Q1 2013 adidas AG Earnings Conference Call
May 03, 2013 AM CEST
ADS.DE - adidas AG
Q1 2013 adidas AG Earnings Conference Call
May 03, 2013 / 01:00PM GMT
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Corporate Participants
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* John Paul O'Meara
adidas AG - Head of Group IR
* Herbert Hainer
adidas AG - CEO
* Robin Stalker
adidas AG - CFO
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Conference Call Participants
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* Matthias Eifert
MainFirst Bank - Analyst
* Jurgen Kolb
CAI Cheuvreux - Analyst
* Michael Kuhn
Deutsche Bank - Analyst
* Richard Edwards
Citigroup - Analyst
* Omar Saad
ISI Group - Analyst
* Louise Singlehurst
Morgan Stanley - Analyst
* Chris Svezia
Susquehanna Financial Group - Analyst
* Rogerio Fujimori
Credit Suisse - Analyst
* Antoine Belge
HSBC Global Research - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the adidas Group conference call for Q1 2013 financial results conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to John Paul O'Meara. Please go ahead, sir.
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John Paul O'Meara, adidas AG - Head of Group IR [2]
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Thank you, Operator, and good afternoon, ladies and gentlemen. Our presenters today are Herbert Hainer, adidas Group CEO; and Robin Stalker, Group CFO. To allow for ease of comparison, all sales and revenue-related growth rates will be discussed on a currency-neutral basis unless otherwise specified.
So, with that, I'll hand over to Herbert to get us going today.
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Herbert Hainer, adidas AG - CEO [3]
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Yes, thanks, JP, and good afternoon, ladies and gentlemen. As you will have seen in our release this morning, we are off to a good start in 2013. Group sales remained on par with the prior year. Excluding the impact front from exiting NFL contract, revenues increased by 1%. Put into context, this is a strong performance, considering the robust event-related sales we enjoyed from the UEFA EURO 2012 and the London Olympic Games in the prior year, where first-quarter sales grew 14%.
Even more importantly, and as we have committed to for 2013, we visibly improved profitability, with the Group operating margin increasing 1.1 percentage points to 11.8%. This, in turn, lifted earnings per share up 6%. A cornerstone of our Route 2015 strategy is to ensure that we drive quality growth for all of our brands. This is based on two principles -- relentless innovation in our strategic growth categories, and flawless execution at the point of sale in all of our markets.
So let's take a look at how we delivered on these principles around the world in the first quarter. Without any doubt, the key highlight has to be the considerable success we continue to enjoy in the emerging markets. We pride ourselves on the attention to detail we put into being close to the consumer in every market we operate in. And this dedication is clearly visible with the 12% growth in Latin America, and 6% growth in greater China we generated in the quarter.
In Latin America, the adidas brand is firing on all cylinders ahead of this summer's football action in the region, with sales for the brand increasing 19%. In greater China we continued to benefit from our healthy market position and in-depth consumer and customer knowledge, most notably in the lifestyle space, where sales increased at a strong double-digit rate. In the European emerging markets, growth also continued, with sales increasing 3%, driven by both the adidas and Reebok brands. This is also a solid performance, given a challenging retail environment in Russia/CIS in the early months of the year.
In Western Europe, not surprisingly, sales declined 6%. Growth in France, Poland, and most of the Nordic countries was more than offset by declines related to the difficult consumer conditions in southern Europe, as well as the high comparisons from the prior-year event-related selling, most notably in the UK.
In other Asian markets, sales declined 4%, as strong double-digit growth in South Korea and Pacific was more than offset by declines in Japan, due also to the tough comparisons of the prior year. And finally, North America, where I'm pleased to report that sales for the Group reaccelerated in the first quarter, rising 3%. Excluding the NFL impact, revenues in the region increased 7%, driven by a 5% increase in adidas and a 19% jump at TaylorMade-adidas Golf.
Moving over to the brands. While we were definitely running up against some high numbers, the adidas brand again came out on top, highlighting the fantastic global appeal and the strong multi-category offering we have at our disposal. Sales increased 1% for the quarter due to double-digit growth rates in all of our key strategic Route 2015 performance categories -- running, basketball and outdoor.
The strong consumer reaction to our latest innovations and fresh designs also meant that adidas was the most significant contributor to the Group's margin improvement in the quarter, as gross margin rose 1.8 percentage points. In running, sales increased 12%, driven by strong growth in footwear and apparel. There is absolutely no reason to doubt that Boost is the most significant innovation in the market has seen in many years. Currently incorporated in three running models, the new technology has been a hit with industry experts, elite athletes, and consumers alike.
The Energy Boost has already wrapped up several coveted industry awards, including Runner's World's Best Debut; Running Network's Best New Shoe; and Shape Magazine's Best Cushioning awards. Our elite athletes are already racking up medals wearing Boost products, with Dennis Kimetto winning the Tokyo Marathon in a course record in the adizero Boost. From a commercial standpoint, Energy Boost has been our most successful running launch ever, with many markets almost completely sold through in the first four weeks. We also had record-breaking pre-sales on our own e-commerce platform, three times more than any footwear model before.
With more volume coming in the second half of the year, we are only getting started with our running revolution. Through further launches of Boost and several other new technologies we have in the pipeline, we are creating new territory and market share potential for the adidas brand, which I am convinced will lead to several years of double-digit growth in the footwear industry's most important category.
Not to be outdone, in basketball we enjoyed another great quarter with sales increasing 18%. North America was again the standout market, with footwear sales increasing over 45%, as our market share continues to edge higher. And during the quarter, we have been busy preparing to introduce our next basketball [selloff]. On Wednesday, we celebrated the retail introduction of the new Crazy Quick franchise, which will feature John Wall and 2012-2013 NBA Rookie of the Year, Damian Lillard.
Another important category that some momentum accelerated in the first quarter was outdoor, where sales increased 21% on top of 45% in the prior year. Strong growth in the Terrex Fast R and Swift Solo product families spurred significant growth in fast-growing outdoor markets such as greater China, Brazil, and South Korea.
To wrap up on adidas, growth in adidas Sport Style also continued, with sales increasing 4%. This was driven by a strong performance in action sports, where sales increased over 50%, supported by new collections in skate and the introduction of our new snowboarding franchise. Also, the adidas NEO label continued to win with the young consumers around the world, as sales grew 9%. With the high visibility we created at the Selena Gomez Collection launch event in New York in spring, the global potential of the adidas NEO is undeniable. Our test stores in Germany also underlined the full potential of this sub-label as we have seen a steady improvement across all of our key KPIs, as we implement the learnings we have acquired over the first full year of operation.
Turning now to Reebok. Overall, the first quarter was in line with our expectations as we build on the momentum we started to create last year with our House of Fitness category priorities. With this quarter, we are also now fully through with the challenging comparisons resulting from the end of the NFL contract and the discovery of issues at Reebok India this time last year.
Excluding these effects, sales were down modestly in the quarter and, more importantly, profitability significantly grew, with gross margin increasing 1.5 percentage points, driven by new product launches. For example, in fitness training, our Delta apparel and CrossFit ranges continue to do very well, growing 13% in the quarter. In Classics, we saw a big acceleration in momentum, with particularly strong sell-throughs from new silhouettes in retro basketball, driving sales up 33%.
During the quarter, we also evolved and improved our digital and e-commerce capabilities for Reebok, introducing a new fitness instructor platform, ReebokONE; and a highly intuitive fitness app which allows consumers to customize their own workouts. As we build on all of these initiatives throughout the year, and introduce more volume in footwear by expanding new lines such as ATV, DMX Sky, and ZigCarbon into the back-to-school season, I'm confident you will see reported growth and margin improvement as promised in 2013.
Finally, for my [ringer] today, let me spend a few minutes on TaylorMade-adidas Golf, where we have had another outstanding quarter. Sales increased 13%, or 9% in euros, to EUR423 million. Excluding the acquisition of Adams Golf, sales increased 5%. Key to our success this year has been our ability to exert the same kind of dominance we have shown for over a decade in metalwoods, also in several of the industry's other key categories.
For example, in irons, we continue to drive market shares higher, thanks to the strong consumer reception to the RocketBladez family. In fact, in the US, our market share is now almost 31%, which is nearly double that of the number-two brand. In footwear and balls, we also saw market share improvements driven by exceptional growth of over 20% in each category. The highly successful introduction of our lightweight technology, adizero, to the footwear category, and the new family of Lethal golf balls were just some of the products that resonated with consumers during the quarter.
Even our smallest brand, Ashworth, showed strong momentum, with sales increasing 32%, highlighting that our efforts to build consumer interest by expanding Ashworth's presence on golf's major tours is paying off.
Looking forward, I fully expect growth to continue in all facets of our golf business. In particular with Adams Golf, we have a third brand with great potential. And in categories such as balls, where we have significant market share potential, we are reinforcing our commitment to attack this opportunity. Our recent announcement that we will construct a new golf ball manufacturing plant in South Carolina is a great example of this.
So, ladies and gentlemen, as you can see, the adidas Group is fit and healthy. And we are right on track to deliver on our three key goals for this year. As a reminder, these are -- A, to deliver a step change in margin progression; B, to seed game-changing product innovations to accelerate growth in key categories; and, C, to maintain a steady course for the Group against a mixed economic backdrop.
There is plenty to look forward to in the coming months. And you will see a lot of activity from all our brands throughout the second quarter to set us up for a strong second half. Some of these I have already mentioned in my speech today. But there is one other that I would like to leave you on today. In just a few short days, we will introduce a revolutionary new [falls] football silo, Nitrocharge, which is designed to become the next iconic football boot of our industry. You will hear a lot more about this in the buildup to the first all-German UEFA Champions League finals, featuring Bayern Munich and the all-adidas Europa League Final between Chelsea and Benfica.
With that, let me now hand you over to Robin to take you through the financials and outlook in more detail.
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Robin Stalker, adidas AG - CFO [4]
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Thank you, Herbert, and good afternoon, ladies and gentlemen. As you've just heard, our Group delivered a solid financial performance in the first quarter of 2013. So for my comments today, I will focus on three topics. Firstly, the reasons for the strong development of our gross and operating margins; secondly, a look at our performance by channel and segment; and, thirdly, our continued progress and discipline in balance sheet and cash management.
So let's start with the clear highlight of the quarter from a financial perspective, and that is the gross margin development. The Group's gross margin increased an outstanding 2.4 percentage points, to a new record level of 50.1%. This is only the second time in our history that we have generated a gross margin above 50%. Compared with the majority of the periods since we began Route 2015, we were able to capture more visibly the positive impacts from pricing and product mix, as well as regional and channel optimization, due to fewer headwinds from sourcing costs.
For the quarter, input costs were essentially flat, and hedging was only slightly negative. However, the negative impacts of the latter will, I expect, become much more pronounced in the coming quarters.
Turning to operating expenses. We continue to tightly balance our investment needs while also ensuring we control growth in our overhead base. This can be seen in other operating expenses increasing only 1% in the quarter. That was mainly a result of higher marketing expenditure, as well as the further expansion of the Group's own retail activities. As a percentage of sales, other operating expenses were up 1.2 percentage points, to 39.5%.
Thereof, sales and marketing working budget expenditure increased to 3%, due to an 8% increase for the adidas brand to support our key innovation launch, Energy Boost, as well as campaigns such as MyGirls and Unite All Originals, which have all been key traffic drivers in recent weeks. As a percentage of sales, sales and marketing working budget increased 50 basis points to 11.6%.
As a result of the modest growth of expenses and the strong gross margin improvement, Group operating profit increased 8% to a new record level of EUR442 million. This translates into an operating margin of 11.8%, up 1.1 percentage points compared to year ago.
Turning briefly to the nonoperating items of the P&L, net financial expenses decreased 23%. This mainly reflects a 31% decrease in interest expenses due to lower gross borrowings. The first-quarter tax rate increased 200 basis points to 27.5%, which is in line with our guidance for a full-year tax rate at a level between 28.0% and 28.5%.
As a result of the higher tax rate, net income attributable to shareholders increased 6% to EUR308 million.
Now let me spend a few minutes on our segments. Wholesale revenues decreased 3% in the first quarter as sales growth at adidas Sport Style was more than offset by double-digit revenue declines at Reebok, which were mainly due to the NFL; the JV in Latin America; and lapping the issues in India that affected our results at this time last year.
Gross margin for the segment was up 2.6 percentage points to 44.3%, driven by pricing as well as more favorable product and regional sales mix. Segmental operating margin for wholesale rose 3.4 percentage points to 36.0% as a result of the gross margin increase, as well as the positive effect of lower segment and operating expenses as a percentage of sales.
Looking at retail, revenues increased 6% as a result of growth at both adidas and Reebok. Comparable store sales were slightly down, 1% versus the prior year, as double-digit sales growth in concession quarters was more than offset by decreases in concept stores and factory outlets. By brand, Reebok comp store sales remained stable in Q1, while adidas comp store sales decreased 1%. Our e-commerce business continues to go from strength to strength, with sales up 68%.
Retail gross margin decreased 80 basis points to 60.7%. Increased promotional activities in certain markets, particularly those still affected by weak economic conditions, led to this development. Segmental operating margin for retail was down 2.6 percentage points to 14.0%, resulting from the gross margin decrease as well as higher segmental operating expenses as a percentage of sales. The latter is due to the higher store base compared to year ago.
Looking at the 1% comparable store sales decline, it should be no surprise that the majority of this decrease is due to the difficult trading environment in Western Europe and Russia/CIS at the beginning of the year, given the overall weakness in traffic and consumer sentiment. Beyond these regions, retailing trading actually was quite robust. Comparable store sales were up 8% in greater China, and even 13% in Latin America. And the adidas brand in North America showed very good comparable store sales growth of 6% on top of the very strong 20% comp growth in the prior year.
As the first quarter is the smallest in our retail calendar, and normally and off-season period in our stores, I would not draw too many negative conclusions from this performance. In fact, looking at the gradual improvements in recent weeks, I can fully reiterate our retail guidance, where we expect to see comparable store sales growth of low- to mid-single-digits for the year.
In terms of our store development, at the end of the first quarter, we operated 2458 stores, and that's a net increase of 12 stores versus the end of December. Of the total number of stores, 1372 were adidas, and 349 were Reebok branded. In addition, the adidas Group retail segment operated 737 factory outlets. During the first quarter, we opened in 92 new stores, closed 80 stores, and remodeled 37 stores.
To wrap up on our operating segments, let me spend a minute on other businesses. Revenues grew 9%, driven by 13% growth at TaylorMade-adidas Golf. While revenues at Rockport increased 2%; sales at Reebok-CCM Hockey were down 18%. This was due to the NHL lockout, which unfortunately continued into the start of the year. As a result of the slow rebound in a hockey market, we are now slightly reducing our sales outlook for Reebok-CCM Hockey to mid- to high-single-digit currency-neutral growth for the year.
The segmental gross margin increase of 90 basis points to 44.6% mainly as a result of the higher weighting of TaylorMade-adidas Golf in the segment. Segmental operating margin was up 2.6 percentage points to 31.3%. This was due to the positive effects from the higher gross margin, as well as lower segmental operating expenses as a percentage of sales, due in particular to the strong growth at TaylorMade-adidas Golf.
Now, finally, looking at the balance sheet, we continue to manage our capital prudently and diligently. Compared to the prior year, we have maintained our discipline on inventories which declined 2%, currency-neutral. As a result, our operating working capital as a percentage of sales remained at a very low level of 20.3%. This, combined with our strong operating performance, led to a decline in cash used in operations, allowing us to reduce net debt by 72%, or EUR460 million, to EUR180 million.
Taking all of our capital management measures together, we have seen another strong increase in our equity ratio, which is up 2.7 percentage points, to 49.7%.
In conclusion, the solid first-quarter results reinforce our confidence in the aspirations we set for the year in March. Given the strong reception to our latest product innovations, and our full pipeline for the second half of 2013, our earnings momentum is set to accelerate as we move through the year.
We continue to expect full-year sales to grow at a mid-single-digit rate on a currency-neutral basis. Given the health of our inventories in the market and the continued desirability of our brands, we now expect to achieve the upper end of our gross margin guidance of 48% to 48.5%. This further underpins our operating margin target of approaching 9% for the year.
Despite continued negative currency translation headwinds from currencies such as the Japanese yen and the Argentine peso, we continue to forecast net income attributable to shareholders to increase at a rate of between 12% and 16%, to a new record level of between EUR890 million and EUR920 million.
So, ladies and gentlemen, on that positive note, let me thank you for your attention. And Herbert and I are now very happy to take your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Matthias Eifert, MainFirst.
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Matthias Eifert, MainFirst Bank - Analyst [2]
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Yes, hi, this is Matthias Eifert from MainFirst. First question I have is about Latin America -- amazing growth rate. Is it already a build up for next year's World Cup, with the whole region is getting excited about, or is it just a better underlying development of those markets which have been a bit difficult in some quarters in the last 2 to 3 years?
And second question I have to is about Reebok apparel. Could you elaborate on that a little bit more? The 13% increase of training that you mention on page 18 of your presentation, is that all apparel-related? And do you plan to grow this apparel initiative out into other categories?
And then my last question would be on China. When will you be there the market leader, given that you keep growing there and everyone else is struggling? Must be just a question of months until you are having the number-one position.
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Herbert Hainer, adidas AG - CEO [3]
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Okay, Matthias. So, let me start with Latin America. As you are following us quite some time, you have seen that in the last several years -- I don't know, eight or nine years -- we have more or less permanently growing double-digit in Latin America, and increased our share there. And I think we really can speak from an underlying good business in Latin America. It's not just one country like Brazil, where we have the World Cup in front of us; it's really going abroad.
You will see in the second half that we start to build up our football business when we start to introduce our new jerseys; official match ball; new football boots, et cetera. But overall we have a very, very solid, very positive business in Latin America overall.
Reebok apparel -- that plus 18% is mainly CrossFit in the Delta range, which we introduced. It's still on a small basis; but, of course, we try within in our initiatives of the House of Fitness, to further expand our apparel offer within the Reebok brand.
And third one on China -- yes, we are definitely getting closer and closer to market leadership. I can't give you any exact date. But you can see that we are growing faster than our main competitors. And if this continues, then we will see it rather sooner than later.
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Matthias Eifert, MainFirst Bank - Analyst [4]
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Okay. And that 6% in the first quarter, is that a good indication of how you see the year? Or can we even expect a small improvement in the coming quarters?
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Herbert Hainer, adidas AG - CEO [5]
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In China, I think this is a good indication that we are going forward. We always told you that we want to have qualitative growth instead of just quantitative growth, and this is underlying what we are doing.
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Matthias Eifert, MainFirst Bank - Analyst [6]
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Excellent. Thank you very much. Keep it up.
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Operator [7]
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Jurgen Kolb, Cheuvreux.
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Jurgen Kolb, CAI Cheuvreux - Analyst [8]
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Thanks very much. Two questions for my side; all about Reebok. First of all, again, the situation in Latin America seems to continue, with Vulcabras, I assume. Maybe an update here, what the situation is, and if that can be claimed quicker than you might think. And, secondly, on new locations for your fitness retail hubs in North America and also in Europe, have you gone any step further? Maybe signed first leases or -- what's the current status on the expansion with this successful format that you already have in New York? Thanks.
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Herbert Hainer, adidas AG - CEO [9]
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Jurgen, good afternoon. So, for the first question, as we might have said already, or you know, we have a contract with our joint venture partner, Vulcabras, in Brazil and Argentina, which is going into the end of 2015. And in the moment, we don't have any further information to that.
On the new location, yes, we are searching heavily. And I do believe that we will get close to the 10 test stores in North America. In the UK it might be between six and eight; it's a little bit more difficult to find the right locations. We have signed the first locations; and for the others, we are in good conversations with our landlords. But this is the best outlook we can give you today.
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Jurgen Kolb, CAI Cheuvreux - Analyst [10]
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Very good. Okay, that's enough from my side. Looking forward to it the launch of the new football boot.
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Herbert Hainer, adidas AG - CEO [11]
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Of course. Nitrocharge.
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Operator [12]
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Michael Kuhn, Deutsche Bank.
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Michael Kuhn, Deutsche Bank - Analyst [13]
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Yes, good afternoon. Also a few questions from my side. Firstly, again on Reebok, I understood that ex-NFL, the phase performance was about flattish in the first quarter. I'd be interested whether you could make some comments, what you expect for the recovery growth path, and what growth rates are realistic for the upcoming quarters.
Secondly, in your retail business, I understood your comment that you expect a return to like-for-like sales growth in the retail channel. Still would be interested what your expectation is in terms of operating profit and operating margin in the retail segment. And, finally, also in connection with retail, you mentioned positive experience lately with your NEO stores in Germany. How far are you, in terms of the development plans for further rollout in Western countries? Thank you.
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Herbert Hainer, adidas AG - CEO [14]
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So, Michael, let me start with your first question. And then, Robin, I think, will talk on the retail part, in terms of gross margin.
So, on Reebok, we were minus 2% if we exclude the NFL, and the Reebok India comparisons. And we are, as I said in my opening speech, expecting getting back to growth in the following quarters and for the year 2013. Of course, it will be built up because in the third quarter we will bring most of our new introductions for back-to-school, especially on the footwear side. And we definitely believe we'll see an acceleration in the third quarter.
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Robin Stalker, adidas AG - CFO [15]
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And as far as the profitability of the retail gross, Mike, yes, we obviously do expect a continued improvement here. There's two factors -- one, in terms of the comp stores, we expect that to turn positive. And secondly, in terms of profitability, you look at the first quarter -- this is not representative. I mean, we will have a better season going forward. This is a clearance quarter, obviously; and so, therefore, the gross margin would be better than that. It will also pay through as we leverage the expenses of the new shops over the coming few quarters. So that will improve.
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Herbert Hainer, adidas AG - CEO [16]
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And the last part of your second question was NEO. So the other 10 stores in Germany are running, and they're getting better and better. We are learning a lot. And as we have said in previous talks, we will take a decision and the summer this year, then we have a 12-month period for all the stores for further rollout. But all that I can see today is very positive, so this should not come as a surprise when we decide that we will further roll out the NEO stores in Europe, in taking this decision in the summer months.
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Michael Kuhn, Deutsche Bank - Analyst [17]
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All right. Thank you.
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Operator [18]
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Richard Edwards, Citigroup.
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Richard Edwards, Citigroup - Analyst [19]
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Hi. My question relates to the wholesale division. Just looking at the OpEx development, it looks like it fell somewhere around 14% in the quarter. Just want to understand if there is any one-off elements to that, or whether we should assume OpEx declines in the coming quarters.
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Robin Stalker, adidas AG - CFO [20]
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Richard, now, I think you've got to realize here that we have some comparisons directly year-over-year with India, and that plays a role in there. But generally you'll see through the performance that we are leveraging better and better our operating expenses. And it's that leverage that you should expect to see in the future, but there is a couple of small items relating to India for last year.
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Richard Edwards, Citigroup - Analyst [21]
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If you stripped out those small items, do you have any sense what the underlying OpEx trend was in Q1?
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Robin Stalker, adidas AG - CFO [22]
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No, I haven't got that figure in front of me, but it won't be a major difference. It's a small percentage.
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Richard Edwards, Citigroup - Analyst [23]
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Thanks so much.
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Operator [24]
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Omar Saad, ISI Group.
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Omar Saad, ISI Group - Analyst [25]
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Thank you. Very nice quarter, guys. Wanted to see if I could get you to elaborate a little bit more on the exciting new Boost platform. What kind of technologies do you think this technology is replacing in the marketplace? And do you think the technology has the opportunity to be levered into some of the other categories -- basketball, football, maybe even some of the equipment categories? I'd be curious to hear your thoughts on that. And I have one follow-up, as well. Thanks.
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Herbert Hainer, adidas AG - CEO [26]
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Thanks very much, Omar, for your positive comments. Boost is, as we have said already, a revolutionary new technology. I don't know exactly which technology this will replace. But what I can tell you is that this is definitely the best technology which is out, by far, in the running category. And you have seen the successes which our retail partners enjoyed after we have launched the first Energy Boost collection.
Unfortunately, we do not have enough supply at the moment, because the technology is -- when BASF and ourselves, but BASF is ramping up. So, during the course of the year, we will bring more volume into the market. And then we will also spread it to other categories. In basketball, as you mentioned, will be the next category where we will bring it in.
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Omar Saad, ISI Group - Analyst [27]
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Great. And that's a good lead-in to the question I had on the supply chain. How are you guys thinking about your supply chain, especially as more and more of these proprietary technologies become an important part of the adidas Group's differentiation in the marketplace? I know the Boost, you are keeping proprietary, but are you thinking -- as we're kind of in a structurally inflationary environment here -- are you thinking more about approaching the supply-chain environment a little bit differently than what was the status quo over the last 10, 20 years?
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Herbert Hainer, adidas AG - CEO [28]
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Well, overall, I must say that we have a very stable and very close related supply base. When you look to our suppliers, we hardly exchange any one of our key suppliers. We just add because of the growth, which we are enjoying since 10 years, more or less. We are working very close with our key suppliers in developing this new, innovative product, and how we can produce it later. Therefore you can be sure that whatever we bring to market on a new, innovative product will be extensively tested in the pre-production with our supply base.
So, I'm absolutely convinced. Also, when you look into the past years, we hardly don't have any quality issues. And we're producing around 240 million pairs of footwear, just to give you an example. Our delivery on time is excellent, so we are quite satisfied with the supply base we have.
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Omar Saad, ISI Group - Analyst [29]
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Okay, thank you. One quick question on pricing. I know pricing and mix have been an important driver. How are you thinking about pricing long-term here? You are kind of using it as a tool to drive the business as innovation becomes a key driver as well.
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Herbert Hainer, adidas AG - CEO [30]
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There is no doubt that with new, innovative, products you can charge better prices. And this is one of the reasons why I said already 10 years ago, that this industry is driven by product, and by product innovation. And we have to make sure that we are the leader in innovation. And I think so far we have proved that with ample innovations which we brought to market in the last -- and just when you look at this year with Boost, there is another revolutionary innovation. And, of course, you can charge better -- means higher prices, and therefore hopefully getting better margins.
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Omar Saad, ISI Group - Analyst [31]
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Herbert, do you feel like innovation is translating into price, more now than it ever has before, for the industry and for adidas?
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Herbert Hainer, adidas AG - CEO [32]
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When you look over to the FOB increases which we had seen the last several years, of course pricing plays more and more of a key role. But we are working on different platforms to make our product; to reengineer our product to play on the pricing side; to reengineer our supply chain. There are all these components coming together that we can enjoy a nice margin, which we did in the first quarter. But pricing definitely is becoming more sensitive as well, and we have a closer look into it.
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Omar Saad, ISI Group - Analyst [33]
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Thanks so much.
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Operator [34]
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Louise Singlehurst, Morgan Stanley.
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Louise Singlehurst, Morgan Stanley - Analyst [35]
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Hi, good afternoon, gentlemen. A couple of questions for me, please. Firstly, in terms of the very strong balance sheet that we're now seeing coming through for adidas, in terms of the uses of cash -- and I know, Herbert, you've spoken in the past about some of the smaller brands. But do you think there is any scope where you might actually reignite some of the talks to dispose any of the very smaller brands in the Group?
And then, secondly, just on the US, obviously a tough market to take market share, and very strong performance in Q1. How are the negotiations working out with Foot Locker and Finish Line, in terms of taking more space? Obviously, are doing very well in basketball. But is there something fundamental you think that's changing for the Group that gives you a lot more confidence in the ability to take market share, along with the new product launches? Thank you.
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Robin Stalker, adidas AG - CFO [36]
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Louise, no change to what we've been consistently saying about our use of cash. Yes, we want to continue to be very disciplined on the control of -- in our balance sheet and generate this cash. First priority is, obviously, investing in the business; second priority is obviously increasing our dividend. And you can see we've recommended an increase of dividend of 35% for this year. But nothing in terms of acquisitions on the horizon. And that's not anticipated.
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Herbert Hainer, adidas AG - CEO [37]
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In terms of the US market, of course the US market is very competitive, as we know. But I think when you look to our footwear business and the market shares, we are enjoying definitely a nice run there with a lot of different products which we brought to the market. And especially, I think when you look to the two customers which you spoke to, Foot Locker Finish Line, where you can see, on the one hand, our originals business with the white walls in the Foot Locker stores; on the other hand, our basketball product, starting with the adizero Crazy Light, and now the Crazy Quick. We definitely have a good presentation, and this will continue.
But also on a lot of customers -- for example, on Dick's, we are building our big shop-in-shop concept, together with Dick's, in a lot of their stores. So, overall, I'm quite happy with the development. Of course, as we say here, Rome was not built on one day. But we are making improvements day by day, month by month, and quarter by quarter in the US.
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Louise Singlehurst, Morgan Stanley - Analyst [38]
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Super. Thank you very much.
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Operator [39]
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Chris Svezia, Susquehanna Financial Group.
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Chris Svezia, Susquehanna Financial Group - Analyst [40]
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Nice performance on the margin. I have three questions. First, I want to focus on the gross margin performance. Being up 240 basis points here in the first quarter, I think you've gotten half your expected gross margin improvement for the year. I'm curious, how much do you anticipate currency to be a pressure point as you go through 2013? And do you anticipate less favorability or benefit from input costs? And how do we think about Reebok on the gross margins? It was up 150 basis points. Does that continue to show improvement and progress for the year? That's my first question on gross margin.
Second question, just on China -- just curious, Herbert, inventory levels in the channel -- what's really working with that consumer? What's resonating? And I'm just curious, if it gets 6% currency-neutral positive comp -- or, excuse me, revenues -- but an 8% comp growth, just curious how the unit growth looks.
And lastly, on Sport Style business, up 4%, that's a good number; I think maybe slower than what you've seen in the past. Just your thoughts about that business for the balance of the year. Thanks.
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Robin Stalker, adidas AG - CFO [41]
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Okay, Chris, thanks. I'll take the first question on margins. So, look, it is a very good development in the first quarter. But as we said, the negative currency hedging impact in the first quarter was pretty minimal. But as I've been telling you the last few quarters, our hedge rate for 2013 is worse than what we enjoyed for 2012. I think we were looking around the 1.38 for the hedge rate in 2012; we're about 1.32 for 2013. And that comes through during the next few quarters, so you will see more of a negative impact from the hedging over the next quarters.
And, nevertheless, I'm expecting that we will show quarter-over-quarter improvements of the gross margin. And as I just said in the prepared comments, we are guiding to now be at the upper end of our range for the gross margin, the 48.5% for the year.
Reebok gross margin development -- yes, we made it clear last year, also, that not only do we expect for 2013 topline improvement for Reebok, but we definitely want to see the margin improvement. And that's our guidance, also, for the complete year, that you will see an improvement in Reebok's gross margin this year.
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Herbert Hainer, adidas AG - CEO [42]
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The second question, Chris, on China inventory levels -- I have said it several times, that we have worked very hard getting a closer collaboration with our retail partners and their stores -- that we know exactly what's going on in the store; and, therefore, we can manage our inventory much better. This is by exchanging sell-through data on a much faster and more detailed level. And the 6% comp stores are only in our own retail stores. So this is not on the 7000 stores which we have with our retail partners.
And I think your third question was on Sport Style, 4% growth, whether there are any issues. No, definitely not. But we also have to make sure that we don't overheat Sport Style, and especially Originals. This is what makes a brand cool with especially the young consumer base. And we have enjoyed such a nice ride the last four years with Originals, that we have to be careful that we don't overheat it, and further build the momentum on a quality basis with our Originals business.
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Chris Svezia, Susquehanna Financial Group - Analyst [43]
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Okay, that's helpful. Just two quick follow-ups. Do you anticipate the sports lifestyle business to grow for the year? And on Reebok, up 150 bps on gross margin, is that -- do you anticipate that to accelerate, as new product begins to hit the marketplace in the third quarter?
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Herbert Hainer, adidas AG - CEO [44]
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Question number one on Sport Style -- yes, we definitely anticipate further growth. And I think on Reebok, in the gross margin, this is a good level for this year. Of course we have to build it further in the years to come. But I think if it stays like that in 2013, we are satisfied with that.
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Chris Svezia, Susquehanna Financial Group - Analyst [45]
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Okay. Thank you very much. All the best.
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Operator [46]
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Rogerio Fujimori, Credit Suisse.
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Rogerio Fujimori, Credit Suisse - Analyst [47]
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Hi, everyone. Two questions for me. First, I was wondering if you could give us a bit more color on the trading conditions in Russia as the quarter evolved, and your thoughts for the balance of the year.
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Herbert Hainer, adidas AG - CEO [48]
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Russia was a more challenging environment in the first quarter, especially because of the weather conditions. You might have seen, it was cold even until the Easter days. And normally, we expect that in February, middle of February, the new spring/summer products are getting into our stores. And, unfortunately with the cold weather, this was not running as well as we had anticipated.
Since the weather gets nicer also here in Europe, the same happens more or less in Russia; also our trading conditions are going better. So, Russia will still grow in 2013. And as you know, we are by far market leader with our two brands, so this is doing very well. And don't forget that Reebok was up 10% in the first three months in Russia. This shows also -- just as a side remark -- that our Reebok product and concept is getting more and more attractive to the consumer.
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Rogerio Fujimori, Credit Suisse - Analyst [49]
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Thank you, Herbert. And you flagged, also, increasing your promotional spending in certain markets; I presume in mostly Western Europe. Do you expect this to be a headwind to gross margins in the coming quarter? Or is this situation already stabilizing? Any color would be appreciated. Thank you.
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Herbert Hainer, adidas AG - CEO [50]
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No, we don't expect that. As you know, we are always spending at a certain level, which you always set at around 12.5%. And it depends, as in any event -- years of big events or in non-event years of more product innovation, as we have had this quarter with Boost. But I think we have quite a discipline in our spending on both marketing sides and the marketing working budgets.
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Rogerio Fujimori, Credit Suisse - Analyst [51]
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Thank you very much.
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Operator [52]
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Antoine Belge, HSBC.
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Antoine Belge, HSBC Global Research - Analyst [53]
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Yes, hi. It's Antoine Belge at HSBC. Actually, three questions. First of all, on your EBIT margin evolution, obviously a very positive evolution on the gross margin. But I think in 2013, you are also expecting some SG&A improvement, so maybe could you comment on that?
And second question regarding the performance of the adidas brand in the US, how have your market share moved in the US for adidas brand with regard to footwear on the one side, and then apparel?
And, finally, regarding the World Cup, are there any development that you could already share with us today?
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Robin Stalker, adidas AG - CFO [54]
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Okay, so I'll take the first two, and then Herbert will close on the World Cup. Look, I can just repeat the comment I made about operating expenses. Yes, we definitely expect to get further leverage out of our operating expenses, not only as we grow in the quality of our sales, but also the initiatives that we started. We started our Route 2015 to become more efficient in various areas. It's the consolidation of our warehousing. It's the consolidation of certain services above markets. And although there are costs involved in setting these things up, 2013 is probably the first year where we should start to see some of the net benefits of that. So that is a fact which will help us get to an operating margin approaching 9%.
Our market shares in the US have basically -- firstly, we only get the footwear market share. And as you know, our apparel is a little bit bigger than some of our competitors, as a percentage, anyway, in the US. But we're still at a very low level of market shares in the States. We're growing slightly, but I think we're only around about the 11% or so at the moment for footwear; maybe up to about 12%.
But as Herbert said earlier, in one of his answers, Rome wasn't built in a day. We're doing everything to make sure that we're building the basis to provide a good, long-term, sustainable, and profitable growth in this very important market. And you'll see further improvements in market share, I'm sure, as we go through the next periods.
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Herbert Hainer, adidas AG - CEO [55]
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And last question concerning the World Cup, no, we don't have yet World Cup product in the market. And because we start in the third quarter, we'll sell the new jerseys of the participating teams; and then, new football silos, as I have mentioned; and then we sell official match ball in December. But, obviously, we have shown all our World Cup-related concepts and products to our retail partners already. And this was very well-received by all of them.
So, we are quite excited about the upcoming World Cup, and also about the qualification status quo of our team. So we expect that we have between eight and 10 teams for the World Cup. And this is quite exciting.
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Antoine Belge, HSBC Global Research - Analyst [56]
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Thank you.
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John Paul O'Meara, adidas AG - Head of Group IR [57]
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So, ladies and government, that completes our call for today. Our next call will be on 8 August for our Q2 results. And we wish you a very happy and joyful summer.
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