On Holding AG (ONON) 2023 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the On Holding AG Q1 2023 Results Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. (Operator Instructions).

I would now like to turn the conference over to Jerrit Peter. Please go ahead.

Good afternoon, good morning, and thank you for joining On's 2023 First Quarter Earnings Conference Call and Webcast. With me today on the call are Executive Co-Chairman and Co-Founder, Caspar Coppetti; CFO and Co-CEO, Martin Hoffman; and Co-CEO, Marc Maurer. Before we begin, I would like to remind everyone that today's call will extend forward-looking statements within the meaning of the federal securities laws.

These forward-looking statements reflect current expectations and beliefs only and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20-F filed with the SEC on March 21 for a detailed discussion of such risks and uncertainties. We will further reference certain non-IFRS financial measures such as adjusted EBITDA and adjusted EBITDA margin.

These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for a reconciliation to the most comparable IFRS measures. We will begin with Caspar, followed by Martin, leading through today's prepared remarks, after which, we are looking forward to opening the call for a Q&A session.

With that, I'm very happy to turn over the call to Caspar.

Thank you, and a warm welcome from my side. It's a great pleasure to be here with you to discuss our first quarter performance and recent milestones. On entered 2023 with high ambitions of continuing our growth journey capturing market share and further increasing profitability. We are pleased to share that the On growth story continues.

We were able to exceed our expectations and post record net sales or CHF 420.2 million in the 3-month period. This reflects a growth rate of 78% versus Q1 '22, which have been somewhat constrained by the supply shortages that had affected our industry a year ago.

As we have shared before, delivering best-in-class profit margins is a focus for On, and I'm happy to report that we have been able to substantially expand our margins in the first quarter. Gross margin for the first quarter was 58.3% and adjusted EBITDA was 14.5%. We are tracking well towards our midterm ambition of delivering best-in-class gross profit margins of 60% and EBITDA margins in the high teens and Martin will expand on this in his comments in a minute. But first, let's have a look at some business highlights from this quarter.

On is an innovation company at heart, and we are happy to report that On's recent running launches have met with very strong consumer demand and have helped On capture additional market share in the running category. I'd like to highlight the extremely successful introduction of the Cloudsurfer 6, which is the first On product to feature computer-optimized technology, which we call CloudTec Phase and will roll out to further models in coming seasons and On is also capturing mind share in the running space.

An emotional highlights was On's first win in the Boston Marathon, with On Athletic's member, Hellen Obiri, distancing a very strong women's field and once again proving that On's highest performance running shoes are some of the fastest marathon products. The Cloudboom Echo 3, for example, will be more broadly available to consumers starting in July this year. We are very satisfied to see that On's lightning and rain strategy, winning races and converting everyday runners to On is delivering strong results.

To illustrate, with the Cloudsurfer, the Cloudmonster, the Cloudrunner and the Cloudgo, four running products that were only launched within the last 12 months are now making up 45% On sales at the leading U.S. running store franchise fleet [feed]. On the Tennis side, we are thrilled to see world #1 Iga Swiatek and Ben Shelton on the court in their new On year. Iga stand as all, coming back from an injury to win her first tournament as a non-athlete by defending her title at the Stuttgart Open in late April. Both the Roger Pro Tennis performance products as well as the Roger lifestyle Tennis franchise are in high demand and have been growing even significantly faster than On overall.

The On brand is strong and keeps getting stronger. In recent months, we have started to shift some of our marketing spend to awareness, image and top funnel investment, and it is paying off. In March, the Cloudsurfer and our tagline Dream On were part of a global brand campaign that featured megaposts in key cities and airports supported by digital ads. In preparation for the spring marathon season, an additional emphasis was put on apparel with the feel nothing campaign dedicated to the design and functionality of On's Apparel.

Boston marathon was supported by concerted peer outreach resulting in strong media presence before and after the race and amplified by Hellen Obiri's stellar performance. As you know, On is regarded as the thought leader for sustainability among sports brands and we have further put significant steps into action. On strategy is to pioneer sustainable technologies and scale them rapidly and so we have taken learnings from Cyclon On's Circle subscription and have scaled into mass market products.

The new Cloudsurfer, for example, is the first commercial running shoe to feature a single material upper made from recycled polyester, which makes the product ready to be recycled. In addition, we use Dope Dyeing, which saves 90% water compared to conventional line. We are now rolling these technologies out to further models in the coming seasons.

We will give you further insights into On's sustainable transformation in the upcoming impact progress report due to release in Q3. Overall, we are extremely happy with how the brand and products are resonating with our fans around the world, and we still have a lot more to come in 2023 to be excited about. Our deepest gratitude goes out to our sales team here at On, who have planned and executed this quarter to perfection.

With this, it is my great pleasure to hand over to Martin for the Q1 financial review. Market deep dives and elevated outlook for the full year.

Thank you, Caspar, and hello, everyone. You mentioned the win of Hellen Obiri in Boston. We are so proud to be one of only four brands to win one of the marathon majors during the last 4 years. Back in 2014, we had our first sales boost in the corner of the Marathon Expo in Boston. And ever since we had dreamed of winning this race 1 day. Therefore, this victory was a very special moment for so many people at On. And now we can dream even bigger.

Our starting Q1 was outstanding and exceeded our own expectations. Net sales for the first quarter reached CHF 420.2 million, up by 78.3% year-over-year. Our gross profit margin increased from 51.8% to 58.3% and our adjusted EBITDA margin from 6.7% to 14.5%.

In our full year results call in March, we shared the strategic pillars that we are executing On to maintain our strong sales and profitability growth in 2023. Our record net sales in Q1 are further validation of the strong brand momentum across all regions, channels and product groups. Our strong supply position and our ability to distribute the high-volume allowed us to capture the full momentum. This is a very different situation to the supply constraints that we had faced 12 months ago.

Recall, these constraints in Q1 '22 had a larger impact on wholesale than on D2C. As a result of the very high demand from our retail partners, combined with a lighter quarter last year. Wholesale in Q1 grew 86%, reaching CHF 283.2 million. The majority of this growth is coming from existing doors, both fueled by existing and new products. With the start of our new spring summer season back in January, we continued our selective store expansion globally.

In our direct markets, On products are now available in almost 9,800 doors. This includes the now 58 doors that we have at Dick's Sporting Goods, a partnership that we are incredibly happy with and it plays an important part in expanding our reach to new customers. In particular, we are very pleased to note that Dick's now posts the highest apparel share among all key accounts, a significant milestone in our efforts to establish On as a head to toe print. The strong demand for the brand is directly reflected in our strong D2C growth across all regions. D2C net sales increased by 64.3% versus last year, a more normalized rate versus wholesale, contributing CHF 137 million to our top line.

All regions grew by more than 50%. In Europe and in APAC, D2C growth had been stronger than wholesale growth. In D2C our data, we can also observe that we are increasingly reaching a younger consumer with our newer running models. This strategically important trend is very visible, for example, with the Cloudmonster and CloudRunner that are among the top of our youngest leading models in our running range, along with many of our younger leading performance all-day products, such as the Cloudnova, this is further validating the successful expansion of our product offerings to a younger audience.

We always emphasize the importance of our multi-channel strategy to meet the customer wherever they are. While still a small part, our own retail stores enable us to showcase On in the most premium way, and we are very happy with how they are elevating brand awareness. This is evidenced both in the increased D2C traffic following store openings and at the same time, a spillover to wholesale doors in proximity to our own stores.

In Q1, we more than quadrupled our retail net sales compared to the same period last year. We mentioned a strong start of our flagship store in London. We're very happy that this momentum has sustained. This is providing us with the evidence that there is a demand for selected larger flagship locations. We are, therefore, extremely excited for the upcoming months which will see the opening of new retail stores in Williamsburg and Miami. Both of these stores will have more than doubled the selling space compared to our current New York store.

Moving on to our regional performance, where we continue to see strength in all geographies. As many of you will have seen in our press release 2 weeks ago, we are updating our disclosure to no longer report Rest of World region as of this quarter. Our Middle East and Africa business will join Europe to form EMEA, while Latin America will be added to North America to form Americas.

Our press release from May 2 provides a detailed walk over from the old to the new regional splits for all quarters of the 2022 fiscal year. Not impacted by this change is the Asia Pacific region. So let me start here.

Net sales in Asia-Pacific accelerated to CHF 31.1 million in Q1, growing by 89.4% compared to the same period last year. All three key markets, Australia, China and Japan have seen a very strong growth rate between 75% and 100%. We have seen a strong increase of local customers as well as international travelers in our Tokyo flagship store as well as our China stores. The APAC region continues to be a very strong showcase of our success, of our apparel business with over 10% apparel share across the whole region.

Moving on to Europe, Middle East and Africa, where net sales continued to grow strongly by 51.6% to CHF 118.9 million in Q1. Sales in the U.K. more than doubled, now making it the second largest country in the region. We already mentioned the multi-channel momentum in the London area, but we see a similar spike in demand in many other key cities. With some distance, Germany remains our largest market in the region as it continued to grow at 56%. With the launch of the new Cloudsurfer On might pick waves with strong presence in most key European cities such as Barcelona, Paris, London, Berlin and our home in Zurich.

Net sales in the Americas increased by 91.9% for the first quarter, reaching CHF 270.2 million. This is CHF 16.5 million more than the previous quarterly record sales in Q4 2022. This exceptional growth was driven by the strong demand in both channels, of course, supported by the controlled door expansion, as outlined earlier.

Turning to our performance by product category. Net sales from shoe grew 80% to CHF 400.5 million. The second half of the quarter saw exciting new launches, which, of course, included a Cloudsurfer that Caspar elaborated on. In the first 3 months, we already sold more of the new Cloudsurfer than during the last 2 years of the old Cloudsurfer model combined. We also launched the Roger Pro Clay in our kids collection. Stood by our emerging presence on tennis courts, demand for the Roger pro is exceeding our own expectations. This is also true for kids shoes.

We launched the Cloud play and the Cloud Sky at a very selective number of key retail partners as well as our own D2C channels and continue to see very strong sell-out numbers. Apparel reached net sales of CHF 16.9 million in the quarter, with a 48.9% year-on-year growth. Our new collections introduced for the spring summer season under the feel nothing campaign have resonated very well with our fans in both channels.

The growth and uptake in apparel continues to be skewed more towards our D2C channel and newer markets as evidenced by the APAC example. This includes the proven ability of our D2C and our own store retail to fully showcase our head-to-toe looks and increase cross-selling between categories.

Moving on to gross profit, which reached CHF 244.9 million in the quarter, more than doubling year-over-year. We achieved a gross margin of 58.3%, up 650 basis points compared to Q1 '22. The significant uplift year-over-year is largely a result of the normalized supply chain environment and the resulting discontinuation of the exceptional airfreight usage, which had been most elevated in the first quarter last year.

Our strong margin in Q1 also validates our full year gross profit margin target of around 58.5%, considering that Q1 normally has a much lower D2C share compared to the rest of the year. SG&A expenses, excluding share-based compensation, were CHF 197.7 million and 47% of net sales in Q1 and reduced from 49.1% in the same period last year.

A couple of callouts in the individual SG&A items. Working through the temporarily above optimal inventory volumes comes with slightly elevated distribution expenses for additional storage space, alongside the cost for the ramp-up of our warehouse automation projects around the globe. With CHF 44.6 million marketing expenses, we invested more in brand building and our position as a premium performance brand Rooted in running and in the consumer awareness or on as a head-to-toe brand than in any previous quarter.

Our big brand presence at key airports like Los Angeles, at the latest festival in China or the Tokyo Marathon, are just a few examples of more upper funnel investments to drive brand awareness globally. More and more customers experience On from a brand perspective, a brand with exciting, highly innovative and sustainable products. A very controlled and disciplined cost management and the strong net sales created economies of scale in both selling and general and administration expenses.

We continue to invest into our team by leveraging outsourcing opportunities. We also continue investing in our digital capabilities to connect more directly with our customers while using our tech landscape to drive efficiencies in key processes. As a result of these dynamics, our adjusted EBITDA reached CHF 61 million in the quarter 288.2%, up from CHF 15.7 million in the prior year period. We achieved an adjusted EBITDA margin of 14.5%, considerably up from 6.7% in Q1 '22.

Now moving to our balance sheet. Capital expenditures were CHF 9.7 million in Q1 '23, or 2.3% of net sales. A significant reduction compared to the CHF 16.3 million we had in Q1 '22, when we were building out our new offices in Zurich and Portland. As expected and communicated in our full year results call our inventory position at the end of Q1 increased slightly as a result of the normalization of lead times.

Our inventory position stands at CHF 465.2 million, up by 17.6%, compared to December '22. The increase is driven by the early inflow of first all winter season products. Overall, our inventory remains very fresh and sets us up to drive a continued high share of full price sales in 2023.

Our cash balance at the end of Q1 was CHF 361.3 million, only slightly below the CHF 371 million at the end of Q4 '22. We are progressing well on the expansion of our existing credit line and continue to anticipate closing the new facility during the course of Q2 or Q3. With that, let's look ahead.

We had a very strong first quarter. We continue seeing a strong end customer demand during the first weeks of the second quarter. Also, as expected, growth rates have moderated as we approach a more comparable year-over-year situation. Our new products are resonating very strongly with existing and new fans. And we maintain a strong order book for the second half of the year, driven by existing and exciting upcoming new products.

As a result of all of this positive momentum, we again raised our guidance for the full year, '23 and expect to reach at least CHF 1.74 billion in net sales and implied year-over-year growth of 42%. We continue to embed an element of caution in our outlook for the second half of the year in the light of the many risks in the current macroeconomic environment.

On gross margin, as I briefly alluded to, we are retaining our gross profit margin guidance of 58.5% for the full year '23 which would, for the first time, bring our gross profit in absolute terms to over CHF 1 billion for the year. On adjusted EBITDA margin, we maintain our target of 15% for the full year, even at the higher net sales expectation, implying a year-over-year absolute adjusted EBITDA increase of close to 60%. With this strong outlook and business momentum, we expect to generate a positive cash flow in 2023.

Last week, we introduced our exciting spring/summer '24 collection to our team and key partners at our global meetings in Ho Chi Minh City, in Portland and in Zurich. We are highly energized and motivated by the initial waves of positive feedback for our apparel and footwear products, from our retail partners and by the continued excitement around the On brand. Our teams are working with full speed to deepen our relationships and to build the foundation for continued strong growth for our partners and for us.

We are so grateful for the strong and collaborative partnerships we continue to form and take this optimism and energy to our daily efforts to build an even more diverse and impactful business going forward. But even more important was the opportunity during the global meetings to connect with so many people from our team from across the world and to speak about dreams and obstacles and about our culture. Because this is the fundamental of everything.

It is such a privilege for Caspar, Marc and I to present our strong results on behalf of our whole team, and we could not be happier about where we stand today. With that, we'd like to open up the session to your questions. Operator, we are ready to begin the Q&A session.

(Operator Instructions) First question is from the line of Abi Zvejnieks of Piper Sandler.

Congrats on the quarter. Just given the strength in Q1, I mean, I know you're supposed to beat through the top line, but are you seeing any changes in consumer behavior that gives you any more caution? Or are there any quarterly headwinds that we should be thinking about in terms of tougher compares -- or I think some peers have called out some softer wholesale trends in 2Q? Just any color there would be helpful.

Thank you, Abi, for the question. And Welcome, everyone, also from my side. So what we saw on the wholesale side in Q1, and it's kind of -- the picture continues in Q2 as well. If there's still a lot of in general, there's still quite a bit of inventory in some of the channels. So it's very important we're monitoring sell-through and to demand for the brand was continued to be strong. And that's what you're seeing in the results. That's what we're continuing to observe. It's a bit volatile in general. So the wholesale environment, when we look at sellout, some weeks are very strong and then some weeks are a bit weaker. And this is also why basically, we want to look at Q2, Q3 and Q4 with an element of caution.

We know -- we are all aware of the macro environment and it's really some uncertainty there. But when we look at (inaudible), we are very confident, and I just want to probably share with you also kind of looking at Dick's, for example there. We're now live in 58 doors than already those doors have the highest average sell-through of all doors that we have On all wholesale doors. So also the new doors that we're adding and the brand has been received super strongly.

Got it. And one follow-up, if I can. Just on the apparel business. I mean this is the strongest year-over-year growth in 4 quarters. So can you talk about any changes to the assortment or the strategy? And like specifically more color on where you see on price points going to that business?

So, we feel very confident where we're bringing the collection. And we would have loved to welcome you at our global meeting, so you could already see what's happening in 2024. In the end, we feel there's a lot of opportunity to take something that's born in performance running and to move it into the movement all the active space. This is why we're partnering with some of the doors that we're partnering as well. And the products continue to evolve, the demand in -- that comes from the sell-in that we have with the key account was very strong. Again, looking at Dick's, for example, they are our strongest apparel door in terms of apparel share. And especially, I want to highlight that our own retail stores see very, very strong apparel numbers. And that's also one of the reasons why we are looking forward to continue to evolve our own retail network.

From a price point perspective, we feel confident where we are and there's definitely room to probably have a few more pieces in a little bit -- kind of a little bit lower price point, which is close to where our current lowest price point is -- but then we also feel we have a spot where there is demand, and we're meeting the right consumer at the right place with the apparel pieces that were having.

The next question is from the line of Aubrey Tianello with BNP Paribas.

I wanted to ask on the updated revenue guidance. And just if you could maybe elaborate a bit more on what's driving a higher guide, whether there's anything specific to call out, either from a region or a product perspective. And then second, you mentioned strong preorders for fall/winter, in particular some key styles, gave you optimism for the back half of the year. Is there any change to your expectation on 2H revenue growth kind of in the low to mid-30s range?

I'm pretty happy to take that one. So we really have seen a very strong demand, but also very good capabilities and fulfilling that demand in the last days of the quarter, which has resulted in the overachievement compared to the number that we indicated in our last call. And now we have given that number into our full year outlook because we stay fully confident on the year to go.

As Marc just said, our business remains strong, the demand remains strong with the changes that we see from on a week-to-week basis. Our preorders for the fall/winter season are very strong, and they -- the growth rate there indicates that we are in a position to overachieve the number but at the same time, we want to stay in a position that we take the right decisions even in a weaker environment. We don't need to chase sales but continue to think long term. And therefore, we embedded that element of cautioness from our -- how we look at the first half year versus the second half year, this stays pretty much in line with what we shared in our last call. So now with the updated Q1 number, we more look at a mid-50s growth rate in the first half and then the low to mid-30s in the back half of the year.

The next question is from the line of Jay Sole with UBS.

Great. Just wondering if you can elaborate a little bit on the growth in the Asia Pacific region, particularly in China, what you're seeing there? And really maybe what your outlook is not just for this year, but even if you look at a little bit beyond how you see that market developing?

Thank you for the question, Jay. I think -- China, we're all aware of how the market came back. And I think January, February was still a bit slower and then it really starts to pick up. And we see -- we're very happy with the traffic that we're seeing in the store. So we currently have 15 stores in China and two of those opened in Q1 2023, and we're planning to have 18 to roughly 21 stores by the end of 2023. So the traffic is there. We're happy with the sell-out that we have in the stores. We are very happy with the product portfolio and how we're able to tell a performance message that's rooted in running, but it actually reaches consumers way beyond running in an active space, in the movement space. And we remain very, very confident for the mid and long term.

We said this before, right? I mean, we were in China because we want to make it one of the top 2 markets and that's what we're aiming for. And this is what you see reflected in the growth rates. Obviously, a lot of investment going in there. We have a team of over 100 people and making sure we have a very tailored marketing approach as well with a lot of local content that we can bring to the market, but the brand is received well, and that's in the end what you've seen the numbers.

The next question is from the line of Cristina Fernandez with Telsey Advisory.

I wanted to ask about the inventory. Can you just give color around how you expect it to slow over the next couple of quarters if we want to the peak on an absolute basis and then decline sequentially, we deliver that inventory, any color for that would be helpful.

Recalling what we shared on the last call, the increase in inventory that we see and the additional increase that we also saw now in Q1 was fully intentional and driven by the high demand that we saw and continue to see in the spring/summer and in the fall/winter orders. So our inventory continues to be fresh and basically will allow us to fulfill the demand in the coming months at full price.

Now the increase of the inventory, as we shared last time, is the result of shorter lead times -- transit times together with a more reliable factory outputs that we have seen. And so back in December, we started to adjust our production orders going forward, but because you have a certain commitment towards your factories, those adjustments will only come into place at scale now in the second quarter. But we already see the first results of that, if we would look 1 level down on inventory.

At the end of December, we had CHF 145 million inventory in transit. Now at the end of March, we only had CHF 124 million of inventory in transit, so CHF 20 million less. So that means that there's already less inventory in the pipeline. And so as we have shared in the last call, our goal is still to reach around 30% of working capital in terms of net sales by the end of the year. So looking at an inventory in the range of somewhere CHF 425 million to CHF 450 million. So this is where we want to be. So at a lower level than where we are at the moment, somewhere between end of March and end of December.

And my second question is when you look at the demand you're seeing globally. Are there any callouts by regions/parts that destination, for example, in the Americas are the same in EMEA or APAC or are there differences in performance by lifestyle. Any callouts there as far as what's working in one region versus the other.

So if we get that correctly, the question is on regional differences from a product side and how the products are received. So when -- I mean, really aside and we mentioned it in the notes as well. I think we saw strong growth across all regions, right? So EMEA, Americas and Asia Pacific, we just spoke about China where January and February was still a very difficult environment. And despite that, we're still almost a 90% of growth in Asia Pacific.

When you look at markets like Germany with 56% growth or the U.K. with above 100% growth, then I think the essence is always the same. It's one product that are performing very well, (inaudible), we spoke about it making up 45% of our performance run range. So new products that have been received really, really well. And we're closely monitoring that the products are being adopted by runners and being born on runners feet along the key running routes. So when we look at share. And there, we sometimes reach above 15%.

And then you have products that's slightly different, especially on the performance of (inaudible) sites. So if you look at the U.S., the Cloudnova is extremely strong, and it's performing very, very well. If you look at China, you, for example, have a product like the (inaudible) that is the strongest franchise. And we feel this is very, very healthy because it allows us to basically balance different products. And then also use them over time for different regions. So we're not reliable on one product, and that was also a clear goal to reduce basically the share of the cloud over time, which we are very much achieving. And just one more remark I want to make here, which is we invested a lot in really routing and communicating the brand from a performance perspective and also reaching a younger audience. And it's paying out in all the countries. And just an example there, also in the U.K., we are very happy to have over 100% growth very much coming from an audience that is among the youngest that we have globally.

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

I wanted to start by asking about regional differences and channel mix and momentum. Martin, I believe you mentioned Europe and Asia D2C growth outpaced wholesale implies imbalance of wholesale growth in North America. I'm curious, is that the function of comparison supply chain issues in the prior year? Or is that simply reflective of sell-through momentum in pure wholesale appetite for the product.

I think if you just look at the growth rates, it's a bit a function of the comparison. So Q2 will be the first quarter where also COVID doesn't play a role anymore in our prior year numbers, maybe with the exception of China. But -- we continue to see and it's fully our strategy to have a stronger growth rate in our D2C channel, both e-com and online compared to our wholesale channel and that's a strategy that we follow in all the geographies. And we see a similar momentum in all the geographies now on a more comparable base.

We invest significantly in our digital capabilities to connect more directly with our customers, to increase our service level with our customers in our direct channels and the experience overall. And as Marc said, our own retail stores play an important part. We gave the example of London, but we see a similar pattern also in L.A. or in Tokyo, where our retail stores are additive to our online channel, but also additive to our wholesale channel.

I also want to ask planned timing of marketing spend across the balance of the year? And any specific marketing plans around the upcoming tennis majors like Wimbledon and French Open.

Yes. What do you -- what you see happening in marketing, and I think what the experience is really a shift from lower funnel to upper funnel. So we are -- we will continue to build the brand and to reach a wider audience. This is what you saw with the launch of the Cloudsurfer. And this is one of the key reasons why we also decided to move into tennis. We're very happy with the impact that Iga and Ben already have, and it allows us to bring the On logo and On brand on the chest of some of the best players to a very, very large audience. And so what we will do is basically have a major launch event around the U.S. open with the two players. It's going to be around August, so late August, just before the game is starting. And it's our very clear goal to continue to make tennis and -- a very inclusive sports that we can also connect between different audiences. So not just to have it as a spectator sport or basically, how can we connect the pro tennis players with the audience that is playing it all day and every day.

And so with the experience with the On-track nights, which is essentially what we're doing on the performance running side, we're going to bring the same concept to tennis, and this is how we want to activate the players in -- during U.S. open. And then I just want to highlight two more key elements for On. The World champs in Budapest are going to be very important for us. And it's the clear goal to be competing for medals on one of the biggest stages. And then this is also the last test, so to say before, Paris which is going to be a very important moment for us. So how can we bring more sustainable innovation and lead from the performance side to a huge audience through athletes, and this is what Paris will be about.

And the next question will be from Alex Straton with Morgan Stanley.

Great. And congrats on another great quarter. Martin, I have two that are probably best for you. Just first, I want to clarify something on the guidance. It looks like you only flowed through part of the first quarter EBITDA be it to the full year. From the commentary, it just sounds like that's conservatism, but I want to make sure I'm not missing anything there that's limiting the flow-through.

And then second, just on gross margin. I think freight was like a 800 bps impact last year. and I'm seeing gross margins up 650 bps. So I'm just wondering, does that mean you didn't fully recapture the air freight or there's something else pressuring margin? I just want to make sure I'm understanding all the moving pieces there.

Alex, I'll be happy to go there. So let me start on the margin side. So really, we continue to see a very high share of full price sales. So there's not discounting embedded in there compared to last year. We still have a negative FX impact in there, especially from the weaker euro. And then elevated inventory level that we have has also created some additional freight costs, especially for delayed unloading of container, which are also reflected in the gross profit that we had for the first quarter. But we are out of that topic.

So going forward, we foresee that we continue driving a high gross profit margin in line with our long-term goal of 60%. Again, there's still pressure from the weaker Euro on the margin side of 60 to 100 basis points. But the rest of the business is really set up to deliver on that higher margin. Our price increases have been very well received by the consumers. We haven't seen any demand impact.

On EBITDA, again, our philosophy is to invest into the business and into the future growth while driving profitability so this is why for us, the full year number is the one that we are managing the 15% EBITDA. And so we are investing into people. We're investing into marketing, into brand building, into innovation, in order to become a bigger brand in the future. At the same time, we also have a lot of initiatives to drive economies of scale being in happiness delivery, but then, of course, also in the operations of our warehouses. And this is reflected in the full year guidance on the EBITDA level.

The next question is from the line of Tom Nikic with Wedbush Securities.

I just wanted to ask, I know we're growing very, very rapidly, and I'm sure you have ambitions, so you'll continue growing over a multiyear period. Do you have today sufficient manufacturing capacity with your partners to support the growth that you expect to see over the next couple of years? Or will you have to find more manufacturing capacity as you continue to grow?

Yes, thank you for the question. I think it's very clear that in -- on the manufacturing side, in general, there is rather overcapacity right now than under capacity. So it's not so difficult to have enough capacity. Nevertheless, we've been planning for that for many years, right? So we've been working with the same partners over time. They know our growth aspirations. And I think the key here is not just to get capacity, but it's basically to allow to partner with the best innovators. And so what we're very much focusing on is how can we bring the most performance from to the market. How can we have the best in its membrane, how can we have the most sustainable products in the market. And in the end, we're investing a lot of time on partnering with the best chemical companies that are out there and this then leading to the best OEMs that will help us manufacturing the product. And we're very confident that we've built a group of partners globally that allows us not just to reach the growth ambitions that we're having, but also to continue to be the most innovative friend out there.

Great. And just one quick follow-up. When we look at EMEA, I think we talked about really great growth in the United Kingdom and strong growth in Germany. That would kind of suggest that maybe there was some slower growth elsewhere in the region. Are there any sort of pockets of EMEA where maybe the brand has not picked up as much on income and elsewhere? And do you view those as opportunities?

Yes. So -- when -- so when we're looking at it, I think, with the formation of the region, EMEA there's many different elements in there. And so let's start with the Middle East, where we basically there is a very, very strong demand, but we have a lot of opportunity in setting up a good retail and wholesale footprint. So that's just a very underpenetrated region compared to the demand that's out there.

When we look at Spain, Italy, which are huge markets and also on the lifestyle side, where we're literally just getting started. We're growing strongly in France, but it's still relatively underrepresented as a brand to some other markets. We've spoken about Germany and U.K. and then there's Switzerland and Austria, where we're very much focused on working with the right partners and bringing a performance on range to life.

As part of that, -- we -- you can also expect some changes on the partners we're working with, especially then for next year, very much trying to focus on the channels that allow us to reach the right consumer which means we're going to get a go out of comfort doors and (inaudible) doors. And obviously, there's some change happening there. But then the impact is going to happen over time and especially then also in spring/summer '24. We're quite confident that we can compensate a lot of that is new channels and with our own retail channel and on D2C channel that we continue to expand.

The next question is from the line of Jonathan Komp of [Baird].

Caspar, if you are still there or Marc. I'm curious, I wanted to ask really what you make of the strength of the newest performance model that you're launching? And just any perspective, how that might be influencing your forward product strategy? And then if you could comment at all on the road to Paris 2024, any high-level thoughts on what we should expect?

Thank you, John, and thanks for asking a question about product. That's what we care about, first and foremost. Yes. As you mentioned, there's been a lot of anticipation for the Cloudsurfer launch. CloudTec phase is a very intuitively understandable technology. And we've been blown away really and surprised by how well it's been taken. Most retailers and our (inaudible) have been selling through this very, very quickly. I think Martin shared some numbers earlier. And that's good news because we're about to roll CloudTec phase out to more products into higher pursuing products to the trail side and also to one of our lifestyle model.

Overall, you followed the market share gains that we've had in the running space. And that's really driven by some of the latest innovations that we've introduced over the last 12 months. Most notably that the Cloudmonster, a very prominent product that continues to be extremely strong, where we're going to go into like a family of Cloudmonster for spring '24. But then maybe a little bit less exciting model like the Cloudrunner that now is usually one with the top 2 sellers can run specialty doors that allows us to capture market share from those bread-and-butter models from other brands and giving the retailers an opportunity to expand their average price points because typically, it's about $10, $20 more expensive.

And then towards Paris, now many of you may be aware that there's an arms race going on currently among the top performance brands of who makes the fastest shoes. And we start this lighting initiative within on -- all about 18 months ago. So to have someone like Hellen

Obiri beat pretty much all the favorites on the women's side for the Paris '24 marathon. Gives us a lot of confidence going into the next season. And at the same time, we're looking how can we bring some of these performance technologies like the pebax foams and so on. Two more consumers, maybe not the ones that they're running a 2-hour marathon but maybe the ones that are running more of a 4-hour marathon, probably pretty much everybody on this call could benefit from these technologies. So those are the things that we're working on, Jon.

Sounds like something I could benefit from. Looking forward to that. And then just maybe a follow-up, Martin, thinking about the financial guidance, the revenue guidance for the year. It looks like the guidance implies first quarter should be about 24%, 25% of the full year revenue.

Historically, it looks like first quarter has been closer to 20% or below. So anything that would change the shape of your revenue cadence throughout the year? Or is that more a reflection of the conservatism that you're baking into the model?

So I think if we look historically, there is -- it's really hard to find a comparable year with all the disruptions that we had. And then remember, back in 2021, we also changed our logic of launching new products from basically a launch in the second half of the year to a launch in the -- in March, January, February. So I think it's hard to use historicals. And as I said in the beginning, if we look into the second half of the year, our order book is strong and indicates that there is an opportunity to overachieve the number that we have. But we also need to keep in mind, we had a very strong holiday season last year with very strong Black Friday, sort of one day sales where we apply a certain level of cautiousness. But again, from our product pipeline and some of the things that Caspar mentioned, there's a lot of confidence that we should see also strong reorders based on the prior that we have on book. but we don't want to be in a position where we have to take short-term decisions in order to chase growth.

The next question is from the line of Sam Poser with Williams Trading.

Most of the questions have been asked, right two. One is just about inventory and where -- and really how to think about what you want your optimum turn to be sort of once we clear through this year because -- and then I have a follow-up. I have a separate question as well.

Yes. Let's start with this inventory. So -- as I mentioned, for us, a good way to think about is on a working capital basis as a lot of the payables and the inventory are ultimately related. So 30% working capital as a goal in percent of net sales over the last 12 months. It's for us a good indication on where we want to be. We had lower levels in the past. And of course, we will continue working on optimizing our inventory, be through it to direct shipments to some of our key account partners, of course, working with our factory partners, but also optimizing our internal processes so we are clearly on this. But for the moment, we'll be focusing on basically bringing our lead times back to where we see the reality now with transit times. And then for us, important is to keep the inventory fresh, to keep inventory in a position that we have more demand than supply so that's an important part of planning the business in a conservative way.

And then secondly, you talked about not too much promotions. I was wondering, one, in Switzerland, one of your larger wholesale accounts, I believe has just broke price average 20% off of all your shoes, at least 20% off there, some old ones that are marked down more. That's something that just popped up in the last week (inaudible). I assume that's a good customer of yours. Why are they breaking price right now?

Thank you for the question. I think what's important to know, first and foremost, is that all the markets have different policies on how we can control pricing, right? So the U.S. knows map, where it's very controlled in Europe that does mix is. So every partner is free to decide on how they want to price in the end product. We're working very closely with all the partners, and it's important that they're showing the product in a premium way and that they're reaching the right consumers and you can rest assured that we're making sure that we're not selling in too many products and that we're working with our partners on showing the premiumness of the brand in the right way.

They wouldn't break price unless there was a need to break price, I would say, regardless of what is permitted in a marketplace.

Sorry, could you repeat that?

We wouldn't be promoting your product unless they thought they needed to promote your product to drive more sales. So we haven't really seen that here in the U.S. yet. But I'm wondering, is that because there's too much inventory in that particular retailer or -- and again, I understand there are different rules and you can't tell them much to do, but at the same time, it was for the odd to see it.

Yes, maybe if we could jump in here.

This particular retailer is 20% off site-wide on all their running products. So this is not unspecific.

Then, let me just highlight two additional points. One is what we're having in Europe, there is a topic of euro versus Swiss francs as well. So as you know, we have still some prices between markets. So this always plays an important role also in terms of their different people can shop and get access there -- can get access to the product. And then I just want to highlight again, systems by 4, as you know, the most penetrated market in -- and what we already said that we're trying to make sure, we're working with the right partners to reach the right consumer as part of that were also not working with stores anymore and more on the Brand shoe and comfort side. So -- and then Caspar already mentioned the fact that this one is a side wide and not just on our promotion.

So there are no further questions, and I hand back to Jerrit Peter.

Thank you, everyone, for being on the call. Have a good day.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.