Earnings Call: Q1 2020

May 12, 2020

Dear ladies and gentlemen, welcome to the Q1 twenty twenty Earnings Call of Westwing Group AG. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Stefan Smaller, who will lead you through this conference. Please go ahead. Thank you. Welcome to the q one twenty twenty earnings call for Westwing. I'm Stefan, Westwing's CEO, and I have with me Sebastian Zorbelich, our CFO. There's certainly unprecedented times for all of us. I hope you and your families are well, which has never felt more important than these days. Before we dig in into our earnings results, let me extend a heartfelt thank you to all our teams all across Europe and in China. In the worst of times for society, we have seen our teams deliver at their very best. With passion, with commitment, and with a strong drive to serve our customers, you have pushed through rapid changes in recent couple of months and keep making us proud. It is extremely appreciated. Thank you very much. With that, let's focus on our earnings. I will now give a business update covering our q one highlights and focus a lot on the events and actions of the first six weeks of the second quarter too. And after that, Sebastian will dive deep into our financials. And after a brief summary from me again, we will go into Q and A. In terms of summary, our results for the 2020 were strong. We have now delivered a third quarter in a row that's improved versus the 2019. We have seen double digit growth of 10% year over year, driven by strong customer momentum both on the loyalty side of existing customers as well as the new customer momentum driven by increasing marketing results from higher investments since middle of last year. In Q1, we have also demonstrated strong unit economics and contribution margins, strong cost discipline and consequently have significantly improved profitability versus the same quarter last year. This has also led to free cash flow improving by €10,000,000 in this first quarter alone versus the same quarter last year, showcasing our continued march towards free cash flow profitability. We also have a very strong net cash balance of €65,000,000 at the end of the quarter, giving us stability and strength in times of duress. We have never felt better about our good cash balance than now. So q one was a really good quarter. And by the end of that first quarter, we were, like the whole world, deep in the middle of dealing with the COVID nineteen situation. I will provide much more details on this in the coming minutes, but a brief summary upfront. We have focused first and foremost on the health and safety of our customers, teams, and partners. We have tightened cost discipline, cut some paid marketing, and have set ourselves up with a defensive stance for the second half of the year when the recession might hit us. In the meantime, however, we have seen astounding growth across all customer cohorts, indicating a fast forwarding rapid acceleration of the secular shift for online and ecommerce. We have seen growth of circa 80% year over year in the second quarter to date. Consequently, most of our efforts right now lie in delivering that growth across our full business model, from ramping up logistics and customer service to increasing volumes with our suppliers. We're glad that our customers are trusting us even more now in these times to make their homes more beautiful, homes which they spend much more time in these days than usual. While dealing with the COVID nineteen situation, we have not let go of our focus areas for the year, and we see strong progress here, reaching the nice milestone of 1,000,000 active customers in early April already. We're also seeing our operations and our technology teams handle the increased volumes amazingly well, a testament to the scalability of our platform and to us being well prepared as designed for the year, now leveraged over higher growth. In terms of guidance, we remain with our full year 2020 guidance for now, as Sebastian will explain in detail later on. Providing you some more details on a customer perspective, we are happy that despite the disruptions in the first half of last year, we are back to strongly growing our active customer base and our top line. By the end of the first quarter of this year, we had served 986,000 active customers, so customers that have done at least one order in the last twelve months and have been able to grow our GMV by 12% to €85,000,000, so slightly above our full year guidance range already in q one. So we were already doing well before COVID nineteen came and had a structurally improved business in q one. And that was because we focus on our customers. We are a growth company. In order to live up to this strategy, we set one key initiative for 02/2020, which was more customers. Keeping our loyal loyal customer base engaged and happy while adding new loyal customers is our key to build a successful company. Improved results over the last quarter proved that this is the right strategy, and we will continue to pursue this strategy and focus all our actions around this topic. The unique loyalty focused business model that we run revolves only around customers. Once we had rolled out our full business model to all our countries in the last year, we are now focused on bringing more customers into this attractive business model, which will bring growth from those customers buying as well as increasing profitability from the operating leverage. This focus on more customers is driven by four major themes this year. With our highly engaging organic and content focused marketing, we're building assets that both drive new customers as well as make existing customers even more loyal. Take Instagram, for example, where by now we are serving more than 3,500,000 followers, and we do that with pretty much the same same team size and cost base than when we were at 2,000,000 followers or earlier, and we're doing it better, actually. In our sites and in our apps where our typical customers come a 100 times a year to us, we inspire, engage them ever more. Our creative teams think of fresh ideas every day, and we have even increased in recent months to focus on rich content, on video content, on more content that merges with the merchandise into our shoppable magazine with which we continue to separate further from the competition to provide something extraordinary and unique. In operations and technology, our customers deserve to be served well. Despite recently increased volumes, this continues to be done at a strong level, and all our indicators show us that our customers continue to be very satisfied by it. Last but not least, we are pushing with strong energy our own and private label offering where we can provide our customers with gorgeous products at attractive prices in our Western collection. And at the same time, we benefit from this by much higher margins, the ability to control the full value chain and quality and marketing synergies. Altogether, Westwing remains at the forefront of ecommerce innovation with our shoppable magazine, and the loyalty of our customers proves that this is the right strategy for Westwing. Yet, we are far from satisfied here. We believe that in all of those areas, we can improve even way beyond where we are today. For instance, in our marketing, we are working on a variety of new organic channels. In our shop of a magazine approach, we are developing new content formats all the time. In our operations, we are focused to dive deeper into how to serve customers better in the future, I. E, faster deliveries, higher quality deliveries, better customer service, as well as technology enabled next level experiences like augmented reality and mobile first content. And in our own and private label, we are driving both the presentation of our products driven by a technology setup that is new in our Western new now sites as well as the development of new products to excite our customers. Let us now look in detail at how the COVID nineteen situation has evolved for us, how it has impacted our business in q two, and how we have been acting. As a first and major priority, we have focused since the February on the health and safety of our customers, our teams, and our partners. We've implemented an array of new measures and have heightened existing measures. Most importantly, in our warehouses, we have adjusted lots of processes, have implemented distancing as required, have implemented temperature checks, have run more shifts, have been sourcing personal protective equipment via our recently opened China sourcing office, and have been using that in our warehouses. And we have heightened already strict hygiene standards further. Our warehouses continue operating fully operational, thanks to the tireless work of our frontline employees who have quickly adjusted to a number of new processes and procedures to ensure we continue to serve our customers while keeping our people healthy. In our offices, we have moved almost 90% of our teams into working from home orders with only those remaining in rather empty offices whose job cannot successfully be conducted from home. This transition of almost a thousand people to a home office has worked remarkably well with productivity levels remaining strong, and TeamSperit actually quite upbeat given the situation. We have also surveyed our worldwide team anonymously a few weeks ago, and more than 95% of our employees are confirming that Westwing is doing a very good job or a good job in ensuring their health and safety. Looking forward on the health and safety side, we will keep all those measures in place for now for as long as needed and likely even beyond that. Being careful here is the basis of our business, of course, and it is what we owe to our colleagues, to our customers, and to the communities we operate in. Turning to the demand side. What has happening what has been happening since late March is an astounding incredible pulling forward of the secular shift of the huge on online of the huge home and living market into the future and online shopping. Customers neither want to go to offline stores right now nor could they for a long time. And they don't want to really because it's not as pleasant an experience as it was in the past now with masks, distancing, long lines, and general concern of the population in closed spaces. In addition, customers are much more at home right now, and home and living is one the categories of spend that customers continue to want because the need has never been bigger. Consequently, we have seen unprecedented growth, really an acceleration of online penetration shifts. We have seen circa 80% of revenue growth in quarter two to date. This elevated growth, most importantly, has happened across all our customer cohorts. So we are seeing our existing cohorts dramatically growing, and we are also seeing marketing delivering many more new customers. The elevated growth has also happened across all our countries with none particularly lagging or standing out as well as across our whole product portfolios in all categories. And we are not just experiencing this growth. We are also pushing this growth and the loyalty of our customers, especially in these dynamic times. We have adapted our communication and marketing and offering to the changed type guys. We're talking about home cooking. We're talking about home office, home gym, staycation at home, etcetera, etcetera. Our daily travel magazine enables us to communicate with the flexibility and real timeliness that has never felt more advantageous. We're right there with our customers as they are navigating a new environment and are starting new projects in their homes. When we look forward, we, however, have very limited visibility. Like, you know, I believe nobody has much visibility in what definitely are unprecedented times, but I can share a few things how we are thinking about this. We believe that our demand was structurally and long term benefit from the current situation. Many customers have at first their their first taste of Westwing, or they have rediscovered their love for Westwing. And given our loyalty model, many of them will stay with us. In addition, customers of all age groups, especially older folks, are subjected to ecommerce for the first time, and we believe this will be one of the key structural levers in our market's online acceleration and after afterwards the market's growth from a higher baseline. In addition, our brand partners will need to shift to online even more, especially in this fragmented industry of home and living where they often do not have a chance to sell on their own that much, and we are a unique platform for them to push growth. At the same time, the upcoming recession will put a dent into customers' willingness to spend. In addition, once stores reopen in full and customers might feel better going there, some of the extraordinary uplift might disappear. What the net result of those contracting trends will be, nobody knows right now. We certainly don't know right now. So what we are doing is to continuing to be anticipatory and react at the same time to the changing side, guys, to what our customers want and to continue to communicate with them through our Shoppable magazine. And when we zoom out further, then, of course, we're humbled by the current growth and certainly very happy that our customers rely on us so much to make their most special place, their homes, more beautiful and become inspired by us, yet we are not blinded nor are we becoming overly confident by these revenue run rates. We remain cautious for now and keep our cash first, cost defensive approach until we have gained further visibility. Yet we are also aware of the long term impact and the chances of the current situation. It provides the unique opportunity for Western to serve our returning and new customers and to do our own part to further accelerate the channel shift towards online in our category. On the supply chain side, we have seen some disruptions, especially from Asia, and we are managing those well by stocking more, by establishing new sources, by developing workarounds, by implementing container shipping alternatives, and by staying in very close contact with our suppliers. While those disruptions are a lot of work for our team, we are handling them well as you can see by the elevated growth numbers. Yet this is one of the key issues for the remainder of the year, which we must focus on, the continued availability of the bestsellers of our West Wing collection. We expect some disruptions here, for instance, in rugs due to the India Lockdowns, but feel that overall the impact should only slightly impact our growth rates going forward. The flexibility in our business with more than 5,000 suppliers and our daily teams model actually being inventory less as well as the international character of our local setups come into play very well here. And certain suppliers are out of stock or not operating or temporarily not operating. We are shifting to others. We believe this will continue throughout the year, and we're well prepared. The positive side of all of this change is that our suppliers have never needed us more. We are open for business. We can serve customers safely, and we are providing growth for supplier brands in a time when other channels are not open or not growing. We have seen new brands approach us significantly more than in the past, and we are leveraging this into a very strong offering. We've also seen existing brands offer more and better priced products to us, which we are using to serve our customers better. On the operations and logistics side, I'm impressed especially how our frontline team members have been delivering the elevated growth so well. We have not seen any major issues here at all. All our warehouses have been operating without fail throughout this situation. The apps, our sites are holding up, and our carrier partners have been working very hard to ramp up in a timely way. It's a true testament to the strength of our platform. While there might be risks going forward on the carrier side, on the warehouse operation side, and on the capacity side, we are taking the necessary measures to make sure we continue to deal well and serve our customers in a world class way. In addition, we are starting to plan scenarios and capacities for the seasonally strong fourth quarter where we might need to make some investments if growth were to persist on the current levels. We are not there yet, though, and we'll have news for you on that in the next quarterly earnings call. Let me end this business update by giving you an update on the five strategic focus areas that we have set out for 02/2020. We are doing well here as described before. More customers is the initiative that obviously is running the best right now with a good q one, with the tailwinds from the recent weeks, our increased marketing investments of last year and the first quarter, and strong offering catapulting us into active customer levels that we had only expected for later this year. On the cost side, we have a leaner and better organization than last year. The restructurings in Italy and France are fully effective in our cost baseline, and we run a leaner organization with the merger of our private label Western Collection and permanent assortment Western, now businesses into one. Operating leverage is the number one driver of future target profitability, so we are laser focused on keeping costs low even if we might have to invest slightly through the year if growth were to persist on the elevated levels. Any of those potential investments would be way below growth rates, though, so high operating leverage is a clear expectation going forward. On the private label side, we have launched our new West Wing collection in q one, and we continue to sell it very well with strong feedback from customers and the press. Although the recent elevated growth will be challenging in terms of availability for some products in the recent month and the next month. We think we continue to do well here. On the operations side, our warehouse footprint is now fully implemented, and we are not expecting major disruptions or moves for the near future. While we might make selective capacity additions and add selective costs in our existing setup depending on how demand will develop in the coming months, these are not structurally changing anything in our footprint. On the COVID nineteen side and mitigating that crisis I've discussed in detail before, we're utilizing the opportunities of this situation well. We are managing the challenges and risks at the same time, and we are prepared for whatever might come in the future, either on the upside or on the downside. So overall, a good first quarter of the year, a very strong start into the second quarter and strong performance across our strategic priorities, yet limited visibility into the second half of the year and being prepared for all scenarios. With that, I would like to hand over to our CFO, Sebastian, to provide you with all the financial details. Thank you, Stefan. Good morning, everyone. First of all, let me tell you that I'm very excited today to present our Q1 numbers as this is my first earnings call as Westwing CFO. Overall, I would also rate that Q1 is a good quarter, showing progress on all important metrics driven by our tireless execution of the plans we have initiated last year. I will start with our top line. Q1, we achieved group revenues of €68,000,000 That's a double digit growth for the group driven by strong customer momentum, as Stefan highlighted in the first part of the presentation. While our GMV growth accelerated in the last two weeks of March significantly as we have ad hoc in April, please recall that we only book revenue once an order is delivered to our customers and hence the vast majority of this momentum will benefit Q2. Good news is also that both our segments have been contributing to our Q1 growth. The DAS segment accounting for 56% of our revenues in Q1 was growing year over year by 12% and our international segment has continued to grow for Q1 showing a year over year growth rate of 7%. Our top line growth continues to be driven by the combination of new customer additions and continued very high loyalty from our existing customers. Next, to double digit growth. In Q1, we also achieved a strong adjusted EBITDA, which is the result of many initiatives aimed at bringing us back to strong profitable growth. I think worth mentioning is that basically all the effects we see are before any positive effects from COVID-nineteen as they will only materialize in Q2. By going down the P and L and giving you some color on our gross margin and the spend like items, I will explain now how this improvement in adjusted EBITDA was achieved. Our gross margin improved by 4.3 percentage points to an all time high of 46.7% based on the ongoing retail margin discipline and a higher private label share. We have improved our fulfillment ratio, which reflects our logistics, customer care and payment costs by 1.4 percentage points compared to Q1 twenty nineteen, as we are by now running an efficient logistics setup with all our warehouses up and running smoothly. Also, the Q1 fulfillment costs were impacted negatively by our warehouse move, which was not pre balanced anymore this last quarter. Our warehouse costs reduced significantly here, overcompensating year over year increased freight costs. As a result of higher gross margin and improved fulfillment costs, we were able to improve contribution margin significantly, reflected by an increase of 5.7 percentage points to 24.3%. Going forward, we must ensure to protect these attractive margin levels and further improve step by step. We would consider the Q1 levels a normal level of contribution margin from which we will further increase mainly by growing the share of our more profitable own and private label products. The marketing ratio increased by 2.3 percentage points to 9% as we have increased our spending since H2 twenty nineteen and have continued to do that in 2020. That this increase in marketing cost is well invested, is proven by our strong customer momentum in Q1 and enables us to cost effectively acquire and retain customers as well as build our own brand. When we decided for higher marketing ratios in 2019 was our plan to finance this with a better contribution margin. And so far this plan pays off well. G and A costs, which primarily consists of salary and wages, were another bright spot in the quarter, going down by 0.8 percentage points, thanks to ongoing cost discipline and operating leverage. The combination of the top line growth, strongly improved contribution margin, as well as managed cost structure resulted in strong bottom line results in Q1, as adjusted EBITDA improved by 4.5 percentage points to minus 1.8%. In absolute number, we had an adjusted EBITDA of minus €1,200,000 versus minus €3,900,000 in Q1 twenty nineteen. Moving to the cash flows. We operate a highly capital efficient business that positions us well to generate positive free cash flows once achieving adjusted EBITDA profitability. As of March 31, we had a negative working capital of minus €5,000,000 This significant lower net working capital compared to the previous year was driven by inventory discipline and high customer prepayments driven by the accelerating GMV growth at the March. Overall, we have a very low CapEx ratio and our CapEx is mostly capitalized internal software development. In Q1 twenty twenty, our CapEx ratio decreased by 1.5 percentage points to 2.8% of revenue versus previous Q1. These are mainly accounting effects and do not reflect a decrease in our technology spending repurposing. We continue to invest heavily into technology as a backbone for our growth and profitability. As a result of our improved bottom line and reduced net working capital, we have improved our free cash flow for the quarter by a strong €10,000,000 versus Q1 twenty nineteen to a negative free cash flow of minus €6,000,000 Our free cash flow margin based on last twelve months improved to minus 4.5% in Q1 twenty twenty with a positive momentum. This free cash flow as well as this financial cash flow that is by now mostly IFRS related lease payments of negative minus €2,000,000 led to a strong cash position of €65,000,000 by the end of Q1. As Stefan mentioned, I think in current times we could not highlight enough our cash position as a key strength, allowing us to navigate the uncertainty ahead of us. After having looked back at a solid Q1, let me now turn to our financial year 2020 guidance. As we currently see so many parameters changing over the last weeks, short term, as described, mostly for the better, and we feel a high uncertainty going forward for seeing multiple trends, some of them in a positive direction, some not so much, like on the positive side, an acceleration of the shift to online, on the not so positive side offline stores reopening, as well as an imminent recession. We are not amending our guidance for the full year 2020. Just to be clear, I'm not going to give any further guidance now, but I want to give you some color around how our P and L might be impacted by a much better top line. As Stefan mentioned, we currently see roughly 80% revenue growth in Q2 to date. Before going into the details, I want to highlight again that we are making very good progress towards our guided target of achieving positive adjusted EBITDA by 2021 as confirmed by our Q1 numbers. To be clear, this confidence is not driven by a few days of stronger top line in Q1, but by us managing well our margins and costs and executing the plans we had made for 2020. We always said that the main driver towards our target P and L is further growth driving operating leverage, while we are also targeting a steady but moderate improvement in gross and contribution margins. So we would expect the incremental revenue to create significant additional profitability in Q2. Let's go through our P and L and discuss line by line the impact of additional top line growth. Starting with gross margin, we would expect no impact either way. Our fulfillment costs, which are largely variable expenses, we would also expect to be stable as a percentage of revenue. While we might see some greater efficiencies due to scale and some fixed costs leverage on overhead and warehouse costs, we also see temporarily slightly higher costs operating in the current times due to the additional safety measures and capacity squeezes. Looking at marketing, we have taken a conservative stance on paid marketing and hence would see our absolute marketing expenses slightly lower than what we have originally planned, giving us strong leverage on relative marketing costs short term. Mid and long term, we still believe to build the 20% plus profitable growth company that we will continue to invest in the range of eight to 10% of revenue. Now moving to G and A, which you can consider mainly fixed costs in the short term. We have built a very strong team over the past years that is able to deliver the current growth. As we are still cautious with regards to the economic outlook in H2 and 2021, we are currently executing our plan to have roughly stable absolute G and A cost. Obviously, if we see growth continue at this pace, we will have to make selected further investments in some teams as well into our technology, but would still see significant operating leverage. While we currently see tailwinds, but also don't know how long these trends will persist, we have to stay cautious on spending and continuously work on all the measures we have put in place before COVID-nineteen to improve our company and to deliver sustainable growth, profitability and free cash flows. I am very confident that we are on the right track with our strong cash position and well prepared to weather various economic scenarios ahead. Now I would like to turn the call back to Stefan before we take your questions. Thank you, Sebastian. In closing, what has become very clear is that we have built a pretty good business model for the current times, and the reasons why all of us continue to work very hard is our now even heightened belief in the strength of our business model and the secular shift to online. And the opportunity remains massive. The market is a €117,000,000,000 in just our European markets with a very low ecommerce penetration, and the current situation is fast forwarding the secular online channel shift rapidly into the future. We clearly believe we will benefit from this not only short term, but also in the long term. Our loyalty driven business model is both effective and efficient. We are now at more than 1,000,000 active customers, and we remain at more than 80% share of orders placed by repeat customers. This loyalty business model is not only the right thing and a great way to build a business overall, but due to its high marketing efficiency and the margin the margin opportunities from pricing power, it enables us to have a very attractive financial profile. Our West Wing Collection, the own and private label part, is a perfect strategic driver for this where we provide best seller products at high quality and good prices, which are perfectly tailored to our customers and provide us with superior profitability. For us, private label is not just another initiative. It is one of the top differentiators of West Wing. Our business is also constructed with a very strong cash profile. We have neutral to negative net working capital, so do not need to prefinance growth. We have very, very low CapEx as these are only our capitalized technology costs, and we rent our warehouses. And we have a strong balance sheet with 65,000,000 of net cash end of last quarter, and we clearly expect not to use very much of it until we reach permanent cash flow profitability. Last but not at all least, we have a highly attractive target P and L targeting around 10% adjusted EBITDA and seven percent free cash flow margin, which mostly will be achieved through operating leverage from growth. As Sebastian has just indicated, q two will be a strong indicator how this can play out at a higher revenue levels. So while society is under duress and our business is strongly changing due to the hard work of our team and the loyalty of our customers, we believe we are set up well for whatever the future may bring. And we are intent on shaping that future to continue to build a profitably growing company for the benefit of our customers, our team, our partners, and our shareholders. With that, we're happy to take your questions. Ladies and gentlemen, if you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 02 to answer your question. And the first question is from Graham Ratnik, Berenberg. Your line is now open. Good morning. I hope you're all safe and well. Just three questions for me, please. Firstly, as stores start to reopen in some of your markets, namely Germany, are you actually starting to see that very impressive 80% growth rate start to decelerate? Are you able to give us a sort of sense directionally on whether momentum has started to abate a little bit into May? Secondly, just on the customer experience, which is, you know, very important in this environment. Given given the very sharp increase in order volumes, you know, how are you managing the risks of any operational issues in the supply chain or logistics to ensure that you you still are offering a a very good customer experience. Because at least on the marketplace side, you you're still reliant on supply logistics where you have less direct control. And then lastly, just on marketing, Wayfair had recently talked of some lower advertising costs as offline players start to scale back on marketing. So was wondering if that was something you were also seeing. You know, did that help your marketing efficiency in q one, and would you expect it to in q two or beyond? Thank you. Okay. Hi, Graham. Hope you're well too and well. I think to start with a question on momentum and and what we're seeing so far, we're not seeing any momentum changes. The reopening of the stores is only going on very selectively, and the time frame, I think, is not long enough yet to draw conclusions from that. So what we see is that those stationary offline stores who opened again also have to deal with difficulties yet, right, long waiting lines, masks, etcetera. So we don't think there are traffic has not been going back to pre pandemic status. But but overall so so just to be very clear, we're not seeing momentum change for now. And but overall, long term, while we believe that customers will return to offline stores again in the future, we think this will still be a slow process and might not end up on the level of before. So we believe the acceleration in the online channel shift will, to some degree, remain. Customers have seen how good it works to order from West Wing and believe most of them will remain. But, you know, again, we don't know that, and we don't plan with that for now, So we plan conservatively. But for now, the momentum is the same as was in April. In terms of customer experience and how we're we're dealing with that, think there's there's a variety of parts of the customer experience to start with the immediate kind of technology and and and what customers experience when they go to the to the site, etcetera. That's been very strong. I mean, we see strong increase in traffic levels, and our technology platform has held up very well. So our team has done a very strong job. We've talked a long I I used to be a CTO in a former life. So Westing is a true technology company from the core, and and we see that everything is holding up very well. So that that part is is is perfectly fine, and we are constantly working on improving that further. Then on the on the product and availability side, so you have two models at Westing. One is the the daily themes model where we actually don't hold inventory. So that's actually perfect for the situation because, obviously, we see some suppliers having stock out, some suppliers not being able to deliver for some time, then we really just switch to another supplier. We have more than 5,000 active suppliers, and we just work with another one. And a lot of the other ones actually have a lot of stock because their other channels are not working very well right now. Their stores are not taking order or their own network is not taking products. So we do see that a lot of our suppliers actually have stock that they can offer us at attractive conditions. And so we're in this daily themes model, we're very well and actually see benefits from that. On the private label and the permanent assortment side, it's a little bit different. There's there's some products which are on demand, like a lot of sofas, where we basically just have to help our suppliers to get, for instance, new fabrics for a sofa where the fabric comes from China, then we help them to switch to a different fabric. And then we have the products which we directly source, mostly in our private label partner Western Collection from factories. And there we see different stages of countries. Right? So for instance, China has reopened already, and and we're receiving orders from China again. So there were some disruptions, but but that's okay. In India, we will see some disruptions, so especially Araxa highlighted that before, because even when India is starting to reopen and the monsoon season will start, and it's not so easy to produce rocks during this time. So we will do we will see some selective stock outs there. We're mitigating that by getting more buffer stocks. Right now, we're already since mid February, we increased our We raised it in our last earnings call, and we are also trying to shift around to similar products that we can use. But there there's probably gonna be some impact, which we, however, will mitigate. Then the next part would be our warehouses, right, once the order has has come through. And there, because the like, Friday q four, just the Christmas season for us is already very strong. Our teams are used to ramping up capacities and and and dealing with more shifts, etcetera, quite fast. So that's what's happening. We've been short term hiring some more people, so our warehouses are dealing very well with this. If, as I said, growth were to persist, we would need to build some selective additional capacities for q four, but that would be done with a with a mindset of flexibility and low cost because, obviously, we don't know that yet. Then on the carrier side, so delivering those products, there, we had seen some capacity challenges. I mean, it's obviously very hard for our carrier partners to deliver all that growth immediately and and pretty much unforeseen. So some of them have struggled a little bit in the beginning, for now, we're seeing that everything has delivered very well. We had seen some weeks of slightly higher delays, but not significantly. And then the last but not least is our customer service operations where our customers send a call if there's, like, they wanna return something or there's any questions, and that has been ramping up. And we have ramped up both internally with hiring, new team members and, adding capacities from external agencies, so which in some other areas of their business don't have as much demand right now. So overall, we're dealing quite well with it. When you look midterm forward, what's gonna be the biggest challenges? I think the two biggest challenges might be the availability of our products, like I just explained, like, rubs in India. So there will be selective products where it's gonna be hard for a few months plus to to get them. So we're working very hard right now to increase our buffer stock. Our sourcing teams are ramped up. We actually just put a significant amount of a team shifting into availability management and getting products. But, overall, that's still not a major part that would impact our growth even if we were not able to successfully handle it because, again, in most of our other business, we're actually being quite flexible. And the second part going forward where we have to work is the potential capacity additions in our operations if growth were to persist through q four. So overall, the, you know, customer experience is working very well right now, actually surprisingly well, but we have to do some more work, and the teams are working very, very hard at this. Then the third question was marketing, and and what do we see? So for us, our marketing model is a little bit different. Right? So so we have mostly our organic marketing, and we always said that asset building and organic marketing is great. And we do see exactly that because, you know, social media usage has exploded through, this crisis, and we actually continue to serve our customers on social media, but even more. And the engagement is higher. We see every metric on social media trending up. Our teams, our marketing teams are producing content from their homes, or our influencer producing content from their homes. So we have seen that this model actually scales extremely well, during this time. On the paid marketing side, which is a really low part of our marketing, I could I think we have seen the similar things, but it's so small for us that I wouldn't dare to speak for the whole market. And, actually, because we wanna be cash conservative and are also a little bit worried still about whether the recession in h two have a good have a have a negative impact for us. We've actually taken paid marketing further down. So while there are theoretical opportunities, we focus in our opportunities very much on organic marketing, which is producing extraordinary results right now. And it's gonna be with us, those customers that we gain in our loyalty model, obviously, no matter what happens in the second half of the year. So I hope that answered the three questions. Yeah. That that's very clear. Just one, quick follow-up. So you talked there about ramping up quite a few teams in Q1, like customer service, etcetera. Just coming back to Sebastian's commentary around the drop through in Q2, should we be broadly assuming that Q1 SG and A is the same as going into q two, or should we actually assume that there is a little bit of growth in SG and A or other costs given some of the the ramp ups you talked about? No. Roughly the same because the ramp up are mostly in operational teams that you would see in contribution margin. We might, going forward for q three and q four, slightly increase also in SG and A, but that would be ever so slightly that I don't think that would be a material effect in this. So we would inform you in the next earnings update. But so far in our SG and A part, we're not seeing increases. We actually had talked about for the full year in the cash cost of that, right, because you see accounting effects which are also a little bit confused by DNA. Like, the cash cash cost part of that, we're actually slightly going down because we wanna be even leaner than than than we've entered the year. But yeah. So so so nothing what what you asked will happen. We see stable cost for q two as well, and we will only see, if so, very slightly increasing cost through q three and q four. Okay. Great. That that's very helpful. Thank you. Thank you. The next question is from Christian Dalles. Your line is now open. Yes, good morning, everyone. Thanks for taking my questions, and congrats to the great results and the strong current trading, really. So yes, a couple of questions were already answered, but maybe you could share some color on new customer growth in Q2. So I think in Q1, new customers were up 6%. So maybe you could update us with the figure what you've seen in the last six weeks here. And then secondly, so given that you're obviously seeing a strong operating leverage on the back of this very strong top line momentum, so would it be fair to assume that you're going to become positive in terms of adjusted EBITDA and free cash flow already in Q2? That would be very interesting. Okay. I will answer question one. Sebastian will cover question two. In terms of new customer growth so, actually, what what you referred to, I think, is active customer growth. So that's a that's a metric that we use, which is basically everyone who has taken at least one order in the last twelve months. It's an LTM metric, so it changes gradually over time, and it went to 986,000 by the '1. And as we had indicated, it went to more than a million already in early April. So that number is growing up quite dramatically. And the interesting thing when you look deeper into it, it's not just new customers or first time customer growth accelerating for marketing. As we said, we see tremendous growth from our existing cohorts, which mathematically means that also our reactivation, so people who had churned in the past, is is growing a lot. So we see growth in those active customer numbers quite dramatically, and that's a that's a really good testament to both how the model works because we always say that there's a lot more people looking at Western. Right? We have shop of magazines, so people come and, you know, stay with us even dozens of times per year and might not even buy. But then when the opportunity is to buy and when the online shift happens, then those will buy. We always said that. The interesting thing is almost like a sneak peek into the future that we're seeing right now where we're seeing both the the the the customers that we already have buying more and the customers that might not have bought but just watched and and and read what we do but might maybe not have been comfortable yet with ecommerce in our in in our industry. And given their age, they are now basically sitting at home and can't go anywhere to the offline stores, and now they're experiencing ecommerce for the first time, and it's a good experience. And we see also the loyalty numbers then be the same. And then as a third effect, obviously, marketing because people are more on social media, and we are having these, more than 3,500,000 Instagram followers and and more on several other organic social media channels. We're seeing more of those then drive into our platform and become first time customers. So we're seeing, like, customer momentum really across all the the the channels and all the ways of us interacting with customers, and we believe that some of that would, either way how the industry develops or the the exact top line develops, a lot of those customers will stay because of our loyalty model. So that's good. Question two, Sebastian. Yes. Hi, Christian. Thank you for your question. I think I tried to guide you how the accelerated top line will, like, fall through our P and L, but let me just highlight. I think all the additional revenue multiplied with our current contribution margin would be what I would consider on top adjusted EBITDA for this quarter. So, I mean, the operating leverage will kick in in the marketing ratio, as we explained, and in the G and A ratio. So you can reduce those significantly with the higher top line. So this is not answering your question, but I think if you do the math, you will come to a positive result. And on cash, we always guided our free cash flow to be roughly three percentage points lower than adjusted EBITDA. I think there we will have a special effect in Q2. As you know, we're with our negative working capital kind of additional growth, we will see very positive impact in our net working capital. So the three percentage point might not be true for the two because we will most likely see positive working capital effects due to the growth. Thank you very much. At the moment, we have no further questions. As we have no further questions, I would like to hand back to you, gentlemen, for some closing remarks. Thank you very much. Thank you very much, everyone, attending the call. I hope you stay healthy. I hope you stay safe, and talk to you soon very much. Goodbye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. Your lines will be disconnected.