Westwing Group Se

Good morning, everyone, and thank you for joining us for our earnings call on the third quarter of 2024. My name is Andreas Hörning. I'm the CEO of West Wing. I'm hosting the call together with Sebastian Westrich, our CFO. Looking at today's agenda, I will begin by providing key updates on the business, followed by Sebastian, who will be presenting the details of West Wing's financial performance. After our investment highlight summary, we will be happy to take your questions. Let's take a look at West Wing's current state and the key achievements in a good third quarter of 2024. We were able to increase our GMV by 2% and our revenue by 3% year over year in a still declining market and while shifting to a mostly global and more premium product assortment. In the DACH segment, we clearly outperformed the market Our top line grew 9 percentage points faster than German online home and living. Adjusted EBITDA amounted to 4 million euros or 4% of revenue. This result was driven by an improved contribution margin and sustained investments into brand awareness. Our free cash flow of the third quarter amounted to minus 6 million euros. It was negative mainly due to the seasonal increase in inventories. Our net cash position at the end of the quarter amounted to 63 million euros. Beyond current financials, we again made good progress on our three-step plan to unlock West Wing's full value potential. Firstly, we successfully implemented the announced reorganizations in Central and Eastern Europe and in our headquarters. Secondly, the migration from our propriety technology ecosystem to a mostly software as a service or SaaS-based platform reached the next important milestones. The new platform was successfully rolled out to customers in four additional countries ahead of plan. Thirdly, we further increased our Western Collection share to an all-time high of 58% of Group GMB in the third quarter. Fourthly, we continued to strengthen our premium brand positioning, for example, with our iconic Pieces brand awareness campaign in Germany. Last but not least, The overall development is fully in line with our guidance that we published in March and which we confirmed today. 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 market for furniture, lighting, and decoration declined year over year in every quarter of 2024. The 5% decline in the third quarter of 2024 was the worst so far. We clearly outperformed the German online market by 9 to 11 percentage points in each quarter of 2024, and our DACH segment continued to grow also in the third quarter. It is worth noting that we achieved this outperformance while switching to a more premium assortment and actively cutting back on non-premium products, which had a negative effect on both our active customer base and on top line. We believe that our growth in a weak market proves that we're right on track with our One West Wing commercial model and the positioning of our brand. Let's have a closer look at our strategy and the progress we've made. In the full year 2023 earnings call, we presented our three-step plan to unlock West Wing's full value potential. We're currently in the second stage, building a lean and scalable platform. I will briefly provide an update on the levers we're working on. Complexity reduction, Western collection share increase, one Western commercial model, and stronger premium brand positioning. Let me start with a follow up on the measures from our last earnings call in August. We shared that we had completed the consolidation of our logistics center footprint and the switch to a mostly global product assortment, with the related restructuring of the Italian and Spanish corporate functions. We then said that we intended to use the momentum and continue with the next step of complexity reduction that also supported the completion of our One Western commercial model and a stronger premium brand positioning. Based on the learnings and experiences we had made during the restructuring in Italy and Spain, we decided to introduce a mostly global product assortment also in Central and Eastern Europe. In addition, we announced to double down on our efforts to strengthen our brand positioning with a premiumization of our product assortment on a global level. This meant that less premium and lower margin products would be phased out. These measures entailed a restructuring and consolidation of related functions. We also stated that both measures would have negative top line impact in the short to mid term but would strengthen the positioning of West Wing similar to the effects we had already seen in Italy and Spain. Since August, we made good progress on all these areas, as well as on the ongoing tech migration to a mostly SaaS-based platform, which I will get back to in a minute. We completed the switch to a mostly global product assortment in Central and Eastern Europe and the related reorganizations of business functions. We made good progress in premiumizing our product assortment on a global level by phasing out less premium and lower margin products. As stated in August, the additional complexity reduction measures likely have a negative top line impact in 2024 and also 2025, but they will strengthen us in the mid to long term by allowing us to concentrate on our target audience, design lovers, and ultimately maximize profitability and cash generation. The expected top line impact of all complexity reduction measures remains in line with the previously communicated range of a low to mid single digit percentage of full year 2024 group revenue. We expect a stronger negative impact in the fourth quarter compared to Q3. We also confirm our forecast of total one-off cash costs for all initiated complexity reduction measures in the range of 10 to 12 million euros. Let's have a look at some other measures we are taking to build a scalable platform. The move to a largely SaaS-based technology platform with the aim of less complexity and completing the One Western commercial model is progressing well. Recent months brought us to further milestones as the new platform was made available in four more countries. In addition to Portugal and the Netherlands, customers in Spain, Belgium, France and Italy now have access to our newly designed website and app, tailor-made for design lovers. This puts us slightly ahead of our initial migration plan. We will migrate all remaining countries to the new platform over the next few months. The next update concerns our gorgeous, sustainable private label product brand, the West Wing Collection. TU3 2024 was again a quarter in which we were very pleased with the performance with its share of Group GMB growing further by 10 percentage points year-over-year to an all-time high of 58%. While we expect the Western Collection share to continue to grow in line with our strategy, its share in the fourth quarter is expected to be lower than in the third quarter due to seasonal factors. This strong development supports our top line as well as profitability since the products are very desirable and they allow us to achieve a higher contribution margin compared to third-party products. One caveat to the aforementioned, we didn't see the full effect of the share increase in the growth margin in Q3 due to an increase in container prices and current price pressure on third-party products. We don't expect third-party prices to go down further, but in any case, we concentrate on increasing our Western Collection share to further improve our growth margin. Let's briefly dive into the Western Collection share development by segment. Two aspects are remarkable about the Q3 numbers. First, we reached a new all-time high in both DACH and international. Second, on the slide, you can see the massive catch-up in the international segment. A few years back, there was a difference of approximately 20 percentage points, and just a year ago, international was still 7 percentage points behind. Now it's on par with Bach in terms of Western collection share. The catch up stems from the switch to a mostly global and more premium product assortment, and it underpins the strength of our strategy. Sebastian will later show the impact on profitability in the international segment. The next update concerns our brand positioning. In Q3, we launched our iconic pieces campaign in Germany, which included out-of-home advertising across major German cities. The campaign was launched in September to kick off a strong main home and living season, autumn-winter. On the current slide, you can see some examples of the brand campaign. On the next slide, you see another initiative to strengthen our premium brand positioning, our collaboration with a renowned porcelain manufacturer, Meissen. Together with Meissen, we designed a limited edition product, a Viet Poche or porcelain key tray that features letter designs from A to Z. On the right hand side you can see for example a tray with the letter G. It's the perfect fusion of Meissen's 300 year tradition of craftsmanship and West Wing's premium design. The collaboration was announced with a joint launch event. It generated quite some buzz on social media and reached more than 1.5 million people organically on Instagram alone. The gorgeous products went live day before yesterday and were sold out on the same day. I now hand over to Sebastian for details of our financial performance.

Thank you, Andreas, and good morning, everyone. I'm Sebastian Westrich, the CFO of Westbay. Let me start with the details on our top line. We achieved a revenue growth of 3% and a GMB growth of 2% in the third quarter of the year. Given the weaker home and living market and the negative impact on top line from the switch to a mostly global and more premium product assortment that Andreas mentioned before, the growth in Q3 is slightly lower compared to the previous quarters of 2024. Let's now take a closer look at the revenue development by segment. The DACH segment grew by 4% in the third quarter of 2024, which is less compared to the previous quarters of 2024. There are several factors to consider when looking at the Q3 growth rate of our DACH segment. Firstly, as Andreas mentioned earlier in this presentation, the German online market for furniture, lighting, and decoration declined by 5% year-over-year in the third quarter of 2024. So we outperformed the German online market by 9 percentage points. Secondly, the German online market declined by four percentage points quarter over quarter, making growth more challenging for us. And thirdly, as we switched to a more premium product assortment, we also see negative top line effects from this in the DAH segment. Taking these effects into account, the 4% growth rate in the DAH segment in third quarter is actually a really good result. The international segment, on the other hand, showed a revenue increase of 2% year-over-year in the third quarter of 2024, slightly better compared to the previous quarters of 2024. It should be noted that the negative impact on top line from the switch to a mostly global and more premium assortment has so far been greater in international than in DACH, especially driven by the changes in Italy and Spain that we already mentioned in previous calls. This explains the lower growth rate of the international segment compared to DACH. Please also note that we expect a greater negative top line impact from the switch to a mostly global and more premium product assortment in Q4. Looking at our P&L, we see improvements across most of the P&L lines. In the third quarter, our gross margin increased by 0.7 percentage points year over year to 50.5%. This development was driven by strong West Wing collection share gains. However, the positive margin effect of the Western Collection share increase was partially offset by increased container costs on the spot market and pricing pressure on third-party products. We were also able to improve our fulfillment ratio by 2.7 percentage points in Q3 compared to the previous year, mainly due to cost negotiations and efficiency gains. All this led to a significant year-over-year improvement in contribution margin of 3.4 percentage points in the third quarter of 2024. We are very proud of this development as it proves the strength of our commercial model. Moving down the P&L, you can see that our marketing ratio increased by 1.8 percentage points in the third quarter of 2024 compared to the previous year. This development is driven by continued marketing investments. Andreas already provided details on the recent campaign earlier in this call. This development is also very much in line with what we pointed out during the Q&A session of the last earnings call. Andreas mentioned that some of the brand investments to kick off the very important Black Friday and Christmas season could start as early as end of Q3, supporting top line in Q4. Looking further down, our DNA ratio, which also includes other results, slightly increased by 0.7 percentage points to minus 20.2% in Q3 2024. I would like to comment on two drivers of this increase. Firstly, we have a negative temporary impact from higher DNA due to the shorter life of internally developed technology assets, which we have seen since the start of our technology migration. This effect accounts for 0.6 percentage points of the increase in the DNA ratio in the third quarter. Secondly, we see a further increase of 0.6 percentage points from one-off restructuring costs, which did not qualify for an adjustment in our management P&L. Our DNA ratio did only increase by 0.2 percentage points Also, across fulfillment, marketing, and G&A, a total of 0.8 percentage points is driven by the shortened useful lives of internally developed tech assets. Positive effects from lower lease expenses largely offset this effect. All this led to an adjusted EBITDA margin of 3.7% in Q3 2024, an increase of 1.1 percentage points year over year. Please note that in Q3 2024, we had one time restructuring expenses of 1.2 million euros related to our complexity reduction measures. Due to their non-recurring nature, we adjusted these expenses in our P&L. The development of adjustments over time, as well as the unadjusted EBITDA, EBIT and Earnings Before Tax can be found in the appendix to this presentation. Looking now at the profitability of our two segments we see opposing developments. The DAH segment profitability declined year over year. The reason for this is that our brand awareness investment again was focused on Germany, our biggest market. Therefore, the full brand investment was allocated to this segment. In contrast to the DAH segment, the international segment showed a significant improvement in adjusted EBITDA margin by 5.4 percentage points year over year. This improvement was mainly driven by a strong increase in West Wing collection share, which Andreas presented as a key achievement earlier in this presentation. We are very proud of this development, which clearly shows that the levers of our three-step plan are producing the expected results. Of course, we will continue working on improving profitability in both segments. Let us now take a look at our net working capital. By the end of Q3 2024, networking capital remained clearly negative at minus 5 million euros. This is an improvement of 3 million euros year over year, mainly driven by increased trade payables and decreased pre-payments on inventories. Quarter over quarter, however, networking capital increased by 6 million euros in Q3 2024, primarily driven by seasonal inventory build up for peak season. If you compare this year's networking capital and inventory development with 2023, Please keep in mind that throughout 2023, we were reducing excess inventory and did not see a typical seasonal networking capital development during the year. On the next slide, you can see capex and capex ratio for the first nine months of the year compared to the previous year. In the third quarter, we made some investments in our warehouse for maintenance and automation purposes. which is why our capital expenditure in the third quarter was higher compared to the previous quarters. This explains the increase in capex year over year. Let us now take a look at our free cash flow. Free cash flow in the third quarter of 2024 was minus 6 million euros. This development was mainly driven by the change in networking capital, which accounted for minus 6 million euros in Q3, and which I explained previously with the main driver of seasonal increase in inventories. Additional effects on free cash flow in Q3 were 1.5 million euros for restructuring expenses, mostly linked to the complexity reduction issues. Free cash flow for the first nine months of 2024 was minus 9 million euros. This is 22 million euros lower than last year. This change compared to the same period last year is mainly due to two effects. Firstly, the change in networking capital, which accounted for 15 million euros. This was mainly due to the seasonal build-up of inventories in 2024, while the change in networking capital in the comparative period in 2023 benefited from the reduction of excess inventories. Secondly, implementation costs of about 5 million euros related to the complexity reduction measures of our three-step plan, which we did not have in the first nine months of 2023. As mentioned in our previous calls, we expect free cash flow for the full year 2024 to be break-even, considering all one-off cash costs for the complexity reduction measures. In terms of net cash, we are pleased to report a strong net cash balance sheet position of 63 million euros at the end of September, 6 million euros below last year's level. The main drivers for the decreased net cash position are our complexity reduction-related one-time restructuring expenses and the networking capital effects from the seasonal inventory build-up. In addition to the already explained free cash flow of minus 6 million euros, we had lease payments of 3 million euros in the third quarter of 2024, mainly for our offices and warehouses, which are shown in the financing cash flow according to IFRS standards. As a result, we maintained a strong balance sheet with no debt other than the IFRS 16 lease obligations. Finally, let's have a look at our outlook for the remainder of 2024. First of all, we confirm the full year revenue guidance. Although the transition to a mostly global and more premium product assortment is expected to have a stronger negative top line impact in Q4 compared to previous quarters, a decline in revenue for the full year 2024 is unlikely by now. However, given the importance of the upcoming peak season and continued challenging market conditions, Q4 performance remains hard to predict. In terms of profitability, the development so far has been in line with our guidance, which we also confirm for the full year. Overall, I second what Andrea said earlier. We are well on track with our three-step plan to unlock the full value potential of Westring, not only in terms of strategy and operations, but also in terms of financials. Our focus in 2024 and 2025 is to build a less complex and much leaner platform that will enable us to scale with operating leverage. While the complexity reduction and premiumization will negatively impact top-line growth in the short term, we will benefit from it in the mid to long term. As communicated in previous earnings calls, our long-term target is to build a highly successful business with an adjusted EBITDA margin of 10% to 15% and strong cash conversion. With that, I'm handing over to Andreas to conclude our presentation with our investment highlights.

Thank you, Sebastian. Let me briefly recap the investment highlights of Westwind. First, we have a unique, relevant customer value proposition through the specific assortment and the way we serve our customers. Second, the market potential is huge, especially in our existing geographies, but also beyond. Third, we have a strong brand with high loyalty and true potential for growth to grow further. Fourth, we have high and increasing margins as well as operating leverage while we scale. Fifth, we have a great balance sheet with a strong cash position and no debt, strong networking capital and low capex. All of this will lead us to the 10 to 15% adjusted every day with a continued strong cash conversion. Sebastian and I are now happy to take your questions.