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Edited Transcript of WDLK.DE earnings conference call or presentation 13-Nov-19 8:30am GMT

Nine Months 2019 windeln de SE Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of windeln de SE earnings conference call or presentation Wednesday, November 13, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Matthias Peuckert

windeln.de SE - CEO & Chairman of Management Board

* Nikolaus Weinberger

windeln.de SE - CFO & Member of the Management Board

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Presentation

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Matthias Peuckert, windeln.de SE - CEO & Chairman of Management Board [1]

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Good morning and welcome to our earnings call.

So let's start on Slide #3, so with the summary.

So for the first 3 quarters, revenue came in at EUR 59.4 million; and EUR 18.5 million in Q3, so which is below last year. So this is mainly driven by our China business, which was impacted by the delayed launch of our bonded warehouse 2, our change in ramp-up of our new TP partner, Langtao, and the delay and lower impact of the new China initiatives.

So on the profit side, we were able to lower the loss in adjusted EBIT by EUR 4 million year-over-year for the first 3 quarters 2019, while other operating contribution improved [by] EUR 1.7 million to EUR 2.8 million year-on-year for the first 3 quarters this year. So the DACH region came -- generated EUR 4.5 million in Q3, which is also below last year. Same applies for Bebitus, which also came in short year-on-year by 1.5 -- EUR 1.4 million in Q3. This leads to a correction of the revenue target for 2019, which is now forecasted to be slightly lower than last year.

Gross profit, on the other hand, came in at 24% in Q3, which was also impacted by the lower sales contribution from China. I also need to mention that other SG&A came in lower by EUR 100,000 compared to previous year in Q3. Our target to reach breakeven in early 2020 remains, but it's highly dependent on the performance of the high-volume promotions in Q4, which we will touch later.

Total cash available was EUR 9.7 million end of quarter and EUR 7.6 million as of November 11. Cash outflow of EUR 2.4 million in Q3 is due to close management of net working capital.

So then let's move to Slide #6, which then highlights the business improvements we've been driving over the last few months.

So as mentioned, so we do have a new TP for our China business, which is the cooperation with Langtao in China. So the cooperation agreement was signed in August 2019. And so what is new with Tmall is -- with Langtao is also they support our Tmall channel as well as our own-operated China shop regarding customer service, brand strategy, product and marketing planning. Second highlight is -- so which was also low light last quarter is we launched our bonded warehouse 2 in China. So this opened on the 4th of November, so right before our Singles' Day promotions. And this now means faster delivery to our customers, also lower transportation cost.

Thirdly, so there's the pregnancy app, which is now on Android. So Android is the major platform being used on mobile phones in China. So this also now helps us to reach a broader customer audience with our pregnancy app, which is a customer favorite since we introduced it.

Regarding social media activities. So we shifted budget towards those new channels, so where we also see a positive impact. So -- and then the highlight in this regard is really that our Instagram followers in -- so grew in triple digits year-on-year. And then the last point is we introduced Amazon express checkout for our German-speaking region customers and which also then showed a positive impact because already in July, quickly after introducing the new payment method, 18% of all German payments in September were done via this new payment method.

So let's move to Slide #7. So displays -- so this displays our growth strategy for China. So -- and as you can see on the left-hand side, so those are the channels we are currently working on. So there's the China web shop, Tmall flagship store, app and the WeChat mini programs. So what we are currently increasing and looking into is the hybrid and offline channels. So we are currently working on an affiliate model, which then helps us to go on hybrid platforms as well as working with strategic partners for shop-in-shop regarding franchise shops in shopping malls. So currently our dedicated team is really working on it and finding solution, which then also will help us to drive further revenue.

So then the headline for this is so what we are going to do is use the good supplier relationships we do have in Europe and that we are able then to source well-known brands for the China market; on the other hand then, find platforms and partners which will help us to broaden our customer base, especially in second- and third-tier cities.

On Slide #8. So this is then the summary of where Langtao -- and then goes a bit deeper where Langtao is really supporting us. So it is, in first place, so platforms. So as mentioned already, so online marketing and also social media. So this is an upgrade for us also regarding brand strategy and promotions and communications with other platforms. So this is already live and in place. So then Langtao also managing our own-operated China shop for online marketing, brand strategy and also promotions. So this is then expected to be finally set up in December 2019.

Customer service. We are also in the process of moving our customer service from outside of China now to the mainland of China, also in cooperations -- cooperation with Langtao. So this is then the transition period we are currently in is going to be then final in Q1 2020. And then we are also offering to our customers long operation hours than we are currently doing. And then which is also then currently what we are working in is opening up new distribution channels in terms of promotions and also then finding a better logistics setup. This is also currently being set up.

With that, we come to our strategy focus also for Germany as well as for the rest of Europe. So this is then our focuses and still remains on growth being the online retailer for young families. So this is done mainly by selection, so really curating with the knowledge and the team which we have, curating the selection for young families as well as then strengthen our private label efforts. Secondly, marketing, high focus on social media. Times are changing. So young families are tending to use those methods more than the very traditional marketing channels. And then also finding synergies with other partners.

And thirdly is innovation. So as touched, pregnancy app is getting bigger and bigger. Finding better cooperations. And then we are currently in the phase of -- after our first test with the Storchenbox, now we launched the Storchenbox #2 and 3, which is also currently very successful and our customer really like that offering.

On Slide #10. So the news from Europe are that we have a new Head of Marketing identified and already hired, which is going to start December 1, 2019. Pricing tool of Omnia is now in -- established for all marketplaces. We are looking into IT shop outsourcing, which will also help us to move fast and also on the costs side. We are going to -- we are right now in the phase of our central warehouse move, which is then going to happen in the first half of year of 2020's. And then high focus on the upcoming events in Europe, which is then Black Friday and the Cyber Week.

For China. So we're already past the Singles' Day on 11/11. Still upcoming for China, very huge promotions on Black Friday and 12/12 as well. So bonded warehouse is finally done, as mentioned. And we are launching a new distribution channel with WeChat mini program. And then another upside, which is then Nick can give an update about, is so also then our efforts regarding VAT refund.

With that, I close and hand over to Nick Weinberger.

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Nikolaus Weinberger, windeln.de SE - CFO & Member of the Management Board [2]

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Okay. Thank you, Matthias.

So let me start on Page 12, so showing the revenue development quarter by quarter for China. First of all, with regard to the third quarter financials that you see on the right side, EUR 10.7 million. Matthias already mentioned that this is, yes, clearly below of what we targeted for this quarter. And the 2 reasons, Matthias mentioned already: that the bonded warehouse, which is live in the meantime, was delayed; and also that we are very busy on the implementation of the cooperation with Langtao, both of which have significant benefits for our customers and for us. So on the bonded warehouse, we have much quicker delivery, lower transportation costs but on the other hand have a bit longer cash conversion cycle. But overall, that's, of course, very positive. And to reiterate again, the bonded warehouse 1 that we have is for Tmall and the bonded warehouse 2 is for our shop. So we are now capable of also delivering from the bonded warehouse for our Chinese web shop.

So you see Q3 was lower. But you also see if you look on the left side that the fourth quarter is typically much stronger, and we expect the same for this year due to the large sale events that we have and had. And with regard to the Singles' Day, which was on Monday, but also included promotions in advance, we see the, yes, expected uptake -- we saw the expected uptake in orders. So overall positive. We were a bit higher on Tmall than previous year and a bit lower on our shop than previous year but overall good uptake. So we would expect a similar development in terms of revenues for the third quarter.

If you move to the German-speaking region DACH. Here I think, on a positive note, you see if you look on the left side that, in the third quarter, we had a small revenue growth. We were back to a small revenue growth in the third quarter, plus 5%. And also here, we have bigger sales event upcoming. If you look at our website right now, we already have bigger sales campaigns at this point. We have Christmas business upcoming. And also on top of that, that's a topic I would like to highlight, is given that we will move our central warehouse in Germany in the first half of next year, we already started identifying inventory that we would not like to move and sell down until then either through the shop or through other channels, which is in total volume more than EUR 1 million, and we start already selling this down in this quarter. So there will be support on the revenue side from these initiatives.

If we move to rest of Europe, which is Bebitus, so the 3 shops in Spain, Portugal and France. You also here, similar to Germany, see a positive, slightly positive, development in the third quarter. So we are back on a smaller growth path and expect also growth in the fourth quarter that, yes, for similar reasons then in Germany.

If we move to the next page here, you see the certain financial metrics that are important for us to look at on a quarter-by-quarter development. And I would like to highlight 3 time periods. One is if you look at the third quarter of 2019, which is highlighted in red, the second bar to the left, and compare that to the third quarter 2018, you see improvements, if you go down, on adjusted EBIT even if it's not a bigger one in this quarter but it's improved. But also on the change in cash outflow. EUR 2.4 million was lower than in the previous year. The first point. The second point is you also see, if you look at the gray bars, the fourth quarter, that it's typically strong, a really strong quarter in terms of operating contribution, EBIT and also change in cash. And we would expect a similar development this quarter given the sales initiatives and that we built up inventory and that then will come down after the sales initiatives.

And then thirdly, if you look at the 9 months all way to the right, you see that on all of these metrics we made significant progress throughout the year, on operating contribution. Other SG&A is lower. So on average, we are below EUR 5 million. We target more to go towards EUR 4 million on a quarter basis. Adjusted EBIT and also change in cash. Even if you take into account the financing round we did at the beginning of -- yes, of this year, with around EUR 9.4 million net proceeds, we improved cash outflow.

Let's move to the next page. Here, you see certain financial metrics we look at on a quarter and 9 months basis. I would just like to highlight certain points that are important to understand our financials.

If you look at the third quarter development, so the bars to the left, the third quarter 2018 to the third quarter 2019, you see that gross profit margin is actually lower with 21.7% compared to 22.2%. But the reason here is simply the mix. We have higher gross profit margins for our Chinese business. If the contribution from the Chinese business is lower, overall margin goes down even though we improve margins for the European business. There's a similar development on the fulfillment costs. If we have lower share of Chinese revenues, fulfillment costs will go down. And the second point is that we, compared to last year, fulfilled more orders for Tmall from our bonded warehouse, which has significantly lower transportation costs.

If we move to the next page. Here, you see our inventory and net working capital development. You see that on the inventory side with EUR 8.0 million. It's around the level end of June. But if you go down, you see that overall net working capital went down from EUR 8.1 million to EUR 6.3 million, so positive -- which has a positive side on the cash. The reason is that we had lower net VAT assets in that period, and that also brought down net working capital as percentage of revenues. And we expect that inventory will go down towards the end of the year, again from selling down.

So in terms of cash, that means we had EUR 12.1 million total cash available end of June. And the cash out was -- but the cash out from operating activities was EUR 2.1 million, with a positive impact from the net working capital that I just described. So end of the third quarter, cash was at EUR 9.7 million. On -- 2 days ago, so November 11, it was EUR 7.6 million. As of yesterday, it was a bit higher even, but it's lowered because especially we built up inventory compared to end of September and now and selling it down in the various sales initiatives.

Okay. We -- Matthias already mentioned that for the overall -- for the full year, we, of course, lower our revenue forecast. We -- given where we had -- Q3 revenues came in, we still have the target of reaching adjusted EBIT breakeven the first half of next year. Important for that is how the financial development in the third -- in the fourth quarter, the current quarter, will be, especially for China, because it builds the basis for the ongoing business; and that we make progress on the various areas that we have. And there are 3 parts. One is on the overall SG&A expenses. I mentioned that we want to get closer to the EUR 4 million per quarter number, and important -- and we have important projects here in terms of efficiency. Matthias mentioned the IT shop outsourcing but also introduction of some tools on the ordering side. For example, in Europe, we will further try to improve the margins, so which has 2 parts of it, the pricing and also the sourcing. The warehouse move is an important project to bring down fulfillment costs. And I mentioned that we will target in -- ahead of the warehouse move, to reduce our overall inventory and the number of product SKUs, which will also lower our warehousing costs.

And then lastly, on China. China has the biggest -- is the biggest lever, by far. You already saw that we are working and made progress on certain topics. We opened a bonded warehouse. We started the cooperation with Langtao. And we are also looking, actively looking in other cooperations for the Chinese market. There's a potential refund from VAT for previous year, which is in total could be more than EUR 2 million, and we are working on that. And therefore, we are -- yes, we are positive that we can improve the Chinese business further.

On the next page. You know that we are working on a capital increase to strengthen liquidity given that our operating cash flow is still negative and also to support some of the growth measures I mentioned before. We had our extraordinary general meeting on August 27 -- September 27, sorry for that. And all the resolutions passed, but there were certain oppositions. And we also received shareholder actions that are currently pending, and we are dealing with that. And we are positive to get these out of the way, but this is a requirement to get the registration of the capital reduction done in the commercial register. So currently we are in the phase of solving the shareholder actions in order then to get the registration done in the commercial register, which is the second step, and then afterwards to initiate the capital increase.

Good. So with that, we can open up to questions, if there are any. Other than that, you will find all the publications on our corporate website. And of course, we are also available for questions directly.

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Operator [3]

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(Operator Instructions) We haven't received any questions. So I hand back to the speakers.

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Nikolaus Weinberger, windeln.de SE - CFO & Member of the Management Board [4]

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Okay. So thank you very much for participating. And as I mentioned, if there are any follow-ups, please contact us directly.

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Matthias Peuckert, windeln.de SE - CEO & Chairman of Management Board [5]

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Okay. Thank you.