On Holding AG

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the On Holding AG Q4 and Full Year 2021 results. Throughout today's call, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone to register for questions. Please press the star key followed by zero for operator assistance. Now I'd like to turn the conference over to Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations.

Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag, Head of Investor Relations. Please go ahead. Florian Maag Afterwards, we are looking forward to opening 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 20F filed with the Securities and Exchange Commission earlier this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please further note that this call will also contain certain non-EFRS 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 reconciliation 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 David, followed by Martin for the prepared remarks.

A warm welcome to all of you joining us today around the world from Switzerland. We are excited to share with you ON's first full year results as a public company after our successful IPO just six months ago. We thank you very much for following our journey and for tuning in today. You will hear about recent progress and important priorities before we dive more deeply into financials, conclude with an outlook on 2022 and then open up to your questions global consumer demand continues to drive on hyper growth we are very pleased to announce that 2021 has been the strongest year in on 12th year history and beats our expectations at the beginning of last year on all accounts we experienced strong global consumer demand across all regions, channels, and product categories. The exceptional momentum lifted net sales to 725 million Swiss francs, representing a 70% year-over-year growth. At the same time, we see a significant jump in ONZE cross-profit margin to the top end of our industry and continued increase in adjusted EBITDA. We are grateful to have successfully navigated the uncertainties of the global pandemic and supply chain restrictions in the last two years. I feel it shows the strength of the on-brand, of our operating model, and most importantly, of our global team. On the supply side, on strong consumer demand is met with better than expected product availability. Some of the brightest members of our team work in supply planning. Their agility and the strong relationships with our suppliers made it possible to mitigate the temporary stop of production in Vietnam in a short amount of time. Of course, COVID is not over. A war in Europe is not just a human tragedy, but could have ramifications in global trade. And inflation is a challenge to consider. We remain on the lookout, vigilant to take on risks as they arise. Risk awareness has served us well in the first thousand years of an incredible journey. Still, we continue to be very optimistic. ON is experiencing a running boom everywhere. Markets like the US, the UK, and China are taking off like never before, and we see strong growth across all regions. The ON brand truly is on fire. Take the US, where ON saw over 92% growth in run specialty and also over 85% in our own eco. Take the UK, where ON grew over 75% in 2021. Or take China, where ON jumped from rank 120 to 35 in the Tmall sports ranking and sees a five-fold increase in brand followers. The momentum of performance brand ON is further fueled by athletes. As you know, ON has been founded by athletes for athletes. We are all inspired by ON athletes who turn their dreams into reality. They truly are on a winning streak across the globe. The On Athletics Club, or shorthand OAC, is ON's elite athlete team based and trained in Boulder, Colorado. We are honored to announce that the two-time 5,000-meter world champion, Helen O'Berry, is joining the On Athletics Club. Helen is one of the most impressive and versatile female athletes. She will move with her family to the U.S. to join the On Athletics Club in Boulder to train with our coach, Jason Ritzenhain, and the OAC team. Many of the OAC athletes have competed in last year's Olympics and continue to stun audiences. Like Australian Olympian Ollie Hoare, who won the fastest mile at the Millrose Games in New York City with a striking time of 3 minutes and 50 seconds. We could not be happier about the success of our athletes and the On Athletics Club. This is why we have decided to establish OAC in Europe and Oceania as well this year. Over in Europe, our athletes from the Swiss Alps have just come home from the most successful Winter Olympics for Switzerland ever. And the Norwegian Olympics team has won the most medals of all nations in this year's Winter Olympics. ONN has been developing shoes and apparel for both teams in the last years and is their official sponsor. Seeing ONN athletes spin across the globe fuels the momentum of ONN as a unique performance brand. We further amplify through broad storytelling in feature-length film and short social stories. I am sure you are targeted as well by our data engine. We are making fast progress towards our long-term brand mission to ignite the human spirit through movement. ON is carried by a rapidly increasing movement of millions who run, explore, travel near and far, lift their spirit and dream ON. This means that ON is reaching a far broader community. ON's brand and products resonate with a bigger market in three ways. First, we are launching exciting products for all type of runners. As an innovation brand, we are building on our technology for world champions and make it vitally relevant for all runners. Just two examples of a record launch of all six new shoe models. Let me just give you two examples out of six all new shoe models. In running, the all-new CloudMonster model will launch this spring and is celebrated by our retailers, who serve the big group of everyday runners. These are runners who demand maximum cushioning. For outdoor retailers, we launched the all-new CloudVista. It is the perfect companion for gravel roads and tracks, versatile and mainstream. At the same time, we see our apparel range growing nearly twice as fast as our shoes. ONCE Innovation Drive is awarded by our industry. Footwear News has named ONCE the 2021 brand of the year back in November. And ISPO, the biggest European sportswear, has given the 2022 ISPO award to our new Xero jacket in apparel and to the all-new Cloud Monster in footwear. My second point is that we see a run culture crossing over into popular culture. A young community in Tokyo, Shanghai, London, and New York has embraced On as a brand that inspires them at the intersection of performance and design. On the fly is off the shelves at tastemaker retail and the select shady and footlocker doors where we choose to play. On performance shoes and apparel pieces pop up in the streets well beyond the running routes. And we believe that ONTAP's into a secular shift where performance is taking over fashion and replaces classical archetypes with performance silhouettes. Driven by this shift, Loewe, one of the fastest-growing global fashion brands and the rising star in the LVMH universe, has asked us to collaborate with them on performance silhouettes. Two years in the making, the unique capsule of enjoues and apparel pieces has launched just last week. Available in all Loewe flagships in select fashion retail and on our website. Days after launch, the collection is almost sold out. Loewe runs a global campaign and especially caters to an intense brand loss in Asia with more than 40 flagship locations. This all means that ON stays firmly rooted in run culture and at the same time is embraced by a much wider market and demographic. And an important third point is that we believe that all communities have a fundamental right to movement. This inspired the launch of our Right to Run social impact program in early 2021. Through partnerships with community organizers and nonprofits around the world, We promote access and inclusion in running. Sometimes it is as basic as having a safe route to run. Together with our partners, we are empowering communities that are at the risk to be left out of the global running community, such as people with disabilities and people of color or those who are experiencing houselessness. We are committed to ignite the human spirit through movement in all parts of society. Now, let me speak to our omnichannel strategy that is so vital to our success. We are not only creating products that our customers love, but also reach them where they shop. ON's omnichannel strategy is firing on all cylinders. It delivers scale, insight, as well as resilience for ON in the following ways. Our own e-comm channel on our website has reached a high share of 36% of our business in 2021. This means that we increase direct connections to our community, now serve customers in 48 countries through D2C, and learn from them. For example, customers who buy apparel as a first piece show a higher lifetime value as they already appreciate on as a sports brand, not a pure shoe brand. And predicting the relevant offering to the right customers at the right time in their journey has allowed us to retain big new customer cohorts. In fact, in the last two years, we have retained our newest customers with a similar stickiness as customers who have come to us when ON was still a smaller brand. This means that ON stays very relevant while we reach a far wider audience. It also shows that running habits that were formed in the pandemic persist. The benefits of this very data-driven approach obviously extends to demand planning and operational effectiveness and, of course, also gives us higher margins. At the same time, we continue to build strong relationships with our wholesale partners. We believe that retail partners with strong brands and a unique offering will continue to add value to their customers in physical locations as well as on digital channels. They inform and inspire beyond the transaction. We are fortunate that strong wholesale brands have partnered with us for years and continue to introduce and position our brand to their unique audience. To mention a few activation highlights with our key wholesale partners, With REI, for example, we exclusively pre-launched the Cloud Ultra as a top trail running shoe to their community of 20 million outdoor enthusiasts. A huge win for building ONCE credibility in the outdoor space. Our fast success at Nordstrom paves the way for roughly 20 additional shopping shops in important Nordstrom doors this year. and the focus on the best footlocker doors introduces on to an even younger audience. At the same time, we have open shopping shops in some of the most premium locations on this planet, at Beaumarchais in Paris and at Harrods in London. These initiatives allow us to grow fast on a global scale in more than 8,700 doors and hundreds of city centers. At more than 1,000 locations, ON is present with a branded drop-in-drop experience. In 2021, we have observed consumers flooding back to the city centers and stores after lockdowns, eager for interaction and experience. As a result, we have seen wholesale revenues bouncing back strongly, keeping our omni-channel mix with D2C very resilient. This has strengthened our belief that attractive physical shopping experiences continue to be an important part of consumer culture and part of the very fabric of our cities. The importance of physical experiences is as well the backdrop for our expansion of our very own retail network in global hub cities. ON flagships act as the most complete experience community center and media channel for our brand. ON New York City is experiencing waiting lines in front of the door, and many community runs start from the space. New York and our eight ON flagships in China are able to attract the highest share of first-time customers to ON across all our channels. Conversion in store is higher than any other sales channel, with a significant share of apparel in some stores up to 25% of sales. All of our stores have reached profitability within nine short months of opening. We will continue to expand to the most important cities on this planet. At the heel of the Tokyo Olympics last year, OnTokyo is set to open in the next weeks, followed by London, and Zurich in summer. It is important for you to know that we are not seeing a cannibalization of our wholesale and D2C channels. Both channels show sustained strong growth at the same time and are highly complimentary. Let me come to the ultimate success factor of all, our team. We are fortunate that ONN has been able to attract exceptional talent. Only 1% of all people who apply at ONN are accepted. In 2021, ONN has grown to 1,100 members who dream ONN and build the future. 600 people have joined Team ONN in the last two years and have mostly worked remotely. The ON team comes from over 65 nationalities and very different backgrounds and mindsets. We see diversity as a catalyst for innovation and creativity. These months, we are seeing an important moment for ON, where the team is moving back together into new social office and lab spaces. Our European technology hub in Berlin was just opened in a big former post office and brings together 200 tech and customer service people. Our new North America home in Portland will see 300 people move in together in April, and 700 people will move into the new OnLabs in Zurich in summer. The team will continue to have the opportunity for hybrid work, but also come together in social spaces again. Nobody is coming back to the office just for a desk. We will continue to build a unique ON Culture along our five spirits and join many RONs along the way together. This will bring collaboration, community activities, and workplace innovation to the next level at ON. When we speak of RON Culture and our team, I have to mention the most important member of our community, our planet. Nature is the most important environment for sports and exploration, but also the most endangered one. So in the next earnings call, we will talk about our important green tech initiatives, Cyclone and CleanCloud. So stay tuned. And with this, I'm handing over to Martin on CFO and Co-CEO to take you on a financial deep dive.

Thank you, David. 2021 has been an extremely exciting and decisive year for ON. And we are very proud of what we have achieved. Not only from a financial perspective, but across so many different dimensions. A year is like a marathon race. The circumstances of the fourth quarter made the last miles even more challenging. But thanks to our whole team, we were able to exceed our expectations for Q4 and to successfully finish the year with many new record numbers. And equally important, we are coming out of Q4 with more confidence and evidence for continued strong growth in 2022. Our financial results in the fourth quarter are further validation of the strong global demand for the on-brand and our commitment to manage the company with a long-term growth and profitability-driven mindset. Net sales for the quarter were 191.1 million Swiss francs, exceeding our previous guidance. This marks a strong 54% increase compared to the fourth quarter last year. Yet, as expected, the growth is slightly slower than in previous quarters. due to the following three transitory impacts. First, the factory closures in Vietnam between September and November have led to supply shortages, especially in Europe, where we had less inventory buffer going into the fourth quarter. Second, until 2020, we launched our new spring-summer footwear collection in November and consequently had higher wholesale volumes in Q4. As of 2022, the spring-summer season starts in January, which is expected to result in a permanent volume shift in our wholesale channel from Q4 to Q1. And third, while North America had lifted most COVID-19-related shopping restrictions, we have experienced repeated lockdowns in Europe, especially Germany, Austria and Switzerland, as well as in some other markets like Australia and various cities in China. Despite these headwinds, we achieved net sales of 724.6 million Swiss francs for the full year of 2021, a 70.4% increase compared to 2020, and a 65% CAGR over the past two years. So we have experience in acceleration in our sales growth compared to 2020. Including 2021, we have grown with more than 65% in 9 out of the 11 years since our foundation. Since the inception of ONN in 2010, our sales have grown with a CAGR of 84%. While the supply constraints impact both our D2C and wholesale channel, the season change and the continued lockdowns are more visible in wholesale only. Consequently, in Q4, we have seen a very strong growth of 76.7% in D2C to 84.7 million Swiss francs, compared to 39.3% growth in wholesale to 106.4 million. On a full year basis, our growth rates of 71.9% for D2C and 69.5% for wholesale are validating the strength of our multi-channel distribution and the fact that D2C continues to outgrow wholesale despite the reopening of many retail stores. Our D2C share on a full year basis grew from 37.7% to 38.1%. The continued engagement of existing customers and increasing brand awareness, as well as a sustained shift in consumer behavior since the pandemic, continue to significantly drive our D2C channel. During 2021, the number of sessions recorded in our e-commerce platform, including China, increased from 66 million to 102 million. We had a very successful holiday season with a stronger focus on our brand story. With the message, for every runner, we were able to push product sales on paid channels, but also create more reach from a storytelling perspective on organic channels. China accounted for 3% of our total e-commerce sales during the full year 2021, versus 1% in 2020. Our Double 11 campaign with a focus on land blockbusters resulted in a 429% growth in terms of sold items in 2021 versus 2020. We first expanded our own retail footprint in China by opening two new stores in Q4, one in Shenzhen and one in Chengdu, as we begin to build our presence in core cities outside Shanghai and Beijing. Overall, our store count in China increased to eight, The store in Chengdu's Taiku Li Mall is our largest retail store to date in China. David already mentioned some key highlights for our strong partnerships with retail partners in the wholesale channel. Overall, our growth in wholesale was driven by an increase of 900 doors from over 7,800 to over 8,700, while also achieving significantly higher net sales per door. Shifting our focus to net sales by geography. North America and Asia are growing strongly, and especially the United States and Canada experienced a new level of consumer demand following the IPO. North America grew 100.1% and Asia Pacific by 35% in the fourth quarter of 2021. In Europe, sales have been more impacted by the supply shortages and by the renewed lockdowns in November and December. and net sales for the fourth quarter ended up slightly below Q4 2021. To be clear, we see all impacts as transitory and expect continued growth rates in Europe as of Q1. For the full year 2021, all regions posed significant growth, with Europe growing 38.8% despite the prolonged lockdowns in Q1 and Q4. North America, 96.8%, Asia Pacific, 85.8%, and rest of the world, 78.8%. Of course, this sustained growth is fueled by our constant innovation and the number of exciting products that we launched during the course of 2021 across all product categories. We are very proud to see a further acceleration of the consumer demand for our expanding apparel line resulting in 216% growth in Q4 2021. Ultimately, for the full year, shoes grew at 68.1%, apparel almost at twice the rate at 130.8%, and accessories at 57.2%. The share of sales from apparel increased from 3.7% to 5%. Cross-profit in the fourth quarter was 111.8 million compared to 64.3 million Swiss francs in Q4 2020. Our cross-profit margin increased year-over-year from 51.7% in Q4 2020 to 58.5% in Q4 2021. As expected, while we had achieved around 60% cross-profit margin in Q3 and Q2, Q4 was negatively impacted by additional air freight to compensate the supply shortages from factory closures, but partially offset by the higher D2C share. Overall, we used less air freight than anticipated, mainly due to the longer factory closures and very volatile air freight rates. On a full-year basis, our cross-profit margin improved by more than 500 basis points from 54.3% to 59.4%. This increase mainly reflects lower customs costs related to the free trade agreement between Vietnam and Europe, as well as lower sourcing costs, but also our ability to drive cost efficiencies across the supply chain. Moving on to SG&A and leaving out shared base compensation for the moment. SG&A expenses as a percentage of net sales were 59.2% for Q4 2021, compared to 45.9% for the same period last year. This increase largely relates to the increased marketing and general administration spend. We did not manage our expenses in Q4 in isolation, but with a clear focus on our long-term growth and our full-year profitability. As mentioned, the IPO ignited a lot of energy and awareness into the brand, especially in North America and Asia. We took the decision to fuel this momentum and to make use of the post-COVID marketing opportunities in the physical and virtual world. Our strong net sales growth, lower than expected expenses in air freight, and other COVID-related cost savings allowed us to invest into brand-building campaigns while still realizing a significant increase in our adjusted EBITDA margin on a full-year basis. It allowed us to create big brand presence at Q4 trade and sport events, especially global marathon majors and trade events like the running event in Austin, where ON had received very positive feedback from the run specialty retail community. And it allowed us to invest into digital customer acquisition to power growth through the holiday season and into 2022. The increase in general and administration expenses was mostly driven by initiatives to enhance our financial abilities as a public company and expenses for our new offices, as well as by higher travel expenses to allow our team members to connect globally in the aftermath of the pandemic. SG&A expenses before share-based compensation for the full year 2021 were 51.5% of net sales compared to 45.5% for 2020. For G&A, this increase is mainly driven by the high expenses just mentioned for Q4. In addition to the Q4 impact, full year 2021 marketing expenses saw the launch of our official expression of our brand mission to ignite the human spirit through movement and assets and promotions created under the Dream On tagline. Sustained brand awareness and sales growth allowed us to further invest in upper funnel acquisition activities and to lay a foundation for future growth. Moving on to share-based compensation. As disclosed in the IPO and announced in our previous call, we granted 7.5 million stock-based awards in Q4. The majority of the grant benefits the leaders and key employees at all, beyond the executive team. On top of that, all other employees at ONN have received a founder's grant at the IPO that turns the full team into shareholders as an appreciation for their hard work in the last 12 years. The majority of the above-mentioned stock-based awards vested at the IPO, and consequently, we recorded 176.2 million share-based compensation expenses in Q4 and 198.5 million for the full year. Adjusted EBITDA, which excludes share-based compensation and one-off transactions related to the IPO, was $11.2 million for the three-month period ended December 31, 2021, very similar to the $11.2 million with strength in the prior year period. As expected, our adjusted EBITDA margin went from 9% in Q4 2020 to 5.9% in Q4 2021. Important for us and in line with our commitment to a continued increase of our profitability, adjusted EBITDA for the full year 2021 increased by 93.8%, from 49.8 million Swiss francs to 96.4 million. In percent of net sales, adjusted EBITDA increased from 11.7% to 13.3%, the highest adjusted EBITDA margin in the history of the company. We ended the year well-financed with 650 million cash on hand, which allows us to pursue our ambitious growth plan. Proceeds from the IPO and subsequent equity transactions were 690 million. Throughout 2021, we continued to invest in our IT infrastructure, especially in our new ERP, CRM, and data analytics landscape, in retail stores, and in office infrastructure. Our capital expenditures in 2021 were 36.2 million, equivalent to 5% of net sales. In 2021, we achieved a positive operating cash flow of 16.9 million, compared to minus 14.7 million in 2020. Naturally, our strong growth results in a significant increase of networking capital, driven by increasing receivables from higher sales volumes with wholesale partners, and by investments in inventory to fuel our future growth. Excluding the growth in working capital of 74.4 million Swiss francs, we achieved a positive operating cash flow of 91.4 million, which further validates the strength of our profitable business model. Now let's look ahead into 2022. As mentioned in our last call, our guidance philosophy is to provide prudent yet aspirational guidance for the full year, not on a quarterly basis. David already shared how we will continue building the brand and drive significant growth across all channels, regions, and product categories. We plan to significantly expand our offering in running, outdoor, and lifestyle, which we call performance all day. with highly innovative and even more sustainable shoes, apparel items, and accessories. We have completed our sell-in season for spring, summer, and fall-winter 2022, and we are seeing very strong pre-orders from existing and new wholesale partners, both for half-year one and half-year two. This includes a very controlled expansion of our partnership with Foot Locker and JD Sports, following successful pilot during the Q3 2021. It will also include a first pilot with Dick's Sporting Goods as of summer, with a very targeted assortment of our running products. At the same time, we have built a significantly elevated customer base in D2C and continue to retain existing and to win new customers. So we expect to reach more fans around the world and allow them to move in on products. In addition, we will bring a new level of brand experience to more flagship stores around the world. For the first time, we will open flagship stores in Europe and Asia outside of China. And we will continue increasing our presence in North America and approximately double our store count in China. As mentioned earlier, all of this gives us additional confidence for our outlook of 2022. This confidence is further elevated by the positive development of the sourcing situation in Vietnam and throughout the supply chain. Since December, our production capacity is 100% back to the levels that were committed pre-lockdown. We are extremely grateful for the support we have received from our factory partners throughout the last months. For example, most partners continued working during the Tet holiday in early February to recover from some of the capacity loss. Overall, we are fast tracking the capacity ramp up planned this year, leveraging our close relationship with the factories. This includes the expansion into Indonesia, where we just started production in a new facility with the goal to produce 10% of our footwear outside of Vietnam by the end of 2022. But of course, managing the supply chain remains a core priority, as we are experiencing volatile shipping costs, port congestion at the US West Coast, and labor shortages due to Omicron infections in some of our warehouses. As explained in our last update, the transitory supply shortages will define our pace of growth in the first two quarters, while supply is not expected to be a significant limiting factor in the second half. By then, our pace of growth will be defined much more by our strategy to build a global premium performance brand. Thanks to very strong partnerships with our factories and supply chain partners and the passionate work by our own supply chain teams in Vietnam and in Zurich, we expect, compared to our Q3 update, to be in a stronger supply position to fuel the demand in the first half of the year. For example, just three weeks ago, we launched the new Cloud5 globally within the planned type frame. It actually marks our biggest product launch ever. Also, the new CloudMonster, our max-cushioned running shoe, will be available to our customers as of March 31. Based on this elevated supply position, we expect to be able to drive more net sales growth in half year one. At the same time, the current situation in Vietnam and our strong pre-orders for fall-winter provide even more confidence to have the right products to return to hyper-growth in the second half. Consequently, and also considering the global economy and geopolitics, we increase our outlook for the full year 2022 and expect to achieve at least 990 million Swiss francs in net sales. Our internal ambition is still higher than that. and we will continue to balance net sales growth versus profitability to mitigate the disruptions across the international supply chain. We will continue using air freight to balance inventory levels against the strong demand. While we were able to achieve our strong Q4 with a lower than expected share of air freight, we still expect a headwind to our cross-margin of approximately 700 to 800 basis points in half year one 2022. compared to half year one 2021. This is comparable to the relative impact we announced in our previous outlook. Outside the transitory impact from higher air freight expenses, we expect to maintain our high cross-profit margin as a premium brand. To offset the impact from some high expenses along the supply chain, we have increased our retail prices in North America by 10 US dollar on roughly 40% of our sales volume. The higher net sales will allow additional growth-focused investments into the brand and the team, while increasing our adjusted EBITDA target for the full year to 130 million Swiss francs and also increasing our goal of an adjusted EBITDA margin to 13.1%. If we are able to achieve higher net sales, we expect to drive additional profitability. We will continue to closely monitor the situation in Russia and Ukraine. Our business exposure in both markets is very limited. We have one distributor in Russia accounting for less than half a million Swiss francs in net sales in 2021. We decided to stop any new product supply into Russia as we clearly denounce all acts of violence and intimidation. We do not have any business in Ukraine. nor any own employees in Ukraine or Russia. But as an international company with a diverse team, our connections to Russia, Ukraine, and the neighboring countries are extensive, including many Russian and Ukrainian team members. These individuals are our team, colleagues, and friends collectively coming together as one community. Looking back, 2021 was an extremely exciting year for the brand. With huge milestones like the IPO, the launch of our new ERP system, our official expression of our brand mission to ignite the human spirit through movement. Exciting new products like the Cloud Ultra, the Cloud Stratos, or apparel items that combine performance and design. with our big steps in sustainability, with many new athletes, our presence at the Olympics in Tokyo, our first podium at the Berlin Marathon, our growing presence in China, and with so many new members in our team. All of us together are fully committed to shape our future and to make 2022 even more exciting. We are extremely grateful to have such an amazing, high-performing sports team that allows us to dream on and to further build on as a global premium sports brand that lives at the intersection of performance, design, and impact. With that, David, Mark, Florian, and I would like to open up the session to your questions. Thank you for your support and for your trust throughout 2021. Operator, we are ready to begin the Q&A session.

Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by 2. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by 1 at this time. One moment for the first question, please. First question is from the line of Jay Sol from UBS. Please go ahead. Great.

Thank you so much, reporter. You know, the question is about the expansion of product offering in 2022. You know, you mentioned that REI, you introduced some outdoor footwear there to great success. Can you just tell us a little bit more, maybe elaborate on that? how the expanded product offering is going to allow the company to address different parts of the market with different types of shoes to continue to expand the brand and expand the audience for the brand. Thank you.

Jay, thanks a lot for the question. This is David. So, hey, we're incredibly excited about how we're expanding the product range. And probably first of all, it's important to know that we also kind of retain customers very much based on lasting franchises and silhouettes. So, of course, seeing the cloud now in its fifth iteration launch, with a huge community is important for us, especially because now the cloud has 44% of recycled contents. But then we also see a record number of all new shoe models this year. And as I mentioned, one very important direction is that we want to reach all type of runners. at the cloud monster as our highly cushioned product is super important and we've just been at the running event in austin and just seeing kind of the intensity of interest by the specialty running community and wider channels as rei fleet and so on has been tremendous but then we're also going to launch the cloud runner and the cloud go at very interesting price point so it's really important how we extend in running But then on the other side, we also feel that we're very much resonating with the consumer that is interested in running, but also in run culture. So their performance is almost kind of taking a bigger share. And that's probably be kind of shown in this Loewe capsule, where Loewe just introduced, asked us to really kind of come to their range with our performance gear, just kind of showing that performance and functional there is very much crossing over into mainstream in fashion as well.

We do not hear you at the moment. Could you please unmute your telephone?

Can you hear me now? I can still hear you. Okay, very good.

So, hey, to sum up, I mean, we're very much kind of extending when it comes to running to all types of runners, but we continue to cross over into what we call all-day with shoes and with also our performance apparel pieces.

Got it. And if I can ask one more. Sorry, we're experiencing a technical difficulty at the moment.

We, operator, we don't experience... Hello?

If I can ask one more question, hopefully you can hear me. You mentioned door increases last year on wholesale doors. Obviously, great success there. And then you mentioned a new pilot with exporting goods. That sounds exciting. Expansion with Foot Locker, JD Sports. Can you just give us a sense of how much door increases you expect in 2022 and a little bit maybe more color on, you know, some of the partnerships with some of the retailers that you mentioned to export against Foot Locker, JD. Thank you so much.

Thanks for the question, Jay. I didn't, I hope I got, this is Mark speaking. I hope I understood the full question regarding Foot Locker and JD and Dick. What we are very much trying to do with Foot Locker and JD is reach and expand into an even younger consumer base, and this is driving the partnership. So with JD, we'll be heavily focused on the UK that is driving a large part of this expansion and on the U.S., And then with Footlocker, the expansion in 2022 is mainly US-based, very strongly kind of defining the key locations together with them, where we believe we have the strongest consumer fit, but then also working on a very distinct product tiering. So, when you experience on across different channels, that you always find the right product for the respective consumer. With DIX, the story is a little bit different. So our goal and our dream is to be number one on Runner Suite, and DIX plays a very important role in there. So we will start pilots with on-branded spaces within some key DIX doors as of this summer, and we'll also start two selected pilots with public land, which is DIX outdoor format, to reach the outdoor consumer.

Got it. Okay. Thank you so much.

The next question is from the line of Jim Duffy from Stiefel. Please go ahead.

Oh, thank you. Hello, everyone. Martin, I think this is coming your direction, but I wanted to ask a few questions on the supply chain backdrop and influence on product flow. Can you speak to the level of in transit inventory positions And I'm curious, is the incremental use of air freight expected to be fully through the P&L in the first half of the year?

Yeah, thanks, Jim. I think most important is we have now confidence and clarity on the factory and the volume that they are producing. And so we can plan basically all the use of air freight much more clearly than in the past. As mentioned, we expect 700 to 800 basis points headwind from use of air freight in the first half of the year compared to the cross-profit margin that we had in the first half of 2021. We will carefully balance basically growth and use of air freight, but what we see is that we will be able to fulfill a higher share of the demand that we are having in the first half of the year, which is also reflected in the increased guidance.

Okay. and then i'm curious the level of in transit in your current inventory positions and then how you're thinking about the progression of inventory across fiscal 22 and then perhaps related to that i'm curious is there a way to characterize the wholesale channel inventory levels where they sit right now versus desired levels

In transit, in the end we are balancing if the volume comes out of the factory at the moment, what goes on ocean freight and what goes on air freight. We see some congestion, especially at the west coast port of LA. We don't see similar congestions at the other ports, so the product is flowing there. Already before the lockdowns, we have adjusted basically how much cushioning we take into account when we plan our production volume for a longer shipping time. So, we have increased it in our internal calculations by two weeks already, even before the impacts. And then maybe Mark can elaborate a little bit how we look at the inventory positions at wholesale.

On the wholesale side, from the beginning on, we have decided to partner with premium retailers and premium wholesale partners. Many of them have an extremely strong standing in the industry. What has happened is that many of the brands have prioritized the same partners. many of our partners with relatively healthy levels. And when it comes to our inventory, we feel the availability that we can provide them is very, very strong. And that is also reflected in some of the sell-through data that we're seeing from them. We're on continuous experience, very, very strong growth.

Thank you.

Next question is from the line of Christina Fernandez from Telsey Advisory Group. Please go ahead.

Good morning and good afternoon there and congratulations on the Better Than Expected quarter. I wanted to ask about You know, the marketing plans, you decided to invest more in 2021, which makes sense given the demand for the product. If you look at 2022, do you expect to be above your long-term target of 12% to 12.5%? How are you thinking about that?

Yeah, I think important is our long-term target for adjusted EBDA margin is to be in the high teens and this is clearly what we're working towards and you also see that we increased our EBDA target despite the fact that we are facing the headwinds from the higher air freight. So we We purposely increased the investments in Q4 in marketing because we have seen the strong sales growth, but we also had a lower share of air freight compared to what we were planning. And so we made use of the opportunities that were there. We will continue to use similar opportunities if they arise, to invest especially in the upper funnel of marketing, to target regions where ONN has a weaker brand presence than average. We will invest into product groups like apparel. But on Our main goal is to increase profitability over time into the high teens.

Thank you. And then my second question is, as it relates to the flow of the year, on sales now, you know, versus the last call. I think on the last call you had talked about, you know, 40%, 45% growth in the back half, which implied about 20% to 25% in the first half. Should we assume that the better product flow you're seeing would just, you know, lift the first half of the year and the second half stays in that range? Or how are you thinking about the split through the year? Thanks.

Yes, so this is how we're thinking about this. We have the visibility for the first half of the year and believe we can fulfill more demand. At the same time, the return to hyper-growth numbers that you just mentioned in the second half of the year, we feel that there's much more confidence behind the numbers because we are now seeing the strong pre-orders from our retail partners new partners, existing partners, new products, existing products. So we have a much higher level of confidence in that number. And we also have the confidence that the product supply should be there based on the current availability of the factory production capacity.

Ms. Fernandez, are you finished with your questions?

Yeah, thank you.

Next question is from the line of John Comp from Baird. Please go ahead.

Yeah, hi, thank you. I want to follow up on some of the product innovation plans that you have, and could you share a little bit more on your plans for 22 on the apparel side, if you have any insights on the launches there and any new categories that you plan to enter and your expectations.

Thanks a lot for your question, Jonathan. You know, I mean, apparel has been growing twice as fast as shoes, and we continue to launch new products. And products that we're launching are – always at this intersection between performance and design and then also sustainability. And that makes just our apparel pieces incredibly versatile. So we're seeing that adoption of our apparel pieces is becoming more wide. And as I mentioned, kind of for example, In some of our own stores in China, it's already 25% of sales. So we feel that it really kind of resonates with our consumers. So you're going to see more launches. In fact, I've just seen in the last two weeks, important apparel launches for us. We also kind of make sure that we double down on the move of our apparel pieces for movement, of course, which is part of our brand mission. So you're, for example, going to see a women's bra line. uh in the future as well so it's really kind of just giving more depth to our range but pretty much in the areas where we uh where we all already play which is of course in the core running but it's then extending also to the outdoors and extending to uh to movement so everything that empowers you to out go out experience nature and move what's very encouraging is that we see for example customers who come to us repel show a higher lifetime value And so our ambition is very clear that Onyx is becoming a global premium sports brand beyond a pure running shoe brand, and that's where we also kind of drive its product.

Yeah, great. That's very helpful. And then maybe a broader question about the plan for 2022 revenue. Is there any more color you can share in terms of some of the channel expectations? I know wholesale you have some shift in the The timing of the spring sell-in this year, but there's also some different comparisons that you'll be cycling throughout the year. So any more directional color on wholesale versus direct-to-consumer and any sort of shaping expectations around those?

John, happy to take that. I think most important to us is that we really see strong growth rates across all the different channels. And if you're looking at D2C, we really see that also the share of new customers, repeat customers, stays very strong. So we are really building that business based on the elevated consumer base that we were building during the pandemic. Then at the same time, Mark already shared some of the expansion plans that we are having in wholesale. And with some of those expansions, we clearly address a different consumer group, where we also expect that they are continue shopping in our D2C channel. At the same time, we are expanding our own retail network. So, we will open up new doors, as we have announced, in Tokyo and London, but also in the U.S. and Switzerland. Doubling our account in China, which will further grow the D2C channel. For us, it's important that both channels are mutually beneficial, and we want to grow both channels and not with a goal of a clear D2C share.

Yeah, great. Thank you very much. Next question is from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead.

Great. Thank you so much. I was very intrigued by your comments on the quality and rate of sell-in for spring, summer 22 and fall, winter 22. I don't know if there's any additional color that you could share on perhaps the year-over-year rate of growth, either in spring, summer, or fall, winter. And then I wanted to ask about the 700 to 800 basis points in gross margin headwinds here in the first half of 2022. I would imagine that some piece of this you expect will be transitory, such as maybe the elevated use of air freight. But is there a portion of it as well that could be sticky, maybe higher distribution center expenses, or at least a portion of them might be a little more permanent? And any color you could share would be helpful. Thanks.

Thank you Kimberly. So let's start with the pre-order and what we're seeing for the second half. I mean, we're not sharing the exact number of the growth, but it's higher than we expected, which is very, very fortunate across all geographies and across all product groups, which is super important to us. So we're seeing exactly the quality in the order that we want. So, for example, as we already mentioned, we want to be number one on runner's feet. So how we're growing in running is a very important measure for us. So we're seeing that happening. At the same time, we're also always looking at what's same store growth and what's new store growth. And we're also seeing that in stores where we already have Quite a significant presence. We're still growing very, very strongly. And then, you know, beyond footwear, it's important for us that we continue to build on as a global sports company. And with that, we're very strongly looking at the apparel share and at the accessory share. And so, we see it's still on a very small basis, our accessories business, but we're expecting very, very strong growth. um in 2022 and on apparel a lot of the order is driven by now being able to be in many of the right channels so we spoke about the shopping shops and with nordstrom which give us an elevated presence and and we experience where we do have shopping shop executions we also have a higher apparel share and that is reflected in in the pre-order so we're really um positive across the board and and martin will martin will quickly talk about the margin impact

Kimberly, so on our distribution costs, we are still seeing a very volatile environment. So, around our last call mentioned that we see air freight price around jumping up from $20 to $40 per shoe. At the moment, we go more towards $16 again. So, it's very volatile. Therefore, it's hard to project. We continuously, we always have a certain amount of air freight share. We were at very low air freight volumes in most parts of 2021 due to very good product availability that we had. So, probably we will have a little bit in higher share also post-half year one. Probably the most long-standing impact will be on higher labor costs in our warehouses, where we don't expect that the effect is reversing. And this is why we have increased the prices in the U.S., as mentioned, on about 40% of our volume to offset those prices and to be able to maintain our cross-profit margin and to clearly work towards the direction of the long-term target of 60% on cross-profit.

Great color. Thank you so much. And it sounds like you expect the price increases that you're taking to be able to fully offset some of the cost inflation, leaving you on track for that high long term adjusted EBITDA margin. Am I hearing you correctly on that?

Yes. At the same time, we do not expect price increases in Europe in 2022, but we are clearly looking at the market and the competitive landscape there, and we have the pricing power as a premium brand to selectively increase them prices also for 2023.

Great. Thanks so much, and good luck here for the year.

Next question, Michael Benetti from Credit Suisse. Please go ahead.

Hey, guys. Good morning. Thanks for taking our question here. Congrats on the next quarter. I guess as we dig in on the gross margin a little bit, as we look back at some of the modeling from the S-1 around the IPO, obviously DTC being a higher gross margin and growing faster is a positive influence, but geography should have been a negative influence with the lower margin U.S. business growing fastest. I think in total, channel and geography would be a slight negative to gross margin year over year in fourth quarter. So my gut there is that underlying profitability in these channels is turning out to be higher than what you anticipated as you scale. Or maybe you tell me you're just selling at much higher levels of full price selling, which you would have to cycle. So I just want to be aware of that. But maybe should we, you know, I guess... some help in how you look at how GM, how the gross margin is actualized versus what you thought at the IPO. Is 5960 a new floor to build off of at this point?

Good question. Thanks for that. We are still, besides the air freight spendings, we were still in a very favorable environment on cross-profit with a strong full price sales, a very high DTC share in the fourth quarter, especially compared to the second and third quarter. At the same time, we had used less air freight in Q4 than we were anticipating. So, going forward, we continue to have a higher cross-profit margin in our D2C business. So, we will see a strong impact from that, helping to offset what you were mentioning, the partially lower cross-profit margins in the U.S. business. At the same time, China is a very strong business for us, also from a cross-profit perspective. So, we feel long-term the 60% is clearly the target that we are working towards. At the same time, we need to factor in the use of air freight to a certain level. Very strong is also that our product prices are fixed for 2022. So this is always committed for the full season. And so we do not expect to see any impacts from higher FOP prices there. This will then only be visible as of 2023. So I think we are still in a very similar environment than in our last calls and the ranges that we were sharing there.

Okay. And then I guess if we – we're back here at $990 million in revenue for the year. We're back to the way you saw the business before the Vietnam issues started. So that's great to see. I think you were thinking originally that on that level of revenues, EBITDA margin would be about 14.1. You're guiding us to 13.1. Obviously, some of that's explainable by the gross margin you talked to in the first half. Is the best way – though, since we're back to those revenues, as we think about 23, I think you were originally looking at something like $1.3 billion in revenues and margins moving towards the 15, 15.5 range on EBITDA. As we lift our eyes a little bit past 22, is that still the right direction to think about the model?

I think we don't want to talk about 23. The 990 still includes headwinds from supply shortages. So I think this is the key differentiator to the number that you mentioned earlier. We maintain our long-term outlook to be able to achieve high teens on our adjusted EBDA margin. And as you said, if we do not expect long-term use of such an high air freight share, which was projected for the first half of the year, which should result in higher profitability, then over time, we have proven our ability to grow profitable, to be conscious on investment versus holding back and and growing in a profitable way. So this is clearly the focus that we will continue to have in the future.

Thanks a lot, guys. Congrats.

Next question is from the line of Sam Poser from Williams Trading. Please go ahead.

Thank you for taking my questions. I've got a few here. Number one, in the gross margin, the 7 to 800 points decrease in the gross margin on the first half, I assume that that would be slightly more weighted to Q1 than Q2. Is that a fair assessment?

That's a fair assessment. probably more 60, 40 across the two quarters.

And then for the full year, let me just ask you all my questions. For the full year, can you just give us some idea of what you're thinking the gross margin is going to be? And number two, is overall, I mean, given the product, some of the product shortages and so on, I assume that the demand for your product is outpacing supply. And given that, and given that you're probably not able to satisfy, you know, some of the sort of that core running businesses and core running consumers and sort of the more heritage business you've developed, why go after that younger, more fashion customer when you could use that production for

um you know better serving sort of that more running more performance customer yeah thank you thank you for the question so on the on the gross profit outlook 2022 so we're not giving a gross profit guidance for 2022 um but i'm super happy to talk about um the the channels and how we're balancing uh supply and demand so i think On is a premium brand and we've historically experienced stronger demand than supply and basically having a certain amount of product scarcity helps us remaining premium and also helps our margin situation. So we'll continue to execute on that strategy. When we're looking at prioritization, for us, it's important to reach the right consumers through the right channels. So, we definitely did prioritize for the running products the channels that reach a running consumer, and so did we prioritize for for more an all-day consumer, the channels that reach an all-day consumer, where we keep product supply as high as possible in all products is our own D2C environment. And I think this is what you're seeing playing out. We have Some flexibility on balancing different products. So when you look at our most important products, we dual or triple source almost all of them. So we can balance between factories, but we don't have 100% flexibility to just move overall capacity around. But I mean, I think going forward, this is probably a little bit on how we can think about which consumers have access to which product groups.

Thanks. And then just one last thing. Your apparel has a ton of performance features in it. And then do you foresee apparel going into, like, you know, let's say athletic specialty going forward? Or is that more going to stay in the performance world?

So basically, again, we're trying to be a global sports brand, and we will bring apparel into the stores where we feel apparel has a good showing and reaches the right consumer. So if you look at the pilot, for example, with Dick's, apparel will be part of that. Apparel will also be in, for example, our Nordstrom doors, but then Run Specialty is a channel that is a little bit less apparel-heavy, and therefore will also have less apparel exposure. Our own D2C channel and our own retail stores are extremely important for the apparel expansion, so we'll continue to drive that. And then I think you can also expect us to be in some channels that are originating more in the apparel space and that have way less footwear exposure, and we'll also expand our apparel assortment into some of these premium doors. Thanks very much.

Good luck. There are no further questions at this time. Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.