On Holding AG (NYSE:ONON) Q1 2023 Earnings Call Transcript

On Holding AG (NYSE:ONON) Q1 2023 Earnings Call Transcript May 16, 2023

On Holding AG misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.08.

Operator: 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. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Jerrit Peter. Please go ahead.

Jerrit Peter: 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 contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20-F filed with the SEC on March 21st for a detailed discussion of such risks and uncertainties.

We will further reference certain non-IFRS financial measures, such as adjusted EBITDA and adjusted EBITDA margin. These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today’s release for reconciliation to the most comparable IFRS measures. We will begin with 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.

Caspar Coppetti: 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 of CHF420.2 million in the three month period. This reflects a growth rate of 78% versus Q1 ’22, which had 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 mid-term 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 mindshare in the running space.

An emotional highlight was On’s first win in the Boston Marathon with On athletics club 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 US running store franchise fleet.

On the tennis side, we are thrilled to see world number one, Iga Swiatek and Ben Shelton competing on the court in their new On gear. Iga stunned us 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 significant 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 mega posters 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 PR 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 Cyclone, On’s circular subscription and have scaled them to 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 dyeing. We are now rolling these technologies out to further models in the coming seasons. We will give you further insights into On’s unsustainable 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 stellar 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.

Martin Hoffman: 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 four 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 one 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 CHF420.2 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. To 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 CHF283.2 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 door expansion globally.

In our direct markets On products are now available in almost 9800 doors. This includes the now 58 doors that we have at Dick’s Sporting Goods, a partnership that we are incredibly happy with, and that plays an important part in expanding our reach to new customers. In particular, we are very pleased to note that Dick’s now boasts the highest apparel share among all key accounts, a significant milestone in our efforts to establish On as a head to toe brand. 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 CHF137 million to our top line. All regions grew by more than 50% in Europe and in APAC DTC growth had been stronger than wholesale growth.

In our DTC 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 Cloud Monster and Cloudrunner that are among the top of our youngest leaning models in our running range. Along with many of our younger leaning performance all day products such as the Cloudnova. This is further validating the successful expansion of our product offerings to younger audience. We always emphasize the importance of our multichannel 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’re very happy with how they are elevating brand awareness.

This is evidenced both in the increased DTC 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’re 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 double 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 two 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 2nd 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 as the Asia Pacific region. So let me start here. Net sales in Asia Pacific accelerated to CHF31.1 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 rates 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 continue to grow strongly by 51.6% to CHF118.9 million in Q1. Sales in the UK more than doubled now making it a second largest country in the region. We already mentioned the multichannel 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 made big 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 CHF270.2 million. This is 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 or expansion as outlined earlier. Turning to our performance by product category. Net sales from Shoes grew 80% to CHF400.5 million. The second half of the quarter saw exciting new launches, which of course included a Cloudsurfer that Caspar elaborated on. In the first three months, we already sold more of the new Cloudsurfer than during the last two years of the old Cloudsurfer model combined. We also launched the Roger Pro Clay and our Kids collection. [indiscernible] 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 CHF16.9 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 CHF244.9 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 CHF197.7 million and 47% of net sales in Q1 reduced from 49.1% in the same period last year. A couple of call outs 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 44.6 million marketing expenses, we invested more in brand building in our position as a premium performance brand rooted in running and in the consumer awareness for 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, brand with exciting, highly innovative and sustainable products. A very controlled and disciplined cost management and a strong net sales created economies of scale in both selling and general and administration expenses. We continue to invest into our team while 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 CHF61 million in the quarter, 288.2%, up from CHF15.7 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 CHF9.7 million in Q1 ’23 or 2.3% of net sales. A significant reduction compared to the CHF16.3 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 CHF465.2 million, up by 17.6% compared to December ’22. The increase is driven by the early inflow of first fall 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 CHF361.3 million, only slightly below the CHF371 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 raise our guidance for the full year ’23 and expect to reach at least CHF1.74 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 CHF1 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 trend. 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 fundament 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.

Q&A Session

Operator: Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from the line of Abbie Zvejnieks with Piper Sandler. Your question please. Abbie, you are now live. Miss Abbie Zvejnieks from Piper Sandler. You are now live.

Operator: The next question is from the line of Aubrey Tianello with BNP Paribas. Your question, please.

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

Operator: The next question is from the line of Cristina Fernandez with Telsey Advisors. Please go ahead.

Operator: The next question is from the line of Jim Duffy with Stifel. Your question, please.

Operator: And the next question will be from Alex Straton with Morgan Stanley. Your question please.

Operator: The next question is from the line of Tom Nikic with Wedbush Securities. Your question please.

Operator: The next question is from the line of Jonathan Komp with Baird. Your question.

Operator: The next question is from the line of Sam Poser with Williams Trading. Your question please.

Operator: So there are no further questions. And I hand back to Jerrit Peter.

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

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