On Holding AG

Good afternoon, good morning, and thank you for joining ONCE 2021 inaugural conference call and webcast for our third quarter 2021 results. With me today on the call are executive co-chairman and co-founder Kasper Kopetti, CFO and co-CEO Martin Hoffmann, and co-CEO Mark Maurer. For the first part, Kasper and Martin will lead through the prepared statements. Afterwards, we are looking forward to open the call for a Q&A session. Before we begin, I would like to remind everyone that the remarks during today's call may contain forward-looking statements regarding future events and financial performance within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only, and such statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our final prospectus filed with the Securities and Exchange Commission relating to the company's IPO on September 16th, 2021, for a detailed discussion of the risks that could cause and actual results to differ materially from those expressed or implied in any forward-looking statement made today. Please further note that this call will also contain certain non-IFRS financial measures, such as adjusted EBITDA and adjusted EBITDA margin. While the company believes these non-IFRS financial measures will provide useful information for investors The presentation of this information is 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 consideration of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. With that, I will turn the call over first to Kasper, followed by Martin for the prepared remarks.

A warm welcome to all of you joining us today. We're excited to share with you ON's first quarterly results as a public company, and we thank you very much for joining this first call following ON's successful IPO. We are very pleased to announce that Q3 has been the strongest quarter in the history of the company in terms of net sales, gross profit, and it adjusted EBITDA. Global consumer demand for the ON brand continued to strongly accelerate, as expressed by the fact that all channels, regions, and product categories are contributing significantly to On's hyper-growth. Who would have thought that our brand, which started 12 years ago with the first prototype, consisting of cut pieces of a garden hose glued to the sole of an old running shoe, would develop into a company that generated net sales of Swiss francs 218 million in this past quarter, Tuesday, 21. We see our recent IPO as a stepping stone in our mission to serve more and more people around the world and have them move with us. We invite everyone to join us on this mission to ignite the human spirit through movement, or in short, dream on. We will continue to discover and explore new frontiers to do things differently and build long-term enduring value for all our partners and stakeholders. Given that this is our first earnings call, and some of you may be new to ONN, we will start with a brief introduction to our foundational history, our core strengths, and growth strategy, and shed light on how we made progress in the past quarter. We will then deep dive into our quarterly performance and conclude with an outlook and guidance before opening it to Q&A. ONN is an innovation company. ONN was born in the Swiss Alps with one goal, to revolutionize the sensation of running based on the radical idea of soft landings followed by explosive takeoffs, or as we call it, running on clouds. Hunt is an innovation company at heart, and we focus our efforts on the three main areas, performance, design, and positive impact. We aspire to increase performance for athletes and everyday consumers by applying smart, distinct, and sustainability-focused designs to our products. We are happy to report that in the past quarter, ON has made strong progress on all three fronts. First, we are proud to have been the official outfit for the Swiss Olympics and Paralympics teams at the Olympic Games in Tokyo. The visibility across the globe, especially of our apparel, led to an increased demand and brand awareness. A personal highlight was watching the women's cross-country mountain biking event, where Swiss athletes won gold, silver, and bronze. and seeing the full podium in ON gear. The Swiss went on to win 27 medals, the best in almost 100 years. We're also proud that 17 athletes competed in ON products in Tokyo, including five athletes from the ON Athletics Club, founded only a year ago and based in Boulder, Colorado, along with four athletes from the Refugee Olympic Team. To enable our athletes to compete on the highest level in long-distance road running and triathlon, We introduced the CloudBoom Echo shortly before the games, both to competitors and consumers. This shoe is the pinnacle of our performance running range, featuring CloudTech, an ultra-light super foam, and a carbon speed board. We have already seen many great results by our athletes in this product, including the third place by Helen Tola at the Burley Marathon this past September. In the performance running segment, ON is able to wow consumers and capture market share with the new Cloud Stratos and with the Cloud Flyer, which continues to have very strong momentum. Second, ON's outstanding design continues to turn heads, and our rapid growth in performance all day, as we call our lifestyle business, is driven by two recently added franchises, the Roger, Roger Federer's signature, and Cloud Nova, Roger Federer's signature footwear line is developing very well, and Roger personally unveiled a limited edition recently at the Labor Cup in Boston, only to see it completely sell out within hours. Both the Roger and Klanova are attracting a younger, urban, and fashion-conscious consumer to on, and are key pillars in our ambition to be a global tastemaker brand. Third, more and more consumers are shopping for full-on outfits. including our apparel and accessories. In Q3, net sales from apparel products grew more than twice as fast as sales from shoes, and we have seen a strong demand for exciting new products like the RelaxFit parka for weather protection in all seasons, our new hoodie, active pants, and climate jackets. All of them reflect our passion for technology, design, and sustainability. And last, not least, We are ready to introduce exciting new footwear and apparel products in performance running, performance outdoor, and performance all day in Q1 next year. Now let's shed some light on the third focal point of ONZE innovation efforts, sustainability. We are highly committed to decoupling our growth from the footprint that we leave on our planet, and we have committed to some of the most ambitious sustainability targets in the industry. On climate, for example, we are working with science-based targets to cut our carbon emissions by 55% through 2030 per product that ON produces. And we are also one of the first sporting goods brands to join the science-based targets for nature pilot program, going beyond climate and including land, water, forests, and biodiversity. We aspire to be both a thought and action leader for our industry. During the Climate Summit COP26 in Glasgow last week, ON announced a very ambitious new material, CleanCloud. CleanCloud takes carbon emissions and turns them into EVA foam. This technology, which we have developed over the last four years, has the potential to be used in the majority of ON's products. We are now working together with Luncatech and Borealis to make the first pairs and scale the technology for mass production. This is a long-term initiative and one of several technologies that ON will build on in our quest to move away from fossil-based material. What sets ON apart is our global footprint. Coming from a very small home market in Switzerland, we needed to expand globally from the very beginning. We believe this early global expansion has been instrumental in driving our net sales CAGR of 85% since inception, making on one of the fastest growing scaled athletic sports companies in the world. So we believe this global presence positions us extremely well for future growth within the large global footwear and apparel markets. Over the past 12 years, we have built a passionate global community of fans across more than 60 countries. And we believe we have opportunities for continued market share gains across the globe. We are in a growth phase in almost all of our international markets and have significant potential to expand our geographic footprint through controlled multi-channel growth. We have historically been extremely successful when entering new markets, For example, we entered the United States in 2013 and have grown net sales to Swiss francs 136 million in the first nine months of 2020 and Swiss francs 265 million in the nine-month period ended September 30th, 2021. We have entered China in 2018 and grew our net sales in the region by 199% from Swiss francs 1.8 million in 2019 to Swiss francs 5.5 million in 2020. In the nine months ended September 30th, 2021, this number is already at Swiss francs 13.7 million. And we are seeing continued very strong growth. During single-stay last week, on-products sold on Tmall and JD increased by over 500%. Complementary B2C and wholesale. In distributing these products, we seek to meet runners wherever they are. After starting off selling on our own website and especially running stores, our products are now also available in some of the most reputable general sporting, outer fashion, and lifestyle retailers in the world through over 8,100 stores and value-adding online retailers across more than 60 countries. In Q3, we continue to strengthen our partnership with some of the best global retailers. At Harris in London, for example, all launched our first ever trade execution of a new premium on retail concept, featuring a mini version of our own retail store concept. On the lifestyle side, we successfully piloted our collaboration with Foot Locker and with JD at very selective prime locations. Both pilots have proven that our products strongly resonate with an even younger consumer group, and we are excited to continue both partnerships by maintaining ONN's premium distribution. The wholesale channel accounted for 64% of our net sales for the nine-month period ended September 30th, 2021. With ONN's community and brand awareness growing globally, we have further began to organically scale our D2C channel through onrunning.com and have increased our D2C sales significantly. In September, we have opened our latest owned and operated ON store in Shenzhen. ON's D2C channel as a whole, which includes our e-commerce sites, a flagship store in New York City, and six retail stores in China, represented 36% of our net sales for the nine-month period ended September 30, 2021. We cannot emphasize enough that we consider our D2C and wholesale channels highly complementary and brand-enhancing. and we will continue to invest in the expansion across both channels. A review of the QC highlights would not be complete without mentioning the great pleasure of running to the New York Stock Exchange together with our team to ring the opening bell and celebrate our initial public offering on September 15th. It's an honor to now hand over to the person who did most of the heavy lifting for this event on CFO and Co-CEO Martin.

Thank you, Kasper. Let's move on to reviewing our financials for the third quarter of 2021. As we mentioned in the beginning of today's call, we see an accelerating demand for our brands globally. Our Q3 results are the strong combination of growth and profitability and the further validation of our business model and our long-term targets. Net sales for the quarter were 218 million Swiss francs, up by 67.6% compared to a third quarter last year when running had already been on fire and many COVID-19 restrictions had been lifted temporarily. So we maintained our strong growth on this elevated level. It is driven by the continued success of ONS core strategies. including increasing brand awareness, multi-channel geographic expansion, and the broadening of the product portfolio driven by innovation, design, and sustainability. Year-to-date, we achieved net sales of 533.5 million, a 77.2% increase compared to the first nine months last year, over the past two years, which further validates the strong continued strength of our brand. The demand for our products accelerated across both the wholesale and the direct-to-consumer channel, as well as all regions and all product categories. As Kasper mentioned, we consider our direct-to-consumer and wholesale channels highly complementary. In Q3, we see the strategy being validated by the strong demand in both channels. E2C grew 93% to $75.7 million, and wholesale net sales increased by 56.7% to $142.3 million. Despite a full reopening of retail stores in most key geographies, we see a very strong continued engagement of existing customers and the growth of new customers in our D2C channel. For example, in North America, D2C grew 129% and in Asia Pacific, 152%. Overall, the contribution of net sales from the direct-to-consumer channel grew to 34.7% for the quarter versus 30.2% in the same period last year. We continue to invest in our brand and community by building partnerships with premium wholesale partners. In Q3 2021, consumer demand for the on-brand in the wholesale channel increased even further and led to strong growth rates in many of our key and field accounts. Across both channels, we are seeing a strong demand globally. with growth rates in all geographic regions exceeding 50%. North America continues to be the growth engine, with a net sales increase of 82.6%, resulting in the United States and Canada being responsible for 51.5% of total net sales. The continued acceleration of the demand in North America is best reflected in the fact that D2C sales grew twice as fast as whole sales. As previously mentioned, we see China as one of the key regional growth drivers, which was showcased with strong triple-digit sales growth in the third quarter. The Asia-Pacific region in total grew by 71.4%, with the significant growth in China being somewhat offset by a slowdown in Australia's wholesale market as local lockdowns continued into Q3. Also in Europe, most markets continue to grow strongly with an overall regional growth of 50.3%. Here it is important to highlight the difference to most other regions. Many European markets had listed COVID restrictions in Q3 2020, which had driven higher wholesale sales in the same period last year. The growth across Our distribution network is fueled by the successful expansion and development of our innovation-driven products. Across all our product categories and all key franchises, the demand is accelerating. Net sales in Q3 2021 increased 65.2% for shoes, 133% for apparel, and 41.5% for accessories. For the first time, apparel contributed more than 10 million in one quarter to our overall net sales. Consumer demand is clearly there, and in own stores in China, apparel already contributes approximately 20% of the sales. Cross-profit in the third quarter was 131.3 million. compared to $70.8 million in Q3 2020. Our cross-profit margin increased year-over-year from 54.5% in Q3 2020 to 60.2% in Q3 2021. This is broadly in line with the strong results we have seen in previous two quarters and another validation of our long-term targets. The increase primarily reflects lower customs costs related to the free trade agreement between Vietnam and Europe, lower sourcing costs, and a very low share of air freighted products in Q3. In the first nine months of 2021, cross-profit increased by 90.9% to 318.5 million, reflecting an improvement of our cross-profit margin from 55.4% to 59.7%. If we leave out share-based compensation for the moment, SG&A expenses as a percentage of net sales were 48.5% for Q3 21, compared to 39.6% for the same period last year. More comparable year-to-date SG&A expenses without share-based compensation where 48.7% of net sales for 2021 compared to 45.3% for the same period last year. This increase is mainly driven by higher investments in digital customer acquisition and demand-creating expenses, and the resumption of investment in grassroots activities post-COVID-19 pandemic lockdowns. In addition, we incurred 7.3 million IPO transaction costs. Then moving on to share-based compensation, which is worth looking at in an isolated way and a bit more detailed manner. Share-based compensation expenses in Q3 2021 decreased to 2.4 million Swiss francs, or 1% of net sales, from 5.3 million or 4.1% of net sales in the prior year period. This change is primarily due to a one-off transaction in 2020. Driven by the strong growth acceleration in the past years and by the successful IPO, we expect to grant approximately 7.5 million additional stock-based awards under our existing equity plan in Q4 2021. Due to the timing of such plans, this impact is not included in our Q3 numbers. Adjusted EBITDA. which excludes share-based compensation and one of transaction costs related to the IPO, was $37.9 million for the three-month period ended September 30, 2021, up from $22.6 million in the prior year period. The EBDA margin remained consistent year-over-year for the three-month period at 17.4%. Year-to-date adjusted EBITDA increased by 121% from $38.6 million to $85.2 million. And percent of net sales adjusted EBITDA increased year-to-date from 12.8% to 16% and validates our commitment to simultaneously grow net sales and profitability. Shifting to our balance sheet and cash flows. On September 15th and prior to the end of our third quarter, we completed our initial public offering at the New York Stock Exchange, in which we and certain selling shareholders sold an aggregate of 35,765,000 Class A ordinary shares at a share price of 24 US dollars. The net proceeds from the IPO for ON were 615 million Swiss francs, was $662 million. This has led to a very strong position of net cash and cash equivalents of 672.1 million Swiss francs, which will enable us to pursue our ambitious growth plan. Now let's look ahead. We are confident that demand for our products will remain very strong across all regions, all channels, and all product categories. Before we detail out our financial outlook and in order to provide a better understanding of the expected financial performance, we would like to share the recent developments and our short-term outlook of the situation in Vietnam and throughout the supply chain. There are two challenges that are connected and that will impact our financial performance in the upcoming quarters. Most significantly, we expect supply constraints and the higher air freight expenses as a result of the recent factory closure in the south of Vietnam. The quantification and mitigation of this impact is being accentuated by a very volatile freight and distribution costs, driven by higher freight and shipping charges and higher warehouse labor expenses. During Q3 2021, our production partners in the south of Vietnam were affected by government mandated closures to combat the spread of COVID-19. The impacted factories represent about 70% of our production capacity. The closure started in July 2021 and factories remained closed as of 30th of September 21. As of beginning, of October, we have seen a gradual reopening and ramp-up. Our key message today is that all factories are open since early November, and as of this week, operate at more than 80 percent of our plant production capacity. To put this number into perspective, it is very important to highlight the fact that our plant production capacity was based on the anticipation of a continued hypergrowth in 2021 as well as in 2022. Versus those goals, until today, the cumulated loss of capacity in the affected region is approximately 12 weeks. To mitigate the impact on our business, we continue to take actions, including the reallocation and prioritization of products across all factory partners, and the use of air freight to balance inventory levels against the strong demand. In addition, already as of Q1 next year, we secured a significant amount of additional production capacity at two new factory partners in Indonesia. We expect to use air freight to be a headwind to our gross margin of approximately 900 to 1,000 basis points. in Q4-21 and in Q1-22. In addition, we are working closely with our retail partners to maximize the number of products available to our end consumers. These measures include a holistic management of all available inventory and the adjustment of launch dates for new products. We are confident that the supply chain disruptions in Vietnam are temporary and that our pricing power will allow us to compensate increased freight and distribution costs in the mid to long term with selective price increases. Turning now to our financial outlook. As this is our first time to provide financial guidance to the public market, we would like to briefly explain how it should be interpreted. Philosophically, we aim to provide prudent, yet aspirational guidance that appropriately balances our optimism in the business with potential risks or headwinds we face. We will provide guidance for the full year, not on a quarterly basis, as this is mirroring the way we steer the business internally, and it allows us to take a long-term growth perspective. For Q4 21, and half year 1.22, we are expecting our financial results to be constrained by the mentioned supply chain challenges. We see the demand clearly above the available supply. Given the current uncertainties in the supply chain, we will prioritize top line over profitability in order to protect our retail partners and our long-term growth. Now, For the full year 2021, we expect next sales of 710 million Swiss francs, representing a 67% year-over-year growth. Our outlook reflects the supply restrictions that we foresee in the last three months of the year. We have started to air-fry selected products from factories after reopening to fulfill the demand. Nevertheless, we are still expecting limited product availabilities in the fourth quarter. Independent of the supply chain disruptions, we have taken the strategic decision to shift the launch of our spring-summer season products from Q4 into Q1, which will result in a general shift of our seasonality. We expect adjusted EBITDA of 92 million Swiss francs. representing an adjusted EBITDA margin of 13% and the year-over-year growth of 85%. We will continue to effort products throughout Q4. In addition, we will drive investments in brand building with strong investments into returning physical global major running events like the New York City Marathon, into upper funnel marketing during the holiday season, but also continue investments into our teams. As earlier indicated, we expect to grant additional stock-based compensation awards under our existing share-based compensation plans. These awards will vest at the grant date, and therefore, we will record a material share-based compensation charge of approximately 173 million Swiss francs in the fourth quarter of 2021. and consequently significantly impact our Q4 unadjusted net profit. As of 2022, we expect an annual dilution from our equity plans of approximately 1.5%. Looking beyond 2021, we are very confident that the supply chain challenges, especially the supply chain constraints, are temporary. and that we should fully focus on our long-term growth opportunities. Especially in half year one, we expect net sales to be adversely impacted and final product availability depends on the continued factory ramp-ups and availability and cost of air freight capacity. At current, we expect a return to strong hyper-growth in the second half of the year We expect at least 960 million net sales, even though our internal ambition is higher than that. We expect to have better visibility in the new year on how quickly we can get additional capacity, and we will revisit the guidance then. To be very clear again, we are experiencing a transitory supply shortage, not a demand issue. This is not a new situation for ONN. Over the last decade, the strong demand for the ONN brand has regularly outpaced supply. And we have experience in turning this into an advantage for ONN by tightly controlling distribution to ensure sustainable quality growth. In the first half of 2022, we will face supply shortages on certain products that are higher than what we would like, and not all consumers will have the ability to buy exactly the product they are looking for. However, we believe in the long run, it will only increase the desirability of their own brand. A tight control of the increase of our SG&A cost base in the first half year will allow us to partially mitigate higher freight and distribution expenses. Consequently, we expect adjusted EBITDA of 125 million and to maintain our adjusted EBDA margin of 13%. As said before, to mitigate the disruptions across the international supply chain, we will prioritize net sales growth over profitability. In conclusion, we are very proud of our recent performance and excited for the opportunities ahead. But most important, we are extremely proud of our team all around the world. for their passion to grow on at such an incredible speed, and for all the hard work that is required to adapt to the fast-changing environment. Thank you so much. For the future, we have the right team of talents in place to drive innovation and to develop exciting products, to engage with our customers in wholesale, online, and our own retail, to continue building a premium brand globally, To make the world a better and more sustainable place. To use our voice to build a more diverse and inclusive run community. Together with our industry partners. All with the goal to deliver on our mission. To ignite the human spirit through movement. And to dream on as a team. With that, Kasper, Mark, Florian, and I would like to open up the session to your questions. Thank you for your continued support and trust. Operator, we are ready to begin the Q&A session.