On Holding AG

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the On Holding AG Q4 2022 Results Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may do so by pressing star and 1. Press the star key followed by 0 for operator access. It's my pleasure, and I would now like to turn the conference over to Jared Peter. Please go ahead.

Good afternoon, good morning, and thank you for joining ONCE 2022 Fourth Floor and Full Year Earnings Conference Call and Webcast. With me today on the call are Executive Co-Chairman and Co-Founder David Aleman, CFO and Co-CEO Martin Hoffman, and Co-CEO Mark Maurer. Before we begin, I would like to remind everyone that today's call will contain forward-looking statements regarding future events and performance within the meaning of federal securities laws. These forward-looking statements reflect our current expectations and beliefs only and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20F filed with the SEC earlier this morning for a detailed discussion of such risks and uncertainties. we will further reference certain non-IFRS financial measures, such as adjusted EBDA and adjusted EBDA margin. These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for reconciliation to the most comparable IFRS measures. We will begin with David, followed by Martin, leading through today's prepared remarks, after which we are looking forward to opening the call for a Q&A session. With that, I'm very happy to turn over the call to David.

Thank you very much and welcome everyone to our fourth quarter results update call. The last three months of our first full financial year as a public company saw an exceptionally strong finish to an exceptional year. It is fair to say that at the time of the IPO, we didn't expect that we would already have beaten the one billion Swiss franc net sales mark so comprehensively in 2022. So it fills me with a huge sense of pride to stand here 18 months later on behalf of the ON team to speak to our very successful fourth quarter that brought us to more than 1.2 billion Swiss francs in net sales for 2022, delivering a year over year growth of 69% versus 2021. Since the IPO, we've often spoken about our philosophy that has guided us since we started. Driving growth while at the same time staying focused on efficiency and driving profitability. So it makes us even more proud of the team's achievement of finishing our first full year as a public company in a profitable way with a net income of 57.7 million Swiss francs. We are so grateful to everyone that has shaped on with us over the past 13 years and set the foundation for this amazing achievement. Finishing the year with such an outstanding Q4 is the perfect testament to the great work our team continues to do and an indicator of the continued momentum and the great opportunity that lies ahead of us. With net sales of 367 million Swiss francs and a growth rate of 92%, the quarter came in significantly ahead of even our own high expectations. The demand for the brand across all regions, categories and channels remains extremely strong and we are so excited that we were able to go into 2023 in such a great position. By switching our URL to on.com, we've also made it even easier for consumers to find our iconic brand online. And we truly believe we are setting ourselves up for our best year yet. I say this both in terms of that strong momentum that we have seen in the first months of the year, as well as where we and the industry are if you look at the normalization of operations. The last three years of the pandemic roller coaster have been a huge challenge and have put our teams and operations to the test. The factory closures in Q3 of 2021 meant a very tight inventory position at the end of 2021 and early 2022, as well as elevated air freight usage, particularly in the first half of 2022. Along with industry, we have seen tight production capacities at factory partners, disruptions of global trade lines, increased T-freight lead times, as well as macro challenges. We were additionally challenged by our 3PL-induced warehouse disruption in the third quarter of 2022. Martin will provide some additional perspectives on how these elements come to play in our financial review, as well as Outlook for 2023. But it is safe to say we are very confident and excited to be heading into a year of increasingly normalized operations, where we can focus even more on driving our brand and continuing to build a community of athletes, fans, and innovators. And an exceptional team that is excited to be part of the next phase of ON. But before we move to the detailed financial review of the fourth quarter, I want to take a few minutes to focus on three areas that are fueling the ongoing momentum we see around the brand as we move into 2023. Namely, the way we are winning in running, our ambitious move into tennis and our growing popularity amongst younger consumers. So let's start with running. It's clear to see that 2022 was a huge year for us. With the introduction of the CloudRunner, CloudGo, and CloudMonster, we added three major silhouettes that have been strongly supporting our ongoing market share increase on runners' feet. We can see this very clearly in our proprietary runner count data, where in particular the CloudMonster and CloudRunner are positively over-indexing with regards to their visibility on the running routes versus their contribution to sales. This, of course, further establishes our credibility as a brand rooted in performance, a key strategic priority for us. We are excited to play our part in fueling run culture and amplifying it with storytelling and content around the amazing sport of running. For example, with initiatives such as our new global event series On Track Nights, which we announced in January. To begin in May with the Track Fest in Los Angeles, these events held at different track meets around the globe will have their own unique local flavor, but all champion a fresh community-focused festival-feel approach to track racing. We also make running more inclusive thanks to our Ride to Run social impact partnerships program. Ride to Run brings together grassroots communities and organizations to make an impact in the realms of safety, access, awareness, and inclusion in running and movement. We continue to expand the program and now partner with 17 organizations globally, helping us to achieve our ambition of reaching 100,000 community members. Another way we fuel run culture and a key component of ON's mission to ignite the human spirit through movement is the ON Athletics Club. an incredibly inspiring group of young track and field talents with tremendous potential and big dreams. Just last month, we announced the launch of the Oceania division of the OAC and together with their counterparts in the US and Europe, we look forward to supporting the next chapter of track and field champions as they set their sights on the Paris 2024 Olympics. While many online athletes are working towards their first Olympic Games, We are extremely excited to have added a reigning Olympic champion to our roster. Triathlon gold medalist at the Tokyo Olympics, Christian Blumenfeld, has joined us with the ambition to defend his title in Paris next year. Alongside Christian and Ironman world champion Gustav Eden, who joined on in fall 2022, we also announced the signing of two more triathletes in January. Reigning female Ironman world champion Chelsea Sodaro and fellow superstar triathlete Paula Findlay have also joined the ON team. What all our OAC team members and ON athletes across running, trail and triathlon have in common is the belief and knowledge that our products put them in a position to win at the highest levels of performance. They know that ON is at the forefront of innovation and has the success of our athletes as its number one priority. Just look at some of the amazing achievements of our athletes recently. This past weekend, we saw Helen O'Berry cruise to victory in the New York Half Marathon with a new course record. And at last month's Melrose Games, one of the most important indoor track events of the season, on had 13 athletes competing. significant jump versus the four we had last year and those athletes delivered career best performances including seven national records and wins for alicia monson in the women's 3000 meter race and jared nuguze in the man's mile this run of form continued when on athlete helen bekele won the osaka marathon in february We look forward to seeing our pinnacle products on the feet of many, many more runners in the near future. That's why we'll be making these products available to the broader markets, for example, commercially launching the new generation CloudBoom Echo 3, which has been on the feet of our most successful athletes in elite competitions in recent months. And our next phase of innovation for the everyday runner is about to shake the market up too. Two days from now, we will officially launch the all-new CloudSurfer, which features our new cushioning technology called CloudTechFace. This evolution of ONN's existing technology was generated using a computer-optimized technology called Finite Element Analysis, which simulates the effects of structures and materials on the human body to minimize stresses and to provide a whole new running sensation. The innovation within the CloudSurfer is here to make waves, and we've seen waves of positive feedback even ahead of the official launch. Early media reviews have been hugely positive, with testers describing being blown away by the new CloudTech phase cushioning, calling it their favorite road running shoe of the year, and heralding the CloudSurfer as an impressive that change for all. And our innovations are not just reserved for footwear. Back in February, we kicked off our spring-summer 23 season with a focus on our full head-to-toe offering by introducing our latest apparel collection. The supporting campaign was centered around the message to feel nothing so you can feel everything, shining a spotlight on our innovative lightweight and high-tech materials. But coming to my second point, it's not just the world of running where we've been making waves. Yesterday, we made our ambitions clear for tennis when we announced the signings of two of the sport's most exciting talents to our roster of top ranked tennis professionals. The women's world number one ranked player, Poland's Iga Swiatek, and America's newest man sensation, Ben Shelton, for whom ON is the 20-year-old's first ever multi-year sponsor. Going forward, both players will be wearing the company's newly developed on-court collection for professional competition and custom editions of the Roger Pro. The competition tennis shoe has been Swiss engineered and designed individually for and in close collaboration with both players, Roger Federer, and the Lightning Innovation Team at ON Labs to meet the demands of their individual style of play. And with an eye on the future, ON has also signed the 16-year-old Brazilian player João Fonseca, who recently made his ATP main road debut at the 2023 Rio Open after some hugely impressive achievements on the junior circuit. With a potent mix of inspirational athletes and innovative heads-to-toe products, we truly believe that tennis can play a key role in fueling the next stage of Ons' growth. Coming to my third point, as we further build the brand in the performance run space and expand across categories, we see that our new product innovations lead us to new customer groups. ON's highly visible technology in innovation in shoes and apparel is increasingly embraced by younger consumers, from tastemaking teenagers in the UK to many young ON fans in gyms and on the streets across the US. This is one reason why we have used our most popular shoe, the Cloud, as our starting base and have reimagined its Cloud set to activate with lower weights and smaller feet. The result? The Cloud plate. ON's first kid shoe and the Cloud Sky, our first shoe for teens and preteens. Our commitment to put performance at the forefront of every new product also starts with the smallest ones. That's why we work together with two leading universities in the field of children's biometrics to tune the Cloud and make sure these shoes help kids' feet grow in the very best conditions. As a small added benefit, Martin, Mark and I were now finally able to fulfill our own kids' wishes that we've been hearing about for many years by getting them into a pair of us. And believe me, we have been hearing these wishes a lot. It's our mission to promote movement among kids and teenagers from a young age to build the love for sports and the relationship with them for a lifetime. With that as an introduction, I'm very pleased to hand over to Martin for the Q4 financial review and our outlook for 2023.

Thank you, David. And hello, everyone from my side. 2022 was definitely a super exciting year with so many highlights, not just as a parent of young children that can now explore the world in on products, but even more for someone who loves sport and movement, who believes in the need for sustainability most importantly for a member of an amazing diverse and inspiring team the on team has grown from 1150 to 1700 during 2022 now representing 79 different nationalities our outstanding achievements are the result of this team and all our global partners and their energy and drive to challenge the status quo on a daily basis Having exceeded 1.2 billion Swiss francs in net sales for the full year, with a 68.7% increase compared to 2021, makes us extremely proud. As David mentioned, being able to convert a strong sales to a bottom line profit of 57.7 million further validates our ability to build a high growth brand while increasing profitability as a result of our strategic and operational progress. Q4 has been exceptionally strong and another record quarter with 366.8 million net sales. In North America, Q4 net sales include some catch-up effect from Q3, following the warehouse disruptions we had back then. But ultimately, the strong demand that we are seeing continues to exceed our expectations across all regions and channels. Consequently, 91.9% Q4 net sales growth year over year, is the result of the strength of the brand that we have built in 22, combined with the good product availability following a further normalization of product supply and our warehouse operations. In Q4 21, we were unable to fulfill all the demand due to supply shortages and low inventory levels as a result of the factory closures in Vietnam during the third and fourth quarter of 21. This effect was more significant in the European numbers where we had even less inventory buffer than elsewhere going into Q4 21. At the same time, we had lower wholesale sales in Q4 21 as key markets across Europe and other regions such as Australia and various cities in China were impacted by repeated COVID-19 related shopping restrictions. Driven by these impacts in 21, wholesale has grown even stronger than DTC in Q4 2022. Wholesale sales more than doubled year over year, growing by 104.3% to 217.3 million Swiss francs. These strong numbers are backed up by the underlying demand and sales through our wholesale partners. In Foot Locker, for example, Q4 was by far our strongest sell-out quarter in history. With the same numbers of doors as in Q3, Units sold increased by over 50% quarter over quarter, supported by the continued demand amongst younger consumers for products such as the Cloud Nova. For the full year 2022, we achieved 73.1% growth in wholesale. We were able to drive significant same-store growth with new and existing products by being disciplined about expanding our door network in our own markets from around 8,000 to 9,200 doors over the 12-month period. With the focus on our premium position, we continued to manage the channel carefully and closed over 200 doors that we considered as less additive to the positioning of the brand. The strength of our premium products rooted in innovation, design, and sustainability is even more directly reflected in the demand we have seen in our D2C business. resulting in 76.4% growth in Q4 versus the prior year period. While others in the market were discounting, we have achieved our strong growth with a very high share of full price sales. We continue to build strong direct connections to our customers and to invest into our D2C capabilities to drive stronger growth of our D2C channel compared to wholesale. We also completed the rollout of our new website, and the purchase of our new domain, on.com, which will allow us to attract and convert even more fans online. We're also thrilled to drive the successful expansion of our own retail store formats. Just a few weeks ago, we opened our largest store to date on Regent Street in London, and it has outperformed our expectations ever since. It was so great to see how the London-run community came together on the opening night to celebrate this milestone. The London Store is a further validation for our multi-channel strategy, driving a visible increase of visitors both to our website and at our retail partners. Already in the first weeks, apparel sales in the London Store exceeded sales in any other location in the UK, which we see as an additional showcase for the head-to-toe strength of our own channels and highlights the opportunity we have in apparel. Reflecting on the full year of 2022, we were able to build on the significantly elevated base of our D2C channel during the pandemic and drive 61.4% D2C growth in 2022. The number of visitors to our website in 2022 increased from 102 to 143 million year over year. Our e-commerce capabilities and direct customer connection will be long-term assets for ONN and our journey of profitable growth. Moving on to our regional performance. Our continued success in building a global brand is reflected in the strong growth across all regions. In Europe, after a muted start into the year, net sales have returned to strong growth in the past quarters, including the 80.6% increase to 79.6 million in the fourth quarter. The great start of the London store in Q1 is, of course, a further confirmation of the brand heat in the UK, one of the fastest growing markets for us over the recent quarters. Net sales have almost tripled in UK, and net sales in Germany and Austria also grew strongly between 40% and 50% respectively. In North America, after the temporary slowdown in Q3 caused by the warehouse disruption, our business reaccelerated in the fourth quarter with a growth rate of 81.5%, accounting for 242.1 million. In Q4, D2C has grown even stronger than wholesales. This confirms both our ability to drive over-proportionate D2C growth, as well as the selective expansion of our wholesale network. The Asia-Pacific region doubled year-over-year to 21.6 million Swiss francs, reflecting very strong momentum in Japan, Australia and China. Finally, the rest of the world grew from 3 million in Q4 2021 to 23.4 million in Q4 2022, largely reflecting the entrance into a number of distributor markets in Latin America during the course of 2022. If we look back at the full year 2022 from a regional perspective, It's great to see how all regions have contributed to drive net sales well above the 1 billion Swiss franc mark. Of course, the incredible and continued momentum of our largest market, North America, has contributed the most in absolute terms. North America was over 60% of our net sales in 2022 and will continue to be our growth engine going forward. In 2022, we further amplified our relationship and trust with many key retail partners. and we are looking forward to grow our combined businesses. Even with this incredible growth, we still see ample opportunities for higher penetration in many areas of the US, and we will continue to calibrate and selectively expand our footprint with wholesale partners to ensure we are present in the most meaningful doors that support our growth and the brand positioning. From a much smaller base, APEC grew by 87.7% for the full year and contributed 6.6% of net sales, despite the ongoing lockdowns in China throughout the year. Thinking about the very strong momentum in China, Japan, and Australia, as well as our upcoming expansion into South Korea, we are extremely excited about the huge growth opportunity out of what is still a very much under-penetrated and nascent region for us. The more than four times year-over-year net sales increase in our rest of world region shows how we are only just getting started in many areas of the world. This fact is equally true for our most mature region. Growth in Europe was 36.1% for the full year, but this does not take into account that many markets are in a very early stage of growth and increasingly picking up momentum. I mentioned the UK as an example, but this is also true for other sizable markets such as France, Spain, and Italy that have only recently or are in the process of being taken in-house. If we switch over to products, the strong momentum of our key footwear franchises continued throughout the fourth quarter, resulting in 96.7% growth. We continue to gain market share in the running community, especially with the CloudMonster, the CloudRunner, and the CloudGo, while at the same time, the CloudNova is winning more and more younger fans. In Q4, we launched the new CloudX, another key franchise that strongly resonates with the fitness community and that continues to win market shares in gyms around the world. The CloudX is also our most sold product in China. On apparel, we further executed our strategy, both from a product and distribution perspective. Compared to Q4 2021, we launched fewer new products in Q4 2022. which led to a comparably lower growth rate of 15.4%. As David mentioned, we have continued to put a big focus on showcasing on as a head-to-toe brand and will be very much focused on the apparel business throughout 2023 and beyond. Ultimately, for the full year, shoes grew at 70.9% and apparel at 30.2%. The growth was well-balanced across all three product categories performance running, performance outdoor, and performance all day. In the fourth quarter, cross-profit reached 214.6 million compared to 111.8 million in the same period 2021. The cross-profit margin of 58.5% significantly improved compared to 57.1% in Q3 and 55.1% in Q2. Compared to Q4 2021, cross-profit margin remained unchanged despite a strong headwind of 280 basis points from unfavorable currency movements. As expected, after almost 12 months of highly inflated use of air freight, we were able to return to sea freight as the main mode of shipment in Q4. SG&A expenses, excluding share-based compensation, dropped significantly from 59.2% of net sales in the fourth quarter of 2021 to 45.1% in Q4 2022, a further proof point to our ability to scale in a profitable way and to actively manage our cost base. During the holiday season, our strength and word of mouth drove a high level of organic traffic, which allowed us to achieve significantly higher net sales with a similar absolute marketing spend compared to the same quarter in the prior year. Other savings as percent of net sales were on distribution and general administration expense, largely as a result of mix and scale gains. As announced in our last quarterly update, share-based compensation in the fourth quarter decreased materially year over year, from 176.2 million to 34.4 million Swiss francs. The 2021 expense had been elevated as a result of our IPO, with considerable amounts of long-term awards that had vested in connection with the listing at elevated share price levels in Q4 21. With 2.8% of net sales, share-based compensation in 2022 is more in line with our future expectations. As a result of the strong net sales, adjusted EBITDA for Q4 exceeded our expectations and reached 61.8 million Swiss francs, up from 11.2 million last year. The corresponding adjusted EBITDA margin increased from 5.9 to 16.8%. For the full year of 2022, our adjusted EBITDA reached 165.3 million and the corresponding adjusted EBITDA margin of 13.5%, well ahead of our previous guidance, both in absolute and relative terms. As you are aware, this full year margin reflects considerable extraordinary air freight usage particular in the first three quarters of 2022. Moving on to our balance sheet. Capital expenditure of 33.6 million Swiss francs in Q4 led to 83 million for the full year 2022, or 6.8% of net sales, a significant increase versus 2021, mainly due to the important investments into our new offices in Zurich and Portland, and ultimately into our team and our culture. Despite the continued expansion of our retail network, we expect the reduction of capex in 2023 to our long-term range of around 3.5% to 4.5% of net sales. As I mentioned in the beginning, our ability to meet the high customer demand with a strong supply of products has led to our very strong growth in Q4. We had early signs at the end of Q3 for this further acceleration of the demand, as well as strong orders for 2023. And we were able to further increase the production output with our factory partners. In anticipation of strong momentum and demand in the first half of 2023, we further strengthened our inventory position to 395.6 million Swiss francs as of December 22, a considerable increase versus the prior year low point following the factory shutdowns. Nevertheless, there are some dynamics that led to this peak inventory position being somewhat higher than it ideally would be. In 2022, our production orders had factored in a higher level of security margin for tight production capacities at factory partners and for volatile sea freight lead times. A faster than expected normalization of both factors has led to a higher than expected cumulated inflow of inventory. We have already adjusted our production plans going forward in order to reflect the shorter lead times. As a result, we expect to maintain the current absolute inventory levels as of Q2, despite the continued expected strong growth rates. For the end of Q1, we expect a higher inventory level, including first products, for the fall-winter season. Overall, as the additional inflow is driven by current and future season products, our inventory remains very fresh and sets us up to drive a continued high share of full price sales in 2023, while creating scarcity at the same time. Finally, turning to cash and liquidity. Our year-end cash balance of 371 million, together with our additionally available credit line of 160 million, puts us in a strong position to continue to support our ongoing growth plans. With that, I'm excited to look ahead and present you our outlook for 2023. Let me start by reiterating our guidance philosophy. We aim to provide prudent yet aspirational guidance that appropriately reflects our belief and optimism in the on-brand and the opportunities we see while taking into account potential risks and externalities. We continue to provide guidance primarily on a full year basis rather than quarterly, reflecting the way we steer our business towards long term success. The focus continues to be on our mission to build a brand that is set up for the long term by emphasizing high quality, durable and profitable growth. When I speak to our expectations for the first quarters in the bid, this marks an exception to this rule. Given where we stand in the quarter, we believe it is appropriate to give you an update on what we expect to achieve in Q1. With that as context, in 2023, we will continue on our strategic roadmap that we set out at the time of the IPO 18 months ago. We plan to launch exciting new, innovative, and sustainable products across all categories, while further growing our existing Blockbuster franchises. will establish even closer and more direct connections with our fans and elevate the brand experience for our most loyal customers our new website and retail formats allowing more and more fans to discover on through our d2c channel and to drive a higher d2c share in addition to the recent london launch we are looking forward to rolling out our next own retail locations in miami and williamsburg new york Both will likely be opening their doors in the second or third quarter. At the same time, we will further expand our international footprint with the conversion of important markets like Italy and Korea from distributed to owned markets. We will carefully expand our presence in wholesale with the goal to reach the relevant customer communities through the right retail partners. With a focus on the Paris Olympics in 2024, We will further invest in our athletes team, both in talents and in product innovation. And we will further strengthen our core and the operational backbone to drive efficiency and scalability. We're excited that the normalization of the supply situation will allow us to focus more resources on building the future. But most importantly, we are looking forward to continuing developing our high performing team and our culture. We closed 2022 on a high, and the first month of 23 have been off to a great start and have strongly supported our optimism and excitement for the year. As you will have seen in our release this morning, we anticipate reaching at least 1.7 billion Swiss francs for the full year 2023, corresponding to a year-over-year growth of 39%. This number includes around 300 basis points headwinds from the current currency environment. and would reflect the currency neutral growth rate of 42%. This full year number is around 30% higher than our aspiration back in September 21 before the IPO. A further testament to the great achievements that our team has accomplished since then. We have been off to a great start in 2023 with ongoing very strong momentum across all regions and product groups and we expect our Q1 net sales to land around 380 million or 61% above last year, maybe even higher. As a result of the strong first quarter momentum and the comparably heavy supply disruptions that we had faced primarily in the first half of 2022, we anticipate a higher growth rate of high 40s in half year one 2023 versus low to mid 30s in the back half of the year. Based on the current momentum and pre-orders for the fall-winter season, we see an opportunity to achieve even higher growth rates in the second half, but we remain prudent in the light of the many risks in the current macroeconomic environment. Despite the strong growth of net sales this year, we do not expect a meaningful further increase of our absolute inventory position throughout the year. Depending on phase thing, we may see modestly higher or lower inventory levels in the quarters, but over the course of the full year, this will allow us to reduce our networking capital balance relative to net sales and to improve our cash flow. Turning to margins. As we have already seen in Q4, we foresee a more normalized supply chain situation in 2023 and consequently a significant reduction of the use of air freight together with lower freight rates. We expect to resume our path towards our mid-term cross-margin target of 60% and currently anticipate a full year 2023 cross-profit margin of around 58.5%. We are committed to continue our focus on efficiency and profitable growth and plan a further increase of our adjusted EBITDA margin to 15% for the full year 2023. representing a 54% increase of the absolute adjusted EBITDA. The continued maturity in key markets and high efficiencies across key processes is expected to drive future scale gains in SG&A. During the course of 2022, we had intentionally held back on marketing spend to make up for some of the additional air freight expenses. To further increase the brand awareness for ONN, And to drive our D2C business, we plan to reinvest a part of the scale gains and to increase marketing spend in 2023 back to around 12 to 12.5% of net sales. We also expect temporarily higher distribution expenses as a result of the expansion of our global warehouse capacity and several automation projects that are foreseen to drive cost efficiencies in the years to come. As mentioned, for the year we expect the reduction of networking capital in relation to net sales and also lower relative capex investments following the completion of our main office build-outs. We will additionally be expanding our existing credit line with the closing of a new facility during the course of Q2 or Q3. Our momentum and outlook are a result of all the achievements and progress we have made in 2022. ON is a very different company than a year ago. We have further elevated our brand and our reach to set ourselves up for ongoing success and market share gains. We have reached new customer communities through our multi-channel approach and our ability to tell the story of running and run culture. We have strengthened our operational backbone and further professionalized our processes and brought our digital platform to the next level. All of this makes the opportunity for 2023 and beyond even larger than ever. The foundation is the belief in our mission to ignite the human spirit through movement and to dream on. Thank you so much for being a part of this journey with us. With that, we would like to open up the session to your questions. Operator, we are ready to begin the Q&A session.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who has a question may press R followed by 1. If you wish to remove yourself from the question queue, you may press R followed by 2. Anyone who has a question may press R followed by 1 at this time. One moment for the first question, please. We have the first question from Alex Stratton from Morgan Stanley. Please go ahead, sir.

Great. Congrats on another great quarter, guys. I have two quick questions for you. First, just on the revenue guide for the year, can you just talk about underlying assumptions by channel and geography? And then secondly, it piqued my interest when you guys mentioned that you kind of walked away from a number of wholesale doors. Can you just talk about the rationale and how you assess that on an ongoing basis? Thanks a lot.

Ladies and gentlemen, just stay on line. One moment, please.

Hey, sorry, I think we had a technical problem here, but hopefully we're back now. So Alex, thank you for your question. I will take the first one, Martin here, and then Mark will take the second one. So as you have seen, we had a very strong momentum in Q4 in all regions. And we foresee that really the growth is also driven by all regions. Of course, North America on an absolute term will drive the majority of the growth. And I think we're in a good position to exceed 1 billion of sales in North America alone. Then Europe, you have seen that we had an 80% growth in Q4 and we see continued momentum also in the first quarter. And here really a lot of the markets where we have a relatively low market share are driving growth like UK, but then also France, Spain, Italy, as well as a lot of fresh products that will come into the DACH region. And then really in China, And Asia, we are super positive in the light of basically the post-pandemic area. So we can fully execute on our plan to continue growth in China and expanding our retail network there. And we really see that a lot of traffic is coming back into the retail stores in recent weeks. So this gives us a lot of positivity for very high growth rates in the APEC region.

Yes. Hi, Alex. So you should actually see this because we're having this beautiful technical setup here. And now we're passing an iPhone around to answer your questions. But I hope you can hear as well. So on the channel focus, I think we keep on speaking about this. I think we want to reach our consumers and provide them an elevated experience through our own D2C channel. So that's also why we're expanding the retail network. but also through our most important wholesale partners. And we'll continue to focus on the partners that we feel they can continue to, and they will help us to elevate the brand, which means we continue to close doors that are a bit less additive to the positioning of the brand. And those are mainly doors that are focused on comfort and brand shoes. And we've done that in the US, and we'll also start to do that a bit more in other regions, especially in Europe.

Thanks a lot. Thanks a lot.

The next question comes from Jim Duffy from Stiefel. Please go ahead.

Well, thank you. Let me start by complimenting the team on the execution through the pandemic and related disruptions. Excellent work. My first line of questioning is about operating expense budgeting. Martin, would you step up to $1.7 billion In 2023, can you speak to where you see leverage opportunities? If I heard you correctly, you plan to reinvest about two points to marketing. Where do you see G&A expense or the opportunities for leverage over the real estate investments you made in 2022 in the new offices? And what's the state of your investments in apparel infrastructure? Thank you.

Okay, thank you, Jim. I will speak about the expenses and then David can speak a little bit more on the apparel side. So I think first and foremost, it's important that we see a normalization on the supply chain. So really the excessive use of F rate that we had this year, that's the biggest upside potential that we have and that is reflected in our cross-profit guidance. At the same time, we still have high growth aspirations and we continue to invest into the business in order to build a business that can handle and further scale from that, while at the same time fully focusing on scale gains and further efficiency. So we will reinvest some of the upside and savings from Airfreight back into marketing for very different reasons. So first to really install on as a head-to-toe brand in customer minds, but also to drive a higher D2C share over the future. And at the same time, we will also invest a bit more on the distribution side because we have some double costs for a temporary period of time by expanding our warehouses. But that's with the clear goal to automate our warehouse and to drive efficiency in the future and basically over time bring our distribution costs below the current level. And we have a lot of opportunities to create efficiencies of scale, and there are some already baked in. So we have started projects to outsource our happiness delivery. We have a lot of scale gains in markets that become more mature, like North America, but also European markets. We invest into the automation of warehouses. We invest into the automation of factory lines. So those are elements. And for us, it's very important that we are committed to drive higher profitability if we exceed our sales goals and the guidance that we have given to see some of that additional upside flowing through to be an LS1.

So, Jim, many comments right now.

Go ahead.

I just wanted to ask a follow-up to Martin. Could you please speak specifically to the G&A line? Would you expect to lever on the G&A line? You made the big investments in real estate in 2022, and I believe you've been making a lot of investments in apparel infrastructure. Would you expect to lever those in 2023?

a lot of the build-out in our new offices that's reflected in the CapEx expenses that we had, which was significantly higher than our long-term aspiration of like 3.5% to 4.5% of net sales. And of course, utilizing the new offices to a higher extent by growing our team and our sales, that's also an area of efficiency. And then a lot of efficiency really comes from growing our team at a slower pace than growing our net sales. So looking into 22, we have grown our team by about 50% while we had grown net sales almost more than 60. And next year, we are looking into adding around 400 people. So also there, you see significant economies of scale happening. Thank you.

And Tim, when it comes to apparel, so as you know, becoming a sportswear brand is a multi-year journey for us, and we feel that all the right pieces are falling into place. So it's fantastic to see that our apparel lineup that we have is really resonating with our community, specifically also in our own retail stores where the share is growing. Now, when it comes to investments, we definitely invest into additional talent where we made some key hires, in the apparel space. It will still take a bit of time for these to flow through the collections that you see the full scope of that. But again, we're working towards the goal of being a global sportswear brand. And this means that we'll be spending even more time on apparel in 23 to further drive this business. So definitely core investments in talents, but also in upper funnel campaigns that increasingly builds our sportswear brands.

Thank you.

The next question comes from Tom Nikic from Wedbush Security. Please go ahead.

Hi. Thanks for taking my question. You know, I think obviously you've made good headway in some of the bigger sneaker retailers, especially in the U.S. with Foot Locker and Dick's Sporting Goods.

um can you give us an update uh where you are in terms of uh number of doors uh with those retailers and in i guess at the end of 2022 and where you expect to get in 2023 yeah so um we footlocker at the end of q4 we were at 150 doors just want to give you an example also on on the success that we're seeing and the feedback that we're having from some of those partners so With Foot Locker in Q4, we had our highest sellout quarter ever. So we had 59% unit increase over Q3, which was the second highest quarter. And this is really also what's then driving the expansion. So we don't really want to give an exact number on where we're going to be by the end of 23, because it will all depend on how many consumers can we reach in a sustainable way with the products that we want to make available to them. So you can expect all the partners to continue to grow. But the speed of growth will really depend on how fast we can also bring an elevated brand experience to life. Then at JD, we stood at 166 stores globally by the end of Q4. And Dick's Sporting Goods actually really, really only started in January 23. So we had very few Dick's stores and seven Topic Land stores by the end of 22. We're currently in 58 doors with exporting goods, and you can expect that number to increase to around 150 doors towards the end of 2023. And then probably just one more retailer we want to highlight here. With Fleet Feet, we are at 275 stores right now. Very, very happy about the growth that we're seeing, especially because it's playing into mainly and almost only into our core running community. which is where we want to, which is absolutely where we want to win.

Great. Thank you very much and best of luck for continued success this year.

The next question comes from Christina Fernandez from TLC. Please go ahead, ma'am.

Yeah, good morning and congratulations on the amazing performance in the fourth quarter. I have two questions related to, I guess, products and distribution. the brand momentum that you're seeing in the new customers coming into the brand, how much is it that they're buying the core franchises like Cloud5 and those you've had for a while versus the new products that you just launched in the last year? And then the second question is the distribution of new products like tennis and kids, will that follow kind of similar sort of wholesale trends partners that you've had in the past, or is that mainly going to be on the DTC channel?

Yeah, so in Q4, 65% of the growth came from new products, and 35% of the growth came from existing products. And when we look at new products, you have a Go, you have a Monster, you have a Runner that are really, really resonating with the consumer. And this is also what allows us to be very positive for 2023 because we see that these core styles are resonating very, very well with our consumers. And then if you look at the Cloud Nova, which is one of our most important silhouettes that's also targeting a younger consumer, we also had a lot of growth coming from that product. And we have very, very strong pre-orders, for example, for the fall, winter season on that product line. you know, if you compare it historically, we're definitely reducing the percentage dependency on the cloud and we're really bringing the right consumer into the right product through the right channel. And then very quickly on tennis and kids. So, you know, I think tennis for us has two parts. One is the tennis for tennis distribution, which is going to be quite limited in the beginning, so we're going to focus on a couple of wholesale partners that are really catering exclusively almost to that community, and then on our own D2C channel. And then what we expect to happen is that tennis will have quite a strong impact on how ON comes to life as a performance all-day brand as well that is inspired by tennis. And so the Roger franchise has been growing very, very strongly and will continue to distribute the Roger franchise through our most important wholesale partners, but also through our own D2C. And KITS is very much a D2C focus with a couple of selected partners. So Nordstrom would be one of them, but please don't expect KITS shoes to follow the same logic that some of the other products did. So we're trying to have a bit of a stronger focus on D2C because we feel we can reach the consumers in a very, very meaningful way through our own channels.

Ms. Fernandez, does that answer your question? Yes, thank you.

The next question comes from Abby Svenix from Piper Sandler. Please go ahead.

Great. Thanks so much for taking my question. Maybe clicking back down on that reducing dependency on clouds. So does that dynamic change at all in the near term with the elevated inventory position? Maybe just getting to talk about are there any categories where that inventory position is more elevated than others? Thank you.

So it's very important to understand that the increase of the inventory was very much intentional and driven by the growth and the momentum that we see. And so that increase has happened in the areas where we also foresee the strongest growth and where basically our products see the strongest demand. And at the same time, we mentioned that we have an cumulative effect out of the fact that We are in the phase of the normalization of our supply chain, and we had factored in longer lead times in the past. So at the moment, there's more product in transit than in an optimal state. And so over time, it's the goal to reduce this. But it's very important. Our inventory is in line with our demand plans and what we see on the pre-orders, but also in the current quarter. And as such, we expect that a lot of that inventory continues to drive a high share of full price sets.

Great. That's helpful. And maybe one more. Just on converting some of the select international markets to owned versus distributed, are there any significant changes on the P&L, either from a growth or operating margin perspective, that we should think about? Or are those just smaller impacts?

For next year, so for 2023, the impact is relatively small. It's about building those markets. So we mentioned Korea, which is a very important market in the Asian region, both for running, but also for outdoor and lifestyle. Then in Europe, Italy is a focus market for us. And then there are also other markets in the future that could be converted, but it's about generating growth for the future and building now the distribution in those markets in the right way and focusing really on the channels where we want to be. And as such, the impact is relatively small, both from a conversion effect as well as from a sales increase effect.

Thank you. The next question comes from Michael Dinetti from Credit Suisse. Please go ahead.

Hey, guys. Thanks for taking our question. I'll add my congrats on a great quarter. Obviously, there's not much to pick out in the quarter. The results were well ahead of what we thought we'd see. I am curious if you could unpack the gross margin, though, a bit in the fourth quarter as we try to connect it to the longer term. I think you were lapping about $7 million in air freight from last year, so about 370 basis points of a tailwind margin. Maybe you tell us how much the mix effects from the regional or channel impacted you, how much effects impacted the gross margin. It would help us connect it to the expansion this year. What really is the driver of the expansion from 58.5% to the long-term 60% as you get past some of the volatility this year? I guess, and then one last one, I guess you could end multi-years. We look out to 24 and 25. Is the low to mid 30s growth rate that you point to in the second half of 23, is that the right way to look at growth going forward when you're lapping the more normal baseline in the second half?

Okay, thank you. So let me go through the different bridges. So if we compare Q4 versus Q4 last year, where our gross margin stayed stable, Basically, you have two effects that balance each other. Last year, we were already using air freight in the range of about 250 basis points. And at the same time, we have for this year a negative impact from the currency environment of 280 basis points. So they offset each other, and as such, our margins stayed where it was. If we look ahead, For the previous year, we had about 37 million of additional air freight this year, which we don't foresee to use for next year. So that's in the range of about 200 and 300 basis points upside. And at the same time, we want to stay prudent also when it comes to guidance on our cross-profit margin in order to factor in – effects that we that we that we may see uh so at the moment we have a very high inflow of product into our warehouses so there may be higher freight costs as a result of that we still want to be in a position to to react on on on air freight in case we see uh some of the products accelerating even beyond the demand that we that we currently see and and then also with the with the new warehouses that we are building um there's a risk for how . If you compare 23 versus 22, at the moment, we expect this to be ethics neutral. So there's no impact from that side. So I think we are clearly on path towards the long-term goal of 60%. But at the same time, we've tried to be prudent and on the conservative side on the guidance. The 30% growth that we have for the low to mid 30s in our half year two guidance, that's what we currently see and assume. If we look into our pre-orders, they indicate that we could drive more growth, but we try to be prudent given all the macroeconomic environments that we currently see. I think it's very important that you see we continue to build for the future. We continue to build pillars for growth. and this will be then defining the growth rate in the future.

Thank you very much.

The next question comes from Jonathan Komp from Bird. Please go ahead.

Yeah, hi, thank you. I want to follow up on the order book and the pre-book visibility that you're seeing. Could you maybe just talk more about the drivers of the growth that you're seeing, you know, the second half of 2022, you had some very successful product launches and some big growth rates. So just I'm curious what's, what's driving the growth as you look ahead. And then maybe more broadly, could you talk about the pipeline and the roadmap you see in your performance running business, especially into an Olympics year next year?

Yeah, I am going to talk a bit about pre-orders and then maybe David can, uh, shed some light into our Lightning collection. But because we're in a very upbeat mood today, so we're going to share some numbers that we usually wouldn't share. But basically, the growth on the pre-orders is really coming from the core run style. So we have the CloudMonster, the CloudRunner, and the CloudGo together. They have an 80% pre-order increase year over year, so fall winter 23 versus fall winter 22, which is extremely strong, and it's really coming from from obviously what we expect to happen on our own D2C site and in our own retail stores, but also from the most important wholesale partners. And then we are very much focused on reaching the right consumers to the right channels, as you know. And so the Cloud Nova has a 70% pre-order increase fall-winter 23 over fall-winter 22. And so this allows us to have a relatively good perspective on which products we will see or where we will see a lot of growth. And this also then leads back, obviously, to the whole inventory question that we also had. This is also then the product where we have a strong inventory position. And I just want to highlight one more product which is launching in a few days, which is the CloudSurfer that is really reaching that elevated core runner that is looking at the cautioned ride and, you know, will allow us to gain share also kind of more in the marathon community. And I feel we're not seeing the full potential of that coming to life in the pre-ora yet because it's only launching, but all the indications that we had from the pre-launches are extremely strong. So we're very confident from a running product portfolio on the growth that we're going to see in fall-winter 23.

John, I just want to build on what Mark just said and just considering that If you think about Q4 last year, half of all the growth came from our all new running products. And now on top of that, the Cloud Surfer that Mark just mentioned. These are early, early days of growing blockbuster franchises. And so you can just anticipate how much runway this will give us. And then apart from that, we're also launching new iterations of our existing running blockbusters, which means, of course, for us that you're also going to innovate on them. So blockbusters that come all new in 23 and 24, you're going to see the CloudBoom Echo 3, which has been at the feet now of pro athletes winning races. And you're also going to see a lot of run apparel that is going to come along. And then you can bet that 24 for the Olympic Games, we're going to be ready with a full range from very accessible running products to the absolute pinnacle running products to go into the banner year for performance running.

And just one follow up, as you think about also building your lifestyle performance all day business, just how are you thinking currently about the right pace and the right strategy to grow the lifestyle business and in certain accounts while not alienating the performance positioning? Thanks again.

So I think when you look at how our performance run category is growing and how our performance all day category is growing, then we see a very, very balanced growth that is important to us. And I think the other thing is when you look at performance all day, it's what products do you see in there and how does performance come to life in those products? So again, you have a lot of products that might sit there, but they're sometimes used for running or they're used for exercising. And I think we want to lead with performance no matter where we grow. And then we want to make sure that we achieve our goal to be the number one on runner's seat, but at the same time be a very, very aspirational and even younger brand today. And we feel there's an opportunity ahead of us that we're not penetrating yet, which is very much the fitness community, and expect to see more products to come also targeting those consumers in a more elevated way.

Thank you very much.

The next question comes from Jay Sol from UBS. Please go ahead.

Great. Thanks for all the commentary on what the company's doing to drive product innovation and its position in the performance categories. I want to ask you about kind of just tell us about your ambitions in the category, maybe how you see the market in terms of size and growth potential, both in terms of footwear and apparel. And then maybe secondly, give an early read on the store on Regent Street in London. How confident are you that you have a store format that can be rolled out broadly across the world?

Let me start with tennis. David is going to elaborate a bit on Registry. I think we've been waiting for yesterday for a long time. We're super excited to have Iga and Ben now being part of our journey that really started with Roger some time ago. The most important thing for us is to basically being able to bring our innovation and our authenticity into the tennis world. And this is what drew IGA to us, what drew Ben to us. And together we want to continue to elevate the product that we can bring to tennis consumers. When you look at the tennis market, the tennis market in itself is sizable, but it's relatively small compared to the running market or the outdoor market. But we feel the opportunity is really in bringing tennis to a more all-day use and from a footwear, but also from an apparel perspective. So we expect tennis to have quite influence on how you dress, how, you know, what kind of sneakers you wear. And we're already seeing that with the Roger franchise that is doing extremely well and it's resonating with the consumer. So Iga and Ben will really help us and our presence in tennis will help us to drive product and authenticity that comes from tennis also in the all-day space. And then we spoke about apparel, and we're very excited to have athletes now head to toe that are reaching millions of viewers when they're playing Roland Garros or Wimbledon, and the first thing you see is an on-logo on their chest. And we feel that's very much going to strengthen our apparel category, and it's an above-the-line category. that we didn't really have to that extent so far. And we're very excited for what's to come for the brand from this investment.

Jay, just jumping to retail. For us, our own retail is not primarily about transaction, but it's about inspiration. And if you just see how our store formats have expanded now, Regent Street does four times the revenues of our first store in New York. We're really seeing a lot of progress. We're also seeing lines in front of Regent Street. So we're really seeing that we're running towards a model that is very sustainable for us in the sense how we inspire customers. Now, remember, we don't plan to open hundreds of stores across the world, but we're going to be very focused on the most important locations, where we have that role of own retail as a media channel and as an inspiration point as well. In China, we have a little bit of a faster pace and there we're definitely running towards a blueprint and also for accelerating even expansion of retail.

Great. Thank you so much.

The next question is from Sam from Williams Trading. Please go ahead.

Thank you for taking my questions. I just have two. One is, in 2023, how do we want to think about the wholesale growth versus the direct-to-consumer revenue growth? And then secondly, what is sort of an optimum inventory turn that you see going forward?

Yes.

Hi, Sam. I'm going to quickly start with the growth and then... Martin will elaborate a bit on the inventory and networking capital side. So I think we should think about in the same way that we thought about it for 22 or 21 without COVID. I think we're really trying to reach the right consumers through the right channels. And this is, again, why we're also a bit cautious in giving you exact numbers of doors. I think we're really focused on managing sell-through very closely. We're really focused on managing inventory positions with our key wholesale partners as well, knowing that there's a bit of uncertainty around consumer demand in the second half of this year. And what we saw in Q4, what we're also seeing right now is that we're able to reach many new consumers through our own D2C channel. We're able to reach them at great margins, all at full price. And we're also able to drive quite a bit of apparel sales through that. And this is a strategy that we're going to continue. And we've communicated that we want to increase our own D2C share over time. You've heard how Regent Street is performing. So we see home retail also gaining speed. So expect that journey to continue. But as always, we're not giving an exact number on the splits.

And then talking to inventory. So this is very much a function also of the future growth that we are expecting. But a good number to think about is that in the past, we have seen our working capital to be in the range of 30% of net sales at the growth rates that we had. So at year end, we were at 37%, so slightly above that. And the 30%, this is how we would look into the future and have it as a reference point.

Thanks. Can I just follow up? I'm not looking for specifics on the breakout of wholesale. I just want to know, are you expecting in 2023, are you expecting wholesale to grow faster than DTC or DTC to grow faster than wholesale? That's not a specific. It's just general.

Yeah. The good thing is that with 22, we have the first year that actually has a clean balance again and a clean starting point because there's no COVID impact. So far, wholesale growth was basically stronger because of the weakness last year and D2C on the opposite. So there's an opportunity for us to grow our D2C share this year. But again, as Mark said, it all depends on the on the sellout and the continued success of our retail partners and how they position themselves in the market. So we will not manage the share, but mid-term, we clearly have the aspiration to over-proportion it to grow our D2C share.

Thank you very much.

Ladies and gentlemen, that was our last question for today. The conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.