Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the On Holding AG Q3 2022 Results Call. [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 2022 third quarter earnings conference call and webcast. With me today on the call are Executive Co-Chairman and Co-Founder, David Allemann; CFO and Co-CEO, Martin Hoffmann; and Co-CEO, Marc Maurer. Before we begin, I would like to remind everyone that the remarks during today's call will contain forward-looking statements regarding future events and performance within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only and such statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Please refer to our 20-F filed with the Securities and Exchange Commission on March 18 for a detailed discussion of such risks and uncertainties. Please further note that this call will also contain 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 of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. We will begin with David followed by Martin leading through today's prepared remarks, after which we are looking forward to opening the call for a Q&A session. With that, I'm very happy to turn over the call to David.

Thank you very much, and a warm welcome from here in Zurich to everyone around the globe joining us today. I'm delighted to be here to speak about another outstanding quarter, and the exciting recent progress and developments at On. As you will have seen in our release this morning, net sales for the third quarter increased by more than 50% to CHF 328 million, our strongest quarter in history. This makes On a CHF 1 billion net sales company. We're looking at the 12 months leading up to the end of September, and it allows us to increase our full year outlook. During our last earnings call, we talked about how we are focusing on building a company that is set up for durable growth with the goal of being the #1 brand on runner's bodies. Today, I delve deeper into the strength of the Young brand and our most recent innovation achievements, before handing over to Martin for a detailed review of our third quarter financial performance, and details on the outlook for the rest of the year. 12 years ago, On started from out of nowhere and has built a powerful grassroots movement of millions within a few short years. It fills me with pride that we continue to inspire and attract a record amount of new runners to On. There is simply an incredible amount of momentum around On right now, and I want to focus on 3 of the key areas that are driving this growth and setting us up for sustained success. Firstly, we are expanding the reach of the brand like never before. On has seen a record number of visitors coming to our website, with almost 10 million sessions per month recorded so far this year. Our Instagram followers just crossed the…

Thank you, David, and hello, everyone, joining our call today. Q3 has been another record quarter for On. Our net sales growth of 50.4% to CHF 328 million has been stronger than expected, and another step on our journey towards durable growth. Those of you who have followed us since the IPO know that why net sales growth is important to us, we are just as focused on expanding on profitability. By further reducing the airfreight share and despite foreign exchange headwinds, we have achieved a record adjusted EBITDA of CHF 56.3 million, an adjusted EBITDA margin of 17.2% in the quarter. The strong results validate a continued high demand for our brand globally. At the same time, they validate our ability to scale and professional life along all parts of the business. David mentioned some of the factors that have driven our record sales. The success of our products, our expanding collaboration with wholesale partners, and our progress to connect even more intensely with our customers. The high demand that we are experiencing has challenged our logistics network. While our supply chain teams across the globe have done an exceptional job to cope with the record volumes, in mid-August, we experienced temporary constraints in our U.S. East Coast warehouse caused by a system upgrade by our 3PL partner. So our team worked fast, and the situation has been remedied. We were not able to fulfill all the demand we had in the U.S., especially in D2C, where we lost some sales due to longer delivery times and higher cancellation rates. In addition, the strength of the U.S. dollar, in conjunction with the weakness of the euro in ratio to our reporting currency Swiss francs, had a significant negative impact on our gross profit margin, and our adjusted EBITDA margin…

[Operator Instructions] The first question is coming from Jay Sole from UBS.

Great. David, you mentioned a lot of innovation that companies delivered over the last quarter, Cloudmonster, the CleanCloud. Can you just talk about the new product pipeline and the innovation that you have planned for next year? Do you see this robust as it's been over the last few quarters? And can you talk about the kind of investments you're continuing to make in product innovation to drive the brand forward?

Very much -- very happy to talk about that because our goal is to be the #1 brand on runners' bodies over time. And so it's super important that we continue to invest in innovation. And you've seen that in the past that we regularly launch new technology platforms. Now you also see how we're working closely together with athletes. So just look at what our collaboration with Gustav Iden athlete, but also for many, many other athletes On Athletics Club to name some -- to name a group that also got an incredible followership around our core running consumer. Now for next year, and I think we mentioned that also in the previous call, we are introducing a whole new technology platform, which is Cloud X 3, which was developed computer assisted, so that we choose the very best form factor to give you the perfect price. And so that's just the next iteration of how innovation comes out of On. And like we mentioned here as well that the foams that we are using in shoes for our athletes and also the Speedboard is can be actually fully bio-based. You see that in the Cyclon. In Cyclon, we will be use very, very advanced foams, and advanced Speedboard, and its fully bio-based and recyclable. So you also see that we can combine high performance for athletes, but at the same time, also achieve our goal of circularity.

Got it. And then maybe, Martin, if I can follow-up, just one other one. Can you just talk about the impact that the warehouse constraints had on sales in terms of like a number? And then also at the same time, within Europe, how much did FX weigh on the growth rate in terms of like basis points?

So the impact of the various constraints was mainly on direct-to-consumer because the omni sale channel traditionally has inventory so the impact there was less immediate. We would have seen a higher D2C share, if we wouldn’t have seen those constraints. They really lasted for about half of the quarter. So the share of our D2C business would have been more in line with what we have seen in the past. To the question on the FX impact on our regions, if you would look at basically the 2 key regions on a rate of last year, then the growth rate in Europe would be more around 41%, and the growth rate in the U.S. about 49%, or North America.

The next question is coming from Jon Komp from Baird.

[indiscernible] Martin, if I can follow-up. Could you talk a little bit more about what's performing your top line revenue growth assumptions in the fourth quarter? And since you commented directionally on the order book into the first half of 2023, could you just maybe frame up sort of what you're seeing in terms of qualitatively the growth and the reaction from your wholesale partners, and how we should view that -- those comments in the context of sustaining good top line growth here?

Yes. Very happy. So as we mentioned, we approached the fourth quarter with a very strong inventory position. We are out of the impacts from last year's factory closures. So we'll also be normalized on the use of airfreight. We started the quarter very strongly. We had a good start into the holiday season. We spoke about the success during the Double 11 festival in China with 135% growth. We have a strong order book. We see continued strong demand from our retail partners as well as from our end customers. So we feel that the 41% growth that is implied in our quarter -- in our guidance for the fourth quarter confirms that. And we also feel that we go with a similar strong momentum into the next year. We have a strong order book for the first half of the year. We are currently in the selling season to basically get the orders on book for the second half of the year, which will then also allow us to give a more precise outlook on the full year in the -- in our next call.

That makes sense. And maybe just 1 follow-up on the margin outlook. If I look at the implied fourth quarter adjusted EBITDA margin, it looks near to just slightly below the third quarter. And I want to just clarify maybe what you're embedding in that outlook given that you should have less freight, and we don't have complete history to see always the seasonality third quarter to fourth quarter, but just any comments directionally on what you're embedding in the fourth quarter margin outlook?

That’s really based on the top line that we see and the investments that we are planning to do and also the cost base that we have built. The FX impact clearly leaves the mark on gross profit, and it shows that we were able to mitigate some of the impacts. We benefit from the price increases that we have done. We benefit from the ability that we have on managing our expenses very carefully, and therefore, I think, it’s a strong message that we confirm the 13.2% EBITDA margin and increase the outlook further. And then, for next year, we see that we are able to drive some of the savings from our reduced airfreight share next year into the bottom line, but that we are also able to reinvest some of those savings into investments in the brand, especially on the marketing side.

The next question is coming from Michael Binetti from Credit Suisse.

Congrats on a nice quarter there with the -- despite the disruption in Atlanta. I guess, could you tell us maybe a little bit of a continuation on the last question, besides airfreight, what are the other inputs you have visibility to today, and what guardrails we should think about that may limit upside, you said some reinvestment. What else should we think about as you think how next year you get back on track to your longer-term goals with gross margins in the high-50s, EBITDA margins over 15%? And then I was also wondering, could you speak a little bit more to what you think is needed for the unlock in apparel growth rates to move above footwear given the small base of that business. Every time you guys opened a company-operated store, and now it seems like the [Dix] test, where you focus on head-to-toe apparel and accessories, seems to shoot up to about 20% of the mix, well above the average for the company. I'm just wondering, what you think is the unlock you need to make that kind of mix more relevant across the entire company?

Yes. I'm happy to start with your first part, and then maybe David elaborate further on the apparel opportunity. So as mentioned, if we look at the excess of airfreight that we had that's about 350 basis points probably saving if we think about the normal -- more normalized year of airfreight use next year. And so that's basically the part that we intend to reinvest in a higher bottom line, but also into more contribution into market share and brand building. We need to observe closely the currency development. So we were speaking about the impact that we have seen now in the third quarter and also in the fourth quarter based on the current environment with the weak euro and the strong U.S. dollar. So we are in a position to approach the year with the necessary caution when it comes to building expenses and driving up our cost lines, so we are able to react to those impacts and protect both our gross profit margin as well as our bottom line. In addition, we see that the price increases are accepted strongly from our customers. They don't lead to a slower demand. And we are also seeing that we are able to benefit from our economies of scale with our factory partners, and therefore, we do not expect an impact from inflation from higher raw material prices on our product cost. So most of that upside from higher prices will also be available for compensating some of those FX impacts.

So, Michael, I’m very happy to take your apparel question. You mentioned it, in our On stores, apparel is up to 20% of share, in China sometimes up to 30%. And we feel that’s super encouraging because it shows that we have clear product market fit with our consumers. And so we continue that road, and we also see that when we partner with wholesale partners, where we open stores, like, for example, recently in Nordstrom, where we have shop-in-shops – On branded shop-in-shops, we get to a similar share. So we feel product market fit is there. Now it’s about giving apparel a bigger presence in the channels where we operate and then, frankly, also expanding the portfolio in apparel because many of the pieces are actually fan favorites, which have been there for a long time and have been continued fan favorites, so that gives us stability, and that’s where we can scale from. So it’s great to see that apparel is coming of age within On. And if you’re talking to Chinese consumers, they don’t see On as a footwear company, they see On already as a sportswear company, and that’s reflected in these figures as well.

The next question is coming from Jim Duffy from Stifel.

Congratulations on crossing the CHF 1 billion threshold on a trailing 12-month basis. I wanted to start by asking about the wholesale business. The wholesale number is particularly strong. You've spoken about strong orders. Can you comment on channel inventories? Others are seeing cancellations, is that something you've experienced? And I'm curious how you're seeing the brand fare against a more promotional backdrop? Has that any impact on demand as others get more promotional?

Marc, do you want to take this one?

Yes. Welcome, everyone, also from my side. So I'm currently sitting in the APAC region. So it's quite dark out here. But it's great to be part of this call. So we've been very close to the channel, and we actually all spent a lot of time with our biggest partners as well really exactly diving into what is inventory on hand? And how do they look at the next month? And what we're seeing is that our inventory position in the channel is very, very healthy. It's sometimes even too low and also due to the constraints that we had in the Atlanta warehouse, and it's across the board. So it's in Europe, it's in the U.S., also in Asia Pacific and Japan, has a very, very strong sell-through, for example, with some of our key partners. We're not seeing cancellations at all. And also the preselling meetings that we had with the largest partners now for fall/winter have been extremely positive. And I think what we always have to keep in mind is that On is right now a $1 billion brand on a 12-month basis, but there's still so much more opportunity versus some of the larger players. And I think, again, we're not in an incremental game here. We have -- we don't -- we're not so dependent on the macro environment. We can gain so much market share still within the channel. And I think that's currently what's at play and On has a very strong momentum with all its key partners.

Excellent. And on the top customer opportunity, can you speak to the evolving composition of your business between performance running, performance all day and performance outdoor product, particularly interested in momentum in the latter 2 categories?

Yes, I can probably elaborate on that, too. So we’re seeing quite a balanced growth between the performance run category and the performance all day category. So both develop in line. I think what’s very important for us is the metric of how is On developing at runners bodies because that’s our core, that’s our authenticity. And we’re very encouraged when we count on the main running routes. And when we look at the run specialty channel, where we’re currently at roughly 10% share overall, but we have very, very strong preorder growth of around 70% for spring/summer ‘23 in that channel. So we’re growing very strongly with the DP products that we’ve launched, with a Cloudrunner, with the CloudGo with the Cloudmonster that are tapping into a broad market. And so I think you see a very balanced growth between the 2. And then on outdoor, which is a little bit smaller business at this point, we see that the trail category is developing very, very well. So everything that’s rooted in trail also on the apparel side is performing strongly. And we see very encouraging sales through numbers on some of those products, especially the Cloudvista and with also quite a bit of opportunity in the all day market. So we report that on basically the outdoor segment, but a lot of it will also be worn as an all day item.

The next question is coming from Alex Straton from Morgan Stanley.

Great. Congrats on another great quarter, guys. I wanted to drill down into Europe quickly. You guys saw a great, nice reacceleration this quarter. Can you talk about what drove that change and just remind us what your biggest markets are there as well as how you think about kind of the future opportunity?

Yes. So the -- I think the biggest -- I mean, let's talk about the market first. So the biggest market is Germany. And then you see U.K., which has a very, very strong growth and becoming more and more important in Europe, also with the partnership that we have in JD. We still have quite some significant volume coming out of Switzerland and Australia, where -- it's just the markets that we have been in longest. So it's quite balanced and -- but then we have a lot of markets that we're just tapping into it. So if you look at Italy, for example, if you look at Spain, which are both very large markets, Spain has just taken in-house Italy. We're going to take in-house from a distributor. So there's still a lot of potential there. And when we look at the figures, I think, and Martin pointed it out, it's very important for us, the figures would have been even stronger if it wasn't for the FX impact. And we saw a bit of shift of orders on how we delivered orders between Q2 and Q3, but consumer demand was always there. So you had a bit an impact from how wholesale would take in orders. But we were always, especially when you look at Germany and U.K., quite happy in how sell-out was developing. And I think this has now come through fully in Q3, and we're also quite happy on what we've seen in October, for example, and happening in Europe, especially given the macro environment.

Great. That's super helpful. Maybe one more quick one from me. It sounds like the Cloudmonster and some of your other recent launches have gotten some great press and acknowledgment for real technical innovation. Can you just talk to us about when exactly you launched those and maybe what you did differently with the shoe in terms of either technical components or even marketing, if there's anything different to be aware of?

I feel we are tapping right into a performance innovation where we are taking our most advanced technology, but then make it much more inclusive, like take the Cloudmonster, which gives you a lot of cushioning based on absolute premium foams, but then, of course, add a very visible technology to it, CloudTec, but almost in a [indiscernible] version. So I think that gets us a lot of eyeballs and it’s very intriguing to our core running community, but then, of course, also ventures beyond that core running technology. And so it’s about taking performance running technology and making it available and relevant for the masses.

The next question is coming from Tom Nikic from Wedbush Securities.

Quick clarification. Did you say that FX was a 250-basis-point impact to the gross margin in the third quarter? I thought I heard that, but I wasn't sure. And then can you tell us how much of an FX impact you're expecting for the gross margin in the fourth quarter?

Yes. So it was 250 basis points compared to last year's rates on the quarter. If we look at year-to-date, it's 170 basis points impact versus last year's rates. And we have based our guidance of the quarter on the current FX rates. And so we expect a similar strong impact for that quarter. And then, as I said, going forward, price increases will help us to offset part of that. And of course, we closely observe where dollar and euro develop compared to the Swiss franc.

Okay. Understood. And just on the gross margin in general, I mean, I know that there was also a headwind this quarter because of wholesale versus D2C mix, which kind of sounds like it was because of some transitory impacts. I mean, should we kind of assume over a longer time period that direct-to-consumer grows faster than wholesale as brand awareness grows and consumers go directly to your brand, and thus, over kind of a longer time period, you would expect to see a -- more of a tailwind to your gross margin from channel mix?

What we see is that On is hot in both channels. Marc elaborated on the opportunity that we have in the wholesale channels, that we are just at the starting line with our adventure with [indiscernible] sporting goods, at the very beginning in Footlocker, but in many other key accounts. Then if we look at our e-comm business, we see the strong momentum also now at the start of the holiday season, we have seen the strong momentum that we had in China. And then we continue to expand our own retail business with the store now in L.A., but then also the expansion in London and Miami earlier next year. We’ll also continue to open new stores in China. So we will drive growth in both channels, and that’s important for us and important is that the customers have the best experience in both channels, that they find the product where they want to shop for the product and that we talk to the right customer in those channels, that we attract new customer groups to our products, and therefore, we are less managed the share of the different channels, but the health of the 2 channels. But we see strong momentum and growth opportunities in both of them.

The next question is coming from Abbie Zvejnieks from Piper Sandler.

Great. So just broadly, I guess, how are you thinking about your consumer and how they may be more resilient in the more difficult macro, given the performance aspect of the business? And then it's great to see inventory levels back in a better position to fulfill that strong consumer demand for the brand. So can you just talk about your -- how your lead times have evolved, and your ability to adjust your forward inventory receipts either up or down based on kind of changes in consumer demand in this uncertain environment?

Abbie, It's a great question when we -- sorry, Marc. When we founded On, Abbie, we came right out of the financial crisis. And then, as a young brand, we asked ourselves, what does that mean now in that part of the cycle? And back then, we realized that people are cutting down on some investments, but -- and they're very much still focused on something that keeps them healthy, and that is running. And it's also one of the most accessible sports, one of the most cheap sports. The only thing that you really need is a good running shoe. That gives you a unique sensation, but also keeps you injury-free. And that's how it played out back then that we saw still people focusing on staying healthy. So we can't predict the future, but that's at least the tail from the past.

Maybe I take the question on inventory. So we mentioned it on the call. We are in a very strong inventory position. And it's important to understand that we have flown a lot of products that were produced right after the lockdowns, and they have been -- they have reached our customers already. So what we put on the ships later on was fresh products. So our warehouse is -- and the inventory levels there is really in line with what we expect to deliver in the next 1.5 quarters. And then it's also important to understand that, as a premium brand, we have relatively long lead time -- or product life cycle time. So it allows us to correct also some excessive positions that we have on certain products without going into this discounting. And if you look at the growth that we have seen in inventory versus last year, then majority of -- part of that growth is coming from growth in our warehouses, but that's more 60% growth. So it's fully in line with our sales growth. And the rest is really the -- that we filled the in-transit inventory because we started to put products back into sea freight versus airfreight.

The next question is coming from Aubrey Tianello from BNP.

Congrats on the quarter, and thanks for squeezing me in here. First question I wanted to ask is on the Roger Federer retirement. Could you guys maybe talk a little bit about the Laver Cup event? What that did in terms of impacting the brand's visibility? And then now that he's officially retired, how do you plan to work with Roger and, more broadly, the Tennis franchise overall where you have other athletes as well?

So, Aubrey, I mean, of course, that was an emotional moment for us when he retired. But probably the upside from that is that he will have more time. And you have to understand that he -- the Roger, for us, is a co-entrepreneur and spends a lot of time probably 20 days of the year in the lab working with us on the Roger Pro, so Pro tennis shoes, but then also on the other parts of the franchise. And now we're just going to spend more time together because we're doubling down on the tennis business and continue to grow the franchise. So it's very important that we spend time together. And Roger is very committed to that. You probably know as well that his house is short 20-minute drive from our lab. So that comes together well.

That's great to hear. And then maybe if I could just one follow-up on China. Can you guys talk about the decision you made to own and operate your On stores there as opposed to maybe going with a partner like other brands have. What are the benefits that you see by taking -- by going this route?

I think it’s – what’s very important to us is that we’re able to bring a very unique and also consistent consumer experience to life. So wherever you experience On, you should do that in a premium way. And we felt for China, the best way to do it, that is on our own. So we decided to do most of our stores completely on our own. We are partnering with local franchisees in Tier 2 cities where we feel they have better access to staff or also to certain retail locations. So you will see, and we already see franchise stores in China, but not we’ve launch master franchising partners. And obviously, those has a positive margin impact than if we’re able to operate the stores completely on our own. And we very much feel On is a Chinese brand with the Swiss [indiscernible]. So we have a completely local team, and feel we understand the market very well. We feel we have access to the best locations. For example, we just relocated stores into ground floor level in some of the key malls, and that was very, very important to us to get even more traffic into the stores. So we feel we can all reach – reach all of that on our own, and that’s why we decided to pursue the opportunity without large multi franchising partners.

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