of Shop and Club and rolling out One Checkout to the remaining countries. This will happen together with the SaaS technology project I will talk about in a minute. Overall, it is great to see the pace at which the team is driving this important change. And we are excited about the ongoing potential of One West Wing to create a much stronger foundation for customer experience and hence our business. Let's move from customer experience to how we market our brand. We recently refreshed our brand appearance with new visuals. This leads to a modernized logo typography as well as a premium and vibrant color scheme. The new design is part of our strategic initiative to clearly position Westing as the leading European premium brand for home and living. This is also supported by the brand awareness campaign Live Beautiful that we've just launched in Germany. On the current slide, you can see some examples of what it looks like. We believe it's the right time to cautiously invest into our premium brand. This brings about an increased marketing ratio, but will also support profitable growth in the future. On the next slide, we see another important initiative that will help us to further improve customer experience and profitability in the future. In a nutshell, we will increase the use of external software as a service, SaaS, to make Westlake's technology stack more modern and efficient. Let me give you some background on this decision. The technology environment in our industry has changed dramatically over the past years. Many e-commerce processes are standardized today and do not offer much potential for competitive advantage. At the same time, various SaaS providers now offer reliable and scalable e-commerce platforms. Also, specialized vendors provide access to a wide range of additional features. On top of that, the pace of technological innovation is accelerating, driven in particular by artificial intelligence. This is why in 2024 and 2025, we will migrate from our internally developed e-commerce platform to a solution largely based on SaaS. Preparations for implementation are already underway. At the same time, tools that uniquely provide for a differentiated customer experience will continue to be developed in-house. Implementation costs will be incurred in the fourth quarter of 2023 and in 2024-2025. On the other hand, from 2025, we expect much shorter development times for new features and lower G&A cash costs. I'm very excited to announce this project, as it will not only reduce our costs, but will also put us in a much better position to grow our business. I now hand over to Sebastian, our CFO, for more details on our financials.

Thank you, Andreas, and good morning, everyone. Let me start with the details of our revenue. Revenue developed in line with GMV in the third quarter and amounted to 93 million euros. This represents an increase of 5% over the same period last year. The international segment is growing slightly faster, up 7% year-over-year, while the DAS segment is up 4%, as Andreas has already mentioned. So we see positive developments across the board. Let's now look at what this means for our bottom line in the third quarter of 2023. I'm pleased to report strong improvements in most of the P&L lines. In the third quarter, our gross margin increased by 2.4 percentage points compared to the previous year. As a result, we achieved a gross margin of over 50%. One of the key drivers is the higher share of our West Wing collection, which comes with better margins. We also improved our fulfillment ratio by 1.5 percentage points compared to the third quarter of 2022. This was mainly driven by further efficiency gains in our warehouses and improvements in freight costs. All this led to a significant improvement in our contribution margin of almost four percentage points compared to the third quarter of 2022. Moving down the income statement, you can see that our marketing ratio increased by two percentage points compared to the third quarter of 2022. This was caused by investments into customer growth, as well as investments into our brand relaunch and the preparation of our brand campaign Live Beautiful. As Andreas mentioned earlier, we expect the marketing ratio to remain slightly elevated in the fourth quarter as well due to the same drivers. Looking further down, we made significant progress in our G&A expenses. The ratio improved by almost six percentage points year over year, driven by our clear focus on efficiency improvements and cost reduction. All of this contributed to the fourth profitable quarter in a row, with our adjusted EBITDA margin improving by 7.6 percentage points year over year to now 2.5% in the third quarter of 2023. Looking at the profitability of our segments, we see healthy developments in both DACH and international. While DACH continues to lead in terms of profitability, the international segment is improving even faster by more than 9 percentage points year over year. Overall, in the first nine months of the year, we achieved an adjusted EBITDA margin of 4%, another significant improvement year over year. Turning to our networking capital, I'm pleased to say that we have continued to keep it in the negative range. As of the 30th of September, it was minus 2 million euros, an improvement of 16 million euros compared to the previous year. It is also worth emphasizing that the healthy level of networking capital was maintained despite the negative seasonal effects and the full repayment of the trade financing facility in the third quarter of this year. As a reminder, at the end of the third quarter last year, we had almost €4 million of trade financing, and if we adjusted from Networking Capital, the like-for-like improvement over 12 months would be €20 million instead of just €60 million. Capital expenditure also remained at a low level. The year-over-year improvement in CapEx was mainly driven by the successful cost reduction of our technology organization as we capitalized a significant part of technology development costs. In addition, we didn't have to make any major investments into our warehouses as we have secured sufficient warehouse capacity in recent years. As a result of the positive development of our P&L, networking capital, and CapEx, free cash flow was also positive in the third quarter, amounting to 3 million euros. In the first nine months of the year, we generated a positive free cash flow of 13 million euros, a significant improvement of 44 million euros yearly. Our financial position remains very strong with 69 million euros of cash and no debt. In the third quarter, we used 7 million euros for the repayment of the previously mentioned trade financing facility and 1 million euros for the share buyback. The strong balance sheet position gives us the ability to continue to manage the business with a long-term perspective despite an unstable and still uncertain macro environment. Finally, let's have a look at the outlook for the remainder of 2023. The full year revenue guidance is confirmed in the upper half of the 390 to 440 million euros range. Of course, there's still some uncertainty regarding our top line development as our most important sales season is just about to start. However, we currently expect that we will be able to continue growth in Q4 2023. Looking at our profitability, we have raised our full year adjusted EBITDA guidance as of the 6th of November. We now expect to achieve an adjusted EBITDA of 13 to 19 million euros. Previously, we expected an adjusted EBITDA in the upper half of the initial guidance of 4 to 30 million euros, which is 9 to 13 million euros. The improvement in our adjusted EBITDA expectation is mainly driven by a better outlook for the fourth quarter based on the stronger than expected preliminary October results despite the challenging market environment. The improved guidance does also include the investment into our brand awareness campaign and also some one-off cash cuts related to the SaaS project Andreas mentioned. We also expect some negative but non-cash effective accounting effects in Q4 caused by the SaaS project as we will have to reverse the capitalization of some software development costs of previous periods. Due to their non-recurring and non-cash character and their relation to previous periods, we plan to adjust those accounting effects in our management accounts. To sum up, we are well on track to deliver our complying guidance with a return to growth and an improved profitability in a challenging market environment. And we have maintained a strong cash balance despite the repayment of the supplier finance arrangements based on networking capital improvements and positive free cash flow. So overall, I think we closed the third quarter with good results and a positive outlook for Q4 2023. With that, I would like to hand it over to Andreas for a brief summary and our Q&A session.

Thank you, Sebastian. As always, we're closing the update with a brief summary of our investment highlights before moving to Q&A. First of all, what is West Wing in a nutshell? It's Europe's leading premium one-stop shop for home and living. This is what we are building. The opportunity in front of us is massive. The home and living market in the countries where we operate has an estimated annual turnover of 130 billion euros and is still in the early stages of e-commerce with exciting growth prospects for years to come. In addition, West Wing is situated in the highly attractive premium segment. And West Wing is already a love brand in this market. We have over 10 million followers on our social media channels. The repeat purchase rate is over 80%. And we are loved by rather young customers with high home and living spend. Our Western Collection is a strong driver. It already generates 48% of total GMB. Creativity and brand loyalty enable a margin uplift of more than 10 percentage points. Our business model is proven to be scalable as we already operate successfully in 11 countries. Further growth is possible without significant investments into physical infrastructure. You also have a strong balance sheet which provides us with ample liquidity and strategic optionality to navigate through the current challenging market environment. And finally, Based on the already best-in-class contribution margin, the proven scalability of our business model, and our love brand, we have an attractive long-term profitability target of 10% to 15% adjusted everyday margin. Now, Sebastian and I are happy to take your questions.