On Holding AG (ONON) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the On Holding AG Q4 and Full Year 2021 Results. [Operator Instructions] I'd now like to turn the conference over to Florian Maag, Head of Investor Relations. Please go ahead.

Good afternoon, good morning, and thank you for joining On's 2021 Full Year Conference Call and Webcast. With me today on the call are Executive Co-Chairman and Co-Founder, David Allemann; CFO and Co-CEO, Martin Hoffmann; and Co-CEO, Marc Maurer. For the first part, David and Martin will read through their prepared statements. Afterwards, we are looking forward to opening the call for a Q&A session. Before we begin, I would like to remind everyone that the remarks during today's call may contain forward-looking statements regarding future events and financial performance within the meaning of the Federal Securities laws. These forward-looking statements reflect our current expectations and beliefs only, and such statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20-F filed with the Securities and Exchange Commission earlier this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please further note that this call will also contain certain non-IFRS financial measures such as adjusted EBITDA and adjusted EBITDA margin. While the company believes these non-IFRS financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for a reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. With that, I will turn the call over first to David, followed by Martin for the prepared remarks.

A warm welcome to all of you joining us today around the world from Switzerland. We are excited to share with you On's first full year results as a public company, after our successful IPO just 6 months ago. We thank you very much for following our journey and for tuning in today. You will hear about recent progress and important priorities before we dive more deeply into financials, conclude with an outlook on 2022 and then open up to your questions. Global consumer demand continues to drive On's hyper growth. We are very pleased to announce that 2021 has been the strongest year in On's 12-year history, and beat our expectations at the beginning of last year on all accounts. We experienced strong global consumer demand across all regions, channels and product categories. The exceptional momentum listed net sales to CHF 725 million, representing a 70% year-over-year growth. At the same time, we see a significant jump in On's gross profit margin to the top end of our industry and continued increase in adjusted EBITDA. We are grateful to have successfully navigated the uncertainties of the global pandemic and supply chain restrictions in the last 2 years. It clearly shows the strength of the On brand, of our operating model, and most importantly, of our global team. On the supply side, On's strong consumer demand is met with better-than-expected product availability. Some of the brightest members of our team work in supply planning. Their agility and the strong relationships with our suppliers made it possible to mitigate the temporary stop of production in Vietnam in a short amount of time. Of course, COVID is not over. A war in Europe is not just a human tragedy, but could have ramifications in global trade. And inflation is a challenge to consider. We remain on the lookout, vigilant to take on risks as they arise. Risk awareness has served us well in the first dozen years of an incredible journey. Still, we continue to be very optimistic. On is experiencing a running boom everywhere. Markets like the U.S., the U.K. and China are taking off like never before, and we see strong growth across all regions. The On brand truly is on fire. Take the U.S., there On saw over 92% growth in run specialty and also over 85% in our own e-co. Take the U.K. There, On grew over 75% in 2021. Or take China where On jumped from rank 120 to 35 in the Tmall sports ranking and sees a fivefold increase in brand followers. The momentum of performance brand On is further fueled by athletes. As you know, On has been founded by athletes for athletes. We are all inspired by On athletes who turn their dreams into reality. They truly are on a winning streak across the globe. The On Athletics Club, or shortened, OAC, is On's elite athlete team based and trained in Boulder, Colorado. We are honored to announce that the two-time 5,000 meter World Champion Hellen Obiri is joining the On Athletics Club. Hellen is one of the most impressive and versatile female athletes. She will move with her family to the U.S. to join the On Athletics Club in Boulder to train with our Coach Dathan Ritzenhein and the OAC team. Many of the OAC athletes have competed in last year's Olympics, and continue to stun audiences. Like Australian Olympian Ollie Hoare, who won the fastest mile at the Millrose Games, New York City with a striking time of 3 minutes and 50 seconds. We could not be happier about the success of our athletes and the On Athletics Club. This is why we have decided to establish OAC in Europe and Oceania as well this year. Over in Europe, our athletes from the Swiss Alps have just come home from the most successful Winter Olympics for Switzerland ever. And the Norwegian Olympics team has won the most medals of all nations in this year's Winter Olympics. On has been developing shoes and apparel for both teams in the last years and is their official sponsor. Seeing On athletes fan across the globe fuels the momentum of On as a unique performance brand. We further amplify through broad storytelling in feature-length film and short social stories. I am sure you are targeted as well by our data engine. We are making fast progress towards our long-term brand mission to ignite the human spirit through movement. On is carried by a rapidly increasing movement of millions who run, explore, travel near and far, lift their spirit and stream on. This means that On is reaching a far broader community. On's brand and products resonate with a bigger market in 3 ways. First, we are launching exciting products for all type of runners. As an innovation brand, we are building on our technology for world champions and make it vitally relevant for all runners. Just 2 examples of a record launch of all 6 new shoe models. Let me just give you 2 examples out of 6 On new shoe models. In running, the ON new Cloudmonster model will launch this spring, and is celebrated by our retailers who serve the big group of everyday runners. These are runners who demand maximum cushioning. For outdoor retailers, we launched all new Cloudvista. It is the perfect companion for gravel roads and tracks, versatile and mainstream. At the same time, we see our apparel range growing nearly twice as fast as our shoes. On's innovation drive is rewarded by our industry. Footwear News has named On the 2021 brand of the year back in November. And ISPO, the biggest European sportswear, has given the 2022 ISPO awards to our new Zero Jacket in apparel and to the all-new Cloudmonster in footwear. My second point is that we see run culture crossing over into popular culture. A young community in Tokyo, Shanghai, London and New York has embraced On as a brand that inspires them at the intersection of performance and design. On flies off the shelves at Tastemaker retail and the select JD and Foot Locker doors where we choose to play. On performance shoes in the apparel piece is pop up in the streets well beyond the running route. And we believe that On taps into a secular shift where performance is taking over fashion and replaces classical archetypes with performance [ zerads ]. Driven by the shift, LOEWE, one of the fastest-growing global fashion brands and the rising star in the LVMH universe, has asked us to collaborate with them on performance events. Two years in the making, the unique capsule of On shoes and apparel pieces have launched just last week, available in all LOEWE flagships, in select fashion retail, and on our website. Days after launch, the collection is almost sold out. LOEWE runs a global campaign and especially caters to an intense brand [ off ] in Asia, with more than 40 flagship locations. This all means that On stays firmly rooted in run culture, and at the same time is embraced by a much wider market and demographic. And an important third point is that we believe that all communities have a fundamental right to movement. This inspired the launch of our Right to Run social impact program in early 2021. Through partnerships with community organizers and nonprofits around the world, we promote access and inclusion in running. Sometimes it is as basic as having a say [ through ] to run. Together with our partners, we are empowering communities that are at the risk to be left out of the global running community, such as people with disabilities and people of color, or those who are experiencing houselessness. We are committed to ignite the human spirit through movement in all parts of society. Now let me speak to our omnichannel strategy that is so vital to our success. We are not only creating products that our customers love, but also reach them where they shop. On's omnichannel strategy is firing on all cylinders. It delivers scale, insight as well as resilience for On in the following ways. Our On e-com channel on our website has reached a high share of 36% of our business in 2021. This means that we increase direct connections to our community, now serve customers in 48 countries through D2C, and learn from them. For example, customers who buy apparel as the first piece show a higher lifetime value, as they already appreciate On as a sports brand, not a pure shoe brand. And predicting the relevant offering to the right customers at the right time in their journey has allowed us to retain big new customer cohorts. In fact, in the last 2 years, we have retained our newest customers with a similar stickiness as customers who have come to us when On was still a smaller brand. This means that On stays very relevant while we reach a far wider audience. It also shows that running habits that were formed in the pandemic persist. The benefits of this very data-driven approach obviously extends to demand planning and operational effectiveness and, of course, also gives us higher margins. At the same time, we continue to build strong relationships with our wholesale partners. We believe that retail partners with strong brands and a unique offering will continue to add value to their customers in physical locations as well as on digital channels. They inform and inspire beyond the transaction. We are fortunate that strong wholesale brands have partnered with us for years and continue to introduce and position our brand to their unique audience. To mention a few activation highlights with our key wholesale partners. With REI, for example, we exclusively prelaunched the Cloudultra as a top trail running shoe to their community of 20 million outdoor enthusiasts, a huge win for building On's credibility in the outdoor space. Our fast success at Nordstrom paved the way for roughly 20 additional shop-in-shops in important Nordstrom doors this year. And the focus on the best Foot Locker doors introduces On to an even younger audience. At the same time, we have opened shop-in-shops in some of the most premium locations on this planet, at Beaumarchais in Paris and at Harrods in London. These initiatives allow us to grow fast on a global scale in more than 8,700 doors and hundreds of city centers. At more than 1,000 locations, On is present with a branded shop-in-shop experience. In 2021, we have observed consumers flooding back to the city centers and stores after lockdowns, eager for interaction and experience. As a result, we have seen wholesale revenues bouncing back strongly, keeping our omnichannel mix with D2C very resilient. This has strengthened our belief that attractive physical shopping experiences continue to be an important part of consumer culture and part of the very fabric of our cities. The importance of physical experiences is as well the backdrop for our expansion of our very own retail network in global hub cities. On's flagships act as the most complete experience, community center and media channel for our brand. On New York City is experiencing waiting lines in front of the door, and many community runs start from the space. New York and our 8 On flagships in China are able to attract the highest share of first-time customers to On across all our channels. Conversion in store is higher than any other sales channel, with a significant share of apparel in some stores up to 25% of sales. All of our stores have reached profitability within 9 short months of opening. We will continue to expand to the most important cities on this planet. At the heel of the Tokyo Olympics last year, On Tokyo is set to open in the next weeks, followed by London and Zurich in summer. It is important for you to know that we are not seeing a cannibalization of our wholesale and D2C channels. Both channels show sustained strong growth at the same time and are highly complementary. Let me come to the ultimate success factor of On: our team. We are fortunate that On has been able to attract exceptional talent. Only 1% of all people who apply at On are accepted. In 2021, On has grown to 1,100 members who dream On and build the future. 600 people have joined team On in the last 2 years and have mostly worked remotely. The On team comes from over 65 nationalities and very different backgrounds and mindsets. We see diversity as a catalyst for innovation and creativity. This month we are seeing an important moment for On, where the team is moving back together into new social office and lab spaces. Our European technology hub in Berlin was just opened in a big former post office and brings together 200 tech and customer service people. Our new North America home in Portland will see 300 people move in together in April, and 700 people will move into the new On Labs in Zurich in summer. The team will continue to have the opportunity for hybrid work, but also come together in social spaces again. Nobody is coming back to the office just for a desk. We will continue to build a unique On culture along our 5 spirits, and join many runs along the way together. This will bring collaboration, community activities and workplace innovation to the next level at On. When we speak of run culture and our team, I have to mention the most important member of our community, our planet. Nature is the most important environment for sports and exploration, but also the most endangered one. So in the next earnings call, we will talk about our important green tech initiatives, Cyclone and CleanCloud. So stay tuned. And with this, I'm handing over to Martin, On's CFO and Co-CEO, to take you on a financial deep dive.

Thank you, David. 2021 has been extremely exciting and decisive year for On. And we are very proud of what we have achieved, not only from a financial perspective, but across so many different dimensions. A year is like a marathon race. The circumstances of the fourth quarter made the last miles even more challenging. But thanks to our whole team, we were able to exceed our expectations for Q4 and to successfully finish the year with many new record numbers. And equally important, we are coming out of Q4 with more confidence and evidence for continued strong growth in 2022. Our financial results in the fourth quarter are further validation of the strong global demand for the On brand and our commitment to manage the company with a long-term growth and profitability-driven mindset. Net sales for the quarter were up CHF 191.1 million, exceeding our previous guidance. This marks a strong 54% increase compared to the fourth quarter last year. Yet, as expected, the growth is slightly slower than in previous quarters due to the following 3 transitory impacts. First, the factory closures in Vietnam between September and November have led to supply shortages, especially in Europe, where we had less inventory buffer going into the fourth quarter. Second, until 2020, we launched our new spring/summer footwear collection in November, and consequently had higher wholesale volumes in Q4. As of 2022, the spring/summer season starts in January, which is expected to result in a permanent volume shift in our wholesale channel from Q4 to Q1. And third, while North America had lifted most COVID-19-related shopping restrictions, we have experienced repeated lockdowns in Europe, especially Germany, Austria and Switzerland, as well as in some other markets like Australia and various cities in China. Despite these headwinds, we achieved net sales of CHF 724.6 million for the full year of 2021, a 70.4% increase compared to 2020 and a 65% CAGR over the past 3 years. So we have experienced an acceleration in our sales growth compared to 2020. Including 2021, we have grown this more than 65% in 9 out of the 11 years since our foundation. Since the inception of On in 2010, our sales have grown with a CAGR of 84%. While the supply constraints impact both our D2C and wholesale channel, the season change and the continued lockdowns are more visible in wholesale only. Consequently, in Q4, we have seen a very strong growth of 76.7% in D2C to CHF 84.7 million compared to 39.3% growth in wholesale to CHF 106.4 million. On a full year basis, our growth rates of 71.9% for D2C and 69.5% for wholesale are validating the strength of our multichannel distribution, and the fact that D2C continues to outgrow wholesale despite the reopening of many retail stores. Our D2C share on a full year basis grew from 37.7% to 38.1%. The continued engagement of existing customers and increasing brand awareness, as well as the sustained shift in consumer behavior since the pandemic, continue to significantly drive our D2C channel. During 2021, the number of sessions recorded in our e-commerce platform, including China, increased from 66 million to 102 million. We had a very successful holiday season, with a stronger focus on our brand story. With a message for every runner, we were able to push product sales on paid channels, but also create more reach from a storytelling perspective on organic channels. China accounted for 3% of our total e-commerce sales during the full year 2021 versus 1% in 2020. Our Double 11 campaign, with a focus on run blockbusters resulted in a 429% growth in terms of sold items in 2021 versus 2020. We further expanded our On retail footprint in China by opening 2 new stores in Q4, one in Shenzhen and one in Chengdu, as we begin to build our presence in core cities outside Shanghai and Beijing. Overall, our store count in China increased to 8. The store in Chengdu's Taikoo Li Mall is our largest retail store to date in China. David already mentioned some key highlights for our strong partnerships with retail partners in the wholesale channel. Overall, our growth in wholesale was driven by an increase of 900 doors from over 7,800 to over 8,700, while also achieving significantly higher net sales per door. Shifting our focus to net sales by geography. North America and Asia are growing strongly. And especially, the United States and Canada experienced a new level of consumer demand following the IPO. North America grew 100.1% and Asia Pacific by 35% in the fourth quarter of 2021. In Europe, sales have been more impacted by the supply shortages and by the renewed lockdowns in November and December. And net sales for the fourth quarter ended up slightly below Q4 2021. To be clear, we see all impacts as transitory and expect continued growth rates in Europe as of Q1. For the full year 2021, all regions posted significant growth, with Europe growing 38.8% despite the prolonged lockdowns in Q1 and Q4; North America, 96.8%; Asia Pacific, 85.8%; and rest of world, 78.8%. Of course, this sustained growth is fueled by our constant innovation and a number of exciting products that we launched during the course of 2021 across all product categories. We are very proud to see a further acceleration of the consumer demand for our expanding apparel line, resulting in 216% growth in Q4 2021. Ultimately, for the full year shoes grew at 68.1%, apparel almost at twice the rate at 130.8%, and accessories at 57.2%. The share of sales from apparel increased from 3.7% to 5%. Gross profit in the fourth quarter was CHF 111.8 million compared to CHF 64.3 million in Q4 2020. Our gross profit margin increased year-over-year from 51.7% in Q4 2020 to 58.5% in Q4 2021. As expected, while we had achieved around 60% gross profit margin in Q3 and Q2, Q4 was negatively impacted by additional airfreight to compensate the supply shortages from factory closures, but partially offset by the higher D2C share. Overall, we used less airfreight than anticipated, mainly due to the longer factory closures and very volatile airfreight rates. On a full year basis, our gross profit margin improved by more than 500 basis points from 54.3% to 59.4%. This increase mainly reflects lower customs costs related to the free trade agreement between Vietnam and Europe, as well as lower sourcing costs, but also our ability to drive cost efficiencies across the supply chain. Moving on to SG&A and leaving out share-based compensation for the moment. SG&A expenses as a percentage of net sales were 59.2% for Q4 '21 compared to 45.9% for the same period last year. This increase largely relates to the increased marketing and general administration spend. We did not manage our expenses in Q4 in isolation, but with a clear focus on our long-term growth and our full year profitability. As mentioned, the IPO ignited a lot of energy and awareness into the brand, especially in North America and Asia. We took the decision to fuel this momentum and to make use of the post-COVID marketing opportunities in the physical and virtual world. Our strong net sales growth, lower-than-expected expenses in airfreight, and other COVID-related cost savings, allowed us to invest into brand-building campaigns while still realizing a significant increase in our adjusted EBITDA margin on a full year basis. It allowed us to create big brand presences at Q4 trade and sport events, especially global marathon majors and trade events like the running event in Austin, where On has received very positive feedback from the run specialty retail community. And it allowed us to invest into digital customer acquisition to power growth through the holiday season and into 2022. The increase in general and administration expenses was mostly driven by initiatives to enhance our financial abilities as a public company and expenses for our new offices, as well as by higher travel expenses to allow our team members to connect globally in the aftermath of the pandemic. SG&A expenses before share-based compensation for the full year 2021 were 51.5% of net sales, compared to 45.5% for 2020. For G&A, this increase is mainly driven by the higher expenses just mentioned for Q4. In addition to the Q4 impact, full year 2021 marketing expenses saw the launch of our official expression of our brand mission, to ignite the human spirit through movement, and assets and promotions created under the Dream On tagline. Sustained brand awareness and sales growth allowed us to further invest in upper-funnel acquisition activities and to lay a foundation for future growth. Moving on to share-based compensation. As disclosed in the IPO and announced in our previous call, we granted CHF 7.5 million stock-based awards in Q4. The majority of the grant benefits the leaders and key employees at On, beyond the executive team. On top of that, all of the employees at On have received the founders' grant at the IPO, that turns the full team into shareholders as an appreciation for their hard work in the last 12 year. The majority of the above-mentioned stock-based awards vested at the IPO. And consequently, we recorded CHF 176.2 million share-based compensation expenses in Q4 and CHF 198.5 million for the full year. Adjusted EBITDA, which excludes share-based compensation and one-off transactions related to the IPO, was CHF 11.2 million for the 3-month period ended December 31, '21, very similar to the CHF 11.2 million in the prior year period. As expected, our adjusted EBITDA margin went from 9% in Q4 2020 to 5.9% in Q4 '21. Important for us and in line with our commitment to continued increase of our profitability, adjusted EBITDA for the full year 2021 increased by 93.8% from CHF 49.8 million to CHF 96.4 million. In percent of net sales, adjusted EBITDA (sic) [ margin ] increased from 11.7% to 13.3%, the highest adjusted EBITDA margin in the history of the company. We ended the year well financed with CHF 650 (sic) [ 653 ] million cash on hand, which allows us to pursue our ambitious growth plans. Proceeds from the IPO and subsequent equity transactions were CHF 690 million. Throughout 2021, we continued to invest in our IT infrastructure, especially in our new ERP, CRM and data analytics landscape, in retail stores and in office infrastructure. Our capital expenditures in 2021 were CHF 36.2 million, equivalent to 5% of net sales. In 2021, we achieved a positive operating cash flow of CHF 16.9 million compared to minus CHF 14.7 million in 2020. Naturally, our strong growth results in a significant increase of net working capital driven by increasing receivables from higher sales volumes with wholesale partners, and by investments in inventory to fuel our future growth. Excluding the growth in working capital of CHF 74.4 million, we achieved a positive operating cash flow of CHF 91.4 million, which further validates the strength of our profitable business model. Now let's look ahead into 2022. As mentioned in our last call, our guidance philosophy is to provide prudent yet aspirational guidance for the full year, not on a quarterly basis. David already shared how we will continue building the brand and drive significant growth across all channels, regions and product categories. We plan to significantly expand our offering in running, outdoor and lifestyle, which we call Performance All Day, with highly innovative and even more sustainable shoes, apparel items and accessories. We have completed our selling season for spring/summer and fall/winter 2022. And we are seeing very strong preorders from existing and new wholesale partners, both for half year 1 and half year 2. This includes a very controlled expansion of our partnership with Foot Locker and JD Sports, following successful pilots during the Q3 2021. It will also include the first pilot with DICK'S Sporting Goods as of summer, with a very targeted assortment of our running products. At the same time, we have built a significantly elevated customer base in D2C and continue to retain existing and to bring new customers. So we expect to reach more fans around the world and allow them to move in On products. In addition, we will bring a new level of brand experience to more flagship stores around the world. For the first time, we will open flagship stores in Europe and Asia outside of China. And we will continue increasing our presence in North America and approximately double our store count in China. As mentioned earlier, all of this gives us additional confidence for our outlook of 2022. This confidence is further elevated by the positive development of the sourcing situation in Vietnam and throughout the supply chain. Since December, our production capacity is 100% back to the levels that were committed pre-lockdowns. We are extremely grateful for the support we have received from our factory partners throughout the last months. For example, most partners continued working during the Tet holiday in early February to recover from some of the capacity loss. Overall, we are fast tracking the capacity ramp-up plan this year, leveraging our close relationship with the factories. This includes the expansion into Indonesia, where we just started production in a new facility with the goal to produce 10% of our footwear outside of Vietnam by the end of 2022. But of course, managing the supply chain remains a core priority, as we are experiencing volatile shipping costs, ports congestion at the U.S. West Coast, and labor shortages due to Omicron infections in some of our warehouses. As explained in our last update, the transitory supply shortages will define our pace of growth in the first 2 quarters, while supply is not expected to be a significant limiting factor in the second half. By then our pace of growth will be defined much more by our strategy to build a global premium performance brand. Thanks to very strong partnerships with our factories and supply chain partners and the passionate work by our own supply chain teams in Vietnam and in Zurich, we expect, compared to our Q3 update, to be in a stronger supply position to fuel the demand in the first half of the year. For example, just 3 weeks ago we launched the new Cloud 5 globally within the planned timeframe. It actually marks our biggest product launch ever. Also, the new Cloudmonster, our max-cushioned running shoe will be available to our customers as of March 31. Based on this elevated supply position, we expect to be able to drive more net sales growth in half year 1. At the same time, the current situation in Vietnam and our strong preorders for fall/winter provide even more confidence to have the right products to return to hyper growth in the second half. Consequently, and also considering the global economy and geopolitics, we increased our outlook for the full year 2022 and expect to achieve at least CHF 990 million in net sales. Our internal ambition is still higher than that. And we will continue to balance net sales growth versus profitability to mitigate the disruptions across the international supply chain. We will continue using airfreight to balance inventory levels against the strong demand. While we were able to achieve our strong Q4 with a lower-than-expected share of airfreight, we still expect a headwind to our gross margin of approximately 700 to 800 basis points in half year 1, 2022 compared to half year 1, 2021. This is comparable to the relative impact we announced in our previous outlook. Outside the transitory impact from higher airfreight expenses, we expect to maintain our high gross profit margin as a premium brand. To offset the impact from some [ high ] expenses along the supply chain, we have increased our retail prices in North America by USD 10 on roughly 40% of our sales volume. The higher net sales will allow additional growth-focused investments into the brand and the team while increasing our adjusted EBITDA target for the full year to CHF 130 million and also increasing our goal of an adjusted EBITDA margin to 13.1%. If we are able to achieve higher net sales, we expect to drive additional profitability. We will continue to closely monitor the situation in Russia and Ukraine. Our business exposure in both markets is very limited. We have one distributor in Russia accounting for less than CHF 0.5 million in net sales in 2021. We decided to stop any new product supply into Russia, as we clearly denounce all acts of violence and intimidation. We do not have any business in Ukraine, nor any On employees in Ukraine or Russia. But as an international company with a diverse team, our connections to Russia, Ukraine and the neighboring countries are extensive, including many Russian and Ukrainian team members. These individuals are team colleagues and friends, collectively coming together as one community. Looking back, 2021 was an extremely exciting year for the brand, with huge milestones like the IPO, the launch of our new ERP system, our official expression of our brand mission to ignite the human spirit from movement, exciting new products like the Cloudultra, the Cloudstratus or apparel items that combine performance and design. With our big steps in sustainability, with many new athletes, our presence at the Olympics in Tokyo, our first podium at the Berlin Marathon, our growing presence in China and with so many new members in our team. All of us together are fully committed to shape our future and to make 2022 even more exciting. We are extremely grateful to have such an amazing high-performing sports team that allows us to Dream On and to further build On as a global premium sports brand that lives at the intersection of performance, design and impact. With that, David, Marc, Florian and I would like to open up the session to your questions. Thank you for your support and for your trust throughout 2021. Operator, we are ready to begin the Q&A session.

[Operator Instructions] The first question is from the line of Jay Sole from UBS.

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

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

We can't hear you at the moment. Could you please unmute your telephone?

Can you hear me now?

I can still hear you.

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

Got it. And if I can ask one more.

Sorry, we're experiencing a technical difficulty at the moment.

Operator, we don't experience...

If I can ask one more question, hopefully you can hear me. You mentioned door increases last year in the wholesale doors, obviously, great success there. And then you mentioned a new pilot with DICK'S Sporting Goods, that sounds exciting, expansion with Foot Locker, JD Sports. Can you just give us a sense of how much door increases you expect in 2022? And a little bit maybe more color on some of the partnerships with some of the retailers that you mentioned: DICK'S Sporting Goods, Foot Locker, JD.

Thanks for the question, Jay. I didn't -- I hope I got -- this is Marc speaking. I hope I understood the full question regarding Foot Locker and JD and DICK'S. So what we are very much trying to do with Foot Locker and JD is reach and expand into an even younger consumer base, and kind of this is driving the partnership. So with JD, we will be heavily focused on the U.K., that is driving a large part of this expansion, and on the U.S. And then with Foot Locker, the expansion in '22 is mainly U.S.-based, very strongly kind of defining the key locations, together with them in -- where we believe we have the strongest consumer fit, but then also working on a very distinct product tiering, so when you experience On across different channels, that you always find the right product for their respective consumer. With DICK'S, the story is a little bit different. So our goal and our dreams to be #1 on runners' feet, and DICK'S plays a very important role in there. So we will start pilots with On-branded spaces within some key DICK'S and doors as of this summer. And will also start 2 selected pilots with Public Lands, which is DICK'S outdoor format, to reach the outdoor consumer.

The next question is from the line of Jim Duffy from Stifel.

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

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

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

Yes. So in-transit, in the end, we are balancing if the volume comes out of the factory at the moment, what goes on ocean freight and what goes on airfreight. We see some congestion, especially at the West Coast port of L.A. We don't see similar congestions at the other ports, so the product is flowing there. But already before the lockdowns, we have adjusted basically how much cushioning we take into account when we plan our production volume for a longer shipping time. So we have increased it in our internal calculations by 2 weeks already, even before the impact. And then maybe Marc can elaborate a little bit, how we look at the inventory positions at wholesale.

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

Next question is from the line of Cristina Fernandez from Telsey Advisory Group.

Congratulations on the better-than-expected quarter. I wanted to ask about the marketing plans, you decided to invest more in 2021, which makes sense given the demand for the product. If you look at 2022, do you expect to be above your long-term target of 12% to 12.5%? How are you thinking about that?

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

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

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

Ms. Fernandez, are you finished with your questions?

Yes.

Next question is from the line of Jon Komp from Baird.

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

Thanks a lot for your question, Jonathan. I mean apparel has been growing twice as fast as shoes and we continue to launch new products. Products that we're launching are always at this intersection between performance and design and then also sustainability. And that makes just our apparel pieces incredibly versatile. So we're seeing that adoption of our apparel pieces is becoming more wide. And as I mentioned, kind of, for example, in some of our own stores in China, it's already 25% of sales. So we still -- we feel that it's really kind of apparel resonates with our consumers. So you're going to see more launches. In fact, I have just seen in the last 2 weeks important apparel launches for us. They're also kind of make sure that we double down on the move of our apparel pieces for movement, of course, which is part of our brand mission. So you're, for example, going to see a women's bra line in the future as well. So it's really kind of just giving more depth to our range, but pretty much in the areas where we already play, which is, of course, in the core running. But it's then extending also to the outdoors and extending to movement. So everything that empowers you to go out, experience nature and move. What's very encouraging is that we see, for example, customers who come to us for apparel show a higher lifetime value. And so our ambition is very clear that On is becoming a global premium sports brand beyond a pure running shoe brand, and that's where we also kind of drive its product.

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

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

Next question is from the line of Kimberly Greenberger from Morgan Stanley.

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

Thank you, Kimberly. So let's start with the preorder and what we're seeing for the second half. So I mean we're not sharing the exact number of the growth, but it's higher than we expected, so which is very, very fortunate. It's across all geographies and across all product groups, which is super important to us. So we're seeing exactly the quality in the order that we want. So for example, as we already mentioned, we want to be #1 on runners' feet. So how we're growing in running is a very important measure for us. So we're seeing that happening. And at the same time, we're also always looking at what's same-store growth and what's new store growth. And we're also seeing that in stores where we already have quite a significant presence, we're still growing very, very strongly. And then beyond footwear, it's important for us that we continue to build On as a global sports company. And with that, we are very strongly looking at the apparel share and at the accessories share. And so we see it's still on a very small basis, our accessories business, but we're expecting very, very strong growth in 2022. And on apparel, a lot of the order is driven by now being able to be in many of the right channels. So we spoke about the shop-in-shops with Nordstrom, which give us an elevated presence. And we experience where we do have shop-in-shop executions, we also have a higher apparel share, and that is reflected in the preorders. So we're really positive across the board. And Martin will quickly talk about the margin impact.

Kimberly, so on the -- on our distribution costs. We are still seeing a very volatile environment. So around our last call, mentioned that we see airfreight prices around, jumping up from $20 to $40 per shoe. At the moment, we go more towards $16 again. So it's very volatile. Therefore, it's hard to project. We continuously -- we always have a certain amount of airfreight share. We were at very low airfreight volumes in most parts of 2021 due to a very good product availability that we had. So probably we will have a little bit in higher share also post half year 1. Probably the most long-standing impact will be on higher labor costs in our warehouses, where we don't expect that the effect is reversing. And this is why we have increased the prices in the U.S., as mentioned, on about 40% of our volume, to offset those prices and to be able to maintain our gross profit margin and to clearly work towards the direction of the long-term target of 60% on gross profit.

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

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

Next question is from the line of Michael Binetti from Credit Suisse.

Congrats on the nice quarter. I guess as we dig in on the gross margin a little bit, as we look back at some of the modeling from the S-1 around the IPO, obviously D2C being a higher gross margin and growing faster is a positive influence. But geography should have been a negative influence with the lower-margin U.S. business growing fastest. I think in total, channel and geography will be a slight negative to gross margin year-over-year in fourth quarter. So my gut there is that underlying profitability in these channels is turning out to be higher than what you anticipated as you scale. Or maybe you tell me if you're selling at much higher levels of full price selling, which you would have to cycle. So I just want to be aware of that. But maybe should we -- I guess, some help on how you look at -- how GM -- how the gross margins actualized versus what you thought at the IPO? Is 59%, 60% kind of a new floor to build off of at this point?

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

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

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

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

I've got a few here. Number 1, in the gross margin, the 700 to 800 points decrease in the gross margin in the first half, I assume that, that would be slightly more weighted to Q1 than Q2. Is that a fair assessment?

That's a fair assessment. It will be probably more 60-40 across the 2 quarters.

And then for the full year -- let me just ask you all my questions. For the full year, can you just give us some idea of what you're thinking the gross margin is going to be? And number 2, is overall, I mean given the product -- some of the product shortages and so on, I assume that the demand for your product is outpacing supply. And given that, and given that you were probably not able to satisfy some of the sort of that core running businesses and core running consumers and sort of the more heritage business you've developed, why go after that younger, more fashion customer when you could use that production for better serving sort of that more running, more performance customer?

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

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

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

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