On Holding AG

Good afternoon, good morning, and thank you for joining on 2023 fourth quarter 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'll briefly remind everyone that today's call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only, and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 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 EBITDA and adjusted EBITDA margin. These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for 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, Gerrit, and welcome everyone to our fourth quarter and full year 2023 results call. I'm talking to you from OnLives in Zurich while my partners Marc and Martin are tuning in live from the New York Stock Exchange. I'm excited to tell you that 2023 has been another exceptional year for our brand. Also very significant revenue growth of 47% to 1.79 billion Swiss francs in 2023. This turns into even 55% growth on a constant currency basis and exceeds the expectations that we had for the year. It means that ON is capturing market share faster than competitors. I would also like to point out the gross profit margin of 59.6% on our journey to becoming the most premium global sports brand. Today, I would like us to speak about why ON is a performance sports brand that appeals to a far wider audience. As you know, the journey of ON is deeply rooted in our commitment to innovation, catering first to athletes and runners. In 2023, we witnessed our running products soar to new heights, further solidifying their dominant position in our portfolio. Let me share an example of this success with the CloudMonster. Launched just two years ago, this running shoe has quickly ascended to be our highest absolute growth franchise in 2023. But we don't pause here. Just two weeks ago, we unveiled the CloudMonster 2, and in early April, we will launch the innovation-packed CloudMonster Hyper. This move not only amplifies the momentum in running, but also introduces a range of options for our channel partners. Smart hearing is in our playbook. I would like to highlight that the success of the CloudMonster franchise is part of a broader narrative where seven of our franchises now contribute over 5% each to our growing top line. Besides the CloudMonster, this also includes franchises like the CloudSwift and the CloudRunner in running, the CloudNova as a running sneaker, and the Roger franchise in tennis. we are expanding the strength and diversity of our innovation-driven portfolio like never before. The strength of our running innovation is showcased by Helen O'Berry scoring major marathon wins for ON in our most advanced shoe technology. Making history in 2023, Helen became the first woman in 34 years to clinch victory at both the Boston and New York City marathons in the same year. And let's not forget her stunning performance at the New York City Half Marathon, where she didn't just win, she shattered the course record. This isn't just a win for Helen, it's a testament to the On brand's growing influence. This is also clearly visible in the fast-growing share of On shoes on major running routes across the world. I'm especially proud of this stellar growth as it is the result of the passion and relentless execution drives of our team. They're beyond thankful for their enormous contributions and the infectious optimism they bring. They truly inspire me. I talked about the success of ON in running. Now, let's zoom out to see the bigger picture. As we reflect on the first post-pandemic year, let's look at the remarkable journey of one in the evolving sports and fashion landscape. We all know that the pandemic has been a catalyst for change, redefining lifestyles and fashion norms. We have been liberated to work more from home, introduce sports and movement to every day, and wear sportswear as the new uniform. Going way back, this revolution reminds me of Coco Chanel freeing women from corsets and introducing comfort and pants to the female wardrobe. Yes, pants. As many of you will know, this happened in the early 20th century. Since then, tech fibers and new manufacturing methods in footwear and apparel have allowed sports brands to retire the military uniform and the classic dress as prime archetypes and inspiration for fashion. Out with the coat, formal jackets, leather shoes, and the dress. In with sneakers, tights, track pants, hoodies, and technical jackets. It's the next revolution. The last pivotal years made it clear that sports is the new uniform, the new normal that will continue to transcend culture and fashion. Sports is not just an activity. It's a statement, a lifestyle, a new luxury for a generation, valuing movement and exploration over possession and status. It follows this logic why fashion brand Loewe has partnered up with us to introduce technical sports footwear and apparel to their collection. The joint edition of the Cloud Tilt sneaker has been a spectacular success, flying off the shelves. Our partnership with Loewe, rooted in creativity and innovation, continues to thrive across apparel and footwear and to elevate on as the most premium sports brands. It is also no coincidence that global fashion brands pivot to sign global sports stars as ambassadors to play in the live sport arenas of the Super Bowl and the Olympics. When we invited Roger Federer to become a co-entrepreneur at ONN a few years ago, it was done to build on the growing cultural relevance of sports and its most exceptional talents. I'm very happy that young tennis greats Iga Sviatek and Ben Shelton have since decided to join ON. They are not only admired for their game, but also for their personality. Their wins in the spectator sport tennis, fully outfitted in ON gear, also elevate ON's apparel to a new level of broad recognition. As ON is expanding its reach, the partnership with many of the world's best athletes will always root us in performance and sports. Because one thing is clear, ON is not a luxury fashion brand, but a premium sports brand. Yet it happens that ON has been emerging as a new brand in sports right at the moment where sports is not the domain of weekend activities anymore. Instead, sport and movement is literally getting woven into the fabric of everyday life. This ties into ON's mission to ignite the human spirit through movement, to not just dream the future someday, but on most days. These are the days where our focus on performance, sustainability, and design perfectly aligns with the contemporary consumers' expectations. It's no surprise that ON is gaining strong brand momentum with teens, according to a recent brand study. To connect to new consumers even more intimately, you will see us expanding ON's global presence by opening an additional 100 brand stores worldwide in the coming years. Believe me, this move isn't just about featuring our cutting edge footwear. It's also a commitment to showcase ON apparel and dress our community from head to toe. In 2023, our apparel line made significant progress. In our flagship stores in New York, Paris, and Shanghai, roughly one in six items sold is already fitting the body, not the feet. Now, let's look ahead to 2024. This will be an exciting year for the ON community and the Olympics in Paris. We are poised to demonstrate ON's athletic DNA, expect groundbreaking ON product innovation, to show up at the Olympics. Up to a dozen athletes of the all-athletics club will compete together with stars like Helen O'Berry and tennis world number one, Iga Sviatek. Or as the New York Times wrote in a recent feature headline about the all-athletics club, the most impressive world championship team isn't a country, it's a brand. For my opening, there are two key points to hold on to. Firstly, ON remains committed to being a performance sports brand at its core, dedicated to innovation and serving the needs of athletes. Secondly, in today's world, sports gear is becoming the new uniform in footwear and apparel. As a leading premium sports brand, ON is ideally placed to be a driving force in this significant cultural transformation. Let's continue to dream big, to push boundaries and to innovate in this transformation to sports culture as the premium sports brand on. And with this, I'm passing the baton from Zurich to New York and to our co-CEO and CFO, Martin Hoffman. Martin, please.

Thank you very much, David. And hello to everyone on the call. We're very excited to be hosting today's call from the New York Stock Exchange. Being here brings back great memories from our listing event in September 2021. It fills us with an immense sense of pride to see what our team has achieved in the first two years since going public. We observe very strong growth, incredible increase in brand awareness, and significant gains in market share, nearly everywhere around the globe. Seeing with our own eyes the fast-growing share of Franus, and on-products along the Bund in Shanghai a few weeks ago or when running through Central Park these past days, but also the increasing diversity and more younger fans wearing our products is extremely rewarding. On our journey towards building the most premium global sportswear brand, 2023 was another exceptional year. David highlighted some of the big achievements who were able to celebrate. All of this is reflected in our very strong financial results. We significantly exceeded our expectations voiced at the beginning of the year and reached 1.79 billion Swiss francs in net sales, a 46.6% increase compared to 2022. It's worth reminding that this includes considerable translation impacts from the strength of the Swiss franc throughout 2023. on a constant currency basis, we are thrilled to say that ON grew by over 55%. As the most premium sportswear brand, our focus is on combining strong top and bottom line growth. In 2023, we achieved this outstanding net sales growth while bringing efficiency and profitability to new heights. We significantly increased our cross-profit margin from 56 to 59.6%, and our adjusted EBDA margin from 13.5% to 15.5%. At the same time, we have grown our D2C share from 36.4% to 37.5%, significantly optimized our inventory position, and achieved a positive cash flow of 163 million Swiss francs, the highest in the history of the brand. Thanks to our partnership with the best and most meaningful retail partners, net sales from the wholesale channel exceeded 1 billion Swiss francs. We also generated more than 1 billion sales in the Americas region and more than 1 billion cross-profit. Over 230 million visitors came to our website, a growth of 63% year over year. These successes belong to our team. Including retail, we have grown from 1,700 to over 2,400 people, now representing 94 nationalities in over 20 offices around the world. Our culture is at the center of our success, and our focus remains on building a high-performing team centered around our mission. We are deeply grateful for all your great work and your passion. The strength of the brand and the momentum we have seen continued into the fourth quarter. Throughout the quarter, we observed very strong consumer demand across all channels. We had a very successful holiday season while maintaining a high share of full price sales. Record high traffic to our website and stores around the world are a true testament to the strength of the on-brand and increased global awareness. As a result, we achieved the highest D2C share in the history of ONN, supporting our highest gross profit margin since the IPO and an adjusted EBDA margin ahead of our own expectations. We definitely finished the year with great momentum. As most of you are aware, the constraints in our Atlanta warehouse back in Q3 2022 and the resulting shift of volumes to Q4 2022 made for a very tough comparison quarter for our America's business in particular. With this in mind, we are thrilled to have achieved 31% net sales growth on a constant currency basis in the fourth quarter. On a reported basis, reflecting the considerable FX translation impacts, we reached global consolidated net sales of 447.1 million Swiss francs. and a 21.9% growth year over year. Compared to the exceptionally strong holiday season in 22, our D2C channel grew by 38.2% to 206.6 million Swiss francs. Currently neutral, the growth was 49%. Sales from D2C accounted for 46.2% of net sales in Q4 23, versus 40.7% in Q422. The significantly higher D2C share serves as a further validation of our D2C-focused multi-channel strategy and the exceptional momentum of our own channels. For the full year 2023, the resulting growth in our D2C channel was over 60% on a constant currency basis. We are excited to see the contribution of our own retail stores to this great achievement. During 23, we opened 15 new retail stores, 10 of which are located in China. In Q4 alone, we opened six new stores in London, Miami, Paris, Beijing, Chengdu, and Guangzhou. And we also expanded our New York Lafayette store. We're eagerly looking forward to the openings in the upcoming weeks and months. Personally, I'm very excited for our first store in my home country, Germany. A new 300 square meter store in the center of Berlin is planned to open later this month. But equally, for our recently opened store in Portland, the home of our brand in North America. As anticipated, reflecting some of the comparison period dynamics, Holzer grew more modestly in the quarter. achieving 10.7% reported or 19% constant currency growth. Our wholesale partners observed strong sellout numbers at full price, both in the brick and mortar locations as well as their online presence. Most of this volume had been shipped towards the end of Q3 in anticipation of the strong Q4. This is reflected in our combined wholesale growth for the second half of the year of 26.8%, equivalent to 36% on a constant currency basis. In EMEA, as previously discussed, we're executing our strategy to fully emphasize the most premium and highest quality growth, reflecting in the closure of around 200 doors in Central Europe that we deem non-strategic. These doors have officially stopped receiving products as of Q1 24, but had already reduced their orders in Q4 23 to some extent. We will continue to manage our different channels very consciously. While we will be adding a lower number of incremental wholesale doors in the future than we have over the past years, we see significant potential for deeper penetration and strategic accounts, same-store growth, and ongoing market share gains. We are very pleased to see how this opportunity materializes with the launch of some of our spring-summer 24 startups. The Cloud Tilt, initially launched in a limited collaboration with Loewe, is now more broadly available and has seen an incredible launch. This completely new all-day silhouette is clearly complementary to our existing portfolio. And based on the feedback and demand from our partners, we are confident that our team has created another blockbuster in the making. Let me move to our original performance. As I just mentioned, our focus in EMEA on the more selective wholesale distribution is paying off. We saw an increasing high-quality demand in our D2C channel, more than making up for the door closures on the wholesale side. In aggregate, net sales in EMEA grew by 22.9% to 112.5 million Swiss francs for the fourth quarter. On a constant currency basis, growth in EMEA was 26% versus the prior year period. The Americas grew by 18.5% in Q4 to 300.6 million Swiss francs. This marks the strongest quarter for the region in the history of ONN and reflects the strong demand for our products. As in EMEA, we have seen a disproportionate growth of the D2C channel. While the reported growth includes nearly 11 percentage points of FX translation impacts, as well as the constraints by the comparison period dynamics. Our constant currency growth is at 29% for the quarter. We continue to be very encouraged by the underlying dynamics and the strength of the brand in the region. APEC reached net sales of 34 million with strength in Q4, corresponding to a growth rate of 57.7%. APEC was, again, the most impacted by FX translation. On a constant currency basis, growth in the region has been over 75%. We are extremely excited about the very strong momentum in China and Japan, and in particular, our ability to gain share and awareness with the dedicated running community. In the Shanghai Marathon held at the end of November, ON ranked as the fifth overall brand in terms of presence on runners' feet, serving as a demonstration of the brand's performance credibility in China. Turning to the performance by product, apparel had been in the focus for our marketing campaigns in the fourth quarter. We are very pleased to see this has led to a fourth quarter growth rate of 60.1% to reach 18.4 million Swiss francs. In our D2C channels, apparel grew 110%. In APEC, the apparel share exceeded 10% in the fourth quarter. The strong demand provides a tailwind to 2024, where exciting new products, updated sizings, and more focus across all channels are expected to drive further success. We're thrilled to be launching our tennis apparel later this week. We know that our most loyal fans have been waiting for this ever since Iga and Ben first set foot on the court in our gear last year. Net sales from shoes grew by 20.4% in Q4, reaching 425.7 million Swiss francs. David mentioned the unparalleled success of the CloudMonster. It's no surprise that CloudMonster was also one of the significant growth contributors during the holiday season. More broadly, we're thrilled to see our strategic priorities playing out as intended, with a large part of growth being driven by our performance-running ranges. In performance all day, the Cloud Nova has established itself as a holiday season favorite, continuing to resonate very strongly with the younger D2C customer in particular. Throughout the holiday season, we maintained a high share of full price sales. Once cross-profit margin in Q4 reached a very strong 60.4%. Over our midterm ambition of 60% plus, and an increase of 190 basis points year-over-year. The increase versus the prior year was further driven by the higher D2C share, overall favorable freight rates, and limited use of air freight. SG&A expenses, excluding share-based compensation in Q4, were 48.9% of net sales, up from 45.1% in the same period last year. The increase was primarily driven by plant Continued investment into brand building, which we had slightly scaled back in half year to 22 to absorb some of the higher freight costs. In addition, so an increase as percentage of net sales, largely due to the somewhat different sales facing in 2023 versus 2022. The resulting adjusted EBDA margin of 16.1% for the fourth quarter is well ahead of our latest expectations. For the full year 23, this brings our adjusted EBDA margin to 15.5%, an increase of 200 basis points year over year, and significantly above our 15% target. This achievement further exemplifies our commitment to not only drive significant growth, But also consistently increase our profitability and take steps towards our stated 18% plus material target. Ultimately, it shows the power of our premium brand positioning. As a result of the temporary downward movement of the US dollars with Frank FX rate in late December. resulting in a 0.84 year-end Swiss franc per U.S. dollar closing rate. The revaluation of our U.S. dollar balance sheet items led to the recording of unrealized FX losses in Q4, weighing on our reported net income and turning it to a loss for the three-month period. However, based on current spot rates, we expect a partial reversal of these Q4 losses and the corresponding gain in the course of 2024. For the full year, we are very pleased to have reached a record net income of 79.6 million Swiss francs, up from 57.7 million in the prior year, even with the significant unrealized FX charges to our reported profits. A strong focus in 2023 was on improving and strengthening our balance sheet. Most importantly, inventory and liquidity. To recall, due to the expected recovery of the global supply chain, we started into the year with an elevated inventory position. Our focus throughout the year had been to maintain the inventory level while growing ourselves. Our teams have done a tremendous job to finish 2023 with roughly the same number of items in our inventory As we had at the end of 2022. In the same time frame, our business has grown by 55%. This puts us in a great position heading into 24. While still providing further opportunities to optimize and to drive additional operating cash flow over the coming quarters and years. We significantly reduce the level of capital expenditures from 22 to 23. on an absolute basis as well as in percentage of net sales. While we had major investments into our office infrastructure in 2022, we invested 2.6% of sales in 2023, mainly in our retail expansion technology and some smaller offices. On an ongoing basis, we continue to expect capex in the range of 3.5 to 4.5% of sales. This includes high expenses in connection with our planned acceleration of retail store rollouts. As a result of our strong profitability and the improved networking capital position, we achieved an operating cash flow of 232 million Swiss francs and a net cash flow of 163 million in 2023. This is by far the strongest cash flow in the history of the company. At the end of the year, our cash balance stood at 495 million Swiss francs, significantly up from 371 million at the end of 22. Together with our 700 million credit line, we are very well financed to invest into our future growth and to dream big. With that, let me turn to our outlook for the year. In 2024, our fans can expect an incredible pipeline of new, exciting and highly innovative products combined with big brand moments and some surprises that are not yet ready to be shared. And all of this delivered by an even stronger, more effective, more efficient and more consumer focused execution engine. Our mission is very clear. We want to be the most premium global sportswear brand. Over the past two years, we have learned a lot. Insights that give us confidence about the return on our planned investments. For example, how we convert brand awareness into sales and ultimately into our D2C business. Learnings about the right formats and layout for our own retail stores and a much deeper understanding of the unit economics and investment levels. Or how we scale apparel and optimize product life cycles. Overall, we have a lot more insights, conviction, and execution capability than we ever had before. And we are very clear on our priorities for 2024. Number one is capitalizing on the immense global momentum of our brand. While we will continue to grow at unprecedented rates at this scale, we know that the on-brand continues to have huge upside in terms of brand awareness and to drive and grow cultural relevance within our core communities and beyond. David elaborated on the incredible opportunity our brand has to fully capture the merging of sports culture and fashion. 2024 will be a year to scale existing and new audiences globally with large brand moments. At our core remains the running community. We believe that the road to the Paris Olympics offer a great opportunity to connect and build credibility as an innovation-driven, premium performance brand around the globe. As mentioned, we certainly have a few surprises up our sleeves. Priority number two is apparel. During the last one and a half years, we made huge steps in creating an exciting apparel product pipeline, and at the same time, a dedicated, powerful apparel organization, as they're known. Recent demand from our partners for updated styles has been higher than our already ambitious expectations. So much so that we had to increase production to fill the growing demand. We're extremely excited to kick off our apparel in tennis and training, which will allow us to speak to new audiences and apparel first categories. At the same time, We will offer our running community exciting innovations at the intersection of performance, design, and sustainability. Priority number three, and closely linked to our apparel edition, is own retail. In 23, we have validated and fine-tuned our store concept. From New York to London to Tokyo, our fans are lining up in front of our stores, showing the draw of our brand and our premium in-store experience. 2024 will be the year to expand globally with more stores in key cities in Europe, North America, and in China, but also first stores in Latin America, Australia, and possibly in the Middle East. Our most premium channel not only supports our how quality grows, but manifests our premium positioning and overall price stability. Bringing on board a large number of new frontline ambassadors to bring our stores to life in an authentic way that represents our culture and our values is one of the elements I'm most looking forward for this year. Priority number four is to elevate the power of our multi-channel strategy. The ever-growing awareness and strong demand for the brand will mean that our D2C will continue to capture a disproportionate share of our growth this year. This is further validated by the strong start into the year of our e-comm and own retail stores outpacing our wholesale growth. Our significantly optimized inventory position will allow us to control the supply into the right channels and the right partners even more consciously. In 2023, we increased our footprint in key global retail partners like JD, DIX, or Foot Locker. We are very pleased with how this has driven high quality and strong wholesale growth last year. At the same time, considering the great collaborations and very positive feedback and pre-orders, we see significant opportunities for the on-brand to increase shelf space and same-store growth within many of our wholesale partners. In core markets like the US and Germany, we have the right partners, and we expect to see less incremental door expansion in 24. At the same time, we have significant opportunities to increase our wholesale presence in some of our less established markets, which will drive additional TOR expansion. Behind all of these priorities is the common thread to take the next step towards our vision, while always being thoughtful about focusing on world-class execution and the long-term success of ONN. Before we come to numbers, Let me quickly remind everyone of our guidance philosophy. In providing guidance, it's always our goal to ensure that we share a common understanding of how we steer our business and how we measure our success and progress. As you know, we always focus on the long term and the achievement of our full year aspirations, and will therefore continue to refrain from providing quarterly guidance. When I provide guidance for Q124 in a bit, This can be considered an exception to this rule, given we are already heading towards the end of the quarter. Considering the large impacts from FX translations we have seen in 23 and expect to remain over the course of 24, we will begin to refer to a constant currency growth rate in our stated net sales expectations. This will ensure we stay focused on the things that we can control and have full accountability over elements of our business that we deem to be the primary measures of success by removing some of the noise of translational swings. Now, at the investor day back in October, we shared our aspiration to grow at a 26% CAGR throughout fiscal year 2026. Our aspiration for 2024 is even higher than that, and we expect to achieve a constant currency growth rate of at least 30%. Considering the Swiss franc strength, this translates to reported Swiss franc net sales of at least 2.25 billion at current spot rates. Within this, the FX translation will be more pronounced in the first half of the year. For Q1, we are seeing strong demand, but we are also compounding against the strong wholesale performance in Q123. driven by the initial expansion into some of the larger key accounts. As a result, for Q1 specifically, we expect a significantly increased B2C share and to achieve constant currency net sales growth of 26%, translating into reported Swiss francs net sales of 495 million. In 2023, we have already demonstrated that our brand is set up to achieve premium margins. We currently anticipate a cross-profit margin of around 60% in line with our mid-term target. This serves as a basis to continue on our path towards the adjusted EBITDA margin target of 18% plus by 2026. For 2024, we will continue to invest to drive long-term, durable growth while we expect to further increase our adjusted EBITDA margin to 16 to 16.5%. Beyond this, we will maintain our focus in 2024 on further optimizing our inventory and networking capital position and with that expect a continued strong positive cash flow. To conclude, we ended the year with a lot of tailwind and opportunities in all parts of the business. The demand for the on-brand remains very strong. Exciting product launches and big brand moments are in the making. We have more capabilities to execute on our strategic plan than ever before, from retail to apparel, from e-comm to operations. And we have a great team in place, ready to dream on. We look forward to another great year. A big thank you to all of you for being a part of our journey. We really appreciate it. And with that, David, Mark, and I would like to open up the session to your questions. Operator, we are ready to begin the Q&A session.