ON Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2023

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the On Holding AG Q1 2023 Results Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer

Speaker 1

assistance. I

Operator

would now like to turn the conference over to Jared Peter. Please go ahead.

Speaker 2

Good afternoon, good morning, Thank you for joining ON's 2023 Q1 earnings conference call and webcast. With me today on the call are Executive Co Chairman and Co Founder, Asper Coppetti CFO and Co CEO, Martin Hoffman and Co CEO, Mark Maurer. Before we begin, I would like to remind everyone that today's call will explain forward looking statements within the meaning of the federal securities laws. These forward looking statements reflect our current expectations and beliefs only and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20 F filed with the SEC on March 21st for a detailed discussion of such risks and uncertainties.

Speaker 2

We will further reference certain non IFRS financial measures such as adjusted EBITDA and adjusted EBITDA margin. These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for a reconciliation to the most comparable IFRS measures. We will begin with Casper, followed by Martin leading through today's prepared remarks, after which we are looking forward to opening the call for a Q and A session. With that, I'm very happy to turn over the call to Casper.

Speaker 3

Thank you, and a warm welcome from my side. It's a great pleasure to be here with you to discuss our Q1 performance and recent milestones. ON entered 2023 with high ambitions of continuing our growth journey, capturing market share and further increasing profitability. We are pleased to share that the ON growth story continues. We were able to exceed our expectations and post record net sales of CHF 420,200,000 in the 3 month period.

Speaker 3

This reflects a growth rate of 78% versus Q1 2022, which have been somewhat constrained by the supply shortages that had affected our industry a year ago. As we have shared before, delivering best in class profit margins is a focus for ON, and I'm happy to report that we have been able to substantially expand our margins in the Q1. Gross margin for the Q1 was 58.3% And adjusted EBITDA was 14.5%. We are tracking well towards our midterm ambition of delivering best in class gross Margins of 60% and EBITDA margins in the high teens. And Martin will expand on this in his comments in a minute.

Speaker 3

But first, let's have a look at some business highlights from this quarter. ON is an innovation company at heart, and we are happy to report That ON's recent running launches have met with very strong consumer demand and have helped ON capture additional market share in the running category. I'd like to highlight the extremely successful introduction of the Cloud Surfer 6, which is the first ON product to feature computer optimized technology, which we call Cloud Tech Phase and will roll out to further models in coming seasons. And ON is also capturing mindshare in the running space. An emotional highlight was ON's first win in the Boston Marathon with ON Athletics Club member Helen Obiri Distancing a very strong women's field and once again proving that ON's highest performance running shoes are some of the fastest marathon products.

Speaker 3

The platform Eco 3, for example, will be more broadly available to consumers starting in July this year. We are very satisfied to see that ON's lightning and rain strategy, Winning races and converting everyday runners to On is delivering strong results. To illustrate, With the Cloud Surfer, the Cloud Monster, the Cloudrunner and the Cloud Go, 4 running products that were only launched within the last 12 months are now making up 45% upon sales at the leading U. S. Running store franchise Fleet Feet.

Speaker 3

On the tennis side, we are thrilled to see world number 1, Iga Swiatek and Ben Schalten competing on the court in their new On Gear. Iga Stant Azal coming back from an injury to win her 1st tournament as a non athlete by defending her title at the Stuttgart Open in late April. Both the Roger Pro Tennis Performance products as well as the Roger Lifestyle Tennis franchise are in high demand and have been growing even significantly The ON brand is strong and keeps getting stronger. In recent months, We have started to shift some of our marketing spend to awareness, image and top funnel investment and it is paying off. In March, the Cloud Surfer and our tagline Dream On were part of a global brand campaign that featured mega posters in key cities and airports supported by digital ads.

Speaker 3

In preparation for the spring marathon season, an additional emphasis was put on apparel with the Feel Nothing campaign dedicated to the design and functionality of ONCE Apero. Wealth Marathon was supported by concerted PR outreach, resulting in strong media presence before and after the race and amplified by Helen O'Bire's stellar performance. As you know, ON is regarded as the thought leader for sustainability among sports brands, and we have further put significant steps into action. ON's strategy is to pioneer sustainable technologies and scale them rapidly. And so we have taken learnings from cyclone on the Circle subscription and have scaled into mass market products.

Speaker 3

The new Cloud Surfer, for example, is the 1st commercial running shoe to feature a single material upper made from recycled polyester, which makes the product ready to be recycled. In addition, we use Dope Dyeing, which saves 90% water compared to conventional 9. We are now rolling these technologies out to further models in the coming seasons. We will give you further insights into ON's sustainable transformation in the upcoming impact progress report due to release in Q3. Overall, we are extremely happy with how the brand and products are resonating with our fans around the world, And we still have a lot more to come in 2023 to be excited about.

Speaker 3

Our deepest gratitude goes out to our stellar team Here at ON, we have planned and executed this quarter to perfection. With this, it is my great pleasure to hand over to Martin for the Q1 financial review, market deep dives and elevated outlook for the full year.

Speaker 1

Thank you, Casper, and hello, everyone. You You mentioned the win of Helen of Pierre in Boston. We are so proud to be one of only 4 brands to win 1 of the marathon majors during the last 4 years. Back in 2014, we had our first sales boost in the corner of the Marathon Expo in Boston. And ever since, we had dreamed Of winning this race one day.

Speaker 1

Therefore, this victory was a very special moment for so many people at ON. And now we can dream even bigger. Our starting Q1 was outstanding and exceeded our own expectations. Net sales for the Q1 reached CHF 420,200,000, up by 78.3% year over year. Our gross profit margin increased from 51.8% to 58.3% And our adjusted EBITDA margin from 6.7% to 14.5%.

Speaker 1

In our full year results call in March, We share the strategic pillars that we are executing on to maintain our strong sales and profitability growth in 2023. Our record net sales in Q1 are further validation of the strong brand momentum across all regions, channels and product groups. Our strong supply position and our ability to distribute the high volume allowed us to capture the full momentum. This is a very different situation to the supply constraints that we had faced 12 months ago. Recall, These constraints in Q1, 2022 had a larger impact on wholesale than on T2C.

Speaker 1

As a result of the very high demand from our retail partners, Combined with a lighter quarter last year, Wholesale in Q1 grew 86%, reaching CHF283,200,000. The majority of this growth is coming from existing doors, both fueled by existing and new products. With the start of our new springsummer season back in January, we continued our selective store expansion globally. In our direct markets, On products are now available in almost 9,800 doors. This includes the now 58 doors that we have at DICK'S Sporting Goods, a partnership that we are incredibly happy with and that plays an important part in expanding our reach to new customers.

Speaker 1

In particular, we are very pleased to note that DICK'S Nobotes, the highest apparel share among all key accounts, a significant milestone in our efforts to establish On as a head to dough print. The strong demand for the print is directly reflected in our strong D2C growth across all regions. D2C net sales increased by 64.3% versus last year, A more normalized rate versus wholesale, contributing CHF 137,000,000 to our top line. All regions grew by more than 50%. In Europe and in APAC, D2C growth had been stronger than wholesale growth.

Speaker 1

In our D2C data, we can also observe that we are increasingly reaching a younger consumer with our newer running models. This strategically important trend is very visible, for example, with the CloudMonster and Cloudrunner that are among the top of our youngest leaning models in our running range. Along with many of our younger leaning performance all day products, such as the Cloud Nova. This is further validating the successful expansion of our product offerings to younger audience. We always emphasize the importance of our multichannel strategy to meet the customer wherever they are.

Speaker 1

While still a small part, our own retail stores enable us to showcase on in the most premium way, and we are very happy with How they are elevating brand awareness. This is evidenced both in the increased D2C traffic following store openings And at the same time, a spillover to wholesale doors in proximity to our own stores. In Q1, we more than quadrupled our retail net sales compared to the same period last year. We mentioned the strong start of our flagship store in London. We're very happy that this momentum has sustained.

Speaker 1

This is providing us with the evidence that there is a demand for selected larger flagship locations. We're therefore extremely excited for the upcoming months, which will see the opening of new retail stores in Williamsburg And Miami. Both of these stores will have more than double the selling space compared to our current New York store. Moving on to our regional performance, where we continue to see strength in all geographies. As many of you will have seen in our press release 2 weeks ago, we are updating our disclosure to no longer report the rest of world region as of this quarter.

Speaker 1

Our Middle East and Africa business will join Europe to form EMEA, while Latin America will be added to North America to form Americas. Our press release from May 2 provides a detailed walkover from the old to the new regional splits for all quarters of the 2022 fiscal year. Not impacted by this change is the Asia Pacific region. So let me start here. Net sales in Asia Pacific accelerated to CHF 31,100,000 in Q1, growing by 89.4% compared to same period last year.

Speaker 1

All three key markets, Australia, China and Japan, have seen a very strong growth rate between 75% 100%. We have seen a strong increase of local customers as well as international travelers in our Tokyo flagship store as well as our China stores. The APAC region continues to be a very strong showcase of our success of our apparel business with over 10% Apparel share across the whole region. Moving on to Europe, Middle East and Africa, where net sales continued to grow Strongly by 51.6 percent to CHF 118.9 million in Q1. Sales in the UK more than doubled, Now making it the 2nd largest country in the region.

Speaker 1

We already mentioned the multichannel momentum in the London area, But we see a similar spike in demand in many other key cities. With some distance, Germany remains our largest market in the region As it continued to grow at 56 percent, with the launch of the new cloud server, On made big waves with strong presence in most key European cities such as Barcelona, Paris, London, Berlin and our home in Zurich. Net sales in the Americas increased by 91.9% for the first quarter, reaching CHF 270,200,000. This is CHF 16,500,000 more than the previous Quarterly record sales in Q4 2022. This exceptional growth was driven by the strong demand in both channels, of course, supported by the control door expansion as outlined earlier.

Speaker 1

Turning to our performance byproduct category. Net sales from Schuh grew 80 percent to CHF 400,500,000. The second half of the quarter saw exciting new launches, which of course included a cloud server that Casper elaborated on. In the 1st 3 months, we already sold more of the new cloud server than during the last 2 years of the old cloud server model combined. We also launched the Roger Pro Clay and our kids collection.

Speaker 1

Due to our emerging presence on tennis courts, demand for the Roger Pro is exceeding our own expectations. This is also true for kids shoes. We launched the Cloud Play and the Cloud Sky at a very selective number of key retail partners as well as our own D2C channels and continue to see very strong sellout numbers. Apparel reached net sales of €16,900,000 in the quarter with a 48.9% year on year growth. Our new collections introduced for the springsummer season under the Feel Nothing campaign have resonated very well with our fans in both channels.

Speaker 1

The growth and uptake in apparel continues to be skewed more towards our D2C channel and newer markets as evidenced by the APAC example. This includes the proven ability of our DTC and our own store retail to fully showcase our head to toe looks And increased cross selling between categories. Moving on to gross profit, which reached CHF244.9 million in the quarter, more than doubling year over year. We achieved a gross margin of 58.3%, Up 6.50 basis points compared to Q1 2022. The significant uplift year over year is largely a result Of the normalized supply chain environment and the resulting discontinuation of the exceptional airfreight usage, which had been most elevated in the Q1 last year.

Speaker 1

Our strong margin in Q1 also validates our full year gross profit margin target of around 58.5 percent considering that Q1 normally has a much lower D2C share compared to the rest of the year. SG and A expenses excluding share based compensation were CHF197,700,000 and 47% of net sales in Q1, reduced from 49.1% in the same period last year. A couple of call outs in the individual SG and A items. Working through the temporarily above optimal inventory volumes comes with slightly elevated distribution expenses for additional storage space alongside the cost for the ramp up of our warehouse automation projects around the globe. With €44,600,000 marketing expenses, we invested more in brand building In our position as a premium performance brand rooted and running and in the consumer awareness for On as a head to toe brand than in any previous quarter.

Speaker 1

Our big brand presence at key airports like Los Angeles, At the Ladies Festival in China or the Tokyo marathon are just a few examples of more upper funnel investments to drive brand awareness globally. More and more customers experience On from a brand perspective, A brand with exciting, highly innovative and sustainable products. A very controlled and disciplined cost management And the strong net sales created economies of scale in both selling and general and administration expenses. We continue to invest into our team by leveraging outsourcing opportunities. We also continue investing to drive efficiencies in key processes.

Speaker 1

As a result of these dynamics, Our adjusted EBITDA reached CHF61 1,000,000 in the quarter, 288.2 percent up from EUR 15,700,000 in the prior year period. We achieved an adjusted EBITDA margin of 14.5%, considerably up from 6.7% in Q1 2022. Now moving to our balance sheet. Capital expenditures We're €9,700,000 in Q1 2023, a 2.3% of net sales, a significant reduction compared to the €16,300,000 we had in Q1 2022 when we were building out our new offices in Zurich and Portland. As expected and communicated in our full year results call, our inventory position at the end of Q1 increased slightly as a result of the normalization of lead times.

Speaker 1

Our inventory position stands at €465,200,000, up by 17.6% compared to December 2022. The increase is driven by the early inflow of first All winter season products. Overall, our inventory remains very fresh and sets us up to drive a continued high share of full price sales in 2023. Our cash balance at the end of Q1 was CHF361,300,000, only slightly below the CHF 371,000,000 at the end of Q4 2022. We are progressing well on the expansion of our existing credit line and continue to anticipate closing the new facility during the course of Q2 or Q3.

Speaker 1

With that, let's look ahead. We had a very strong Q1. We continue seeing a strong End customer demand during the 1st weeks of Q2. Also, as expected, growth rates have moderated as we approach a more comparable year over year situation. Our new products are resonating very strongly with existing and new fence, And we maintain a strong order book for the second half of the year driven by existing and exciting upcoming new products.

Speaker 1

As a result of all of this positive momentum, we again raised our guidance for the full year 2023 and expect to reach at least CHF 1,740,000,000 And implied year over year growth of 42%. We continue to embed an element of caution in our outlook for the second half of the year in the light of the many risks in the current macroeconomic environment. On gross margin, as I briefly alluded to, we are retaining our gross profit margin guidance of 58.5% for the full year 2023, which would for the first time bring our gross profit in absolute terms to over CHF 1,000,000,000 for the year. On adjusted EBITDA margin, we maintain our target of 15% for the full year even at the higher net sales expectation, implying a year over year absolute adjusted EBITDA increase of close to 60%. With this strong outlook and business momentum, we expect to generate a positive cash flow in 2023.

Speaker 1

Last week, we introduced our exciting springsummer 2024 Collection to our team and key partners at our global meetings in Ho Chi Minh City, In Portland and in Zurich, we are highly energized and motivated by the initial waves of positive feedback for our apparel and footwear products from our retail partners and by the continued excitement around the On brand. Our teams are working with full speed to deepen And to build the foundation for continued strong growth for our partners and for us. We are so grateful for the strong and collaborative partnerships we continue to form and take this optimism and energy to our daily efforts to build an even more diverse and impactful business going forward. But even more important was the opportunity During the Global Meetings, to connect with so many people from our team from across the world and to speak about dreams and obstacles And about our culture, because this is the fundament of everything. It is such a privilege for Casper, Mark and I to present our strong results on behalf of our whole team, and we could not be happier about where we stand today.

Speaker 1

With that, We'd like to open up the session to your questions. Operator, we are ready to begin the Q and A session.

Operator

The first question is from the line of Abi Svyniks with Piper Sandler. Your question please. Abby, you are now live. Ms. Abby Swayniak from Piper Sandler, you are now live.

Speaker 4

Great. Thanks so much for taking my question. Congrats on the quarter. Just given the strength in Q1, I mean, I know you're supposed to beat through the top line, But are you seeing any changes in consumer behavior that give you any more caution? Or are there any quarterly headwinds that we should be thinking about in terms of tougher compares?

Speaker 4

Or I think some peers have called out some softer wholesale trends in 2Q. Just any color there would be helpful. Thank you.

Speaker 5

Thank you, Abi, for the question, and welcome everyone also from my side. So what we saw on the wholesale side in Q1 and it's kind of the picture continues in Q2 as well. If there's still a lot of in channel, there's still quite a bit of inventory in some of the channels. So it's very important we're monitoring sell through and demand for The brand was continued to be strong. That's what you're seeing in the result.

Speaker 5

That's what we're continuing to observe. It's a bit volatile in general. So the wholesale environment, When we look at sell out, some weeks are very strong and then some weeks are a bit weaker. And this is also why basically we want to look At Q2, Q3 and Q4, with an element of caution, we know we're all aware of the macro environment And it's really some uncertainty there. But when we look at ON, we are very confident.

Speaker 5

And I just want to probably Share with you also kind of looking at DICK'S, for example, where Renal Life in 58 doors and already Those stores have the highest average sell through of all doors that we have it on, all wholesale doors. So also the new stores that we're adding, the brand has

Speaker 4

I mean, this is the strongest year of year growth in 4 quarters. So can you talk about any changes to the assortment or the strategy and like specifically more color on There you see on price points going for that business. Thank you.

Speaker 5

Yes. Thank you. So We feel very confident where we are bringing the collection and we would have loved Welcome you at our global meeting so you could already see what's happening in 2024. In the end, we feel there's a lot of opportunity to take something that's in performance running and to move it into the movement all day active space. This is why we're partnering With some of the doors that we're partnering as well and the products continue to evolve.

Speaker 5

The demand in that comes from the sell in that we have with the key accounts It was very strong. Again, looking at DICK'S, for example, they are our strongest apparel door in terms of apparel share. And especially, I want to highlight That our own retail stores see very, very strong apparel numbers. And that's also one of the We are looking forward to continue to evolve our own retail network. From a price point perspective, we feel confident where we are.

Speaker 5

There's definitely room to probably have a few more pieces in a little bit kind of a little bit lower price point, which is Close to where our current lowest price point is, but then we also feel we have a spot where there is demand and we're meeting the right consumer at the right place with the apparel pieces

Speaker 4

Thank you.

Operator

The next question is from the line of Aubrey Tiano with PNP Paribas. Your question please.

Speaker 6

Hi. Thanks so much for taking the questions. Wanted to ask on the updated revenue guidance and just if you could maybe elaborate a bit more on what's Driving a higher guide, whether there's anything specific to call out either from a region or product perspective. And then second, You mentioned strong preorders for fallwinter, in particular, some key styles that gave you optimism for the back half of the year. Is there any change to your expectation on 2H revenue growth kind of in the low to mid-30s range?

Speaker 7

Okay. Happy to take that one. So we really have seen a very Strong demand, but also very good capabilities in fulfilling the demand in the last days of the quarter, Which has resulted in the overachievement compared to the number that we indicated in our last call. And now we have given That number into our full year outlook because we stay fully confident on the year to go. As Mark just said, our business remains strong.

Speaker 7

The demand remains strong with The changes that we see in from on a week to week basis, our preorders for the fall winter season Very strong and the growth rate there indicates that we are in a position To overachieve the number, but at the same time, we want to stay in a position that we take the right Decisions even in a weaker environment, we don't need to chase sales, but continue to think long term. And therefore, we embedded that element of cautionness from our how we look at the first half year versus the second half year. This stays pretty much in line with what we shared in our last call. So now with the updated Q1 number, we more look at A mid-50s growth rate in the first half and then the low to mid-30s in the back half of the year.

Speaker 6

Great. Thank you.

Operator

The next question is from the line of Jay So with UBS.

Speaker 8

Great. Thank you so much. Just wondering if you can elaborate a little bit on the growth in the Asia Pacific region, particularly in China, what you're seeing there? And really maybe what your outlook is, not just for But even if you look out a little bit beyond how you see that market developing? Thank you.

Speaker 5

Thank you for the question, Jake. Hey, I think China, we're all aware of how the market came back. And I think January, February was still a bit slower and then it really started to pick up. And we see we're very happy with the traffic that we're seeing In the store, so we currently have 15 stores in China and 2 of those opened in Q1 2023. And we're planning to have 18 to roughly 21 stores by the end of 2023.

Speaker 5

So the traffic is there. We're happy with the sellout that we have in the stores. We're very happy with the product portfolio and how we're able to tell A performance message that's rooted in running, but that actually reaches consumers way beyond running in an active space, in a movement space. And we remain very, very confident for the mid- and long term. We said this before, right?

Speaker 5

I mean, we're in China because we want to make it 1 of the top two markets and that's what we're aiming for. And this is what you see reflected In the growth rates, obviously, a lot of investment going in there. We have a team of over 100 people, making sure we have a very tailored marketing approach as well with a lot of Local content that we can bring to the market, but the brand is received well and that's in the end what is in the numbers.

Speaker 8

Terrific. Thank you so much.

Operator

The next question is from the line of Cristina Fernandez with Telsey Advisors. Please go ahead.

Speaker 4

Hey, good morning. I wanted to ask About the inventory, can you just give us color around how you expect it to slow over the next couple of quarters? It's 1Q, the peak on an absolute basis, and then it declines sequentially Deliver that inventory, that will be helpful.

Speaker 7

Mr. Tim, happy to take this one. Recalling what we shared on the last call, the Increase in inventory that we see and that the additional increase that we also saw now in Q1 was fully intentional and Driven by the high demand that we saw and continue to see in the spring, summer and in the fall winter orders. So our inventory continues to be fresh and basically will allow us to fulfill the demand in the coming months at full price. Now the increase of the inventory, as we shared it last time, is the result Of shorter lead times, of transit times, together with more and more reliable factory outputs that we have seen.

Speaker 7

And so Back in December, we started to adjust our production orders going forward. But because you have a certain commitment towards your factories, Those adjustments will only come into place at scale now in the Q2. But we already see the first results of that If you would look one level down on inventory, at the end of December, we had €145,000,000 inventory in transit. Now at the end of March, we only had €124,000,000 of inventory in transit, so €20,000,000 less. So that means that there's already less inventory in the pipeline.

Speaker 7

And So as we have shared in the last call, our goal is still to reach around 30% of working capital in terms of net sales the end of the year, so looking at an inventory in the range of somewhere €425,000,000 to €450,000,000 So this is where we want to be. So at a lower level than where we are at the moment, somewhere in between end of March end of December.

Speaker 4

Thank you. And my second question is when you look at the demand you're seeing Globally, are there any call outs by region as far as are the parts that are resonating, for example, in the Americas Sorry, the same as anemia or APAC, are there differences in performance by lifestyle? Any call outs there as far as That's working in 1 region versus the other?

Speaker 5

So if we got that correctly, the question is on Regional differences from a product side and how the products are received. So when I mean, really aside and we mentioned it In the notes as well, I think we saw strong growth across all regions, right? So EMEA, Americas and Asia Pacific. We just spoke about China where January February was still a very difficult environment. And despite that, we're still almost at 90% of growth in Asia When you look at markets like Germany with 56% growth or the U.

Speaker 5

K. With above 100% growth, then I think the essence is always the same. It's one product that are performing very well. And the Monster to Goat Surfer, we spoke about it making up 45% of our performance run range. So new products that have been received really, really well.

Speaker 5

And we're closely monitoring that the products are being adopted by runners and being worn on runner's feet along the key running routes. So Then we look at share, and there we sometimes reach above 15%. And then you have products that's slightly different, especially on So if you look at the U. S, the Cloud Nova is extremely strong. It's performing very, very well.

Speaker 5

If you look at China, you, for example, have a product like the CloudX, That is the strongest franchise. And we feel this is very, very healthy because it allows us to basically balance different products And then also use them over time for different regions. So we're not reliable on one product. And there was also clear goal to reduce Basically, the share of the cloud over time, which we are very much achieving. And just one more remark I want to make here, which is We invested a lot in really routing and communicating the brand from a performance perspective and also reaching a younger audience.

Speaker 5

And it's paying out in all the countries. And just an example there also in the UK, we are very happy to have over 100 And growth very much coming from an audience that is among the youngest that we have globally.

Speaker 4

Thank you.

Operator

The next question is from the line of Jim Duffy with Stifel. Your question please.

Speaker 9

Thank you. Hi, Casper, Mark and Martin. I wanted to start by asking about regional differences in channel mix and momentum. Martin, I believe you mentioned Europe and Asia DTC growth outpaced wholesale. That implies imbalance of wholesale growth in North America.

Speaker 9

I'm curious, is that The function of comparison supply chain issues in the prior year or is that simply reflective of self momentum and Pure wholesale appetite for the product.

Speaker 7

I think if we just look at the growth rates, It's a bit of function of the comparison. So Q2 will be the Q1 where also COVID doesn't play Roll anymore in our prior year numbers, maybe with the exception of China. But We continue to see and it's fully our strategy to have a stronger growth rate in our D2C channel, Both ecom and online compared to our wholesale channel. And that's the strategy that we follow in all the geographies. And We see a similar momentum in all the geographies now on a more comparable base.

Speaker 7

We invest Significantly in our digital capabilities to connect more directly with our customer to increase our service level With our customers in our direct channels and the experience overall. And as Mark said, our own retail stores Play an important part. We gave the example of London, but we see a similar pattern also in L. A. Or in Tokyo, Where our retail stores are additive to our online channel, but also additive to our wholesale channel.

Speaker 9

Thank you. I'd also like to ask about the planned timing of marketing spend across the balance of the year And any specific marketing plans around the upcoming tennis majors like Wimbledon and the French Open?

Speaker 5

Yes. What you see happening in marketing and I think what you experienced is really a shift From lower funnel to upper funnel, so we are we will continue to build the brand and to reach A wider audience, this is what you saw with the launch of the Cloud Surfer. And this is one of the key reasons why we also decided to move into tennis. We're very happy with the impact that Egor and Ben already have. It allows us to bring the ON logo and the ON brand On the chest of some of the best players to a very, very large audience.

Speaker 5

And so what we will do is basically Have a major launch event around the U. S. Open with the 2 players. It's going to be around August, so late August just before the game is starting. And It's our very clear goal to continue to make tennis and a very inclusive sport that we can also Connect between different audiences.

Speaker 5

So not to just to have it as a spectator sport, but basically how can we connect The pro tennis players with the audience that is playing it all day and every day. And so what you experienced with the On Track nights, which is essentially What we're doing on the performance running side, we're going to bring the same concept to tennis and this is how we want to activate The players in

Operator

during the U.

Speaker 5

S. Open. And then I just want to highlight 2 more key elements for On. The world champs in Budapest are going to be very important for us. It's the clear goal to be competing for medals on one of the biggest And then this is also the last test, so to say, before Paris, which is going to be a very important moment for us.

Speaker 5

So How can we bring more sustainable innovation and lead from a performance side to a huge audience through athletes and this is what Paris will be about.

Speaker 9

Thank you.

Operator

And the next question will be from Alex Trappin with Morgan Stanley. Your question please.

Speaker 10

Great. Good morning. Thanks for taking my question and congrats on another great quarter. Martin, I have 2 that are probably best for you. First, I want to clarify something on the guidance.

Speaker 10

It looks like you only flowed through part of the Q1 EBITDA beat to the full year. From the commentary, it just sounds like that's conservatism, but I want to make sure I'm not missing anything there that's limiting the flow through. And then second, just on gross margin. I think freight was like an 800 bps impact last year, and I'm seeing gross margins up 6 So I'm just wondering, does that mean you didn't fully recapture the airfreight or there's something else pressuring margin? Just want to make sure I'm understanding all the moving pieces there.

Speaker 10

Thanks.

Speaker 7

And exactly happy to go there. So let me start on the margin side. So really, we continue to see a very high share of full price sales. So there's no discounting Embedded in there compared to last year, we still have a negative FX impact in there, Actually from the weaker euro. And then that elevated inventory level that we have has also created some additional freight costs, For delayed unloading of container, which are also reflected in the gross profit that we had for the Q1.

Speaker 7

But we are out of that topic. So going forward, we foresee that we continue driving a high gross With margin in line with our long term goal of 60%, again, there's still pressure from the weaker euro On the margin side of 60 to 100 basis points, but the rest of the business is really set up to deliver on that Hi, Armatull. Our price increases have been very well received by the consumers. We haven't seen any demand impact. On EBITDA, again, our philosophy is to Invest into the business and into the future growth, while driving profitability.

Speaker 7

So this is why for us, The full year number is the one that we are managing, the 15% EBITDA. And So we are investing into people. We are investing into marketing, into brand building, into innovation in order To become a bigger brand in the future. At the same time, we also have a lot of initiatives to drive economies of scale Being in happiness delivery, but then of course also in the operations of our warehouses And this is reflected in the full year guidance on the EBITDA level.

Speaker 10

Great. Thanks a lot.

Operator

The next question is from the line of Tom Nikic with Wedbush Securities. Your question please.

Speaker 11

Hi, good afternoon gentlemen.

Speaker 5

Thank you for taking my question. I just want to ask, I

Speaker 11

know you're Growing very, very rapidly and I'm sure you have ambition, so you'll continue growing over a multi year period. Do you have Today, sufficient manufacturing capacity with the partners to support the growth that you expect to see over the next couple of years? Or will you have to find More manufacturing capacity as you continue to grow?

Speaker 5

Yes. Thank you for the question. I think it's very clear that in on the manufacturing side in general, there is rather Overcapacity right now than undercapacity. So it's not so difficult to have enough capacity. Nevertheless, we've been planning for that for many years, right?

Speaker 5

So we've been working with the same partners over time and they know our growth aspirations. And I think the Key here is not just to get capacity, but it's basically to allow to partner with the best innovators, right? And so What we're very much focusing on is how can we bring the most performance foam to the market? How can we have the best and lightest membrane? How can we have the most sustainable products in the market?

Speaker 5

And in the end, we're investing a lot of time on partnering with the best chemical companies that are out there And this then leading to the best OEMs that will help us manufacturing the product. And we're very confident That we've built a group of partners globally that allows us not just to reach the growth ambitions that we're having, but also to continue to be the most innovative friend out there.

Speaker 11

Great. And just one quick follow-up. When we look at EMEA, Yes. I think you talked about really great growth in the United Kingdom and strong growth in Germany. That would kind of suggest that maybe there was some slower growth elsewhere in the region.

Speaker 11

Are there sort of pockets of EMEA where Maybe the brand has not picked up as much momentum as elsewhere and would you view those as opportunities?

Speaker 5

Yes. So when we're looking at it, I think with The formation of the region, EMEA, there's many different elements in there. And so let's start with the Middle East, where we basically There is a very, very strong demand, but we have a lot of opportunity in setting up a good retail and wholesale footprint. So That's just a very underpenetrated region compared to the demand that's out there. Then we look at Spain, Italy, which are huge markets Also on the lifestyle side, we're literally just getting started.

Speaker 5

We're growing strongly in France, but it's still Relatively underrepresented as a brand to some other markets. We've spoken about Germany and U. K. And then there's Switzerland and Austria, We're very much focused on working with the right partners and bringing a Performance 1 range to life. As part of that, we you can also expect some changes on the partners we're working with, especially then for next year, Very much trying to focus on the channels that allow us to reach the right consumer, which means we're going to get a go out of comfort doors and brown shoe doors.

Speaker 5

And obviously, there's some change happening there, but then the impact is going to happen over time and especially the Northern Spring Summer 2024. We're Quite confident that we can compensate a lot of that with new channels and with our own retail channel and own B2C channel that we continue to

Operator

The next question is from the line of Jonathan Komp with Baird. Your question.

Speaker 12

Yes. Hi, good afternoon. Casper, if you're still there or Mark, I'm curious, I wanted to ask really what you make Of the strength of the newest performance models you're launching and just any perspective how that might be influencing Your forward product strategy and then if you could comment at all on the road to Paris 2024, Any high level thoughts on what we should expect?

Speaker 3

Thank you, John, and thanks for asking a question about product. That's what we care about 1st and foremost. Yes. As you mentioned, there's been a lot of anticipation for the Cloud Surfer launch. Cloud tech phase is a very intuitively Understandable technology.

Speaker 3

And we've been blown away really and surprised by how well it's been taken. Most retailers in our own lab shop have been selling through this very, very quickly. I think Martin shared some numbers earlier. And that's good news because we're about to roll Cloud Pak Phase out to more products into higher Cushing products to the trail side and also to one of our lifestyle models. Overall, You followed the market share gains that we've had in the running space, and that's really driven by some of the latest innovations we've introduced over the last 12 months, most notably the CloudMonster, a very prominent product that continues to be extremely strong, Where we're going to go into almost like a family of cloud monsters for spring 2024.

Speaker 3

But then maybe a little bit less exciting model like the Cloudrunner That now is usually one of the top 2 sellers who can run specialty doors in our houses to capture market share from Those bread and butter models from other brands and giving the retailers an opportunity to expand their Average price point because typically it's about $10 $20 more expensive. And then towards tariffs, Many of you may be aware that there's an arms race going on currently among the top performance brands of who makes the fastest shoes. And we start the sliding initiative with INON only about 18 months ago. So to have someone like Helmut Bierry beat Pretty much all the favorites on the women's side for the Paris 24 marathon gives us a lot of confidence going into the next season. And at the same time, we're looking how can we bring some of these performance technologies like the PBX foams and so on 2 more consumers maybe not the ones that they're running a 2 hour marathon, but maybe the ones that are running more of a 4 Our marathon, probably pretty much everybody on this call could benefit from these technologies.

Speaker 3

So those are the things that we're working on, John.

Speaker 12

Sounds like something I could benefit from, looking forward to that. And then just maybe a follow-up, Martin, thinking about guidance, the revenue guidance for the year, it looks like the guidance implies Q1 should be about 24%, 25% of the full year revenue. Historically, it looks like Q1 has been closer to 20% or below. So anything that would change the shape of your revenue cadence throughout the year? Or is that more a reflection of the conservatism At your baking end of the model?

Speaker 12

Thank you.

Speaker 7

So I think if we look historically, there's It's really hard to find a comparable year with all the disruptions that we had. And then Remember back in 2021, we also changed our logic of launching new products from basically a launch in

Speaker 11

the second half of the year to

Speaker 7

a launch in the Half of the year to launch in the more in January February. So I think it's hard to use historical. And as I said in the beginning, if we look into the second half of the year, our order book It's strong and indicates that there is an opportunity to overachieve the number that we have. But we also need to Keep in mind, we had a very strong holiday season last year with very strong Black Friday Cyber Monday sales where we apply a certain level of cautiousness. But again, from our product pipeline and some of the things that, that customer mentioned, There's a lot of confidence that we should see also strong reorders based on the preorders that we have on book.

Speaker 7

But we don't want to be in a position where we have to take short term decisions in order to chase growth.

Speaker 12

Very helpful. Thank you.

Operator

The next question is from the line of Sam Boza with Williams Trading. Your question please.

Speaker 11

Good morning. Thank you or good afternoon. Thank you for taking my question.

Speaker 5

Most of the questions

Speaker 11

have been asked right. 2, one is just about inventory and Where and really how to think about what you want your optimum churn to be sort of once we clear through this year because And then, I have a follow-up.

Speaker 2

I have a separate question as well.

Speaker 7

Let's start with inventory. So As I mentioned, for us, a good way to think about is on a working capital basis as a lot of the payables and the inventory are Ultimately related, so 30% working capital as a pro in percent Of net sales over the last 12 months, it's for us a good indication on where we want to be. We had lower levels in the past. And of course, we will continue working on optimizing our inventory, these rates through direct shipments to some of our Key account partners, of course, working with our factory partners, but also optimizing our internal processes. So we are clearly on this.

Speaker 7

But for the moment, we'll be focusing on basically bringing Our lead time is back to where we see the reality now with transit times. And then for us, important is to keep the inventory fresh, to keep inventory in a position that we have more Demand then supply, so that's an important part of planning the business in a conservative way.

Speaker 11

Thank you. And then secondly, you talked about not too much promotions. I was wondering, 1, in Switzerland, one of your larger wholesale accounts, I believe, Has just broke price and it's 20% off of all your shoes, at least 20% off there, some old ones that are marked down more. That's something that just popped up in the last week, Ochsner Sport. I assume that's a good customer of yours.

Speaker 11

Why are they breaking price right now?

Speaker 5

Thank you. Thank you, Sam, for that question. I think what's important to know, 1st and foremost, is that All the markets have different policies on how we can control pricing, right? So the U. S.

Speaker 5

Knows math, where it's very controlled in Europe that doesn't exist. So every partner is free to decide on how they want to price in the end product. We're working very closely with all the partners It's important that they're showing the product in a premium way and that they're reaching the right consumers. And you can rest assured that We're making sure that we're not selling in too many products and that we're working with our partners On showing the premiumness of the brand in the right way.

Speaker 11

They wouldn't break price unless there was a need to break price, I would say, regardless of what is permitted in the marketplace.

Speaker 5

Sorry, could you repeat that?

Speaker 11

We wouldn't be promoting your product unless They thought they needed to promote your product to drive more sales. We haven't really seen that here in the U. S. Yet. But I'm wondering is that because there's too much inventory in That particular retailer or and again, I understand there are different rules and you can't tell them what to do, but same time, it was sort of odd to see it.

Speaker 3

Yes. Maybe I can quickly jump in here. This particular retailer is 20% off site wide on all their running products. So it's not on specific.

Speaker 5

Sam, let me just highlight 2 additional points. 1 is what we're having in Europe. There is a topic of euro versus Swiss francs as well. So as you know, we have different prices between markets. So this always plays an important role also in terms of where And different people can shop and can get access to the product.

Speaker 5

And then I just want to highlight again, system is by far, And as you know, the most penetrated market and what we already said that we're trying to make sure we're working with the right partners to reach the right consumer. As part of that, we're also And not working with stores anymore and more on the brand shoe and comfort side. So and then Casper already mentioned the That this one is a side wide and not just enough promotion.

Operator

So there are no further questions, and I hand back to Jared Peter.

Speaker 7

Thank you everyone for being on the call. Have a good

Operator

day. Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.

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Earnings Conference Call
ON Q1 2023
00:00 / 00:00