Westwing Group Se

Good morning, everyone, and thank you for joining us for our full year 2023 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, I will begin by providing key updates on our business for 2023, after which Sebastian will share the details of West Wing's financial performance. I will then outline our path to full value potential and Sebastian will present the financial implications of it, including our guidance for 2024. After our investment highlights summary, we will be happy to take your questions. Let's take a look at West Wing's key achievements of the past year. Firstly, I am pleased to report that we managed to deliver strong financial results in a declining market. We were able to keep our top line stable with revenue of 429 million euros and delivered an adjusted EBITDA of 18 million euros, both in the upper half of our updated guidance. Free cash flow was very strong at 30 million euros. Secondly, we improved our margins and cost structure and kicked off further improvements. The cost savings were a result of the 30 million euros savings commitment we had made in 2022. The most important upcoming improvement lies in our project to move from a proprietary in-house technology platform to a mostly software-as-a-service-based solution, which we kicked off towards the end of last year. Thirdly, we are also very pleased with the performance of our West Wing collection, which is our gorgeous, sustainable private label product brand. Its share of the group's gross merchandising volume, or GMV, grew further by six percentage points year-over-year, to an all-time high of 47% for the full year. Fourth, we implemented the One Western commercial model for seamless customer experience, such as a single site and app across our shop and club sales business in the DACH region and mostly in our international segment in line with our plan. Fifth, we successfully strengthened our premium positioning in 2023. This was done mainly through product assortment updates, investments into a refreshed brand identity and brand awareness, better on-site content, collaborations and first steps in offline presence. Sixth, we made progress on our ambitious sustainability targets. We continued our focus on products, planet and people and got the official validation for our long-term science-based targets on the reduction of greenhouse gas emissions. Let's take a look at our 2023 top line and its drivers. As I just mentioned, we kept our top line promise by delivering 429 million euros in revenue, which corresponds to a GMV of 481 million euros. Important KPIs I would like to highlight are the GMV per active customer and the number of active customers. The GMV per active customer improved by 4% year over year. This metric reflects how much each of our active customers, that is anyone who made a valid order within the last 12 months, purchased from us on average in 2023. The positive trend is very promising as our customers are spending an increasing amount of money with us. The number of our active customers itself is promising as well. Mid 2023, we reached a post-pandemic turning point and since then have been able to slightly increase the number of active customers quarter over quarter, both in Q3 and in Q4. At the end of 2023, the number of active customers stood at 1.3 million. Let's briefly put our top line into perspective by looking at market development. As you can see on the left hand side of the slide, the German online home and living market declined by 10% for the full year 2023, with a slight recovery in Q4, but still at minus 6% year over year. We clearly outperformed this market development. For the full year, our DAF segment achieved minus 3% year over year compared to the minus 10 for the market. In Q4, we achieved a plus 2% growth compared to a minus 6% in the market. We believe that the return to growth in a shrinking market proves that we're right on track with our One West Wing commercial model. Besides top line, we also delivered on our profitability promise. Cost savings and operational improvements paid off in 2023, leading to an adjusted EBITDA of 18 million euros at a 4.1% margin. This marks an improvement of 5 percentage points year over year. Retaining to financial stability and profitability was the number one priority of ours in 2023, and we clearly delivered on it. The good profitability in combination with a fantastic networking capital development resulted in a strong free cash flow of 30 million euros and a great net cash balance of 82 million euros with no debt by the end of 2023. Sebastian will share details in a few minutes. As I said, returning to profitability was the clear priority of ours in 2023. Let me briefly outline what we focused on last year besides the completion of the €30 million cost savings. Next to our West Wing collection, which I already mentioned, main strategic initiatives were the completion of our One West Wing commercial model, the strengthening of our premium brand positioning, and our progress in sustainability. Regarding One West Wing, we now have all our offerings for our customers on one site and one app in all West Wing countries. Only the single checkout at purchase across shop and club sales offering is still missing in some geographies in line with our rollout plan. We continue to see more activity across the business models and especially more activity in our shop offering in the single app. About the strengthening of our premium positioning. Here I will provide some details later during the call. But let's have a closer look at our achievements and sustainability in 2023. Sustainability is at the core of our strategic development. We cluster the initiatives in three categories, products, planet, and people. On products, most importantly, we increase the use of sustainable materials. For the West Wing Collection, 48% of the products now feature our We Care label, meaning the products and or their input materials are made according to referenceable and credible sustainability standards. On top, We've implemented 100% sustainable packaging for all West Wing collection products. We also improved on sourcing and social responsibility throughout our supply chain. We evaluated all non-EU suppliers and a large share of our EU suppliers on social aspects in 2023. Let me jump to the third category, people. Our fantastic team is what constitutes this company, and in the context of our sustainability efforts, we've been investing ever since in the well-being, health, and safety of team members at offices, logistics centers, and our stores. For instance, we were able to reduce lost time accidents significantly in 2023. Coming to the second point on the slide, planet. This is about greenhouse gas emission reduction. Two points are worth mentioning here. Firstly, thanks to consolidation of our operations and improved energy efficiency, we were able to reduce our Scope 1 and 2 emissions significantly in 2023. Secondly, and moving to the next slide, we received validation for our long-term carbon targets by the Science-Based Targets Initiative . These targets include a 75% reduction in greenhouse gas emissions for Scope 1 and 2 until 2030, and the commitment that 80% of our suppliers by spend will have science-based targets in line with the 1.5 degrees Celsius Paris Agreement in place themselves by 2027. I want to highlight this in particular, not only because it showcases our commitment to transforming our business practices in line with climate science, but also because it will underpin our sustainability efforts over the coming years. We are in the process of developing our Climate Transition Plan that outlines specific initiatives to achieve our emission reduction targets. If you would like to learn more on our efforts in sustainability, please also refer to our 2023 Sustainability Report, which will be published on the 4th of April in a few days time. I now hand over to Sebastian for details on our financial performance.

Thank you, Andreas, and good morning, everyone. I am Sebastian Westrich, the CFO of Westling. Let me start with a quick review of our 2023 financial results in comparison to our guidance. Our initial guidance for 2023 aimed at revenue between 390 and 440 million euros and an adjusted EBITDA of 4 to 13 million euros, which corresponded to an adjusted EBITDA margin between 1 and 3%. At the beginning of November 2023, we were able to raise our guidance. We communicated expected revenues in the upper half of the guidance and increased the guidance for adjusted EBITDA to 13 to 19 million euros due to the positive outlook for Q4 2023. We are very proud to have delivered both revenue and adjusted EBITDA in the upper half of our updated guidance. We closed the year 2023 with revenue of 429 million euros and an adjusted EBITDA of 18 million euros. In addition, this performance enables us to achieve positive free cash flow for the full year 2023, and I will go into more detail on top line, profitability, and cash flow in the following slides. Let us start with the development of our top line. We achieved a stable top line in 2023 and returned to growth in the second half of the year. While we realized GME for the full year slightly above 2022, revenue was very slightly below previous year's levels, decreasing by 1%. After the return to growth in Q3 2023, we were also able to continue growth in Q4. Given the weak home and living market that Andreas mentioned in the beginning, the stable top line indicates market share gains and therefore is a great achievement. If you now take a closer look at the revenue development by segments, you can see that the international segment grew by 2% year-over-year in 2023, while the DAS segment showed a slight decrease by minus 2%. The stronger development of international compared to DACH remained also in Q4, with a stable year-over-year top-line development of DACH and a 4% growth of our international segment. As we are often asked about the reasons for the stronger growth of the international segment, I can only repeat our previous statements. The stronger performance of the international segment is probably due to better consumer sentiment in some of the countries compared to DACH. In addition, we rolled out our one West Wing commercial model earlier in international, and there will be difference in terms of competition, market share, et cetera. There are many different factors influencing the development of individual countries, and we cannot point to one major driver. On the next slide, I would like to highlight one of the key drivers of our top line recovery. That is the development of our active customers. The number of active customers, their customers with a valid order within the last 12 months and of the reporting period by during the pandemic and has been declining since then. However, in Q3 2023, we reached an important turning point in return to growth looking at quarter over quarter numbers. This positive trend continued in Q4 2023 with a 1% growth in active customers quarter over quarter. Another important key performance indicator that I would like to highlight is our Western Collection share. Andreas already mentioned the increase in 2023 to an all-time high of 47%. This strong development supports our profitability as our Western Collection products allow us to realize higher contribution margins compared to third-party brands. On the next slide, I will show you the positive development of our contribution margin in more detail. The graphic on this slide shows the development of our contribution margin per order in Euro over the last five years, as well as the contribution margin as percent of revenue in the boxes above the bars. The chart shows that we earn more money with every single order. And it shows that we realized huge improvement in 2023, increasing the contribution margin in Euro per order by 23% from €35 in 2022 to €43 in 2023. This improvement in unit economics is showcasing the strengths of our One West Wing commercial model. It is driven by three main effects. Firstly, by higher average basket size driven by both West Wing collection share and the premiumization of our offering. As a result, the average basket size increased by 10% year-over-year in 2023. Secondly, by improved gross margins, again driven especially by the higher West Wing collection share, and last but not least, by efficiency improvements and cost reduction in wealth operations and freight. Let us now move on to our management P&L. Looking at our management P&L, we see improvements across almost all P&L lines. In 2023, our gross margin increased by 2.6 percentage points compared to the previous year. In the fourth quarter of 2024, we even achieved an increase by 4.2 percentage points year over year. As a result, we achieved a gross margin well above 50%. As mentioned before, one of the key drivers, the higher share of the Western Collection, which comes with better margins. We were also able to improve our fulfillment ratio by 0.7 percentage points for the full year, but due to one-off costs related to the consolidation of our Polish warehouse footprint, our fulfillment ratio increased by one percentage point in Q4 year-over-year. We expect the logistics ratio, however, to decrease again in 2024. All this led to a significant improvement in our contribution margin of more than three percentage points in both full year 2023 and Q4 2023 compared to previous year. We are very proud of this development and it proves the strength of our commercial model. Moving down the management panel, you can see that our marketing ratio increased by 1.5 percentage points for the full year 2023 and increased by 5.1 percentage points in Q4. This was mainly driven by investments into our refreshed premium corporate identity and brand awareness campaign Little Beautiful that Andreas already talked about. Please keep this in mind when looking at the segment profitability as the marketing investment mainly was allocated to the DACH region and thus reduced adjusted EBITDA margin in DACH. We will continue to invest in our brand in 2024 so the marketing ratio will remain elevated. Looking further down, we made significant progress in our G&A expenses. The ratio improved by around three percentage points, driven by the successful implementation of cost savings and clear focus on efficiency improvements. G&A increased compared to 2022. There are two main drivers for this development. The first is the shortened lifetime of our in-house developed technology assets as we decided to move to a mostly SaaS-based technology platform. The second is higher lease payments based on index-linked rent. All this contributed to a strong improvement of our adjusted EBITDA margin year-over-year by more than five percentage points for the full year 2023, leading to a 4.1% adjusted EBITDA margin. This, by 2023, marked the turnaround for West Wing in terms of operational efficiency and profitability. As we are looking here at the management P&L, I also want to quickly update you on the adjustments of one-off effects related to the tech migration that we mentioned in our Q3 earnings call in November. As explained, we had to reverse the capitalization of internal tech development as we had decided to move to a mostly SaaS-based platform. This non-cash accounting effect had an impact of 3.9 million euros in Q4 2023 and was adjusted in the management P&L. In addition, we realized first one-off cash costs for the implementation of the new tech platform amounting to 0.2 million euros for severances, which were also adjusted in the management P&L. The described adjustments are part of the appendix of this presentation and we will keep you updated on the development of the one-off cash costs also going forward to allow for full transparency. In addition, you can find the unadjusted consolidated income statements in our quarterly reports. Looking at the profitability of our segments, we see healthy developments in both DAH and international. And we are pleased to report that the international segment is catching up with the profitability of DACH segment and shows positive adjusted EBITDA both for the full year and Q4 2023, especially driven by positive developments in France and the Netherlands. The DACH segment achieved an adjusted EBITDA margin of 6.8% in full year 2023, up 3.5 percentage points year over year, but the international segment is now also profitable with an adjusted EBITDA margin of 1.1% in full year 2023. This is a significant increase by 7 percentage points year-over-year. This positive development overall is mainly driven by an increased Western collection share and efficiency gains. In Q4 2023, the adjusted EBITDA margin of DAG was below previous year's level, which is mainly caused by the brand awareness campaign that was focused on the German market so far and which I already talked about briefly. Without the brand awareness investment, the adjusted EBITDA margin of DAG would have been well above the previous year's level. Turning to free cash flow, I am pleased to say that the positive development of our adjusted EBITDA, networking capital and CapEx enabled a very strong positive key free cash flow of 30 million euros in 2023 and increased by 48 million euros year over year. In Q4, the free cash flow also improved by 5 million euros year over year to 60 million euros. A key driver was an improvement of networking capital, which was mainly driven by the massive reduction of inventory by 17 million euros compared to the end of 2022. I will highlight the improvement of the networking capital on the following slide. In 2023, networking capital improved by 11 million euros compared to 2022 and was negative at minus 8 million euros. This is a great achievement and mainly driven by the significant reduction of our net inventory, the major driver being the reduction of our stock. I'm very happy about this development as we were able to improve gross margin at the same time as I showed earlier. Let's now look at the CapEx development. We reduced CapEx in 2023 year-over-year by 9 million euros to 5 million euros in 2023. The CapEx ratio in 2023 was 1.3% of revenues. I would like to mention that we had a positive effect from CapEx from the reversal of the capitalization of internally developed tech solutions of 3 million euros, which is part of the one-off effects related to the tech migration that I mentioned earlier. The CapEx reduction compared to 2022 without this effect would be 6 million euros, which still is a good result. On my last slide in the financial update, you can see the net cash development year over year. As a result of this strong free cash flow, we were able to strengthen our balance sheet with a net cash position of 82 million euros at the end of 2023. This included investments of 4 million euros in our share buybacks. Our lease payments, which according to IFRS 16, have been shown in the financing cash flow and therefore are not part of the free cash flow, amounted to 12 million euros. We are pleased to have ended the year 2023 with a strong balance sheet with zero debt This gives us the strategic optionality and the confidence to focus on our long-term strategy in a challenging market environment. With that, I would like to hand it over to Andreas, who will talk now about our way forward.

Thank you, Sebastian. Let's now look into our way forward to unlock West Wing's full value potential over the next years. We are in the middle of a three-step plan to do exactly that. I will outline the steps on this slide, including the main levers, which you will see on the same slide as we go. The first step was to turn around the company post-COVID and to implement an updated strategy. This phase lasted from mid 2022 to the end of 2023. The second step, which we are currently in and will last into next year, is about building a lean, scalable platform. The third step, which we will enter into next year is then to grow the business while being disciplined on costs, which means we will make use of the operating leverage potential that lies within our business model. On the slide, you will now see the main profitability and top line levers connected to the three phases. For the first phase, the turnaround meant we had to right size the organization. In parallel, we increased the Western Collection share which by the way is not only a margin driver but also a top line driver since the products are so desirable. We also implemented our One West Wing commercial model and we started to strengthen our premium brand positioning. For the current phase, we are reducing complexity further across the company mainly with two initiatives, the technology switch and another one that I will outline in a minute. By the way, When we talk about building a platform, we do not mean things like marketplace or logistics services for third parties. Our platform is about the 360 degrees customer experience for a one stop destination. It includes different ways to navigate our product assortment, mainly shop and club sales, but also stores and retail partner channels. It also includes aspects such as our social media presence and our premium services, for example, the interior design service and the West Wing branded delivery fleet. During the third phase, we will be growing the business both within and outside of our current geographies and stay disciplined on costs, as I said. On the slide, you can now also see what we believe the levers mean for bottom and top line. You can see that during the turnaround, our business shrank and we went from minus 1% to plus 4% adjusted EBITDA from 2022 to 2023. In the current phase, top line is expected to be rather flat and you can see that we will have a better profitability on average than in the first phase. Sebastian will talk about this later. From next year onwards, pending market development, of course, we believe we can grow the business again. Over time, we will then get to 10% plus adjusted EBITDA. Again, Sebastian will share more thoughts on this later. Before I hand over to Sebastian, I will outline three of the levers a bit more in detail on the following slides, complexity reduction, brand positioning and country expansion. Starting with complexity reduction. The first topic, the switch from a mainly in-house to a mainly external software as a service or SaaS technology solution was announced already last year. I will repeat the main rationale. 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. And on top of that, the pace of technological innovation is accelerating, driven in particular by artificial intelligence. This is why we are migrating from our internally developed e-commerce platform to a solution largely based on SaaS. Preparations for implementation are underway. It's important to mention that tools that uniquely provide for a differentiated customer experience will continue to be developed in-house. The other three topics on the slide are interlinked. One is the consolidation of our logistics center footprint. Currently, we have extra logistics centers in Poland, Italy, and Spain to serve the needs of our local club sales business. we will consolidate them into our large European logistics center located in Poland where we still have sufficient capacity and benefit from scale effects. The next topic is about restructuring our corporate functions in Italy and Spain. To date, we have significant local offices in Milan and Barcelona and the setup needs to become more efficient. Italy and Spain are core markets for West Wing and we are committed to provide our valued customers with an exceptional service. But to ensure the viability of the Italian and Spanish entities, we have to restructure our organization in these countries and make them profitable. The adapted setup aims at using synergies by implementing a streamlined and less complex structure. This is closely connected to the last topic, the harmonization of our offering across countries towards a mostly global product assortment. This approach had already been implemented in the Netherlands and France a few years ago, and has proven to be successful. Hence, it will be implemented in Italy and Spain as well. All of these measures will help us to build a lean and flexible platform, while the switch to a mostly global offering will likely lead to a temporary top line loss in Italy and Spain. On the next slide, I will talk about the strengthening of our premium brand positioning. It has six main aspects. First and most important one is our product assortment. We are doubling down on the uniqueness of it through our own design Westing collection and the best third party design brands. We are building Europe's premium one stop destination for home and living design lovers. The second aspect is about building our premium services that complement our retail activities further. These services include our Westing branded delivery fleet, our interior design service and best in class customer care. Thirdly, we are continuing to invest into brand marketing. We refreshed our premium brand and corporate identity in 2023 and launched the brand awareness campaign Live Beautiful in Germany. We will continue on this journey and scale it to other countries. Fourth, we are pushing for an even more attractive, inspirational storytelling with refined visuals and tone of voice to support customers' purchasing decisions. Investments are being made, for example, into our content production facilities. Fifth, we will engage much more in collaborations with premium brands and well-known personalities. As an example, in Q4 2023, we collaborated with footballer Lukasz Podolski. The collaboration was a great success and addressed new customer segments. Lastly, we will continue to expand our offline presence. In 2022, we opened our first offline store in Hamburg in a prime location on Jungfernstieg, a few footsteps away from Cardi B's Alsterhaus. Earlier this month, we opened our second physical retail space in a special location. Let me show you some impressions of our new store. Our new offline location in Stuttgart is our first ever store-in-store, and it sits within Breuninger's flagship fashion lifestyle house. one of Europe's leading upscale department stores. It's only three weeks ago that we opened this location. Our guests enjoyed an exciting evening event hosted by our founder, Delia Lachance, and Breuninger's flagship store manager, Gerhard Schmarholz. Ever since, customers have been flocking to our gorgeously designed area to touch and feel the West Wing brand and our beautiful West Wing collection products. That's exactly why we are doing this. We will continue to selectively expand our offline presence in major cities throughout Europe over the next years. Talking about expansion, we will also be opening new country websites over the next few years. However, it is important to mention that the new country expansion will follow an entirely different setup compared to what West Wing did in the past. In the years after founding, West Wing entered new countries by building up local offices and warehouses with a significant local team setup. The focus was on a local supply base and product assortment consisting of third party products. The offering was heavily focused on the club sales business and the setup only allows for very small scale effects. As I just mentioned, we're currently changing the historic setup in Italy and Spain with a restructuring. For our upcoming country expansion, we will focus on a very lean and flexible setup. Any new country will be managed by our headquarter team in Munich, and served by the Central European Logistics Center in Poland. We will offer a mostly global product offering and will translate content supported by artificial intelligence to the various languages. The offering will be Shop and West Wing Collection Fest. This setup will allow us to scale with operating leverage. West Wing is currently active in 11 European countries. We will start the expansion by adding Portugal to our Western countries still this year. Based on our learnings, we will then expand to additional European countries from 2025 onwards. Sebastian will now share the financial implications of our path to full value potential and the outlook for 2024. Thank you, Andreas.