Q3 2021 On Holding AG Earnings Call
Before we begin I would like to remind everyone that the remarks during today's call may contain forward looking statements regarding future events and financial performance within the meaning of the federal Securities laws.
These forward.
This reflects our current expectations and beliefs only and.
And such statements are subject to certain risks and uncertainties that could cause actual results to differ materially.
Please refer to our final prospectus filed with the Securities and Exchange Commission relating to the company's IPO on September 16, 2021 for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Please further note that this call will also contain certain non <unk> financial measures such as adjusted EBITDA and adjusted EBIT margin.
The company believes these non <unk> financial measures will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with the high frame.
Please refer to today's release for a reconciliation of our non <unk> financial measures to the most comparable measures prepared in accordance with high frame.
With that I will turn the call over first to Caspar followed by marketing for the prepared remarks.
<unk> welcome to all of you joining us today, we're excited to share with you on first quarter results as a public company and we thank you very much for joining this first call following our successful IPO.
We are very pleased to announce that Q3 has been the strongest quarter in the history of the company in terms of net sales gross profit and adjusted EBITDA.
Global consumer demand for the on brand continued to strongly accelerate as expressed by the fact that all channels regions and product categories are contributing significantly to our hyper growth.
Who would have thought that our brand, which started 12 years ago with our first prototype consisting of pieces of a garden hose glued to the soul of an old one issue, but to develop into a company that generated net sales of Swiss francs 218 million and this past quarter Q3 'twenty one.
We see our recent IPO is a stepping stone in our mission to serve more and more people around the world and have them move with us.
We invite everyone to join US on this mission to ignite the human spirit through movement already short dream on Gleevec.
We will continue to discover and explore new frontiers.
To do things differently and build long term enduring value for all our partners and stakeholders.
Given that this is our first earnings call until a few may be new to <unk>, we will start with a brief introduction clarification of history.
Core strengths and growth strategy and shed light on how we made progress in the past quarter.
We will then deep dive into our quarterly performance and conclude with an outlook and guidance before opening to Q&A.
<unk> is an innovation company.
On the board in the Swiss Alps, with one goal to revolutionize the sensation of running based on the ready Claudia.
Soft landings, followed by explosive takeoff or as we call it running in the cloud.
<unk> is an innovation company at heart and we focus our efforts on three main areas performing design and positive impact we aspire to increase performance for athletes and everyday consumers pipelining smart distinct and sustainability focused designs to our products.
We are happy to report that in the past quarter on has made strong progress on all three fronts. First we are proud to have been the official outfitter for the system fixed and Paralympic teams at the Olympic games in Tokyo.
The visibility across the globe, especially if our apparel led to an increased demand and brand awareness.
Personal highlight was watching the limits cross country mountain biking event.
With athletes won gold silver and bronze and see the full podium in all year.
The Swiss went on to win 20, sentimental, but that's an almost 100 years.
We're also proud that 17 athletes competed in on product in Tokyo, including five athletes from the honest slightly club founded only a year ago and based in Boulder, Colorado, along with four athletes from the refugee OLED team.
To enable our athletes to compete on the highest level in long distance road running at flat loan Vince.
We introduced the cloud to Mako shortly before the games, both the competitors and consumers.
This shoe is the pinnacle of our performance running range featuring cloud pick an ultralight Super Bowl and the carbon speed board.
We have already seen many great results by our athletes in this product, including the third place by Helen tool at the Berlin Marathon This past September.
In the performance running segment, almost able to while consumers and capture market share with the new cloud Shadows and with the cloud flier, which continues to have very strong momentum.
Second bonds outstanding design continues to turn half an hour rapid growth and performance all day as the call our lives to the business.
It's driven by two recently added franchises.
The Roger Roger Federer as signature and Carla.
Roger Federer signature footwear line is developing very well and Roger personally unveil a limited edition recently at the Labor Cup in Boston.
Only to see complete the sell out within hours.
Both the Roger and <unk> are attracting a younger urban and fashion conscious consumer drawn and our key pillars in our ambition to be a global tastemaker brand.
Third more and more consumers are shopping for pull on our <unk>.
Including our apparel and accessories in Q3 net sales from apparel products grew more than twice as fast as sales from shoes.
And we see a strong demand for exciting new products like they would exit parka provided protection all season, our easily active pens and climate check.
All of them reflect our passion for technology design and sustainability.
And last not least we are ready to introduce exciting new footwear and apparel products and performance running performance outdoor performance all day in Q1 next year.
Now, let's set some light on the third focal point of onto innovation efforts.
<unk> ability.
We are highly committed to the company our growth from the footprint that the lease on our planet and.
And we have committed to some of the most ambitious sustainability targets in the industry.
On climate for example, we are working with science based targets to cut our carbon emissions by 55% through 2013 per product on producer.
And we are also one of the first sporting goods Brent joined the science based targets for nature of pilot program going beyond climate, and including land water Forest and biodiversity.
We aspire to be both a thought and actually did for our industry.
During the climate summit Cop 26 in Glasgow last week unannounced very ambitious new material.
<unk> cloud.
Clean cloud takes carbon emissions and turn them into <unk>.
This technology, which we have developed over the last four years has the potential to be used in the majority of bonds product.
We are now virtually together with loan to tick and borealis to make the first pairs and scale the technology for mass production.
This is a long term initiative and one of several technology that <unk> built in our quest to move away from fossil based material.
With tests on apart is our global footprint.
Coming from a very small home market in Switzerland, they needed to expand globally from the very beginning.
We believe this early global expansion has been instrumental in driving our net sales CAGR of 85% since inception.
On one of the fastest growing scaled asset sports companies in the world.
So we believe this global presence positions us extremely well for future growth within the large global footwear and the pellet market.
Over the past 12 years, we have built a passionate global community of fans across more than 60 countries.
And we believe we have opportunities for continued market share gains across the globe.
We are in a growth phase in almost all of our international markets and have significant potential to expand our geographic footprint through controlled multi channel growth.
We have historically been extremely successful in entering new markets. For example, we entered the United States in 2013 and have grown net sales to Swiss francs $136 million in the first nine months of 2020 and Swiss francs $265 million in the nine month period ended September 30.
2021.
We have entered China in 2018 and grew our net sales in the region by 199% from Swiss francs, $1 8 million in 2019 to Swiss francs, $5 5 million in 2020.
In the nine months ended September 32021. This number is already at Swiss francs, $13 7 million.
And we are seeing continued very strong growth during.
During Singles' day last week on product sold on Tmall and JD increased by over 500%.
Complementary DTC and wholesale.
In distributing these products, we seek to meet runners wherever they are.
After starting off selling on our own website, and especially running stores.
<unk> are now also available in some of the most repeatable general sporting out of fashion and lifestyle retailer in the world through over 8100 stores.
And value, adding online retailers across more than 60 countries.
In Q3, we continued to strengthen our partnership with some of the best Global retailer as Harrison London. For example, all launched our first ever trade execution of our new premium on retail concept featuring a mini version of our own retail store concept.
On the lifestyle side, we successfully piloted our collaborations with foot locker and with JD and very selective prime locations.
Both pilots have proven that our products strongly resonate with an even younger consumer group and we are excited to convenient both partnerships by maintaining our premium distribution.
The wholesale channel accounted for 64% of our net sales for the nine month period ended September <unk> 2021.
With the <unk> community and brand awareness growing globally. We are further began to organically scale <unk> channeled through on running dot com and have increased our DTC sales significantly.
In September we have opened our owned and operated on store and Janssen.
On C to C channel as a whole which includes our E Commerce site, a flagship store in New York City, and fix weaker stores in China.
Presented 36% of our net sales for the nine month period ended September 32021.
We cannot emphasize enough that we consider our DTC and wholesale channels highly complementary and Brandon Ensing and we will continue to invest in the expansion across both channels.
A review of the Q3 highlights would not be complete without mentioning the great pleasure of running to the New York stock exchange together with our team to ring the opening bell and celebrate our initial public offering on September 16th.
It's an honor to now hand over to the person that is most of the heavily for this event on <unk> CFO and COO CFO Martin.
Thank you Kasper.
Let's move on to reviewing our financials for the third quarter of 2021.
As we mentioned at the beginning of today's call, we see an accelerating demand for our brands globally.
Our Q3 results are a strong combination of growth and profitability.
And to further validation of our business model and our long term targets.
Net sales for the quarter were $218 million with strength.
By 67, 6% compared to the third quarter last year.
We're running had already been on fire at many COVID-19 restrictions.
Being lifted temporary.
So we maintained our strong growth from this elevated level.
It is driven by the continued success of <unk> core strategy.
Including increasing brand awareness.
These channel geographic expansion and the programming.
The product portfolio, driven by innovation design and sustainability.
Year to date, we achieved net sales of $533 5 million or 77, 2% increase compared to the first nine months last year.
And the 71% CAGR over the past three years.
Which further validates the strong continued strength of our product.
The demand for our products accelerated across both the wholesale and the direct to consumer channel as well as all regions and all product categories.
As Kasper mentioned, we consider our direct to consumer and wholesale channels highly complementary.
In Q3, we see this strategy is being validated by the strong demand in both channels.
DTC grew 93% to $75 7 million.
Wholesale net sales increased by 56, 7% to $142 3 million.
Despite the full reopening of retail stores in most key geographies, we see a very strong continued engagement of existing customers and.
And the growth of new customers in our D to C chamber.
For example, in North America, DTC grew 129% and in Asia Pacific 152%.
Overall, the contribution of net sales from the direct to consumer channel.
Grew to 34, 7% for the quarter versus 32% in the same period last year.
We continue to invest in our brand and community by building partnerships with premium wholesale partner.
In Q3 2021 <unk>.
<unk> demand for the <unk> brand in the wholesale channel increased even further and lead to strong growth rates in many of our a key and few of the comments.
Across both channels, we are seeing a strong demand globally with growth rates in all geographic regions exceeding 50%.
North America continues to be the growth engine with a net sales increase of 82, 6%, resulting in United States and Canada being responsible for 51, 5% of total net debt.
The continued acceleration of the demand in North America is best reflected in the fact that DTC sales grew twice as fast as wholesale.
As previously mentioned, we see China as one of the key regional growth driver, which was showcased with strong triple digit sales growth in the third quarter.
The Asia Pacific region in total grew by 71, 4% with the significant growth in China being somewhat offset by a slowdown in Australia wholesale market is slow.
Local lockdowns continued into Q3.
Also in Europe, most markets continued to grow strongly with an overall regional growth of 53%.
Here it is important to highlight the different to most other region. Many European markets happiness, the COVID-19 restrictions in Q3 2020.
Which have driven higher wholesale sales in the same period last year.
The growth across our distribution network is fueled by the successful expansion of development of our innovation driven product.
Across all our product categories and all key franchises.
Demand is accelerating.
Net sales in Q3, 2021 increased 65, 2% for shoes.
133% for apparel at 41, 5% for accessories.
For the first time, a private contributed more than $10 million in one quarter or two our overall net sales.
Consumer demand is clearly there and then on owned stores in China.
<unk> already contributes approximately 20% of the sales.
Gross profit in the third quarter was $131 3 million compared to $78 million in Q3 2020.
Our gross profit margin increased year over year from 54, 5% in Q3 22, 62% in Q3 21.
This is broadly in line with the strong results, we have seen in previous two quarters.
And another validation of our long term targets.
The increase primarily reflects lower customs costs related to the free trade agreement between the economic Europe.
Lower sourcing costs and the very low share of airfreight a product in Q3.
And the first nine months of 2021 gross profit increased by 99% to $318 5 million.
Collecting and improvement of our cross profit margin from 55, 4% to 59, 7%.
If it leaves out share based compensation for the moment SG&A expenses as a percentage of net sales was 48, 5% for Q3 21 compared to 39, 6% for the same period last year.
More comparable year to date SG&A expenses with our share based compensation were 48, 7% of net sales for 'twenty, one compared to 45, 3% for the same period last year.
This increase is mainly driven by higher investments in digital customer acquisition and demand, creating expenses and the resumption of investment and Crestwood activities post COVID-19 pandemic lockdown.
In addition, we incurred $7 3 million IPO of transaction cost.
Then moving on to share based compensation, but just worth looking at in an isolated way in a bit more detailed manner.
Share based compensation expenses in Q3, 'twenty, one decreased to $2 4 million Swiss francs or 1% of net sales.
From $5 3 million or four 1% of net sales in the.
Prior year period.
This change is primarily due to a one off transaction in 2000.
Driven by the strong growth acceleration in the past years and by the successful IPO.
We expect to create approximately seven 5 million additional stock based awards under our existing equity plant in Q4 2021.
Due to the timing of such plans. This impact is not included in our Q3 numbers.
Adjusted EBITDA, which excludes share based compensation and one off transaction cost related to the IPO.
It was $37 $90 million for the three months period ended September 32001.
Up from $22 6 million in the prior year period.
The EBITDA margin remained consistent year over year for the three months period at 17, 4%.
Year to date, adjusted EBITDA increased by 121% from $38 6 million to $85 $2 million.
In percent of net sales adjusted EBITDA increased year to date from 12, 8% to 16% and.
It validates our commitment.
To simultaneously grow net sales and profitability.
Shifting to our balance sheet and cash flow on September 15th and prior to the end of our third quarter. We completed our initial public offering at the New York stock exchange <unk> and certain selling shareholders sold an aggregate of $35 million 760.
5000 class a ordinary shares at a share price of 24 U S dollar.
The net proceeds from the IPO for all of our $615 million with strength was 662 million U S. Dollar.
This has led to a very strong position of net cash and cash equivalents of $672 1 million Swiss francs.
Which will enable us to pursue our ambitious growth plans.
Now, let's look ahead.
We are confident that demand for our products remained very strong across all regions all channels and all product categories.
Before we detail out our financial outlook and in order to provide a better understanding of the expected financial performance, we would like to share. The recent developments and our short term outlook of the suggestion in Vietnam and throughout the supply chain.
There are two challenges that are connected and that will impact our financial performance in the upcoming quarters.
Most significantly we expect supply constraints and higher airfreight expenses as a result of the recent factory closures into south of Vietnam.
The quantification and mitigation of this impact is being accentuated by a very volatile freight and distribution costs.
Driven by higher freight and shipping charges and higher warehouse labor expenses.
During Q3 2021, our production partners in the south of Vietnam for affected by government mandated closures to compare to the spread of COVID-19.
The impact of factories represent about 70% of our production capacity.
The closures started in July of 2021 and factories remain close.
30 of September 21.
As of beginning of October we have seen a gradual reopening and ramp up.
Our key message today is that all factories are open since early November.
Of this week operate at more than 80% of our planned production capacity.
To put this number into perspective it is very important to highlight the fact that our planned production capacity was based on the anticipation of a continued hyper growth in 2021 as well as in 2022.
Versus dose goals until today to cumulated loss of capacity in the affected region is approximately 12 weeks.
To mitigate the impact on our business, we continue to take actions, including the reallocation and prioritization of product across all factory partner.
And the use of airfreight to balance inventory levels.
The strong demand.
In addition already as of Q1 next year, we secured a significant amount of additional production capacity at two new factory partners.
Indonesia.
We expect to use air freight to be a headwind to our gross margin of approximately 900 to 1000 basis points in Q4, 'twenty, one I think Q1 'twenty two.
In addition, we are working closely with our retail partners to maximize the number of products available to our consumers.
These measures include a holistic management of all available inventory and the adjustment of launch dates for new products.
We are confident that the supply chain disruptions are temporary.
And then our pricing power will allow us to compensate increased freight and distribution costs in the mid to long term with selective price increases.
Turning now to our financial outlook.
As this is our first time to provide financial guidance to the public market, we would like to briefly explain how it should be industry.
Philosophically, we aimed to provide prudent yet expiration of guidance.
Appropriately balances our optimism in the business with potential risk or headwinds we face.
We will provide guidance for the full year not on a quarterly basis. As this is mirroring the way we steer the business internally and it allows us to take a long term growth perspective.
For Q4, 'twenty, one and half year 122, we are expecting our financial results to be constrained by dimension supply chain challenges.
We see the demand clearly above the available supply.
Given the current uncertainties in the supply chain, we will prioritize top line of our profitability in order to protect our retail partners.
And our long term growth.
No.
For the full year 2021, we expect net sales of 710 million Swiss francs, representing a 67% year over year growth.
Our outlook reflects the supply restriction that we foresee in the last three months of the year.
We have started to FY selective product from factories after reopening to fulfill the demand.
Nevertheless, we are still expecting limited product availability in the fourth quarter.
Independent of the supply chain disruptions, we have taken the strategic decision to shift the launch of our strengths summer season products from Q4 into Q1, which room is solid and the channel shift of our seasonality.
We expect adjusted EBITDA of $92 million with strength, representing an adjusted EBITDA margin of 13% ended the year over year growth of 85%.
We will continue to effort products throughout Q4. In addition, we will drive investments in brand building with strong investments into returning physical global nature running events like the New York City Marathon.
Into upper funnel marketing during the holiday season, but also continued investments into RFP.
As earlier indicated we expect to <unk> additional stock based compensation awards under our existing share based compensation plans.
These awards will vest at the correct date, and therefore, we will record a material share based compensation charge of approximately $173 million with strength in the fourth quarter of 2021.
And consequently significantly impact our Q4 adjusted net profit.
As of 2022, we expect an annual dilution from our equity plans of approximately one 5%.
Looking beyond 2021, we are very confident that the supply chain challenges, especially to supply chain constraints.
Temporary and that we should fully focus on our long term growth opportunities.
Especially in half year, one we expect net sales to be adversely impacted and final product benefit it depends on the continued factory ramp ups and availability and cost of airfreight capacity.
At current we expect a return to strong hyper growth in the second half of the year.
And we expect at least $960 million net sales.
Even though our internal ambition is higher than that.
We expect to have better visibility into new year on how quickly we can get additional capacity and we will revisit the guidance then.
To be very clear again.
We are experiencing a transitory supply shortage not a demand issue.
This is not a new situation for us over the last decade to strong demand for the on plant has regularly outpaced supply.
We have the experience of turning this into an advantage falling by tightly controlling distribution to ensure sustainable quality growth.
In the first half of 2022, we will face supply shortages on certain products that are higher than what we would like and not all consumers will have the ability to buy and expected the product they are looking.
However, we believe in the long run it will only increase.
The desirability of the on Prem.
A tight control of the increase of our SG&A cost.
In the first half year will allow us to partially mitigate higher freight and distribution expenses.
Consequently, we expect adjusted EBITDA of $125 million and to maintain our adjusted EBITDA margin of 13%.
As said before to mitigate disruptions across the international supply chain, we will prioritize net sales growth over profitability.
In conclusion, we are very proud of our recent performance and excited for the opportunities ahead.
Most important we're extremely proud of our team all around the globe.
For their passion to grow at such an incredible speed and for all the hard work that is required to adapt to the fast changing environment.
So much.
For the future we have the right team of talent in place to drive innovation and to develop exciting products.
To engage with our customers and wholesale online and our own retail.
To continue building, our premium trends globally to make the world a better and more sustainable place to use our voice to build a more diverse and inclusive running community.
Together with our industry partners.
All with the goal to deliver on our mission.
To ignite the human spirit through movement.
And to dream on as a team.
With that Casper market, Florida.
To open up the session to your questions.
Thank you for your continued support and trust.
Operator, we are ready to begin the Q&A session.
Thank you Pete.
A question on today's two teeth press star followed by one on your kind of thank you Pat.
If you do change your mind, please pass staff.
<unk>.
And ensure that you need to make any when you get to ask your question.
We'll be taking our first question today from Kimberly Greenberger of Morgan Stanley.
Kimberly FTE.
Great. Thank you so much good afternoon, and congratulations on the fantastic quarter bright clear out of the gate.
I wanted to ask about.
Yes.
Expansion of factoring capacity I know you were working on diversifying our sourcing base, even prior to Covid, but.
But if you just sort of step back and think about.
The goal is.
For the business over the next 234 years.
What's your philosophy about how to develop additional factory capacity and diversify our sourcing base.
In order to.
Maybe at least partially shield from some of the volatility we're seeing concentrated in Vietnam right now thanks, so much.
Yes welcome everyone also from my side. This is mark speaking and thank you so much.
<unk> for your for your question so.
I think while they already started doing some time ago as we started to prioritize and TLLP over efficiency.
And that really has allowed us and I'll also add to delivered a quarter that we delivered to navigate through some of the challenges.
And that we saw over the last year. So on the demand side, but also on the supply side. So we will continue to build a very agile and nimble sourcing environment and supply chain environment, but it means is.
First <unk>.
Tried to diversify into more countries ideally also countries that are closer to the consumer.
Or some of our consumers for example in Europe are closer to North America as long as the capabilities are there and it is meaningful for us to do so and we have pilots running in certain countries.
The second thing that we continue to do it we will continue to dual source, our key styles and key materials. So this is another reason why we're able to move volume around pretty quickly and why basically as soon as the factories reopened we could start and full speed right out of the gate because to mature.
The components were there so we want to create and continue to create create redundancies and on the supply chain side. So so we can react to a very fast changing.
And environment that we that we basically see there.
And and I think.
Obviously, we feel that.
Labor.
Continue to be a very constrained resource and to even become more constrained over time. So we're working heavily with all our partners to reduce the dependency on labor be it in warehouses, but also be it in on the factory side and tend to make sure. They are able to automate more and more parts of the.
Please.
That is very clear mark. Thank you so much I wanted to ask about wholesale as well if I could.
Wholesale revenue this quarter came in well above our expectation I'm wondering if you can talk about any additional.
Expansion in wholesale any new partners you brought on here.
And what Youre seeing interest and demand in that channel. Thanks, so much.
Thank you Kimberly and most of them answered that one.
On the wholesale side so Indiana.
<unk> that we're seeing we're seeing that coming from from end consumers in the key segments that were in the running outdoor and performance of <unk>.
Does that consumers shop on our own website and to our own channels, but also with our most important wholesale partners.
So the wholesale partners are looking at in that demand very very positively enter orders and the order book that we're seeing for the next.
Six months spring summer its way of off basically and kind of what we could have expected, but again, we have supply constraints for the first month and we are right now taking orders for the second half of the season.
It allows us to do this very strong demand is very very.
Thought through approach on how to expand our wholesale channels and take the right decisions and work with the right partner at the right time, and that's part of that we're doing certain trials.
So we've piloted 32 foot locker doors in the U S. With pilot, that's 10 Kt doors in the U S and China.
<unk> J D doors in Europe, and we're seeing very very strong results.
We will take wholesale decisions that allow.
Two.
Go after hour mission and some of our key target one of it being in the end the number one brand on runners feet. So you can expect us to expand wholesale in a way and we can be very very successful for example, beef runners in the U S and around the globe.
Terrific. Thanks, so much into the mic here.
Keith.
We'll be taking our next question today from Grace Smalley of Jpmorgan Grace.
Please go ahead.
Alright. Thank you. Thank you good morning, Thank you for taking my question.
Yes.
Given the current supply constraints, you're asking how are you prioritizing the allocation between your wholesale partners.
Thank you and the channel.
And then you mentioned you have pricing power and potential of selective price increases and maintain our long time can you comment on whether you're planning any price increases for next year and answer any questions. After the platform.
Thank you.
So could you speak to the first one on marketing I will speak to the pricing question. So.
We spoke about that a few times in the past as well and it's very important to understand that on a true omni channel brand and we've said, we're taking a consumer perspective. So we want to have the product available for the consumer that wants that product through the channel of the consumer's choice and what that means is.
Basically when you looked at our running product, we will treat our key running partners and our own D to C business on the same level when it comes to product prioritization and we will do the same on outdoor and the same on on that.
The performance of all of the sites now as you know there is a very very strong demand on the direct to consumer side.
And Thats product prioritization.
Is that reflected accordingly in the outlook that we gave just one additional comment which is important here. We also feel that.
Over the next couple of months are a great opportunity to continue to build shelf space with some of our key partners and Thats also one of the reasons why we prioritize topline. So we can gain additional self shelf space with some of our partners.
Through that kind of takes us into 'twenty, two 'twenty three as well.
And then focusing on the price increase question.
So on as a premium brand and.
We have significant pricing power.
And it's just premium price level, especially also versus our.
Competitors.
We are planning selective price increases and in spring 2022.
Focus on North America.
And they will be relevant for about 40% of our volume.
Great. Thank you and then.
Just follow up with a broader question on the industry and I think that money.
Correct.
And a customer panel currently just wondering what your thoughts on China, Castleton, Shang, Kenny and benefited Shanghai event.
The conference center strength, even as economies rehan. Thank you.
Thank you and races as Kasper.
You mentioned some of the factors running.
Running is our habits. Many on this call are probably lenders when you once you get to the point, where you can run twice three four times.
It's hard to let go because it keeps you see very good sensation.
And so that does help et cetera during the pandemic.
<unk> is still in play, but let's also not forget while when consumers now go back to their gyms, a lot of people do running into some treadmills as well so.
We're relatively less exposed as an industry to deliver return to Jim's because running is now a part of our February per account.
So yes participation in the sport.
And.
I'll keep position that we cannot only just grow with the industry, but we can take significant market share.
Given the way, we have been able to manage our supplies and plan for hyper growth going into 'twenty two.
Yeah.
Perfect. Thank you very much.
Thanks, Greg.
We are now going to need a the key Michael Binetti of credit Suisse.
Michael Please go ahead.
Hey, Thank you guys. Thanks for all the detail and congrats on your first quarter here in public.
I just wanted to ask you maybe on.
The new distribution, you mentioned, a few stores as foot locker and a few with J D and I know that you guys have had product and foot locker in the past I think there's a long time ago and I think at the time.
Youre thinking on why that didn't go forward a while ago was because you need to probably to bring more of a fashion component to it you mentioned.
A few references to lifestyle early on I know you've been investing in the design team and in some of the assets needed to push further on the on the lifestyle side and then I'm sorry.
I'd be curious to hear where you where you feel like you are on that and how much opportunity. There is in retailers like foot locker JD and the near term is that something that we could see.
I will start to accelerate significantly here.
Driven by some of the lifestyle side, you guys have been working on.
Thank you for the question.
As you can imagine at over eight years <unk> has evolved as a brand and sovereign footlocker and the last time in.
The reason why we feel.
We feel broking partners like foot locker and J D.
It's beneficial.
Just wanted to point out a few so first of all.
And we are starting from a consumer perspective, and we feel <unk> has an opportunity to target.
Even younger consumer than we already have in foot locker and <unk> channels to target that younger consumer.
We do have the product for that consumer. So this is what the tests are showing.
Product, especially the cloud NOLA is resonating extremely well with that consumer base and so we very much feel this is an opportunity to capture.
Capture that additional opportunity then.
Second topic is <unk>.
One is attracting a very female consumer as well and we are able to bring more female consumer into some of these channels, which stay very much I. Appreciate it. So we're taking kind of a win win situation in there and then probably circa one.
They are working a lot on clearing the product so shady and footlocker has a very very differentiated product assortments to two for example add fleet feet or some of our own specialty retailer. So we feel on has some.
And then have an assortment. So we can efficiently target several consumer segments through different partners and we stay very very detailed hearing always staying premium.
In terms of full partner base, but also in terms of pricing and first and so that business is successfully working.
You can expect to take additional most but always.
Greeley relief and sell through and slow and making sure we're taking the right steps at the right time.
Thanks.
And then if I can ask a follow up as you look at next year I thought it was interesting that you were able to guide us to stable, 13% EBITDA margins and frankly, that's not far off what we heard is we thought as we talk to see through the IPO process about where you thought the business would be next year, but you.
You did point to some very heavy gross margin pressure from air freight I know that starts in the fourth quarter and into the first quarter I think that makes it very impressive that you're able to still guide to flat EBITDA margins next year, but maybe could you help us think about maybe some of the.
How to think about SG&A versus gross margin next year, how youre, how youre building to that in your model on the.
Maybe even first half versus second half so that we understand what some of the dynamics are going to be here as you guys go through the the supply constraint that you pointed to.
Yes happy to Mike.
So I think looking at our Q3 results.
That validates our long term targets.
That we discussed.
Kevin.
For Q4 now in order for half year. One next year, we expect that those long term goals are impacted by <unk>.
Higher and above average effort cost, but just the COO.
A key driver.
Four four lower gross profit margin and also EBITDA margin.
This impact is India and reflected in the 13% guidance that we have given both in 2021, which forces the impacting Q4, and then for 2022, which reflects the impact and how you want to be we also considered in their deal the upsides from.
From the price increases.
And also as we always committed to grow topline and profitability in line of course, we will also grow our SG&A cost base carefully.
Under consideration of the of the current circumstances into higher to higher freight costs.
But we also mentioned it on the on the call.
Especially in the next two quarters, we were clearly prioritize our topline.
Profitability because for us it's super important that our consumers can buy our products.
Our retailers to have sufficient amount of product that we.
So we keep our shelf space and to.
And also considering the 900 to 1000 basis points impact from the air freight.
But we foresee.
In Q4 in Q1.
Okay very helpful. Congrats again guys. Thank you.
Thank you Mike.
Thank you Michael.
We'll now be taking our next question from Jay <unk> of UBS.
Please proceed with your question.
Great. Thank you so much.
Would it be possible elaborate a little bit on the growth you saw in Europe in the quarter.
Is the strength concentrated in some of your other countries like Germany and Switzerland.
Companies that are already a strong base I mean did you see was the growth broad based or are you seeing increasing momentum in some of the other countries across Europe. Thank you.
Yes. Thank you. Thank you for the question so.
The good thing is I mean, we're seeing the growth is very much and distribute that across many countries and it's also on the wholesale side definitely impacted by some of kind of the lockdowns that we saw happening nothing to start part b, but beforehand, but were seeing as UK is very strong so UK, so comparable EBIT smaller too.
Some of the other markets and we're investing heavily so this has been very very positive.
Germany, Switzerland, as well as Austria.
Continue to basically deliver strong results and then we see that we have a lot of opportunity still in France. For example, and we're putting putting kind of lots of pieces in place. So we can capture that.
Sing.
Want to point out, which we didn't top tier is that.
It's not only footwear that has delivered to it so, especially also apparel has been very strong in some of our European markets and has delivered a very very strong growth.
Great and then if I can ask you just about the fiscal 'twenty two guidance based on what you've seen from the press.
The stores that you have opened I mean, what is your thought about store growth as we think about the model for 'twenty, two and also E. Commerce E Commerce capabilities, where you had to be able to enhance the e-commerce growth that youll have all over the world.
Thank you.
Let me quickly start on that on store growth, maybe kasper you can elaborate a bit more on the ecommerce side. So on the store side.
The biggest part of the stores and where that's going to come from China as we're continuing to build our network of stores in China, We're already at eight stores as of today and they're all working very very well.
Together with our with Tmall and JD really shaping that environment and at the same time.
Continue to rollout on experiences in the key cities across the globe.
So we're planning to rollout two for example top tier in London at some of the next locations.
Can also expect some of the key cities in the U S to get.
Fully.
Okay.
And the top.
Retail partnership after the opportunity to bring on to life in a very very differentiated way together with them and they spoke about carrots.
And we'll be having a concept starting to rollout its not strong for example that has delivered very very strong results, especially also on the apparel side. So we'll definitely continue to build this all encompassing brand experience.
And happy to follow up on the DTC question.
You'll see very very strong demand across all regions on a lot of that demand is converted in our own DTC website.
If you look at it.
<unk>.
The ratio between new customers and existing customers, mostly stays the same.
Which means that we were still bringing.
Bringing a lot of new people.
Two the on brand at the same time.
<unk>.
Elevate the brand awareness that we're seeing especially in the U S. Now through the IPO drive more consumers to our website on their own terms and this is something that.
And when you look into the next year, we will continue to.
Explore how do we find ways, we will continue to find ways, where we're not too reliant on the too big.
Online AD providers, but we have many many channels.
Consumers 12 website.
We're also investing in our own data capture.
On our own website.
We're planning to bring a new web store online in the second half next year. So there are a number of initiatives that will continue to drive our DTC push and we'll continue that DTC channel is growing faster.
In the wholesale channel.
Terrific. Thank you so much.
Thank you Jay.
Our next question, we're going to be the key Jim Duffy of Stifel.
Kim.
Thank you Louis.
Thank you.
Terrific quarter and outlook given the challenging backdrop.
I Hope you guys can speak in more detail about the product pipeline looking into 2022, both key new franchises and important updates.
From existing franchises and could you maybe touch on the influence of manufacturing disruption on the new release calendar.
Yeah, nothing to talk about the new franchises in Denmark, you could probably take the question on the release so.
We have two to three business units the.
Running outdoor and lifestyle sites and running our our goal is to be the number one brand undrawn receipts.
So they are actually adding three very exciting franchises next year.
That will help us get broader acceptance, even hopefully push on our market share available 10%.
So the first one is the cloud runner, which will be launched in spring.
Supportive Bob Cushing shoe.
The 150 U S dollars and the second one is the cloud go which is the neutral version of that same price point.
We expect to be the biggest franchise.
James.
Distribution.
And then begin to not get it.
Enough People's feet and then there is the cloud monster is our most crucial product to date, so really this Max cushioning segment.
That's sitting on top of the cloud startups, which is already taking them off the top spot in current distributions have been launched only in July.
On the running side on the outflow side and we have an update of our hiking boots, which had already taken quite some market share, especially here in Europe and the outs, but also estimate 12 weeks with the stores like an Rei in North America and Europe.
Adding.
Multifunction outdoor product.
There is called the cloud one to kind of like a new product.
Product that will be very very popular for people that are not going to the extreme outdoors, but they're looking for a board approved through that protect him well and then on the on that from an aldi in our lifestyle segment. We are adding two silhouettes that we have just now present.
In our global meeting last week.
Two very easy to variable and one is called the cloud EC basically ultralights coupon product also quite interesting from our system stability point of view, because it's made up of only six parts versus like on average, 30% 35 parts maybe.
Construction products and.
And then last not least the cloud which was.
Kind of like inspired by <unk> heritage.
And brings a new silhouette.
Due to the lifestyle channel.
Thank you Kasper, Florida overly on the footwear side and please let me reiterate again that our apparel. This quarter was 133%. So there is also a lot of apparel launches coming up next year and we foresee all of those too.
To happen as planned and so there is there's no impact on the apparel side from a production perspective that when it comes to launch dates. So that's probably just quickly look at the first quarter because that's the.
Quarter, that's most impacted by it we will launch the next iteration of the cloud in the first quarter as planned. So we're able to go ahead with that launch as planned. We're also able to go ahead with the launch of Monster as planned in the first quarter. The main impact is going to happen on the Cogs runner and Thats kind of.
Launched in slightly delayed and we will communicate Tyler most important retail partners and that launch date as soon as soon as it is available.
Again, our philosophy is to make sure that the products that is most relevant to the consumers and they're already know it is available. So we will prioritize existing products over new launches as they are also contributing a huge part of revenues.
Excellent. Thanks for that detailed overview of the pipeline guys and cast for a really exciting announcement around clean cloud can you speak more about that development process for clean cloud.
Variability timing.
And we do believe that provide you relative to competitors in the marketplace.
Absolutely I'm glad that you are as excited as we are.
We have a long term vision of moving away from perpetual based.
Raw materials.
Two full circle Iot so.
With the view of taking our product back and making new ones out of them.
The timeline as you can imagine is challenging and it will be a little bit of a moving target.
But we hope to get there and we've seen the majority of our products are no longer perpetual based.
We should get there well before the end of the decade.
And so clarity will.
It will depend on how quickly can be built.
Return networks and Theyre also looking into not just two number one system partnering with the industry and retailers and will have you know when it comes to clean cloud. This is approach. It gets started about four years five years ago and it came from the inside.
There were.
Some biofuels available.
The company started capturing carbon from the air and turning into for example, <unk> and whats basically if you can make <unk> you can make plastics and we can make good stuff that we make our profit from.
It was a very very challenging time, we followed BBC for leaks on technologies during this time.
Without going into too much detail one of them entail extra duty make chemical processing plants here somewhere in that small town in the Alps in Switzerland that had access to hydropower because some of these processes are quite energy.
Intense.
And whenever we kind of felt like we're.
They're in.
In some of the hurdle came out now with this latest announcement.
Feel that we're very close to two to bring us to scale. So we found them two very strong partners.
Borealis had already been a partner for the four years, helping us develop.
The compound and before we do test suite.
This compound.
It is.
Performance enough to hit most more than half of pharma product range, and then launch the tech really defining a very efficient way of capturing.
Monarch site at the exhaust pipe of SM in factory and also providing large enough quantities of it.
They also use an efficient process.
As energy intense by using enzymes to turning these into ethanol ethanol is the base for most of the products.
So currently we're we're <unk>.
Making the first phones.
We hopefully can showcase later.
I would say by the middle of next year.
So schuh fully made out of capture carbon and.
We're negotiating currently.
How quickly we can scale. This up this requires major investment on their part and ours basically you have to build a plant to processes at the same time I think it's important to state that we're not just banking on one technology. So we have about three or four technology stuff. We're looking at.
Non fossil based.
And some of them for example, our post consumer waste.
Just to make sure that we.
We will have multiple supply chains available and also can get to scale and this is the.
I see an elevated year two to our hearts and we don't want to we don't want to show concepts to the route we want to show a way of how can we move to scale quickly and Thats what were doing there with these two partners at the moment.
Outstanding stuff, Thank you very exciting.
Thank you Kim we are now going to move on to a question from Jonathan Komp.
<unk>.
Jonathan Please go ahead.
Yes. Thank you very much I wanted to ask about 2022 I know youre guiding revenue to grow 35%. Despite the headwinds in the first half. So I'm wondering if it's possible to comment on the growth you might be able to achieve for the year. If it werent for the constraints that you mentioned on the supply chain.
And when you think about the second half of 2022 is it possible that maybe highlight that the most important drivers that you see to that to the strong growth that youre guiding to.
So starting with the second part and Sean I think the.
Marcos Spansion inventory.
Now in the quick into discussions with our key accounts about their fall winter order. So it's affected the order for the second half of the year.
There's a lot of <unk>.
Very strong.
<unk> from from that side, we have our orders for the first half of the year, where we will face the supply.
Trends.
Be able to fulfill the full demand.
And as this business whether it be kept.
The confidence from those same on our direct to consumer channel customers spot mentioning that.
Where we still see strong growth rates of new customers of repeat customers.
And.
As we pointed out we see that in the in the second half of the year, we will return to hyper growth.
Agenda in the range of 40% to 50% and respectively. In the first half hour number is constrained by the supply.
Given on the.
The on the feedback that we get from our from our retail partners. We would have seen a similar growth rate in the first half as well.
Yes, that's very helpful. Thank you and then one bigger picture question. When you look at your business across the main categories running outdoor and performance all day our lifestyle.
How do you think about the long term.
Make between those categories and even.
What your business might look like longer term, if you roughly split across those broad categories.
If you look at.
On an innovation company.
Alright Thats great.
Okay.
So.
Most of the most of the segments that we're in are heavily inspired by performance and Thats.
The foundation of our brand we are an innovation company at heart and B B.
We bring technology solutions to all segments.
That will go to help consumers have a better experience in running that means staying around faster injury free lighter.
In outdoor and lifestyle basically they just feel that they are able to move.
Bradford located with swipe left so these are major trends that we're banking on.
And.
We are.
But we're not really looking at we don't even sphere do.
Do we have a growth school for lifestyle versus truck.
We feel that.
Consumers now expect versatile product.
And most of our products can list in one or two of the two of us.
Sometimes the time DSD routes.
And that's what's been driving some of the success of the brand that we're not just making.
Kind of like a very narrow use case product.
That makes sense very helpful, but very importantly on it.
Yes.
Let me just say.
<unk> at Casper pointed out an innovation company at heart and it's rooted in running so.
Thanks Jordan.
<unk>.
And from a communication and also and brand perception perspective.
Very much rooted in Rod and this will also drive.
An example of Edwards.
That's great. Thanks again.
Thank you Jonathan we're now going to take question from.
Cristina Fernandez of Telsey Christina <unk>.
Okay.
Good afternoon, and congratulations on a good first quarter.
Good to see.
For next year can you help us.
Think about growth for different <unk>.
Any puts and takes.
Based on inventory distribution and also some of the initiatives you have with your wholesale partners.
Yes look I think.
Let's look at the three.
Three main regions, which is basically North America, Europe and APAC.
If you look at if you look at North America, North America growth continued to be the key growth driver and Melbourne next year as well so in terms of absolute numbers, but also in terms of the growth that we're seeing and very much also driven by our direct to consumer channel then when you look at Europe and various markets there.
It's already a bit more established like Switzerland, Austria, and some parts of Germany, and then there is a lot of opportunity to continue to grow for example, in the UK and France.
To elaborate that.
So Europe will continue to have and growth momentum, but it will be a little bit slower or are expecting it to be a little bit slower than in the U S.
And then Asia Pacific very much driven more and more by China.
He has incredible momentum you've heard the statement.
Also on some of the Q3 events that we had that in double 11, so very strong momentum that we're seeing there and we assume that the strongest percentage growth number will come from from Asia Pacific are specifically.
China.
Now inventory Luckily again.
Sure.
We are working very hard on having a very nimble and agile supply chain. So that also means that we can react to market differences.
<unk> is also what you saw reflected in our 2020 results on the demand side, absolutely. We're basic in maneuvering between different markets that had appeared Covid lockdowns.
So we are we are confident that we can make sure that the inventories in the birdhouse RM. According to the demand that we are foreseeing and plan.
Yeah.
Okay.