On Holding AG (ONON) 2021 Q3 法說會逐字稿

Hello and a warm welcome to the On Holding AG third-quarter 2021 results call. My name is Melissa and I will be your operator. (Operator Instructions). I would now like to hand the conference call over to your host, Florian Maag, Head of Investor Relations and Corporate Finance. You may begin.

Good afternoon, good morning and thank you for joining On's 2021 inaugural conference call and webcast for our third-quarter 2021 results. With me today on the call are Executive Co-Chairman and Co-Founder, Caspar Coppetti; CFO and Co-CEO, Martin Hoffmann; and Co-CEO Marc Mauer. For the first part, Caspar and Martin will read through the prepared statement. 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 final prospectus filed with the Securities and Exchange Commission relating to the Company's [add sale] on September 16, 2021 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 contains 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 was 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 Caspar followed by Martin for the prepared remarks.

A warm welcome to all of you joining us today. We are excited to share with you On's first-quarter results as a public company and we thank you very much for joining this first call following On's successful IPO.

We are very pleased to announce that Q3 has been the strongest quarter in the history of the Company in terms of net sales, gross profit and adjusted EBITDA. Global consumer demand for the On brand continued to strongly accelerate, as expressed by the fact that all channels, regions and product categories are contributing significantly to On's hyper growth.

Who would have thought that our brand, which started 12 years ago the first prototype, consisting of cut pieces of a garden hose glued to the sole of an old running shoe, would develop into a company that generated net sales of CHF280 million in this past quarter, Q3 2021. We see our recent IPO as a steppingstone in our mission to serve more and more people around the globe and have them move with us.

We invite everyone to join us on this mission to ignite the human spirit through movement, or in short Dream On. We will continue to discover and explore new frontiers to do things differently and build long-term enduring value for all our partners and stakeholders.

Given that this is our first earnings call and some of you may be new to On, we will start with a brief introduction to our foundation and history, our core strengths and growth strategy, and shed light on how we made progress in the past quarter. We will then deep dive into our quarterly performance and conclude with an outlook and guidance before opening it to Q&A.

On is an innovation company. On was born in the Swiss Alps with one goal, to revolutionize the sensation of running based on the radical idea of soft landings followed by explosive takeoffs, or as we call it running on clouds. On is an innovation company at heart and we focus our efforts on three main areas: performance, design and positive impact. We aspire to increase performance for athletes and everyday consumers by applying smart, distinct and sustainability focused designs to our products.

We are happy to report that in the past quarter On has made strong progress on all three fronts. First, we are proud to have been the official outfitter for the Swiss Olympics and Paralympic teams at the Olympic Games in Tokyo. The visibility across the globe, especially of our apparel, led to an increased demand and brand awareness.

A personal highlight was watching the women's cross country mountain biking event where Swiss athletes won gold, silver and bronze, and seeing the full podium in On gear. The Swiss went on to win 27 medals, the best in almost 100 years.

We are also proud that 17 athletes competed in On product in Tokyo, including five athletes from the On athletic club, founded only a year ago and based in Boulder, Colorado, along with four athletes from the refugee Olympic team. To enable our athletes to compete on the highest level in long distance road running and triathlon, we introduced the Cloudboom Echo shortly before the games, both to competitors and consumers.

This shoe is the pinnacle of our performance running range featuring CloudTec, an ultralight super foam, and a carbon speed board. We have already seen many great results by our athletes in this product, including the third place by Helen Tola at the Berlin Marathon this past September. In the performance running segment On was able to wow consumers and capture market share with the new Cloudstratus and with the Cloudflyer, which continues to have very strong momentum.

Second, On's outstanding design continues to turn heads and our rapid growth in Performance All Day, as we call our lifestyle business, is driven by two recently added franchises, the Roger, Roger Federer's signature, and Cannula.

Roger Federer's signature footwear line is developing very well and Roger personally unveiled a limited edition recently at the Laver Cup in Boston only to see it completely sell out within hours. Both the Roger and Cannula are attracting the younger, urban and fashion conscious consumer to On and are key pillars in our ambition to be a global pacemaker brand.

Third, more and more consumers are shopping for full On outfits, including our apparel and accessories. In Q3, net sales from apparel products grew more than twice as fast as sales from shoes and we have seen a strong demand for exciting new products like the relaxed fit parka for better protection all seasons. Our new hoodie, active pants and climate jacket, all of them reflect our passion for technology, design and sustainability.

And last, not least, we are ready to introduce exciting new footwear and apparel products in performance running, performance outdoor and performance all day in Q1 next year.

Now let's shed some light on the third focal point of On's innovation efforts, sustainability. We are highly committed to decoupling our growth from the footprint that we leave on our planet, and we have committed to some of the most ambitious sustainability targets in the industry.

On climate, for example, we are working with science-based targets to cut our carbon emissions by 55% through 2030 per product that On produces. And we are also one of the first sporting-goods brands to join the science-based target for a major pilot program going beyond climate and including land, water, forest and biodiversity.

We aspire to be both a thought and action leader for our industry. During the climate summit COP 26 in Glasco last week, On announced a very ambitious new material, CleanCloud. CleanCloud takes carbon emissions and turns them into EVA foam. This technology, which we have developed over the last four years, has the potential to be used in the majority of On's product.

We are now working together with LanzaTech and Borealis to make the first pairs and scale the technology for mass production. This is a long-term initiative in one of several technologies that On will build in our quest to move away from fossil-based material.

What sets On apart is our global footprint. Coming from a very small home market in Switzerland, we needed to expand globally from the very beginning. We believe this early global expansion has been instrumental in driving our net sales CAGR at up 85% since inception, making On one of the fastest growing scaled athletic sports company in the world. So, we believe this global presence positions us extremely well for future growth within the large global footwear and apparel market.

Over the past 12 years we have built a passionate global committee of fans across more than 60 countries and we believe we have opportunities for continued market share gains across the globe. We are in a growth phase in almost all of our international markets and have significant potential to expand our geographic footprint through controlled multichannel growth.

We have historically been extremely successful when entering new markets. For example, we entered the United States in 2013 and have grown net sales to CHF136 million in the first nine months of 2020 and CHF265 million in the nine-month period ended September 30, 2021. We have entered China in 2018 and grew our net sales in the region by 199% from CHF1.8 million in 2019 to CHF5.5 million in 2020.

In the nine months ended September 30, 2021 this number is already at CHF13.7 million and we are seeing continued very strong growth. During singles day last week On products sold on Tmall and JD increased by over 500%. Complementary D2C and wholesale, in distributing these products we seek to meet runners wherever they are.

After starting off selling on our and website and especially running stores, our products are now also available in some of the most reputable general sporting, outer fashion and lifestyle retailers in the world through over 8,100 stores, and value adding online retailers across more than 60 countries.

In Q3, we continued to strengthen our partnership with some of the best global retailers. At Harrods in London, for example, On launched our first ever trade execution of a new premium On retail concept, featuring a mini version of our own retail store content. On the lifestyle side, we successfully piloted our collaboration with Foot Locker and with JD at very selective prime locations.

Both [stylists] have proven that our products strongly resonate with an even younger consumer group and we are excited to continue both partnerships by maintaining On's premium distribution. The wholesale channel accounted for 64% of our net sales for the nine-month period ended September 30, 2021.

With On's community and brand awareness growing globally we have further began to organically scale our D2C channel through onrunning.com and have increased our D2C sales significantly. In September, we have opened our [interest] owned and operated On store in Shenzhen. On's C2C channel as a whole, which includes our e-commerce site, a flagship store in New York City and six retail stores in China, represented 36% of our net sales for the nine-month period ended September 30, 2021.

We cannot emphasize enough that we consider our D2C and wholesale channels highly complementary and brand enhancing and we will continue to invest in the expansion across both channels.

A review of the Q3 highlights would not be complete without mentioning the great pleasure of running to the New York Stock Exchange together with our team to ring the opening bell and celebrate our initial public offering on September 15. It is an honor to now hand over to the person who did most heavy lifting for this event, On's CFO and Co-CEO, Martin.

Thank you, Caspar. Let's move on to reviewing our financials for the third quarter of 2021. As we mentioned at the beginning of today's call, we see an accelerating demand for our brands globally. Our Q3 results are the strong combination of growth and profitability and a further validation of our business model and our long-term targets.

Net sales for the quarter were CHF218 million, up by 67.6% compared to the third quarter last year when running had already been on fire and many COVID-19 restrictions had been lifted temporarily. So, we maintained our strong growth at this elevated level. It is driven by the continued success of On's core strategies, including brand awareness, multichannel geographic expansion and the broadening of the product portfolio driven by innovation, design and sustainability.

Year to date we achieved net sales of CHF533.5 million, a 77.2% increase compared to the first nine months last year, and a 70.1% CAGR over the past two years, which further validates the strong continued strength of our brand.

The demand for products accelerated across both the wholesale and the direct-to-consumer channel, as well as all regions and all product categories. As Caspar mentioned, we consider our direct-to-consumer and wholesale channel highly complementary. In Q3 we see the strategy being validated by the strong demand in both channels. D2C grew 93% to CHF75.7 million and wholesale net sales increased by 56.7% to CHF142.3 million.

Despite the full reopening of retail stores in most key geographies, we see a very strong continued engagement of existing customers and the growth of new customers in our D2C channel. For example, in North America D2C grew 129% and in Asia Pacific 152%. Overall the contribution of net sales from the direct-to-consumer channel grew to 34.7% for the quarter versus 30.2% in the same period last year.

We continue to invest in our brand and community by building partnerships with premium wholesale partners. In Q3 2021, consumer demand for the On brand in the wholesale channel increased even further and led to strong growth rates in many of our key and [field] accounts.

Across both channels we are seeing a strong demand globally with growth rates in all geographic regions exceeding 50%. North America continues to be the growth engine with a net sales increase of 82.6%, resulting in the United States and Canada being responsible for 51.5% of total net sales. The continued acceleration of the demand in North America is best reflected in the fact that D2C sales grew twice as fast as wholesale.

As previously mentioned, we see China as one of the key regional growth drivers, which will showcase with strong triple-digit sales growth in the third quarter. The Asia-Pacific region in total grew by 71.4% with the significant growth in China being somewhat offset by a slowdown in Australia's wholesale market as local lockdowns continued into Q3.

Also in Europe, most markets continue to grow strongly with an overall regional growth of 50.3%. Here it is important to highlight the difference in most other regions, many European markets have lifted COVID restrictions in Q3 2020, which had driven higher wholesale sales in the same period last year.

The growth across our distribution network is fueled by the successful expansion and development of our innovation driven products. Across all our product categories and all key franchises the demand is accelerating. Net sales in Q3 2021 increased 65.2% for shoes, 133% for apparel and 41.5% for accessories.

For the first time apparel contributed more than CHF10 million in one quarter to our overall net sales. Consumer demand is clearly there and in On's owned stores in China, apparel already contributes approximately 20% of the sales.

Gross profit in the third quarter was CHF131.3 million compared to CHF70.8 million in Q3 2020. Our gross profit margin increased year-over-year from 54.5% in Q3 2020 60.2% in Q3 2021. This is broadly in line with the strong results we have seen in the previous two quarters and another validation of our long-term target. The increase primarily reflects lower customs costs related to the free trade agreement between Vietnam and Europe, lower sourcing costs and the very low share of air freighted product in Q3.

In the first nine months of 2021, gross profit decreased by 90.9% to CHF318.5 million, reflecting an improvement of our gross profit margin from 55.4% to 59.7%. If you leave out share-based compensation for the moment, SG&A expense as a percentage of net sales was 48.5% for Q3 2021 compared to 39.6% for the same period last year.

More comparable year-to-date SG&A expense without share-based compensation were 48.7% of net sales for 2021 compared to 45.3% for the same period last year. This increase is mainly driven by higher investment in digital customer acquisition and demand creating expenses and the resumption of investment in grassroot activities post COVID-19 pandemic lockdowns. In addition, we incurred $7.3 million IPO transaction costs.

Then moving on to share-based compensation, it's worth looking at in an isolated way in a bit more detailed manner. Share-based compensation expenses in Q3 2021 decreased to CHF2.4 million or 1% of net sales, from CHF5.3 million or 4.1% of net sales in the prior year period. This change is primarily due to a one-off transaction in 2020.

Driven by the strong growth acceleration in the past years and by the successful IPO, we expect to (inaudible) approximately CHF7.5 million additional stock-based awards under our existing equity plans in Q4 2021. Due to the timing of such plans, this impact is not included in our Q3 numbers.

Adjusted EBITDA, which excludes share-based compensation and one-off transaction costs related to the IPO, was CHF37.9 million for the three-month period ended September 30, 2021, up from CHF22.6 million in the prior year period. The EBITDA margin remained consistent year-over-year for the three months period at 17.4%.

Year-to-date adjusted EBITDA increased by 121% from CHF38.6 million to CHF85.2 million. As a percent of net sales adjusted EBITDA increased year to date from 12.8% to 16% and validates our commitment to simultaneously grow net sales and profitability.

Shifting to our balance sheet and cash flow, on September 15, and prior to the end of our third quarter, we completed our initial public offering at the New York Stock Exchange in which we and certain selling shareholders closed an aggregate of 35,765,000-plus A ordinary shares at a share price of $24. The net proceeds from the IPO for On were CHF615 million or $662 million. This has led to a very strong position of net cash and cash equivalents of CHF672.1 million, which will enable us to pursue our ambitious growth plan.

Now let's look ahead. We are confident that demand for our product will remain very strong across all regions, all channels and all product categories. Before we detail out our financial outlook, and in order to provide a better understanding of the expected financial performance, we would like to share the recent development and our short-term outlook of the situation in Vietnam and throughout the supply chain.

There are two challenges that are connected and that will impact our financial performance in the upcoming quarters. Most significantly we expect supply constraints and higher airfreight expenses as a result of the recent sector re-closures in the sales in Vietnam. The quantification and mitigation of this impact is being accentuated by very volatile freight and distribution costs driven by higher freight and shipping charges and higher warehouse labor expenses.

During Q3 2021, our production partners in the south of Vietnam were affected by government mandated closures to combat the spread of COVID-19. The impacted factories represent about 70% of our production capacity. The closure started in July 2021 and factories remained closed as of September 30, 2021.

As of beginning of October we have seen a gradual reopening and ramp up. Our key message today is that all factories are open since early November and, as of this week, operate at more than 80% of our planned production capacity. To put this number into perspective, it is very important to highlight the fact that our planned production capacity was based on the anticipation of continued hyper growth in 2021 as well as in 2022, versus those goals until today, the accumulated loss of capacity in the affected region is approximately 12 weeks.

To mitigate the impact on our business, we continue to take actions including the reallocation and prioritization of product across all factory partners and the use of airfreight to balance inventory levels against the strong demand. In addition, already as of Q1 next year we secured a significant amount of additional production capacity at two new factory partners in Indonesia. We expect to use airfreight to be a headwind to our gross margin of approximately 900 to 1,000 basis points in Q4 2021 and in Q1 2022.

In addition, we are working closely with our retail partners to maximize the number of products available to our end consumers. These measures include the holistic management of all available inventory and the adjustment of launch dates for new products. We are confident that the supply chain disruptions in Vietnam are temporary and that our pricing power will allow us to compensate increased freight and distribution costs in the mid- to long-term with selective price increases.

Turning now to our financial outlook. As this is our first time to provide financial guidance to the public market, we would like to briefly explain how it should be (inaudible). Philosophically we aim to provide prudent yet aspirational guidance that appropriately balances our optimism in the business with potential risks or headwinds we face. We will provide guidance for the full year, not on a quarterly basis, as this is mirroring the way we steer the business internally and it allows us to take a long-term growth perspective.

For Q4 2021 and half year one 2022, we are expecting our financial results to be constrained by the mentioned supply chain challenges. We see the demand clearly above the available supply. Given the current uncertainties in the supply chain, we will prioritize topline over profitability in order to protect our retail partners and our long-term growth.

Now for the full year 2021, we expect net sales of CHF710 million representing 67% year-over-year growth. Our outlook reflects the supply restrictions that we foresee in the last few months of the year. We have started to airfreight selected products from factories after reopening to fulfill the demand. Nevertheless we are still expecting limited product availability in the first quarter.

Independent of the supply chain disruptions we have taken the strategic decision to shift the launch of our [straight] summer season product from Q4 into Q1, which will result in a channel shift of our seasonality. We expect adjusted EBITDA of CHF92 million, representing an adjusted EBITDA margin of 13% and a year-over-year growth of 85%. We will continue to airfreight products throughout Q4.

In addition, we will drive investment in brand building with strong investment into returning physical global major running events like the New York City Marathon into upper [funneled] marketing during the holiday season, but also continue investments into our team.

As earlier indicated, we expect to grant additional stock-based compensation awards under our existing share based compensation plans. These awards will vest at the [current] date and therefore we will record a material share based compensation charge of approximately CHF173 million in the fourth quarter of 2021. And consequently significantly impact our Q4 unadjusted net profit. As of 2022 we expect an annual dilution from our equity plans of approximately 1.5%.

Looking beyond 2021, we are very confident that the supply chain challenges, especially the supply chain constraints, are temporary and that we should fully focus on our long-term growth opportunities. Especially in half year one we expect net sales to be adversely impacted and final product availability depends on the continued factory ramp-up and availability and cost of airfreight capacity.

At current we expect a return to strong hyper growth. In the second half of the year we expect at least CHF960 million net sales, even though our internal ambition is higher than that. We expect to have better visibility in the new year on how quickly we can get additional capacity and we will revisit the guidance then.

To be very clear again, we are experiencing a transitory supply shortage, not a demand issue. This is not a new situation for On. Over the last decade the strong demand for the On brand has regularly outpaced supply and we have experience in turning this into an advantage for On by tightly controlling distribution to ensure sustainable quality growth.

In the first half of 2022 we will face supply shortages on certain products that are higher than what we would like and not all consumers will have the ability to buy exactly the product they are looking for. However, we believe in the long run it will only increase the desirability of the On brand.

A tight control of the increase of our SG&A cost base in the first half year will allow us to partially mitigate higher freight and distribution expenses. Consequently we expect adjusted EBITDA of CHF125 million and to maintain our adjusted EBITDA margin of 13%. As said before, to mitigate the disruptions across the international supply chain we will prioritize net sales growth over profitability.

In conclusion, we are very proud of our recent performance and excited for the opportunities ahead. But most important, we are extremely proud of our team all around the globe for their passion to grow On at such an incredible speed and for all the hard work that is required to adapt to the fast-changing environment. Thank you so much.

For the future, we have the right team of talent in place to drive innovation and to develop exciting products, to engage with our customers in wholesale, online and our own retail, to continue building a premium brand globally, to make the world a better and more sustainable place, to use our voice to build a more diverse and inclusive run community together with our industry partners, all with the goal to deliver our mission -- to ignite the human spirit through movement and to dream on as a team.

With that, Caspar, Marc, Florian and I would like to open up the session to your questions. Thank you for your continued support and trust. Operator, we are ready to begin the Q&A session.

(Operator Instructions). Kimberly Greenberger, Morgan Stanley.

Great, thank you so much. Good afternoon and congratulations on the fantastic quarter right here out of the gate. I wanted to ask about your expansion of factory capacity. I know you were working on diversifying your sourcing base even prior to COVID.

But if you just sort of step back and think about the goals that you've got for the business over the next two, three, four years, what's your philosophy about how to develop additional factory capacity and diversify your sourcing base in order to maybe at least partially shield from some of the volatility we're seeing concentrated in Vietnam right now? Thanks so much.

Welcome, everyone, also from my side. This is Mark speaking and thank you so much, Kimberly, for your question. So, I think what we already started doing some time ago is we started to prioritize agility over efficiency. And that really has allowed us now also to deliver the quarter that we delivered and to navigate through some of the challenges that we saw over the last years on the demand side but also on the supply side.

So, we will continue to build a very agile and nimble sourcing environment and supply-chain environment. What that means is first we'll try to diversify into more countries, ideally also countries that are closer to the consumer or some of our consumers, for example, in Europe or closer to North America, as long as capabilities are there and it is meaningful for us to do so and we have pilots running in certain countries.

The second thing that we continue to do is we will continue to dual source our key styles and key materials. So, this is another reason why we were able to move volume around pretty quickly and why, basically, as soon as the factories reopened we could start full speed right out of the gate because the materials and the components were there. So, we want to create and continue to create redundancies on the supply chain side so we can react to a very, very fast changing environment that we basically see there.

And I think third, obviously, we feel labor will continue to be a very constrained resource and even become more constrained over time. So, we are working heavily with all our partners to reduce the dependency on labor be it in warehouses but also be it on the factory side, and to make sure we're able to automate more and more parts of the processes.

That is very clear, Marc. Thank you so much. I wanted to ask about wholesale as well if I could. The wholesale revenue this quarter came in well above our expectations. I'm wondering if you can talk about the additional expansion in wholesale, any new partners you brought on here this year and what you are seeing in terms of demand in that channel. Thanks so much.

Thank you, Kimberly. So, I am also going to answer that one. On the wholesale side, so in the end the demand that we're seeing, we're seeing that coming from end consumers in the key segments that we're in, running, outdoor and performance all day. And these end consumers shop on our own website and so our own channels, but also with our most important wholesale partners.

So, the wholesale partners are looking at that demand very, very positively and the orders and the order book that we're seeing for the next six months, for example, is way above basically what we could've expected. But again, we have supply constraints for the first month and we're right now taking orders for the second half of the season.

So, what this allows us to do, this very strong demand, is have a very, very thought through approach on how to expand our wholesale channels and take the right decisions that work with the right partners at the right time. And as part of that we're doing certain trials. So, we've piloted 32 Foot Locker doors in the US, we've piloted 10 JD doors in the US and 10 JD doors in Europe and we're seeing very, very strong results.

And we will take wholesale distribution that allow us to (inaudible) figure -- go after our mission and some of our key targets, one of it being in the end the number one brand on (inaudible). So, you can expect us to expand wholesale in a way and we can be very, very successful, for example, with runners in the US and (inaudible).

Sure. Thanks so much and good luck here.

Grace Smalley, JPMorgan.

I guess firstly, just given the current supply constraints that you are seeing, how are you prioritizing the product allocation between your wholesale partners and your direct-to-consumer channel?

And then you mentioned your pricing power and potential selective price increases in the medium- or long-term. Can you comment on whether you are planning any price increases for next year and also any cost pressures (inaudible) from your competitors?

So, I'll quickly speak to the first one and Martin will speak to the pricing question. We spoke about that a few times in the past as well and it's very important to understand that On is a true omni-channel brand and with that we're taking a consumer perspective. So, we want to have the product available for the consumer that wants that product through the channel of the consumer's choice.

And what that means is basically when you look at our running product we will treat our key running partners and our own D2C business on the same level when it comes to product prioritization. And we will do the same on outdoor and the same on the performance all day side. Now as you know there's very, very strong demand on the direct-to-consumer side and that product prioritization is reflected accordingly in the outlook that we gave.

Just one additional comment which is important here. We also feel that the next couple months are a great opportunity to continue to build shelf space with some of our key partners. And that's also one of the reasons why we prioritize topline so we can gain additional shelf space with some of our partners and can through that take that into 2022, 2023 as well.

Then, Grace, focusing on the price increase question. So on the premium brand, and (inaudible) significant pricing power (technical difficulty) this premium price level, especially also versus our competitors. So, we are planning selective price increases in spring 2022. They will focus on North America and they will be relevant for about 40% of our volume.

Great. Thank you. And if I may just follow up with a broader question on the industry. I think that running footwear seems to be a bright spot across all brands currently. Just wondering what your thoughts are on what is driving and the category strength. Clearly it benefited during COVID but it seems to have gone from strength to strength even as economies reopen. Thank you.

Thank you, Grace. This is Caspar. You mentioned some of the factors, running is a habit. Many on this call are probably runners. Once you get to the point where you can run twice, three, four times a week it's hard to let go, you see a very good sensation. And so, there was (inaudible) during the pandemic (inaudible). But let's also not forget when consumers now go back to their gyms, a lot of people do run in gyms and treadmills as well.

So, we are a little bit less exposed as an industry to the return to gyms because running is now a part of every workout. So yes, participation in the sport is up and we are now key positioned that we can not only just grow with the industry but we can take significant market share given the way we have been able to manage our supply and plan for high growth going into 2022.

Michael Binetti, Credit Suisse.

Thanks for all the detail and congrats on your first quarter here public. I just wanted to ask you maybe on the new distribution. You mentioned a few stores with Foot Locker and a few with JD. And I know that you guys have had product in Foot Locker in the past. I think it was a long time ago and I think at the time the thinking on why that didn't go forward a while ago is because you needed probably to bring more of a fashion component to it.

You mentioned a few references to lifestyle early on. I know you've been investing in the design team and in some of the assets needed to push farther on the lifestyle side. And then -- so I'd be curious to hear where you feel like you are on that and how much opportunity there is in retailers like Footlocker, Finish Line, JD in the near term? Is that something that we could see start to accelerate significantly here driven by some of the lifestyle stuff you've been working on?

As you can imagine over eight years On has evolved as a brand into [wearing] Footlocker the last time. And the reason why we feel working with partners like Footlocker and JD is beneficial, I just want to point out a few.

So, first of all, (technical difficulty) and we're starting from a consumer perspective. And we feel On has an opportunity to target an even younger consumer than we already have. And Footlocker and JD are great channels to target the online consumer. And we do have the product for that consumer. So, this is what the tests are showing, that product, especially the Cloudnova is resonating extremely well with that consumer base. And so, we very much feel this is an opportunity to capture that additional opportunity.

Then second topic is On attracting a very female consumer as well. And we are able to bring more female consumers into some of these channels, which they very much appreciate. So, we're creating a win-win situation in there.

And then probably the third one, we are working a lot on tiering the product. So, JD and Footlocker have a very, very different (inaudible) product assortment to, for example, a Fleet Feet or some of our On specialty retailers. So, we feel On has the size and has an assortment so we can efficiently target several consumer segments through different partners. And we feel very, very detailed tiering, always staying premium in terms of who we partner with, but also in terms of pricing.

And first and (inaudible) that this is successfully working. And you can expect On to take additional moves, but always really, really saw through and flow, making sure we are taking the right steps at the right time.

Thanks. And then if I could ask a follow-up. As you look at next year, I thought it was interesting that you were able to guide us to stable 13% EBITDA margins and, frankly, that's not far off what we heard as we talked with you through the IPO process about where you thought the business would be next year. But you did point to some very heavy gross margin pressure from airfreight. I know that starts in the fourth quarter and [into] the first quarter. I think that makes it very impressive that you're able to still guide to flat EBITDA margins next year.

But could you help us maybe think about some of the -- how to think about SG&A versus gross margin next year? How you are building to that in your model, and maybe even first half versus second half, so that we understand what some of the dynamics are going to be here as you guys go through the supply constraint you pointed to?

Yes, happy to Michael. So, I think looking at our Q3 results, it validates our long-term targets that we discussed and given. And for Q4 now and also for half-year one next year, we expect that those long-term goals are impacted by higher and above average airfreight costs, which is the key driver for lower gross profit margin and also EBITDA margin.

And this impact is in the end reflected in the 13% guidance that we have given both in 2021, which [proceeds] the impact in Q4, and then for 2022, which proceeds the impact in half-year one. We also considered India the upsides from the price increases. And also, as we always committed to grow top line and profitability in line, of course, we will also grow our SG&A cost base carefully and under consideration of the current circumstances and the higher freight costs.

But we also mentioned on the call, especially in the next two quarters we will clearly prioritize our topline versus profitability. Because for us it's super important that our consumers can buy our products, that our retailers have sufficient amount of product that we keep our shelf space. And this has been also considered in the 900 to 1,000 basis points impact from the airfreight that we foresee in Q4 and Q1.

Okay, very helpful. Congrats again, guys. Thank you.

Jay Sole, UBS.

Great, thank you so much. Would it be possible to elaborate a little bit on the growth you saw in Europe in the quarter? Was the strength concentrated in some of your -- the countries like Germany and Switzerland where the Company has already a strong base? Was the growth broad-based? Are you seeing increasing momentum in some of the other countries across Europe? Thank you.

The good thing is we're seeing the growth is very much distributed across many countries. It's also on the wholesale side definitely impacted by some of the lockdowns that we saw happening not in the third quarter but beforehand. But we are seeing that the UK is very strong. So, UK still comparably a bit smaller to some of the other markets and we're investing heavily, so this has been very, very positive.

And Germany, Switzerland as well as Austria continue and to basically deliver strong results. And then we see that we have a lot of opportunity still in France, for example, and putting lots of pieces in place so we can capture that (inaudible). So, you are seeing -- I want to point out, which we didn't talk yet, is that it's not only footwear that has delivered (inaudible), especially also apparel has been very strong in some of our European markets and has delivered a very, very strong growth (inaudible).

Great and then if I could ask you just about the fiscal 2022 guidance. Based on what you've seen from the stores that you have opened, what is your thought about store growth as we think about the model for 2022 and also e-commerce? What e-commerce capabilities will you have to be able to enhance the e-commerce growth that you'll have all over the world? Thank you.

Let me quickly start on store growth and maybe, Caspar, you can elaborate a bit more on the e-commerce side. So, on the store side, the biggest part of the stores will definitely come from China as we'll continue to build our build our network of stores in China. We are already at eight stores as of today and they are all working very, very well. And together with our -- with Tmall and JD really shaping that environment.

And at the same time we'll continue to roll out On experiences in the cities across the globe. So, we are planning to roll out to, for example, [Topi] in London at some of the next locations. You can also expect some of the key cities in the US to get (technical difficulty) retail partners. We have the opportunity to bring on to life in a very, very differentiated way together with them.

And we spoke about Harrods and we're having a concept that we're starting to roll out with Nordstrom, for example, that has delivered very, very strong results especially also on the apparel side. So, we'll definitely continue to build this all-encompassing brand experience.

I'm happy to follow up on the D2C question. You've seen very, very strong bent demand across all regions and a lot of that demand is converted in our own D2C website. If you look at the mix, the ratio between new customers and existing customers roughly stays the same, which means we are still bringing a lot of new people to the On brand.

At the same time we elevate the brand awareness that we're seeing especially in the US now through the IPO drives more consumers to our website on their own terms. And this is something that when we are looking to the next year and we will continue to explore how do we continue to find ways where we're not too reliant on the two big online ad providers, but where we have many, many channels that lead consumers to our website.

We're also investing in our own data capture, our analytics (inaudible) website, and we are planning to bring a new web store online in the second half of next year. So, there are a number of initiatives that will continue to drive our D2C push and we'll continue that -- the D2C channel is growing faster than the wholesale channel.

Jim Duffy, Stifel.

Hello, everyone. Terrific quarter and outlook given the challenging backdrop. I'm hoping you guys can speak in more detail about the product pipeline looking into 2022, both key new franchises and important updates to look for from existing franchises. And can you maybe touch on the influence of manufacturing disruption on the new release calendar?

Yes, I'm happy to talk about on the new franchises. And then, Marc, you can probably take the question on the release calendar. We have three business units, the running, outdoor and lifestyle side. In running our goal is to be the number one brand on runners' feet. And so, we're actually adding three very exciting franchises next year that will help us get broader acceptance even and hopefully push out our market share available of 10%.

So, the first one is the CloudRunner which will be launched in the spring. It's a supportive, well-cushioned shoe at USD150. And the second one is the CloudGo, which is the neutral version of that, same price point that we expect to be on the biggest franchise once it gains enough distribution and we get it on enough people's feet.

And then the CloudMonster is our most cushioned product today, so really this next cushioning segment that is sitting on top of the Cloudstratus, which has already taken one of the top spots in terms of solutions that we launched only in July. So, that's on the running side.

On the other side we have an update of our high single which has already taken quite some market share, especially here in Europe in the Alps, but also resonates well with stores like an REI in North America. And we are adding a multifunction outdoor product where it is called the CloudOne, kind of like a mid-cut product that will be very, very popular for people that are not going to the extreme outdoors but they're looking for a waterproof shoe that protects them well.

And then on the -- from the layer [lifestyle] segment we are adding two silhouettes that we have just now presented in our global meeting last week, two very easy today. One is called the [CloudEasy]. Basically an ultralight slip on product, also quite interesting from a sustainability point of view because it is made out of only six parts versus like on average 30 or 35 parts that we construct our products of. And then last, not least, the [CloudRich] was inspired by track heritage and brings a new silhouette to the lifestyle channel.

Thank you, Caspar, for the overview on the footwear side. And please let me reiterate again that our apparel growth this quarter was 133%, so there's also a lot of apparel launches coming up next year. And we foresee all of those to happen as planned. And so, there's no impact on the apparel side from a production perspective.

When it comes to launch dates, so let's probably just quickly look at the first quarter, because that's the quarter that's most impacted by it. We will launch the next iteration of the Cloud in the first quarter as planned. So, we're able to go ahead with that launch as planned.

We're also able to go ahead with the launch of the CloudMonster as planned in the first quarter. The main impact is going to happen on the CloudRunner and that's going to launch slightly delayed. And we will communicate to our most important retail partners that launch date as soon it is available.

Again, our philosophy is to make sure that the product that is most relevant to the consumers and they already know it is available. So, we will prioritize existing products over new launches as they're also contributing a huge part of revenues.

Excellent. Thanks for the detailed overview of the pipeline, guys. And Caspar, really exciting announcement around CleanCloud. Can you speak more about that development process for CleanCloud availability, timing and the lead you believe that provides you relative to competitors in the marketplace?

Absolutely. I'm glad you are as excited as we are. But we have a long-term vision of moving away from petrol-based raw materials and to full circle (inaudible), with a view of taking our product back and making new ones out of them. The timeline, as you can imagine, is challenging and it will be a little bit of a moving target. But we hope to get there and the majority of our products are no longer petrol-based. We should get there before the end of the decade.

And for clarity, it will depend on how quick we can rebuild the return networks. And we're also looking into not just doing our own system, but partnering with the industry and retailers and what have you now.

When it comes to CleanCloud, this is a project that started about four or five years ago and it came from the inside that there were some biofuels available where companies started capturing carbon from the air and turning it into, for example, jet fuel. And basically if you can make jet full you can make plastics and you can make the stuff that we make our product from.

It was a very, very challenging time. We followed maybe three or four leads on technologies during this time. Without going into too much detail, one of them entailed actually building a chemical processing plant here somewhere in a small valley in the Alps. And so that had access to hydropower because some of these processes are quite energy intense. And whenever we felt like now we are there some other hurdle came up.

Now with this latest announcement we feel that we are very close to bringing this to scale. So, we found two very strong partners. Borealis had already been a partner for the four years helping us develop the compound and before we tested it. This compound has performed enough to hit more than half of our product range and then LanzaTech really finding a very efficient way of capturing carbon monoxide at the exhaust pipe of a cement factory and also providing large enough quantities of it.

They also use an efficient process that is not as energy intense by using enzymes to turn it into ethanol. Ethanol is the base for most of the products that we make. So, clearly we are making the first foams that we hopefully can showcase later -- I would say by the middle of next year. So, a shoe fully made out of captured carbon. And we are negotiating currently with both LanzaTech and Borealis how quickly we can scale this up. This requires major investment on their part and ours. Basically you have to build a plant to process this.

At the same time I think it's important to state that we are not just banking on one technology. So, we have about three or four technologies that we're looking at that are non-fossil based and some of them, for example, are post-consumer waste. Just to make sure we will have multiple supply chains available and also can get to scale.

And this is, as you know, very dear to our hearts [add on]. We don't want to show concepts to the world. We want to show a way of how can we move this to scale quickly and that's what we are doing together with these two partners at the moment.

Outstanding stuff. Thank you. Very exciting.

Jonathan Komp, Baird.

Thank you very much. I want to ask about 2022. I know you are guiding revenue to grow 35% despite the headwinds in the first half. So I'm wondering if it's possible to comment on the growth you might be able to achieve for the year if it weren't for the constraints you mentioned on the supply chain. And when you think about the second half of 2022, is it possible to maybe highlight the most important drivers that you see to the strong growth you're guiding to?

So, starting with the second part, I think Marc was mentioning that we are not in the discussions with our key accounts about their -- following their orders, I [suspect] the order for the second half of the year with a lot of very strong feedback from their side. We have our orders for the first half of the year where we will take the supply constraints and we will be able to supply the full demand.

This is where we get the confidence from, and same on our back to consumer channel. Customers was mentioning that where we still see strong growth rate of new customers, of repeat customers. And as we pointed out, we see that in the second half of the year we will return to hyper growth, so in the range of 40% to 50% and respectively in the first half our number is constrained by the supply given on the feedback that we get from our retail partners. We would have seen a similar growth rate in the first half as well.

Yes, that's very helpful. Thank you. And then one bigger picture question -- when you look at your business across the main categories, running, outdoor and performance all day or lifestyle, how do you think about the long-term dynamic between those categories and even what your business might look like longer-term if you roughly split across those broad categories?

Look, very (multiple speakers).

(multiple speakers) innovation company (inaudible)? Sorry, Caspar, you go.

So, most of the segments that we're in are heavily inspired by performance and that's the foundation of our brand. We are an innovation company at heart and we bring technology solutions to all segments that help consumers have a better experience. In running that means they run faster, they're injury free, lighter in outdoor and lifestyle. Basically they just feel better, they're able to move more effortlessly, they (inaudible) less.

So, these are megatrends that we are banking on. And we are not really looking or we don't even steer -- we have a growth goal for lifestyle versus running. We feel that the consumers now expect versatile product. And most of our products can live in one or two, sometimes three times (inaudible), and that's what's been driving some of the success of the brand. We're not just making a very narrow use case product.

Let me just say only as Caspar pointed out, we are an innovation company at heart and it is rooted in running. So, (technical difficulty) from a communication and also a brand perception perspective (technical difficulty) very much rooted in running and this will also drive (technical difficulty).

Cristina Fernandez, Telsey.

Good afternoon and congratulations on a good first quarter. I wanted to see if for next year can you help us think about growth for the different regions. Any puts and takes based on inventory distribution and also some of the initiatives you have with your wholesale partners?

Let's look at the three main reasons, which is basically North America, Europe and APAC. So, if you look at North America, North America will continue to be the key growth driver (technical difficulty) next year as well. So, in terms of absolute number but also in terms of the growth that we are seeing and very much also driven by our direct-to-consumer channel.

Then when you look at Europe, there is markets where On is already a bit more established like Switzerland, Austria on some parts of Germany. And then there is a lot of opportunity to continue to grow, for example, in the UK and France as we already elaborated. So Europe will continue to have growth momentum but it will be a little bit slower -- we're expecting it to be a little bit slower than in the US.

And then Asia-Pacific very much driven more and more by China, which sees incredible momentum. You've heard in the statement upfront also on some of the Q3 events that we had on double 11. So, very strong momentum that we are seeing there and we assume that the strongest percentage growth number will come from Asia-Pacific or specifically China.

Now inventory luckily, again, we are working very hard on having a very nimble and agile supply chain. So, that it also means that we can react to market differences very, very fast. It is also what you saw reflected in our 2020 results on the demand side. Actually we're basically maneuvering between different markets that had a pure COVID lockdown. So, we are confident that we can make sure that the inventories in [their] house are according to the demand we're foreseeing and planning.

Thanks, very helpful. And then a second question maybe just bigger picture. On the marketing message, as you launch new products should we think about the marketing being different, maybe spread out across more categories and product? And is still kind of 12% -- is that a good absolute dollar spend as a percentage of sales that we should think about over the next -- 2022 and the next couple years?

Happy to take this. We mentioned this that with the cross we will have more opportunities to also invest into our (technical difficulty) movement. We also had great activations around our new concept of 0.2 at the New York Marathon in London. At the same time of course we see physical events returning and we will be present at all events as well to work with our community and present the brand there.

And in conclusion, we expect that our spending on marketing will stay (technical difficulty). Of course, we will have more money available for upper funnel brand building investments. And then of course, although in our direct-to-consumer channel, heavily spending on the digital side.

Sam Poser, Williams Trading.

Thank you very much for taking my question. I'm just wondering about how you think about allocating -- how you allocate product specifically versus -- you talk a lot about what the customers want and what the demand is. But how are you planning to keep that supply below demand once the business -- once the supply chain eases?

And are possibly any of the big order backlogs that you're seeing the result -- because we're hearing this from other people that retailers are writing a lot of orders just because they know they know they're not going to get what they want. So, demand may be overstated because of the supply chain disruption.

Thank you for the [observation]. On has been built over the last 11 years as a premium brand. And part of that is what's consistently keeping basically supply below demand. It has been very, very important to us. And so, when we are taking decisions on how to grow the business, we are always doing that with that framework in mind. And we don't foresee right now, for the foreseeable future, that demand is slowing down to an extent that we wouldn't -- where we would have too much supply.

And with that, in order to make that statement I think it's very important for us to have access to stock, basically reports from all our retailers and (inaudible). So, we know very, very well what their sellout looks like. And we understand for a large part of our business what the product is that is in the market.

And so, we're very much steering the business also from that perspective, so (inaudible) when we do selling with the retailer we're not just selling new products. We're looking at what is the right product for them to sellout and then we are planning basically the business accordingly. So, this is very much how we're looking at it. Was there a second question? Did that answer your question?

That answered my question, thank you.

Thank you very much. Thanks for your time and for your questions and speak soon again.

Have a great day, everybody.

Thank you very much. Goodbye.