On Holding AG

And gentlemen, thank you for standing by. Welcome and thank you for joining the On Holding AG Q2 2022 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 touch-down telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Derek Peter, Head of Investor Relations. Please go ahead, sir.

Good afternoon, good morning, and thank you for joining ONCE 2022 Second Quarter Earnings Conference Call and Webcast. With me today on the call are Executive Co-Chairman, Co-Founder Kasper Kopetti, CFO and Co-CEO Martin Hoffmann, and Co-CEO Marc Maurer. For the first part, Kasper and Martin will lead through the prepared statements after which we are looking forward to opening the call for 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 on March 18th for a detailed discussion of the risks that could cause actual results to differ materially from these expressed or implied in any forward-looking statements 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 courts with IFRS. Please refer to today's release for reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. With that, I will turn over the call first to Kasper, followed by Martin for the prepared remarks.

A warm welcome to all of you joining us today. I hope that you have been able to spend some quality time over the summer with your families and friends. We are excited to discuss Onn's performance in the second quarter of 2022 with you, share some big milestones, and give you some color on how we look at Onn's continued growth trajectory in the current macro environment. This is our fourth earnings call post-IPO, and on behalf of the whole Onn team, we are very proud to present another record quarter. Consumer demand for the ON brand remains very high. ON grew 67% overall in the second quarter of 22, and many key markets had outstanding growth rates, such as the US and Japan, which doubled, or the UK and Australia, which grew by more than 60%. All geographies, channels, and categories contributed strongly to this outstanding result, confirming ON's tried and tested strategy of maintaining a well-balanced product and distribution portfolio. ON is winning with consumers and also on the racetrack. As a result of this strong growth, ON is making significant market share gains in the specialty and high-end distribution channels that we choose to play in. The growth comes from both established as well as new product franchises, and I would like to call out some of these new products that have become instant fan favorites. On's promise to runners is to run on clouds, and we are doubling down on this with more underfoot protection and ultralight comfort. This spring, we have introduced the Cloud Monster for maximum cushioning and the Cloud Runner for ultimate all-round comfort and performance. The Cloud Monster is already amongst the best sellers in our own distribution, and it has given us access to an additional consumer and first-time purchaser of our brand. The Cloud Runner, introduced early in Q2, jumped straight to being one of ON's most successful performance running shoes when looking at the combined run specialty and general sporting goods channels. In performance outdoor, the Cloud Vista, which also launched in Q2, is quickly rising to the top of the leaderboard. And last but not least, the Cloud 5, which we launched earlier this year, is continuing its winning streak in performance all day. But we also have new styles in this category. If you're looking for a light summer shoe for your August getaway, we can recommend the Cloud Easy with its ultralight slip-on knit upper. On the apparel side, Q2 saw the entry into a new product category with the launch of our Active Bra and Performance Bra. Both have received great feedback from customers, been covered by numerous media channels, and both bras are now among the best-selling apparel items in On's e-commerce. Now let's move on to our fastest products and to racetrack. You will remember that we introduced you to On's Lightning program at our last quarterly update. This includes a dedicated team that works on making the fastest shoes to unleash our athletes' full potential. What we didn't expect is that we would be able to stand here only three months later and talk to you about On's first track and field Diamond League victory, On's first Commonwealth Games victory, and ON's first World Championship medal as well. You most likely have never heard of Dominic Lovallu from South Sudan. Well, you're in good company. Neither had the elite field in the 3,000 meters of the Stockholm Diamond League meeting, where Dominic came first, ahead of the favorite who would go on to win three medals at the World Championships at the Commonwealth Games. Stockholm was Dominic's first elite race, for the simple fact that he's a refugee and does not have a passport. ON has supported him for some years now, first through the Athlete Refugee Team and now here in Switzerland, and we are very happy for him and this incredible achievement. Only a couple of weeks ago, ON athlete Helno Beery added another huge milestone by winning ON's first track and field world championship medal in Eugene, Oregon. And OFC founding member Olly Hoare took the 1,500 meters gold at the Commonwealth Games in Birmingham. We are not just winning on the track, but also making strong progress on sustainability. First, I would like to give you an update on our circularity program, Cyclone. The shoe that you will never own and is only available through a subscription called Cloud Neo. Circularity and the use of lower impact materials are a big part of ON's mission to decouple ON's resource consumption from our strong growth. One of ON's core company values is the survivor spirit, and it stands for innovating our way to a more sustainable future. Over the past weeks, our very first community of cyclone subscribers in the US and Switzerland received the CloudNEO, and we look forward to giving more and more people around the world the opportunity to run and exploring ONN's most sustainable product to date. This very special launch has brought ONN a step closer towards our sustainability mission to lower ONN's carbon footprint by designing products made for circular systems and engineered with fossil-free materials. As you observe the consumer behavior in connection with Cloud Neo and a subscription model, we are not resting in our push to more sustainable products on all fronts in the short term as well. For example, we have significantly increased the level of recycled polyester in some of our more recently launched running products. The CloudVista, CloudMonster, and CloudRunner contain 74%, 84%, and even 90% recycled polyester, respectively. In comparison, in our spring-summer 21 range, the level had been at 16% on average. We are on a steep learning curve and fast implementation cycle. And some of the learnings from the groundbreaking Cloud Neo have already found their way into other products. The newly launched sneaker Cloud Easy is made with only 15 pieces, about half of what a regular On uses. Less parts mean less impact and higher recyclability. This combined with a new half speed board made from injected TPU and the full-knit upper made of 100% recycled polyester leads to significant waste reduction without any compromise on performance nor comfort. We also believe that what gets measured gets done. ONHAV sets ambitious, clear sustainability targets, and we are committed to transparently reporting on our progress towards them, which brings me to the pleasure of making you aware of the upcoming publication of ONN's latest impact progress report. Not only will we be updating on our goals and progress, you will also find a number of fascinating case studies on projects our teams have been passionately working on over the past months and years. In sum, while looking back from the halfway mark of our 2022 race, half year one has been incredibly strong for ONN. Despite the supply challenges and macro headwinds, We have achieved new record numbers, launched well-resonating products, and reached new milestones together with our exceptional team and athletes. At the same time, we have plenty of energy and stamina for the second half of the race. While we're staying vigilant and financially prudent as always, all indicators show that demand for the on-brand will stay very high. This puts on in the privileged situation to consciously select which of the levers we want to pull at which point in time to deliver durable and controlled growth. With that, let me pass over to Martin for the Q2 financial review and the outlook for the rest of the year.

Thank you, Kasper. And hello, everyone, also from my side. With 291.7 million Swiss francs and 66.6% growth, Net sales in Q2 have been by far the strongest in the history of all. In June, for the first time, net sales in a single month exceeded 100 million. And net sales in the first six months of the year have grown by 67.2% to 527.3 million Swiss francs. Our adjusted EBITDA more than doubled compared to Q1. And if we exclude the extra air freight, which was needed to overcome the residual impact of the supply side from last year's factory closures, our cross-profit margin and adjusted EBITDA margin for both Q2 as well as half-year one would already reconfirm our long-term profitability target. We could not reach such incredible results without the dedication and passion our team puts into all parts of the business every day. we have grown from 1,150 to almost 1,500 team members since the beginning of the year. Over the last weeks, Casper, David, Mark, Olivier, and I had the opportunity to visit our North America team in their new office in Portland, our tech and happiness delivery team in our recently opened office in Berlin, and our development and innovation team in Ho Chi Minh City. After two years, we were also allowed again to visit Tokyo to meet with the Asian teams and to see firsthand how ON's new Tokyo store resonates very strongly with Japanese customers. We also had the opportunity to visit many of our factories and factory owners to align on our joint growth plans. And last but not least, we opened ON Labs, which is what we call our new office in Zurich. And for the first time in four years, all our Switzerland-based teams are now starting their lunch runs from the same building, where they share a coffee on our community plaza. We also had the opportunity to already welcome many of our global key retail partners to our new home base. OnLeft also serves as the new innovation heart for ON. More than 30% of the space is dedicated to research and product development. allowing us to take Swiss engineering to the next level. We have even opened our own sample production line to produce shoes and apparel samples on-site. Together with an elevated computer simulation program and the world-class sport science laboratory, we are now able to test and refine innovations at a much higher pace. And OnLabs is home to our first own retail store in Europe, which allows us to test the latest innovations for on-store design and to further build a strong run community in our hometown. Now let me turn to our financial performance in the quarter in some more detail. Our net sales growth has been stronger than expected and driven by all channels, regions, and product categories. The success of our latest product launches exceeded our own expectations, and lower effort rates allowed us to deliver more product to meet the incredible demand we have seen at our retail partners as well as our own direct-to-consumer channel. In Q2, we saw our omnichannel strategy shine again with strong growth of 70.1% in wholesale and 60.8% in direct-to-consumer. In wholesales, growth was driven by the continued gain of market share with most of our existing retail partners. This is driven by the success of existing and new products, as well as a further selective expansion of our doors with our global and regional key accounts. We see the strong growth in our D2C channel, consisting of ONN's own e-comm and own retail, as a further validation of our ability to build and retain a loyal fan base and to provide the best and most authentic experience to our customers. For the first time, direct-to-consumer net sales surpassed 100 million in a quarter, reaching 105.6 million. The contribution of net cells from the D2C channel was 36.2% for the quarter versus 37.5% in the same period last year. Especially in Europe, Q2 D2C cells last year were still inflated by the ongoing lockdowns. Germany, for example, only lifted restrictions in May 2021. Starting in October, we expect to roll out our new website, which will provide our fans a much more tailored, individualized brand experience. And it will allow us to show more product details, which we believe is a key driver for further growth of our apparel share. Within D2C, while it's still a small part, we are pleased to observe the success increasing contribution of our own retail stores. The new flagship stores in Tokyo and Zurich had a very successful start financially, but also as hubs for the local run community. Our New York City flagship store had its strongest quarter in history, driven by a significant increase in in-store traffic. This success is giving us a lot of confidence for the next stores in the US. We expect to open on LA in September and on Miami in December. The opening of our London store will be slightly delayed to very early 2023. With that, We expect to end 22 with 13 owned and operated stores in China and six owned retail stores in all other markets. As mentioned, all regions contributed significantly to the net sales growth. In North America, we continue seeing the strong brand momentum that has been fueled by the IPO, by a strong product market fit of our existing and all recently launched products, and by the successful expansion of our collaboration with the best key accounts and specialty stores in the region. Q2 net sales in the North American region more than doubled, increasing by 102.5% to 181.7 million Swiss francs. With this, North America accounted for 62.3% of our business in the three-month period. Net sales in Europe. grew by 17.5% to 83.3 million Swiss francs. Wholesale has grown over proportionately, as we continue seeing a stronger shift from online to offline shopping. Also, D2C sales in Q2 last year had been elevated due to the sustained lockdowns in many key markets. In addition, net sales growth has been negatively impacted by the weaker Euro and British Pound compared to the Swiss francs, We continue to be very encouraged by the development in individual markets within Europe, including but not limited to UK and France. Net sales in Asia Pacific grew by 52.2% to 17.9 million Swiss francs. The very strong growth in Japan and Australia allowed us to offset most but not all of the impact from the extensive lockdowns in China. Our warehouse in Shanghai And around half of our China stores had been closed for two months, resulting in approximately 5 million lost sales. Due to the structure of the China business, the impact is over proportionate on our DTC and apparel business. As soon as restrictions were lifted, we have seen a very strong recovery in China. And in June, our own retail locations had their strongest months in history. Finally, rest of world net sales grew by 224.2% to 8.8 million, reflecting the post-COVID recovery in many of our distributor markets, as well as some earlier shipments of fall-winter products compared to Q2 last year. Moving to the performance by product category. As Kasper mentioned, our expanded line of innovative performance running shoes is driving market share gains in the running market, both from existing as well as new customers. The Cloud Ultra and Cloud Vista have become favorites on the feed of trail runners, and the Cloud Nova continues to drive us to new customer groups. Net sales from shoes increased by 68.2% year-over-year for the quarter to 280.6 million Swiss francs. Net sales from apparel products grew 31.3%, which was slightly below our expectations, but also shows the large opportunity that we have in this category, given the strength and penetration of our brand in footwear. Our strategy to build on as a sportswear brand has been validated in Q2 by the ongoing very strong apparel sales in our own retail stores, as well as in shop-in-shop environments. The apparel share in our new Tokyo store is already at 18%, and in Zurich at 19%. In Europe and North America, we continue to invest in shop-in-shop installations, for example, in Nordstrom, Sportcheck, and Breuninger. As a result, we see both a strong uplift in overall sales and a significantly higher apparel split between 15% to 25%. Finally, net sales from accessories increased by 51.9% to 1.8 million Swiss francs. Cross-profit in the second quarter 2022 was 160.8 million Swiss francs compared to 106.3 million in the previous year period. As expected, we continue to selectively use air freight in Q2 to ensure key product availabilities. We have, however, come a step closer to normalization and have reduced the required air freight share in comparison to the first quarter. As a result of the investment into air freight, our cross-profit margin decreased from 60.7% in Q2 last year to 55.1% in Q2 this year, but was up sequentially from 51.8% in the first quarter of the year. In Q2, we continued to invest in all parts of the business, while still delivering profitability despite significant air freight costs. SG&A expanded before share-based compensation and excluded 3.3 million IPO-related equity transaction costs in Q2 2021 were 48% of net sales in Q2 this year, compared to 48.7% for the same period last year. ShareFax compensation led to a lower expense, both in Q2 this year and in the prior year period. due to reductions of existing provisions to reflect revised estimates in connection with future option exercises. Despite the investment in air freight, as well as the higher but controlled SG&A expense, we achieved a strong adjusted EBITDA of 31.4 million, an increase of 4 million and 14.7% compared to prior year periods. Adjusted EBITDA margin for Q2 this year was 10.8% compared to 15.7%, with this reduction again largely being a result of air freight costs. Moving to the balance sheet, capital expenditure for the quarter was 11 million Swiss francs, or 3.8% of net sales, largely consisting of investment into new owned retail stores, office build-outs, as well as into IT infrastructures. Inventories increased by 54.3 million compared to end of March, reflecting the significantly improved supply situation. With this position, we were well equipped to deliver our strong fall winter season pre-orders beginning as of early July. Higher working capital was a key driver for the reduction of our net cash from 600.4 million at the end of Q1 to 557.7 million at the end of Q2. So our strong balance sheet allows us to pursue our ambitious growth plans and upcoming investments. Now let's look ahead. To help frame our financial outlook, let me share our view on some of the underlying drivers. First, the macroeconomic environment. Despite the macro uncertainty, we currently do not see any signs of a slowing demand for on-product Appropriately, in an environment like this, some key accounts have started to pay more attention to their in-store inventory, but sell-out numbers for ON have stayed consistently strong. And we are clearly planning the business this year for continued strong growth. But we are also focused on controlled and durable growth, which I will come back to at a later point. Second. Given the macroeconomic uncertainties, we took the decision to grow our cost base more conservatively and to reduce our goals for new hires for the remainder of the year. And while we felt the importance for our teams to come back together physically after the end of the pandemic, we plan to make more use again of the proven ability to working together virtually and to reduce travel in the months to come. Third. Our financial results are impacted by the current volatility of currencies, especially the strength of the US dollar and the weakness of the Euro in ratio to our reporting currency, Swiss francs. A strong US dollar versus Swiss francs can be considered a tailwind for net sales and absolute cross-profit by having a negative impact on cross-profit market. A weak Euro versus Swiss franc has a negative impact on net sales, on cross-profit and cross-profit margin. We will continue to report our results on a stated basis and focus on the underlying business developments. But a continued high volatility of currencies may impact those reported results. Our guidance in general is based on spot rates. Fourth, Thanks to the dedication and commitment of our factory partners, we were able to compensate for the majority of the lost production capacity during the factory closures last fall. Our supply situation has improved significantly, and as announced in earlier calls, we expect to use a more standard ocean freight for the vast majority of shipments. But our recently launched CloudMonster and CloudRunner are exceeding expectations. And in order to provide sufficient supply, we decided to continue investing into air freight for both franchises in Q3 to meet this demand. This will have a limited impact on our cross-profit margin of 150 to 200 basis points in the third quarter. In addition, we expect an additional 50 basis points headwind for Q3 and Q4 from the current currency rates. With all that context as a backdrop, Based on the performance we have seen in the first half year, we are once again raising our outlook for 2022 from 1.04 to 1.1 billion Swiss francs, which effectively passes through slightly more than our Q2 overall performance for the full year. This new top line reflects a strong full year growth of 52% compared to 44% in our previous guidance. As always, we will continue to strive to exceed this number, but only in the service of a durable long-term growth. Let me explain what we mean with durable and controlled growth. We are thinking long-term, and our goal is to build a durable company at the intersection of performance, design, and impact. Managing that growth ensures scarcity, which is the key driver to build desire and to maintain our position as a premium brand. It also allows a balanced growth across both channels and all regions. Growing strongly but controlled also puts focus on efficiency across all parts of the organization as a prerequisite for a continued increase of our profitability. And last but not least, the strong focus on tighter inventory control, premium positioning, and the controlled growth of the cost base makes ON more resilient against the impact of a potential economic downturn. 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 145 million Swiss francs, reconfirming our goal of an adjusted EBITDA margin of 13.2% for the year, even at a significantly elevated top line outlook. As you can see, A foundation is being laid for a larger and even more profitable company in the years ahead. Not even 12 months ago, we filed for our initial public offering. So much progress since then. We became a more diverse, inclusive, and more sustainable company. We introduced new exciting innovation and sustainability-driven apparel and footwear products for running, outdoor, and performance all day. We entered into new markets, including Latin America and Hong Kong, and we started to work with some of the largest key accounts in the world to increase our share on runners' feet and also with the younger community. We have grown our last 12 months' revenue by 64%, from $570 million to $937 million. And our teams achieved all of this despite the ongoing impact from COVID-19, factory closures in Vietnam, and the recent lockdowns in China. Almost 600 people started at ON since the IPO, and we are proud to welcome them in our new offices around the world. We're equally proud about our athletes, their success and their passion for innovation that has driven the development of exciting new products. But most importantly, our culture has not changed and continues to be ruled by our five spirits, the athlete, explorer, positive survivor, and the team spirit. They will continue to drive our future, and we couldn't be more excited about all the opportunities we see in front of us. We will continue to ignite the human spirit through movement and to dream on. And with that, Casper, Mark, and I would like to open up the session to your questions. Operator, we are now ready to begin the Q&A session.

Ladies and gentlemen, At this time, we'll begin the question and answer session. Anyone who wish to ask a question may press star followed by one on their touchdown telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may click star followed by one at this time. One moment for the first question, please. The first question comes from the line of Christiana Fernandez-Vontelke. Please go ahead.

Good morning and congratulations on the nice quarter. I wanted to ask about your view of the industry, inventories across the marketplace and what impact, if any, that is factoring into the outlook. I mean, there's definitely a conversation of inventory picking up and promotions increasing. in the back half of the year.

So how are you thinking about, you know, your outlook in that context?

Thank you for the question. And this is Mark speaking also from my side. Hello to everyone. So we're watching that very, very closely. And the way we're looking at this, one, we're in close contact with all the factory partners and we're trying to understand how production volumes are moving. And then we're very much focused on sellout and inventory data also with our key retailers to also understand what market dynamics from a discount perspective we might see in the second half of the year. I think what's very important for us, and as you can see in our Q2 numbers, we're still very much in the game of gaining market share and it's not about incremental growth. And so we feel that the strong brands will continue to see strong momentum also in the second half of the year. And this is reconfirmed by our partners and how they're looking at their order book with Dawn. I think in general, there is some expectation that the brands that probably have a little bit less momentum, there is some higher inventory positions and probably also a slowdown on the production side.

Thank you. And then as a follow-up, can you talk about demand trends by region? North America continues to be an outperformer. Perhaps Europe, where growth has been a little bit slower, how are you expecting that to progress over the back half of the year?

Yeah, so I think what you're seeing in the numbers is similar to what we expect to happen in the second half of the year. So we continue to see the US to be very, very strong. The order book looks very, very good for the second half of the year. Key parameters that we're using for our D2C business, like traffic and so on, look very, very strong. We're seeing Japan, Asia strong. We spoke about how quickly China has has come back and the tune once we were able to reopen the warehouse and the stores was strong. And UK continues to be strong, also thanks to a continued door expansion with some of our key accounts. And then we are very happy, especially also in Germany, which is a very large market for us, that the outlook is positive. We're having a bit of a shift from more online to offline shopping. And that's probably going to continue in the second half of the year, but this is also what's reflected in how we're looking at D2C versus wholesale business in our Q2 numbers. So I think you can very much expect a continuation of what you're seeing in these numbers.

The next question comes from the line of Marco Binetti from Credit Suisse. Please go ahead.

Hey, guys. Thanks for all the detail here. Congrats on a great quarter and obviously a tough macro. I'm very happy to see it. Would you help orient us here with the model, I guess, just on the – you mentioned 150 to 200 basis points of freight, sorry, in the third quarter and 50 basis points of FX. How much were those two components in 2Q? And then maybe how much are you thinking – how much is in the full year for air freight in particular – And I think you're baking in an EBITDA margin of about 17% in the second half of the year, and that includes some level of unusual freight. Since we don't have a lot of history here with the model that I would consider to have occurred in a normal macro year to look at as we try to improve the model going forward, is 17% plus what you would consider normal profitability level for this business in the back half of a fiscal year?

Hi, Michael.

Thanks for the question. To shed a bit more light on this, so already in the second quarter, we used about half of air freight than what we used in the first quarter. So you really see that our supply situation improves dramatically. And now for the third quarter, we really talk about a relatively low number, somewhere around 5 to 6 million that we are going to invest into air freight in order to provide sufficient supply for the products that we mentioned, mainly the CloudMonster and the CloudRunner. And then for the fourth quarter, we expect that we are really in a normal ratio of air freight to ocean freight to what we have also seen before the factory closures happened. On ethics, we already had some headwind also in the Q2 numbers, and we expect that to continue, which as we outlined on the call, comes from the relatively strong US dollar to the Swiss francs, and then the relatively weak euro to the Swiss franc. If this continues to be the case, then the impact is about 3, 4 million for the second half of the year, which makes the 50 basis points. And then I think on the EBITDA, clearly we talked about that we are a bit more conservative in growing our cost base. um we we reduce a bit the the how bullish we are on on hiring new people that doesn't mean we don't we don't hire anymore we'll still grow significantly but just a bit more cautious to to compensate some of those additional impacts on gross profit in order to maintain the 13.2 ebta target that we have given for the full year

And I guess to follow that, thinking a little bit bigger picture, as we look out beyond 22 and hopefully get back to normal here, what do you think are some of the biggest unlocks coming up that we'll see on both the apparel side and moving the footwear assortment beyond the cloud platform?

That's a very good question. We're in the business of delivering innovation to the market. That's why consumers are drawn to the brand and innovation for us has several aspects. It's mostly performance driven and for many people performance translates into comfort so that's mostly on the running side. We innovate on the design side and very, very big focus is also the sustainability side. And as we go through the second half of the year and into 2023, we're actually going to deliver on all these fronts, both on footwear and apparel. We have tremendous success now with products like the Monster and the Runner, which create a great underfoot cushioning experience for runners. and we're really catching up with the demand here um we're extremely happy with how cloud ec has launched where we have incorporated some of the learnings from actually the cycle program on on making a less complex shoe that's still extremely comfortable but it has a very positive impact on the environment and it's at the same time creating a new look that the consumers gravitate to. And of course, we're seeing the success of Aracha franchise at Grenova continue. On the apparel side, we're doubling down on everything that's related to running because that's where we're seeing consumers transition most easily from footwear to the apparel side. So the running bras have been a great addition. As I said on the call earlier, these items are now in the top 10 in our own distribution. We added the tide, we're adding three more over the next 12 months. And then we have some first installation pieces coming for the fall, always from a perspective of making very light and stretchable products. And then into spring 23, we've announced it on the last call, we're going to innovate on CloudTech. We have a product coming called the CloudSurfer that features CloudTech Phase, which is an evolution Some might say a revolution of the sensation of running on clouds, a different aesthetic that allows us to provide more cushioning in a slimmer package. So it's basically a combination of these things. I don't want to go through a long list of products here, but the key takeaway is as we're bringing these products to market, they are already contributing significantly to our results. So they're very meaningful to our growth and to our revenues and our profitability. Thanks a lot, guys. Congrats again.

The next question comes from the line of Alex Stretton from Long Stanley. Please go ahead.

Great. Thanks so much for taking my question and congrats on another outstanding quarter, guys. I know you guys said you're slowing your hiring rate, which definitely makes sense in light of the uncertain macro. And it's what we've heard from a number of peers as well. So I just wanted to clarify, will that be a slowing across the board or in specific areas? And then aside from the lower travel expense you mentioned, what other cost-saving levers can ON pull on to kind of cushion profitability should the top line slow for the rest of the year? Thanks.

Hi, Alexa. Martin again.

So as we said in the first half of the year, We grew the team by about 350 team members to 1,500. You can expect a similar number for the second half, but we would have grown faster than that. And this is where we just become a bit more defensive, which is also always a good thing in such a high growth environment to slow down a little bit in order to also drive efficiency in the company and improve processes. We will not compromise on areas where we really talk to the customers, especially in happiness delivery. That's where we will continue building the team to the size of the business that we expect, especially around the holiday season in the US. We are committed to continue investing in brand building and sports marketing. really in driving the brand. We also continue to invest in inventory in order to be in a position to fulfill the demands that we currently see. So we don't want to artificially cut the opportunity in that area. But there are always levers in all of the cost elements to slow down, to react. Again, we are in a growth environment. So for us, it's not about taking something away. It's just about adding cost more cautiously in any area.

Great. That's super helpful. Maybe one quick follow-up. It seems like price increases are also a way to kind of maybe offset some of the headwinds. Can you just remind us how much you guys have taken price this year, what the plans are for the back half, and then next year, as well as if you've seen any consumer pushback? It seems like not for the results, but just any color there would be great.

We fully execute on what we announced in the past. So in the US, we have increased our prices on about 40% of our volume, mainly the cloud by 10 US dollar. Another 20% of volume will be affected in the second half of the year and then another 20 to 30% in Q1 next year. And then Europe will see the price increases on about 80% of the volume in Q1 next year. So I think with that, we are in a good position also to offset some of the higher costs that we expect on the purchase prices for products. I think we have now a pretty good picture how that looks like also for spring next year. And we're in a good position with the price increases that we have planned. At the same time, we continue seeing markets where we have a strong pricing power and where we will use that and then selectively use price increases in some of those markets.

Thank you so much.

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

Thank you. Hope you're all doing well and have a nice summer. Very impressive 2Q results and congratulations on the strong market reception of new products. I wanted to start by asking about the June strength that you highlighted. Some others have reported slowing trends in June. Can you speak to the composition of your June strength? Was that driven by D2C or increased volume of wholesale shipments? And was it led by any particular geography?

So the question is about, basically the way we understand it is about what Martin mentioned, that the month of June was the strongest month in the history of ON and basically where this growth came from, if I understand it correctly. So I think June is very much, again, in line with what you see in the Q2 number. It's not an outlier to the other months from a D to C and geographical split. So in the end, it was just kind of the highest level that we've achieved so far with a very similar split. And I mean, we have some seasonality in the business. So June has historically been a good month and a very important month to on. I think July is another month that is very important and big. And so I think this is a bit where seasonality also plays a role.

Thank you for that. Can I also ask about the D2C growth? Can you speak about how that splits between new customers versus repeat purchasers, perhaps given some context of the growth in the D2C customer file?

Yeah, thank you.

So, I mean, we're not sharing the exact details on new customers and repeat customers. But we're watching it very, very closely because it's important to us when you look at the health of the business. And so when you look at the market like the US, which has experienced a very, very strong growth, so we added some definitely more new customers than we would add in a more mature market like Switzerland or like Germany, for example. I think one area that we're focusing very much on and which will be important for us in the months and years to come as well is how can we provide a very very um basically a very good brand environment to our consumers so so that we can bring them back or keep them in the on environment so we reduce our dependency also on paid acquisition um which is something we're consistently working on and this is going to be expected to be a focus over the months and years to come and then i think you know, we spoke about the metrics that we're using. So, you know, I said retention is important. Your customer acquisition is important and conversion is important. And this is also how we're looking at brand versus category. So we're looking very closely at some Google data on how the category is evolving online versus offline and how the brand is evolving there. And we really see that the on brand on all parameters continues to be very, very strong. And our conversion rates continue to be very, very positive in all different consumer segments that we're having.

Thank you for that.

The next question is from the line of Jonathan Kahn from PERC. Please go ahead.

Yeah, hi, thank you. I want to ask about, Martin, I know you made the comment that you still have the ambition to be able to exceed the full year revenue guidance. which I believe is the typical approach. But I'm wondering if you can maybe just discuss some of the levers that you see to drive revenue growth, whether it's some of the distribution opportunity you have. I know you mentioned the e-commerce site coming up, or just any other drivers that you see as levers going forward.

Hi, John. Happy to do so.

I think if we look at the opportunities that we have to grow, be it at our guidance or above, then clearly the expansion and then also the continuous increase in sell-through with the key accounts that we have started to work with is a key driver and gives us a lot of levers. We spoke about new products that are launching uh in in in early q3 like the cloud go which is a is another high volume model so the success of that will define some of the some of the growth um the holiday season in the us of course is a very important element of our d2c business on an annual basis We currently see, as Mark just explained, in the data that we are on track to continue growing strongly, but also there can always go a bit stronger or weaker. Just to put then also the second half-year growth into perspective with the first half-year of growth and why is the outlook below our year-to-date growth? One important element, of course, is the season shift that we had in the first quarter. So, where basically the first quarter growth was not like for like compared to last year. And then, especially in the US, we have seen a strong uplift from the IPO since September. So, we also run into a year-over-year growth. effect there and therefore a bit more cautious on the underlying growth rates of the U.S. business as of October. And so all of those elements are together is why we feel there's a lot of opportunity that we have. But at the same time, it's also necessary to plan long term to look at this from a durable perspective and really plan for the long term and not chasing growth. So as I said, we will be ready to capture the demand if it's there, but we will not artificially chase it with things that are not in the benefit of the long term thinking of the brand.

Yeah, that's really encouraging. Thank you. And then, Casper, if I could, I had two product follow-up questions. First, on the Cyclone, any learnings that you've seen from the behavior from the consumers or any expectations around longer-term economics or profitability of that model as you prove it out over time? And then, secondly, just on the Roger, any update on that franchise and the plans we should expect going forward?

Thanks, John. On cycle, I mean, in terms of consumer behavior, it's too early to tell literally consumers have just received the shoe. What's very encouraging is that people like the product. But it's the learning curve that we're on. This is going to be a retention game and a management of churn going forward. So we also feel that these are areas that are going to possibly benefit the way we look at our old B2C businesses. We were definitely encouraged by the first reaction, and we're also thinking about introducing additional models within the Cyclone program within the next 12 months or so, both on footwear and apparel. And then, yes, thanks for the question on the Roger. Obviously, a very important franchise for us. With the US Open coming up, actually, Roger came up with a very... Cool looks back flashback on the early part of his career, and we're going to introduce a limited edition top model. I can't say too much, but it's going to be a very exciting launch potentially resulting in some lines outside of key retail stores. But, you know, these kind of things need to stay secret until the last minute, and then this mid-top model, along with other Roger updates, are going to hit the market as well this fall so that people can go stylish through hopefully a nice fall anywhere in the world.

Great. Thanks for all the color. Best of luck.

The next question is from the line of J. Sol from UBS. Please go ahead.

Great. Thank you so much. Casper, Mark, Martin, can you give us an update on just the wholesale door count globally? If you could give us an idea of how much it's grown in TQ over last year and sort of give us an idea of where you think it can go bigger picture and maybe how some of the performance in the newer wholesale doors like a footlocker has been. Thank you.

Our door count by the end of half year one is 8,612 doors. And the parallel is in roughly a quarter, a little bit over 2,000 of these doors, similar for accessories. We ended basically end of 21 with 8,364 doors. So that's the growth. So you're also seeing that a lot of the growth is actually coming from same store growth and not Just from heading door, which is very, very important to us. Expect a slight increase to continue for the second half of the year. But again, the growth will mainly come from in-store growth and not from door expansion. On some of the key accounts, you're aware that we opened with Dick's House of Sports. We already opened in Qt and we already spoke about this. And with public lands, then our expansion with Foot Locker is well on the way. Our expansion with JD is well on the way and we'll continue to grow with them in their best tier A doors. We're closely watching sales, so we're extremely happy. And with all three accounts, we're very happy with the consumers that we're getting a non-product. You know that we want to run on, that we want to win on runner's feet, and that's why Dix is very, very important to us and out of the gate on was extremely strong in the doors that we opened. So definitely we'll continue to see a little bit of shift more towards key accounts also in the second half of the year.

Got it. Thank you so much.

The next question is from the line of Tom Nicky from Redbox Security. Please go ahead.

Hey, everybody. Thank you for taking my question. I just want to ask about the gross margins. I think when you reported three months ago, you said that excluding air freight, your gross margins would have been close to 60%. Is that the way we should also think about Q2 gross margins excluding freight? And when we look at the back half of the year, I know you highlighted a little bit of freight in Q3 and some FX headwinds. But should we think about gross margins being higher year over year in the back half of the year? Thanks.

Yes.

So if you exclude the F rate, then we basically reconfirmed again the ability to go towards the 60%. Now in Q2, we also had the negative impact from FX. And therefore, this would have to be excluded as well in order to exceed the 60%. But for the second half of the year, it's exactly as you say. So 60% is what we could consider the baseline. And then the impact from air freight comes on top, traditionally Q4. can even be a bit stronger due to the strong D2C sales that we will be seeing and expect to be seeing out of the holiday campaign. But that really depends on the share of D2C to wholesale in Q4, not in Q3.

Understood. Thanks very much, and congratulations on all the momentum in the business.

The next question is from the line of Sam Poza from Williams Trading. Please go ahead.

Good morning. Thank you for taking my questions. I wanted to know what the, you know, you mentioned the headwinds of about 200 basis points for gross margin in Q3 and around 50 basis points in Q4. Can you give us what the offsets, can you sort of give us a better line on where you expect the gross margins to be by quarter?

make it simple. The guidance on cross-profit, more indicated to what I just said. Basically, commentary is there against last year and the long-term expectation. And I also mentioned a bit the absolute impact that we are expecting from both the FX headwind as well as the higher air freight.

But you would expect, I'm just confirming, and I have one other question after this. You expect gross margin in Q4 to be higher than it is in Q3 from a mixed perspective, I gather, from what you said. And that's from more detail. Yes. Yes.

based on current expectations from the fact that we will not be using excessive air freight as we outlined for Q3 with those five to six million additional spending for CloudRunner and CloudMonster.

Okay, great. And then you've been mentioning key accounts a number of times. Can you give us some indication on, you know, who you regard as key accounts at this time?

Thank you.

In the end, it's about the size of an account. It's about how global an account is, the growth potential, and also about the significance an account has in a specific consumer segment. So it's a bit difficult to answer this question, but again, if you look at For example, the US, we would have in our core running segment, we would have an account like FleetFeed, who is an amazing partner to us and very, very important to us. If you look more in the outdoor space, then we've been working with REI for many years and they're a very, very good account for us. And then more on the performance holiday side, we spoke about JD, we spoke about Foot Locker. So I think those are some examples of key accounts, and you would have that for different geographies. And this is what we basically count as key accounts. And it's clear that they're all multi-door accounts. So a single-door account would never be a key account.

So then lastly, if I may, with the expansion that you're having within these key accounts, which also does impact the number of doors that you're in, are you how are you allocating product are you like like the smaller accounts are are you are you able to to maintain inventory levels in the smaller accounts as you become more aggressive with the key accounts yes so when we look at product allocation it's always about the consumer

And so the question is, if you're speaking to a co-runner, where does the co-runner shop and what's the product that caters best to that community or to the co-runner? And this is how we would allocate product. So if you're looking into a hiking shoe, then our best outdoor partners, independent of whether they're key accounts or independent small accounts, would have the highest level of priority. If you're a runner and you want to access our latest running product, Then again, we would look at the accounts that are very much specialized in running all our run specialty partners that we're working with, but also accounts like Fleet Feet. And then if you're more looking at the product for your all day use, you might have a JD or Foot Locker being prioritized. And the only account or channel that basically gets highest priority in all different categories is our own D2C, because we feel very much that with our own D2C website and stores, we cater to all the communities that we're targeting, and therefore they should find all the respective products there as well.

Thank you very much. I appreciate it.

The final question comes from the line of Abby. Second question, Piper Sandler. Please go ahead.

Thank you guys for sending me in. Do you have an update on your market share in specialty run? And then how does this differ in North America versus Europe? And then secondly, I guess, who is the new consumer that you think you're reaching with products like CloudMonster? And can you comment on which brands or maybe which styles you think on is gaining share from in that specialty run channel? Thank you.

Thanks, Abby.

So with the CloudMonster and the CloudRunner, we're really reaching maybe some people that didn't dare to wear an umbrella because they felt too light and maybe not enough cushion. And with these two models, we were able to provide underfoot protection and unparalleled comfort to your very, very average runner that maybe wouldn't even consider themselves a runner, but they run for fitness. They run to stay in shape. maybe they're a little bit older and I count myself in that same target group, you know, where once you go past 40 running, it becomes harder. And now we're seeing with this success of these two models that we've almost left out this market segment. And part of the U.S. success is also explained by that there's just a lot of these kind of runners in North America and we're now able to offer them a product as well. And over to Mark on the market share.

So when we're looking at market share, I think we are in most of our run specialty doors in the key markets such as Germany or the US, we are amongst the top three brands. And we're seeing in many doors, for example, in the US still a growth rate of above 50%. And this is all growth that comes from same store because run specialty is definitely the area where we already have the highest distribution, highest density. So we continue to gain share. We continue to grow much stronger than the channel is growing. And also looking at the order book and looking at some of the product innovations that Kasper already spoke to, we're very positive that consumers will continue to benefit from that.

Great. Thank you so much. Ladies and gentlemen, this concludes the Q&A session. The conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Good night.