Full Year 2013 adidas AG Earnings Conference Call

ADS.DE - adidas AG
Full Year 2013 adidas AG Earnings Conference Call
Mar 05, 2014 / 02:00PM GMT 

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Corporate Participants
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   *  John Paul O'Meara
      adidas AG - VP, IR
   *  Herbert Hainer
      adidas AG - CEO
   *  Robin Stalker
      adidas AG - CFO

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Conference Call Participants
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   *  Cedric Lecasble
      Raymond James & Associates - Analyst
   *  Jurgen Kolb
      Kepler Cheuvreux - Analyst
   *  Matthias Eifert
      MainFirst Bank - Analyst
   *  Julian Easthope
      Barclays Capital - Analyst
   *  Andreas Inderst
      Exane BNP Paribas - Analyst
   *  Andreas Riemann
      Commerzbank - Analyst
   *  Philipp Frey
      M.M. Warburg & Co. - Analyst
   *  Michael Kuhn
      Deutsche Bank - Analyst
   *  Antoine Belge
      HSBC - Analyst

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Presentation
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Operator   [1]
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 Good day, ladies and gentlemen, and welcome to the adidas Group conference call for the full-year 2013 financial results. For your information, today's conference is being recorded. And at this time, I would like to turn the conference over to John Paul O'Meara. Please go ahead.

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 John Paul O'Meara,  adidas AG - VP, IR   [2]
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 Thank you, operator, and good afternoon, ladies and gentlemen, and good morning to those of you following us from the States. To allow for ease of comparison today, all sales and revenue-related growth rates will be discussed on a currency neutral basis unless otherwise specified. In addition, all comparisons will also exclude goodwill impairment losses which Robin will discuss in detail in this presentation today.

 So let's get started and I'd like to hand over now to our CEO, Herbert Hainer.

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 Herbert Hainer,  adidas AG - CEO   [3]
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 Thanks, JP, and good morning or good afternoon, ladies and gentlemen. And welcome to the call also from my side. Before we turn to the results of the past financial year, I would like to briefly comment on yesterday's decision of the Supervisory Board with regard to the early extension of my executive Board contract until March 2017. I am pleased that the Supervisory Board has expressed its confidence in me by extending my contract by another two years.

 The generation change which has already begun with our management team is a process we intend to complete carefully and diligently. And yesterday's decision gives the Company sufficient time to ensure a smooth transition at the helm of the adidas Group and to optimally facilitate the process of succession for the Company.

 In addition, we will do everything in our power to successfully execute against our strategic business plan for 2015. At the same time, we will define our new long-term strategy together with the next generation of Company leaders in order to prepare the adidas Group for another era of growth and success. And I am very much looking forward to the next three years. It will be an exciting period for our Group.

 But first things first. Let's now turn our attention to the 2013 financial year. In a marathon, every inch of every mile counts. And in this spirit I am pleased to report that we dug deep in the final stretch of the year and regained the level of growth momentum more typical of our high-performance standard.

 After a flat performance in the first nine months, we had an exceptional fourth quarter with sales growing by 12%. This drove operating profits up almost fourfold compared to the prior year to a new fourth quarter record of EUR98 million.

 The strong revenue finish to the year which was past our expectations, ensured that we comfortably met our revised full-year target from September despite a further worsening of currency exchange rates which caused us a massive 9 percentage points on the top line in the fourth quarter.

 For the full year, this translated to sales growing 3% on a currency-neutral basis or declining 3% in reported euros to EUR14.5 billion. Gross margin increasing 1.5 percentage points to a new record level of 49.3%. Operating margin extending 70 basis points to 8.7%. Finally, net income attributable to shareholders growing 6% to EUR839 million, well within our September range of EUR820 million to EUR850 million.

 This result, ladies and gentlemen, is a clear testament to the persistence and energies we exercise in making the most out of a challenging year in several areas. As a recap, three key items in particular impacted our results versus our initial expectations: negative currency developments, distribution constraints in Russia/CIS, as well as a stalling global golf market.

 I discussed the latter two of these three issues in detail on the nine months results call, and while the impacts are significant in terms of our profitability and top-line achievements, in the end, the devaluation of major currencies versus the euro was simply the factor that was too significant in magnitude to cover operationally. However, as frustrating as that is, we cannot and should not overlook the powerful underlying operational progress we are making with our brands. This is where I want to focus my attention today with you because, ultimately, that is how we will win.

 And the best place to start is with our fastest growth engine of the year, running. We called out 2013, as you might remember, as the year of running. And it was exactly that. Sales grew an impressive 17%, and we are by far the hottest and most talked about brand in the category right now. With Boost, Springblade, the miCoach Smart Run watch or established families such as Supernova or Essentials, adidas is winning and is winning big.

 In the fourth quarter alone, sales increased 31% in the category. And the most important and greatest thing is we are only at the beginning. This is important as running is the authenticator of footwear and apparel technology in our industry. If running is the authenticator of the industry, then football is the authenticator of what it is to be at adidas. If anyone was in doubt about our leadership in the category, then our 35% growth in the fourth quarter should easily settle any debate.

 Our growth was fueled by a fantastic start of our World Cup product campaign and a very good Christmas sales. Throughout the quarter, adidas excited football fans around the globe with its colorful Samba collection including a new boot from each of our key ranges: adiZero F50, Predator, Nitrocharge, and 11Pro.

 We also launched the 2014 FIFA World Cup kits of leading national Football Federations, including reigning champion Spain, Argentina, and Germany. The kits are inspired by pride, passion, and the evolution of next generation football fans. The shirts that our teams will wear in Brazil this summer are 50% lighter than any previous adidas jersey.

 Brazuca, the official match ball of the World Cup, was also a favorite amongst Christmas shoppers around the world. In addition to this, Brazuca is the first ball with its own Twitter account followed by already more than 100,000 fans worldwide. Nowhere is this showing up more relevant commercially than in their own retail stores where we are already enjoying phenomenal sales results of Federation jerseys and the official match balls. In the early weeks of the year, sales of these items were up over 200% compared to the last World Cup in 2010.

 The so-called nonevent year and we were playing against the tough comparisons with our year of 2012 success; we increased our football revenues by 4% in 2013. So forget all you may have heard or written about the weak adidas performance in football in 2013. We are leading in this category that is so close to the adidas DNA. And yes, we are leading it in Germany, too. We are the clear number one in the football overall business, and we are also leading in terms of market share and footwear based on what consumers tell us about their preference in football.

 According to the latest NPD data, we are solid 6 percentage points ahead of the number two. Is there fierce competition out there for market share in football footwear? Absolutely, as it is the case in all other major sporting categories. In almost all football markets, the two largest brands hold an 80% to 95% share depending on which market you look at. While this tells you something about the performance of all other competitors out there, let me assure you of one thing. Wherever we might be in second place, we will attack it. We will win back market share.

 Another category where there is fierce competition is in sports lifestyle. And again after mid-single-digit growth in the first nine months, adidas Originals and Sport Style sales accelerated in Q4 to 12%. This means we finished the year with 5% sales growth in revenues well in excess of EUR3.2 billion. Our strategically important adidas NEO label plays a central role continuing to win the hearts, minds, and the wallets of teenagers around the world. 14% growth year over year is a testament to the fact that more and more young consumers are in love with this young and fresh label. We are now generating almost EUR700 million in sales with the label, which is impressive by any standard.

 Taking it all together, it was a very good end to the year for adidas with 10% sales growth in the fourth quarter and 2% for the full year. Our diligent focus on driving quality growth fueled by innovation and strong channel management also once again paid off for the brand, which can be seen in the strong 2 percentage point increase in the gross margin.

 Moving over to Reebok, I am pleased to report a similar story. As promised, we returned Reebok to growth in 2013 with sales increasing 2% for the year and 9% in the fourth quarter. For the year, excluding the NFL license impact that still burdened the first quarter, sales increased 4%. And add to that tremendous increase in gross margin of 4 percentage points to 39.7%, the gap between the other -- the Reebok gross margin is at its narrowest level. We're now in touching distance of our Route 2015 goal to lift Reebok's margin above 40%. And I am confident the gap in margins between the brands will continue to narrow further over time.

 Why? Because we're on a clear, consistent, and sustainable growth path. Growth in 2013 followed that from 2012 coming exactly in those categories that fit perfectly with our positioning for Reebok as the fitness brand, with sales in 2013 increasing 18% in fitness training; 37% in classics; and more than 300% in studio, albeit from a small base.

 We also continued to bring our unique FitHub concept to new markets, which is an important long-term strategic investment to drive a common presentation of Reebok around the world. In December, for example, the first Reebok FitHub and CrossFit box opened in France, located in one of the premiere shopping destinations, Avenue De L'Opera in Paris.

 This original and innovative concept combines the Reebok retail store and the CrossFit [trip].

 Finally, to wrap up on the brands, let's have a look at TaylorMade-adidas Golf. As you know, in the third quarter we took swift action to clean up the market following a slower year for the golf industry. While it cost us some margin to do so, it was the right thing to do. As a result, we were able to swiftly swing back to action in Q4, reminding the consumer and the competition just how powerful an industry leader as we are.

 In the time period when many equipment manufacturers are seasonally quiet, TaylorMade excited the industry with the launch of SLDR and JetSpeed, two extremely popular drivers that are both played extensively on the PGA tour. This, together with good market share increases in irons and footwear due to SpeedBlade and adiZero, respectively, allowed us to grow 25% in the fourth quarter and finish the year with a sales increase of 3%.

 Before I hand over to Robin, let me quickly run through the geographical performance where again the message from the fourth quarter is very positive with good momentum improvement in nearly all of our markets.

 Let me start in European emerging markets where sales grew 4% for the year. Russia/CIS obviously plays a central role in this region and as we discussed several times, this year had its fair share of challenges also self-made from our distribution center hiccup. The good news is we have put our own operational issues behind us during the fourth quarter. With strength improving during the last weeks of 2013, sales in Russia grew 8% in Q4.

 Operationally, the market has also started well in 2014. The recent winter Olympic Games in Sochi showed the world how passionate Russia is about sport, and we are already looking forward to playing a major role in the buildup to the 2018 FIFA World Cup in Russia. Nevertheless, we cannot ignore the significant weakness of the Russian ruble since the beginning of the year as well as the current uncertainty in the region, both of which have added considerable risk to our results in euros.

 But Robin will take up this topic in more detail in his overall discussion on currency.

 Elsewhere in the emerging markets, 2013 was an outstanding success. Latin America, which will have a lot of attention in 2014, we led from the front with sales growth of 19% for the full year and 32% in the fourth quarter. This was driven by the rising anticipation and excitement ahead of the World Cup in Brazil but it also reflects our continuous investment and improvements in this vibrant part of the world.

 Moving on to greater China, we continued to keep both our major competitor and the local brands on the back foot in 2013. Our revenues increased at very consistent rates throughout the year, climbing 8% in the fourth quarter and 7% for the year. Our local management team continues to execute with excellence, blending the appeal and the attractiveness of adidas with a deep understanding of the Chinese consumer.

 All research confirms that we are one of the hottest brands in China right now with a fantastic brand footprint being in over 7600 stores in more than 1000 cities.

 In other Asian markets, sales increased a strong 15% in the fourth quarter in 5% in 2013, driven by strong growth in South Korea, India, and Australia.

 North America developed lower than our initial expectations with a 2% increase. There some lifestyle trends moved against us, and we suffered from lower growth than expected in adidas basketball due to the unfortunate injury of our star athlete, Derrick Rose.

 Developments at TaylorMade also impacted this development. Nevertheless, trends picked up in the fourth quarter with a strong end to the year for brand adidas where sales increased by 10%. Running and football were standout categories growing 40%-plus in the period.

 Finally, sales in Western Europe also finished the year positively with growth of 3% in the fourth quarter. For the year as a whole, sales were down 6%. This was largely related to the absence of the UEFA EURO 2012 and the London 2012 Olympic Games, the latter having about a 2 percentage point impact on the region's results.

 It is also due to the continuously negative economic climate and lackluster consumer confidence in most European markets, especially in southern Europe. And lastly, it is also a result of a fierce competitive battle for market leadership in this important region.

 So ladies and gentlemen, this sums up our operational performance for 2013. We may not have reached all our ambitious targets that we had originally set for the year, but we are proud that we ended on a high note in Q4 and made 2013 another year of records for the adidas group. And we have every intention to strive for the same again in 2014.

 But before I come to that, let me hand over to Robin to give you more details on our financial results and how currencies are affecting these results.

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 Robin Stalker,  adidas AG - CFO   [4]
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 Great. Thanks, very much, Herbert, and hello, everybody.

 As you have just heard, operationally it has been a good year for our Group with further progress on several key Route 2015 strategic initiatives. While this is extremely encouraging as we stay diligent and focused on delivering long-term sustainable growth and margin improvements, the foreign exchange and macroeconomic environment has and will unfortunately continue to leave its mark on our financial statements. I will spend some time on this at the end of my comments today.

 But first, let me complete the review of the key 2013 and Q4 financials. Starting with our gross margin where once again I am proud we have set the industry benchmark for margin management achieving a 1.5 percentage point increase to 49.3% for the year. This performance was driven again by a more favorable product and pricing mix as well as an improved regional and channel mix which more than offset negative effects from a less favorable hedging rate as well as lower margins at TaylorMade-adidas Golf.

 The negative hedging effect amounted to 70 basis points while the impact of markdowns at TaylorMade-adidas Golf reduced the Group's gross margin by 30 basis points for the full year. With the exception of TaylorMade-adidas Golf, gross margin increased in all brands and channels. For the fourth quarter, gross margin declined by 10 basis points. Excluding prior-year one-off effects related to Reebok India, on a like-for-like basis, the Group gross margin would have been up 40 basis points in Q4.

 Looking at our operating expenses, other operating expenses as a percentage of sales were up 1 percentage point to 42.3% for the full year. This was mainly due to the accelerated pace of our own retail rollout as well as ongoing investments in the Group's infrastructure throughout the year. The decreased leverage due to the lower top-line growth than originally expected also contributed to this development.

 Sales and marketing was in budget as a percentage of sales increased 30 basis points to 12.4%. As a result of the strong gross margin improvement, Group operating margin expanded 70 basis points to 8.7%. For the fourth quarter, other operating expenses as a percentage of sales decreased 2.5 percentage points due to solid operational leverage in that quarter. This drove operating margin for the quarter up 2 percentage points to 2.8%.

 During the fourth quarter, we added 129 stores to our retail portfolio, bringing our net openings for the year to 294. At the end of 2013, our retail segment operated 2740 stores. Of the total number of stores, 1557 were adidas and 404 were Reebok branded. In addition, we operated 779 multi-branded factory outlets. So in summary, in 2013 we opened 534 new stores; 240 stores were closed; and 127 stores were remodeled.

 Retail revenues grew 8% to EUR3.4 billion, representing 24% of total group sales. While comp store sales were down 1% for the full year, they turned positive in the fourth quarter, rising 3% for the period.

 By brand, adidas comp store sales were up 3% for the quarter and remained stable for the full year. Reebok comp store sales remained unchanged in the quarter and were down 3% for the full year.

 Our eCommerce business continues to do extremely well with sales increasing 59% in the fourth quarter and 64% for the full year to EUR250 million.

 Now moving back to the P&L, looking briefly at the nonoperating items, net financial expenses decreased 2% to EUR68 million for the full year. While net interest expenses were down 23% due to lower gross borrowings, this good progress was offset by higher negative exchange rate variances which increased to EUR18 million from EUR7 million in the prior year.

 And by the way, the full-year tax rate decreased 30 basis points to 29.0%.

 Moving over to the balance sheet, operating working capital as a percentage of sales increased 90 basis points to 20.9% compared to the prior year. At year end, inventories were up 13% on a currency-neutral basis. This was as a result of our expectations for growth in the coming quarters as well as higher inventory in Russia/CIS due to distribution center issues during the second half of 2013. The latter accounted for around two thirds of the total increase. However, as I stated at the end of the nine-months period, we expect this to normalize during the course of the year due to adjusted inventory buying levels for that market.

 In terms of the other balance sheet impacts, as a result of our annual impairment test we have impaired goodwill and recorded a EUR52 million pretax charge as at December 31, 2013. Goodwill on our balance sheet declined 6% to EUR1.2 billion with two-thirds of the decline related to the impairment and the rest due to currency movements.

 Looking at the specifics, which will probably come as no surprise, within the wholesale cash generating unit, Iberia, goodwill impairment losses of EUR23 million were recognized. Within the retail cash-generating unit North America, goodwill impairment losses of EUR29 million were recognized.

 The goodwill of these two cash-generating units is completely impaired. The impairment losses were mainly caused by adjusted growth assumptions and an increase in the country-specific discount rate.

 As in the prior year when we impaired goodwill of EUR265 million, the impairment loss of EUR52 million is noncash in nature and does not affect the adidas Group's liquidity.

 In terms of capital structure, we ended the year with a net cash position of EUR295 million compared to the EUR448 million last year. Higher working capital requirements as well as the higher dividend payment and higher capital expenditure were the primary drivers of this development. Nevertheless, taking everything into account, our equity ratio increased a strong 1.8 percentage points to 47.3% at year end.

 As a result of this strong balance sheet, at our Annual General Meeting we will propose a dividend of EUR1.50. This is in line with our shareholder return policy to continue progress on increasing our payout ratio within the corridor, of course, of the 20% to 40%.

 For 2013 this represents an increase in the payout ratio to 37.4%.

 Now finally, ladies and gentlemen, before I hand back to Herbert, let me give you some insight into how currencies have impacted our results in 2013 and a look into the implications for 2014.

 Accumulated for the 12 months, currencies wiped out around EUR750 million from our top-line results, or 5 percentage points in growth. Throughout the year the impact got sequentially worse with a peak of 9 percentage points seen in Q4.

 To give a few examples, the average rate of the Japanese yen was 21% lower versus the euro. The Argentine peso, 20% lower. The Brazilian real, 12% lower. The Australian dollar and Turkish lira, 9% lower. And the Russian ruble and Canadian dollar, 6% lower versus the euro.

 Unfortunately, these uncontrollable and unavoidable negative effects will continue in 2014. From today's perspective looking into 2014, taking a simple calculation of the year-to-date averages and applying the current spot rate for the rest of the year, which you can all do yourselves, by the way, the picture looks just as bleak. For example, the Argentine peso has already devalued another 32% versus the euro. The Turkish lira, 17%; the Russian ruble, 15%; and the Brazilian real, Australian dollar and Canadian dollar all 11%; and even the Japanese yen, a further 7%. And of course, as you know, there are others as well.

 Taking all this into account if things stay as they are, we will see at least the same kind of translation negative as we saw in 2013. And it is a mid-single-digit percentage point negative impact on growth.

 Now on top of that, we will see additional gross margin pressures, given the sharp weakening of currencies such as the Argentine peso and the Russian ruble, already so early in 2014. This is because these markets have open exposures against the US dollar related to our US dollar sourcing costs which in these markets are either too expensive or too liquid to hedge.

 Taking all of the foreign-exchange-related impacts together, the impact on operating profit could therefore be in the region of EUR150 million to EUR250 million. Now obviously, while on aggregate there is very little we can do in the short term to compensate for these massive currency issues, rest assured we will diligently pursue measures to combat the negatives over time. For example, where it makes commercial sense and the consumer environment can bear it, we will selectively increase prices. In certain markets where currency trends persist, we may choose to strategically prioritize our investments or change our business model. And in other cases, we may even choose to absorb the negatives for a period time to protect and nurture our longer-term potential.

 So based on what we know today, we have best reflected the current situation in our guidance range for 2014, which Herbert will outline in a moment.

 So ladies and gentlemen, let me wrap up by saying while the currency situation is not pleasant, fundamentally we are very encouraged by the underlying development of our brand. Our strong margin delivery despite all of our challenges, underlines our focus on driving long-term, sustainable and profitable growth for the Group. We will continue to work hard over the next months to master the economic environment, and we can do so with confidence given the strong pipeline of products and brand stories we have at our disposal.

 And to give you more details on that, let me know hand you back to Herbert.

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 Herbert Hainer,  adidas AG - CEO   [5]
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 Thank you very much, Robin. Let me now talk, ladies and gentlemen, about our operational outlook for the year, which Robin rightly says, looks extremely promising.

 2014 is a big sports year; there is no doubt about that. And as you would expect from a leading sports company, we will live up to the occasion, lift our game, and strive to achieve new heights for the adidas Group. Be it product, be it campaigns, be it imagination, we have everything we need to be successful. And we will do it with determination, speed, and with leadership.

 2014 is a football year. It will be an adidas football year. As the official sponsor, supplier, and licensee of the 2014 FIFA World Cup, we will utilize the biggest stage the world of sports can offer to drive new record sales in the category.

 On the field of play, adidas will be represented by eight federations. These eight teams include the number one through four of the current FIFA world ranking -- Spain, Germany, Argentina, and Colombia.

 Our latest footwear innovations will be worn by the likes of Lionel Messi, Xavi, [Rusi], Bale, Robben, Schweinsteiger, De Rossi, Benzema, Oscar, Alfred, just to name a few. In the coming months, we will also bring out an array of additional innovative products including the adidas miCoach Smart Ball and the adidas Samba brand, the first-ever football shoe with a knitted upper. It will be at retail in mid-March. And every launch will be paired with stunning new communication activities.

 So there is no doubt that you will see an exciting World Cup. And I can't wait until the Brazuca starts to roll June 12.

 Our ambition has not changed. Our goal is to achieve new record sales in our football category, being the first brand to reach EUR2 billion in sales of football performance products only.

 In running, we will continue to be focused on the expansion of the highly successful Boost franchise, targeting more than 8 million pairs in the category in 2014 as well as the further global rollout of Springblade to new markets.

 Basketball will see the introduction of Boost with the launch of D Rose 5.0 in the second half of 2014. Furthermore, we will leverage our own court visibility through top NBA players such as Derrick Rose, Jeremy Lin, Dwight Howard, Damian Lillard, John Wall, and Ricky Rubio.

 The Originals, the relaunch of Stan Smith, and the introduction of synthetic slacks are said to be the major hits at retail in 2014 with strong early sales for us.

 In addition, we can look forward to new collaborations with Japanese streetwear designer Nigo, singers Kanye West and Rita Ora, as well as new collaborations with Brazil's The Farm Company and British retailer, Topshop.

 After successfully piloting the adidas' NEO stores in Germany in 2012 and 2013, we will extend our test phase by opening stores in Poland and the Czech Republic in 2014 as we continue to drive towards our long-term target to grow NEO into a EUR1 billion business. First NEO store in Poland opened its doors in Warsaw on February 20. And we will also, following the successful test in Germany, to open some more stores here.

 For Reebok, our category approach will drive quality growth for the brand again in 2014. As we leverage our strategic collaborations with CrossFit, with Spartan Race, and with Les Mills. All of these consumer access points give us exciting opportunities to reach our consumer right where he or she does his sport or fitness -- in the gym, in the studio, or at new forms of community-based events such as the CrossFit Games or the 2014 Spartan Race series. And we have the product firepower to match these great activities.

 With the shoe of cross fitness, the CrossFit Nano 3.0, our new, revolutionary, industry-first shoe for obstacle racing, the all-terrain series; new running innovations such as the [set Quick] and the JetFuse; or our fantastic new walking shoe, Skyscape, which we just launched with Australian top model, Miranda Kerr, our footwear offering is a big step forward compared to the year 2013.

 And add to that the significant increase in depth to our performance apparel offering led by the Reebok One series collections as well as new tailored designs for studio, we have fantastic opportunities to build on the success in apparel we started to enjoy, 2013.

 In addition, we will also continue our successful partnership with pop icons and celebrities such as Alicia Keys, Shaq O'Neal, and T.A.G. Art to drive heat in our classics business as well as bring back legendary iconic Reebok product such as the Insta Pump Fury which celebrated its 20th anniversary this year.

 While the growth market overall is likely to remain difficult in 2014, TaylorMade-adidas Golf will sustain and extend its clear industry leadership. While we once again have great innovation to leverage, our focus in 2014 is on driving strong sales growth. Therefore, for the first months of the year we will focus on ensuring strong point-of-sale results for the volume shift in Q4 and shift selling this year more towards the second quarter to be better aligned with the peak selling season.

 So lots of great products and initiatives. But to truly leverage them to their fullest, we will step up our game with the consumer, connecting and executing with excellence at every opportunity. In this respect, 2014 will see several new initiatives commence in the areas of digital and on retail.

 The majority of our communication activities today have been in social media because this is the space where our core target consumer is engaging with brand content. To bring greater consistency, increase speed, and drive higher levels of brand activation online, adidas will be investing throughout the year in establishing digital newsrooms around the whole globe. This will allow us to better coordinate the brand's online presence as well as leverage and magnify key brand initiatives all year round.

 Reebok is also creating a global digital center at its headquarters in Canada. This center and its team will engage the fit generation consumer in the social world, enabling Reebok to be part of the conversation in real time. In addition, Reebok is also opening the so-called Reebok Production Studios to allow the brand to become a constant creator of exciting and relevant content.

 Similarly, as announced at our Investor Day, 2014, we will see the beginning of a renewal of the environment where our brand should shine the best: our own retail stores. Here we have the clear goal, not only to drive higher levels of consumer service but to elevate our store experience to fully represent the image and aspiration of the brand.

 The adidas brand is introducing its first new retail concept in six years with the introduction of the so-called HomeCourt format for Sport Performance and the neighborhood concept, Originals.

 Be HomeCourt era began on the 1st of January at the remodeled adidas Brand Centre in Beijing, our largest adidas store on the planet. HomeCourt features sport and passion in every single element of the store, be it architecture, communication, presentation, tools, and product. And it is already hitting the spot with the consumer with sales in the first weeks of the year since reopening up, 40% compared to the prior year.

 Over the course of 2014, HomeCourt will be introduced in 25 stores globally. The next curtains will be lifted in April, and adidas will open its first South American HomeCourt store in Rio de Janeiro, Brazil followed by Europe, debuting in the UK at Bluewater in Kent and Harrods in London.

 Furthermore, Berlin will see the first store with the new retail concept, Originals neighborhood in March 2014. We will also pose an experiment with single-category stores such as outdoor, women, and kids mainly in our key markets, China and Russia.

 And in addition, we will also continue to run our pilot store projects for NEO to further test the acceptance with the consumer, and we will extend the Reebok FitHub concept. In total, we plan total net openings across all concepts of around 250 stores in 2014.

 So there is a lot happening already and a lot to look forward to in 2014. But what does the successful performance of our brands in the various retail channels and markets around the world mean for our 2014 and Route 2015 objectives?

 Well, while we are on track operationally, the environment unfortunately his served up more challenges than we had anticipated with adverse currency movements being the most significant one. Excluding currencies, I am convinced that we will achieve most if not all operational targets we set ourselves within our Route 2015 Strategic Business plan.

 Nevertheless, the currency situation as it is right now represents a significant risk to achievement of our goals, as Robin has already outlined in detail. We have reflected the situation in our guidance range for net income attributable to shareholders of EUR830 million to EUR930 million. We have to give you a wider range here because current market volatility makes it hard to predict what the final influence of currency will be on our results. But we can influence our performance. We will pursue our goals with determination and focus.

 And as Robin explained earlier, currency deterioration is a factor where our influence, at least in the short term, is limited. Nevertheless, we have a proven track record and we know we can deliver big results when it counts. We will drive high-single-digit currency-neutral sales growth in line with our strategic plan in 2014, and we definitely want to continue to drive this kind of growth also in the future.

 In euro terms, we will grow our bottom line at a much faster rate than the top line.

 As long as currencies don't worsen materially from today's standpoint, I am confidence that we will achieve a double-digit compound annual earnings growth rate over the Route 2015 period.

 Don't forget, since 2010 we have already generated a 14% compound annual earnings growth rate. This is an exceptional return given difficult and uncertain global economic environment.

 Before I close, today brings with it an end to an era at the adidas group. As you all know, Erich Stamminger has decided to dedicate more time to his private life, and his last day with us is exactly today. Erich and I have worked side by side for more than 20 years, and I can only praise his fine sense for building our brands. On behalf of everyone at the adidas Group, let me thank Erich for his leadership expertise and the many contributions he has made to the success of the Group and its brands in the last three decades.

 At the same time, I am pleased to welcome Eric Liedtke to the executive board who most of you saw in action at our Investor Day. Eric will be in charge of global brands, and under the mentorship of Erich Stamminger, Eric has already contributed to the extremely positive development of the adidas brand in the recent year.

 Ladies and gentlemen, let me summarize. We are a high-performance company, and we want to achieve more for ourselves and for you. Be assured we are ready, willing, and able to do this as is clearly visible in our strong fourth-quarter performance.

 If there is one message that I would like you to take from today's presentation, then it is the following: we are a growth company, and despite all challenges, the next two years will be operationally very successful for the adidas Group. We will make sure we do what is right for the long-term success of our Group. We will make more decisions and pursue our goals with determination and focus.

 While currencies will interfere with our financial results, they will not deter our willpower to follow the vision of the Group -- to be the leading sports company in the world.

 We are here for the love of sport. This is our passion. We will continue to work in a way that makes us proud of the results. And I am convinced that we have everything in place to reach new heights, break records, and drive long-term sustainable value.

 With that, ladies and gentlemen, Robin and I are now happy to take all your questions.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Cedric Lecasble, Raymond James.

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 Cedric Lecasble,  Raymond James & Associates - Analyst   [2]
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 Yes, good afternoon, gentlemen. I would have a main question on how do we reconcile your gross margin trends and your EBIT guidance when we understand that forex currencies are real headwinds today, but at the same time, your gross margin guidance is not that negative. So, it is more reflected on the EBIT guidance so could you explain us maybe a little more why OpEx will play against the Company more than expected in 2014? That is the first question.

 And the second question, could you update us on your running sales, on your sales in running and maybe give us in percentage of sales on percentage as the adidas brand? That would be very useful. Thank you.

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 Robin Stalker,  adidas AG - CFO   [3]
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 Thank you very much for those two questions. The currencies are obviously playing a role throughout the whole P&L. For this particular guidance that we?re giving, however, what we are pointing out is that we lose a lot of leverage. If we lose so much on the top line, it's not just so much that the gross margin suffers. It is really the operating margin suffers because we don't get the full benefit of the decreases in cost because so much of our headquarter costs and indeed, some of our long-term contracts are obviously, denominated in euros or dollars. So that is part of the reason.

 And in terms of the FX movements within the gross margin, that has a lot to do with the hedging. We hedge basically for all of our markets 12 months in advance. But for those markets where it has in the past anyway been not economic to hedge or it hasn't been possible really to hedge, and I am calling out here particularly Argentina and Russia, there we are exposed when there has not been hedging because they have to buy in the market and the dollars, whatever it is, and that has an impact on the margin.

 But I think in our net margin guidance, 49.5% to 49.8%, gives us a good indication that we're still expecting the trend in our margin to really to be positive.

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 Herbert Hainer,  adidas AG - CEO   [4]
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 Let me answer the second question on running. Please understand that we don't give out absolute numbers for our running category, but let me tell you that in the fourth quarter our running business was up by 34%. And I am definitely more than convinced that going forward for the next years we will see double-digit growth on the running category.

 Why? Because first and foremost I think with Boost we have a unique technology which first and foremost nobody else has. And this is so exceptionally better than what is out in the market that we get so many positive comments either from the specialty running stores, from the running core group, that as I said in my speech already, we will ramp up to 8 million pairs in running in 2014 and do even more going forward.

 But Boost is just one part. It is Springblade. It is miCoach smart watch, which gives us absolutely credibility. And I can tell you that we have never been better and never had higher market shares in the running category of past EUR100 than we have today. And this will continue.

 And this also follows our strategy that we start from the top, convince the real runners with the best product and then we will trickle it down.

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 Cedric Lecasble,  Raymond James & Associates - Analyst   [5]
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 Thank you.

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Operator   [6]
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 Jurgen Kolb, Kepler Cheuvreux.

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 Jurgen Kolb,  Kepler Cheuvreux - Analyst   [7]
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 Thanks very much. Three questions from my side. First, in your annual report you talk about the North American market again and that you see substantial potential to increase your market share there. And you are talking about improved distribution and higher share of specifically developed products that market.

 Now, the growth in market share in 2013 as we know it didn't work out. So what is changing now for 2014 and maybe also for 2015 that makes you confident that you can now finally use that potential and show developing market share there, first of all?

 Secondly, on TaylorMade, you indicated that you certainly lost some market share because of some cleaning of inventories. Do you think you can recover that lost margin entirely in 2014 or is that a process that will probably also last into 2015?

 And lastly on the FX impact and the mid-term strategies, Robin, I hear you say you will partly change the business model. What does that exactly mean? And selective price increases -- in what countries do you specifically look at that? So maybe some elaboration on these individual strategies. Thanks.

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 Herbert Hainer,  adidas AG - CEO   [8]
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 Let me start with the first question, North America. As you remember in the first two years of our Route 2015 planning, 2011 and 2012, we grew double-digit in North America, and we were pleased with the results. Unfortunately this didn't continue in 2013, as you rightly pointed out. The main reasons have been that there is a certain shift in the fashion part of the business towards more performance-related lifestyle silhouettes. So going a little bit away from the originals.

 And the second point is that unfortunately for the whole year, Derrick Rose more or less didn't play at all. He didn't play the back season, 2012/2013. And then he came back in October and then got injured again. And obviously, this is not helping our basketball business.

 There is no doubt that the potential for us in North America is much bigger. We make good inroads into the market. We increase our margin; we increase our profitability; we grow. But yes, it definitely could be more.

 I don't see a fast change in this fashion shift, as I said, but going forward we will bring an array of new products suites, the Stan Smith launch, synthetic slacks and so on and so forth that I definitely see starting in the second half of 2014 and then going into 2015, definitely much more potential.

 Running will help us, no doubt. I'm sure football and soccer will help us in the US. And then hopefully all our guys are being back in October when the new basketball season will start.

 Second question to TMaG. There is no doubt that the leading position which we have in TMaG being the clear market leader in metal, woods, and in irons, in the meantime this will continue, no doubt. And we will keep our market share.

 Of course, we all, not just Element -- all has hoped for a better 2013 but when it started that badly in the first half, especially in North America, product had been already shipped to the markets. I think we had been the first one who realize that there's too much product into the market and we took, especially in Q3, to clean up the market. And this obviously has hurt our margin to a certain extent as well. Going forward, as we have said already, we will try to be more closer to the market demand in the sell through numbers with our shipping patterns. And therefore you can expect for the first quarter a lower net sales in 2014 for TaylorMade and then from the second through the fourth quarter ramping it up again because we want to make sure that the products are selling through in the first quarter which were shipped in the last quarter of 2014.

 But all what we hear about our SLDR driver and our JetSpeed is definitely very successful.

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 Robin Stalker,  adidas AG - CFO   [9]
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 And in terms of the business model, obviously, this is an ongoing thing. We look at each of our operating units and consider what we should be doing here, but it will involve questioning investment -- what we invest in, do we invest in rollout of fair retail in certain markets? It will involve looking at the mix of product that we want to sell in these markets. Maybe there's opportunities for local sourcing. Or where do we actually buy the product from? And the types of distribution that might include more eComm, or whatever.

 And of course, we continue to look at what can we do to become even more efficient on our cost base. And you have seen us cluster market. You have seen the Euro 1 initiative that we announced last year. You have seen us also look at the Jambe in America. And these are the sort of things that we will continue to do to look at improving our business model, to improve the profitability in the individual markets.

 In terms of price increases, yes, this is a sensitive issue obviously because clearly, as I said, the consumer needs to be in a situation to be able to pay or to be able to afford some of this. And therefore, obviously, leaves you in markets where there is a higher inflation. But we do have opportunities. If you think of some of our own retail areas where we have more flexibility perhaps on the pricing. And you have heard from Herbert's comments about the very attractive and somewhat higher margin or at least higher priced product offerings that we now have in the market that we believe we can further perhaps see opportunities with price increases there.

 But this will be something taken on a case-by-case basis depending on the individual country situation.

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 Jurgen Kolb,  Kepler Cheuvreux - Analyst   [10]
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 Understood. Just one quick follow-up. Have you already terminated maybe the opening of one or some stores specifically in Russia because of these ruble issues?

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 Robin Stalker,  adidas AG - CFO   [11]
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 Yes, I think that is fair to say. We have reviewed our opening strategy in those sort of markets, yes.

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 Jurgen Kolb,  Kepler Cheuvreux - Analyst   [12]
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 Okay. Very good. Thanks very much, guys.

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Operator   [13]
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 Matthias Eifert, MainFirst Bank.

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 Matthias Eifert,  MainFirst Bank - Analyst   [14]
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 Matthias Eifert from MainFirst. First question on the guidance again. Robin, you mentioned up to EUR250 million negative EBIT impact from currency this year. Do we understand it correctly that you have factored that into the lower end of your guidance range for EPS, what you have given? And you come up with that current spot rates? Or would that lower and allow even a small deterioration from a currency standpoint from today's levels? That would be my first question.

 Secondly, can you go a bit more into detail into Russia? Were you fully back up in the fourth quarter in terms of your delivery from the new distribution center? Or were there still some issues at the beginning of the quarter? I.E., can we assume that maybe in Q1 you are back to 100% and have a more stronger growth rate?

 And on the same page, how was the retail performance there in terms of like-for-like? And can you explain also a bit more about the adidas 3% like-for-like in the fourth quarter, which was quite nice? Was it all driven by World Cup product already, or was there really an underlying improvement in the fourth quarter? Thank you.

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 Robin Stalker,  adidas AG - CFO   [15]
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 Okay, Matthias, I'll start with -- and yes, you're absolutely right I can confirm that the range that I gave you of what we estimate could be the impact -- EUR150 million to EUR250 million on the EBIT line is that we have taken into consideration. And given the net income guidance of the EUR830 million to EUR930 million -- and yes, we do certainly hope that that covers also some further deterioration that may be possible. But at the moment it is the best estimate we can give. Obviously, we don't know exactly where we we?ll land, but that is why we have such a large or wide range that we presented.

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 Herbert Hainer,  adidas AG - CEO   [16]
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 And in terms to Russia, Matthias, I happily can confirm that the warehouse is fully functionally and is distributing flawlessly the products to our over 1000 stores in Russia. How the first quarter will compare to the last quarter and what influence, this is I can't give you exactly, because even in the third quarter when we had the difficulties, we were delivering close to 1 million pieces per week. But it was not to the extent which we expected in the exact order manner.

 But this is over. We are happy that it is fully working now, and I can tell you that 2014 started well in Russia. So far we don't see any negative impact from the political situation. Obviously, it would be better if it would be solved fast and peacefully because the longer it goes the more nervous consumer gets, and a nervous consumer is never good for your business.

 But so far, as I say, knock on wood, we haven't seen any negative impact.

 The adidas performance in the fourth quarter with flat 3%, is coming from different sources, be it football, be it running, which I said already. And you look at even higher, if we wouldn't have had a setback in outdoor because of the warm climate in most of the parts of the world was holding us back a little bit. But the main drivers have been running and football.

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 Matthias Eifert,  MainFirst Bank - Analyst   [17]
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 Thanks, very helpful. Thank you.

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Operator   [18]
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 Julian Easthope, Barclays.

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 Julian Easthope,  Barclays Capital - Analyst   [19]
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 I would ask up to three questions as well, if I may. Maybe I'll start with the letter that you put in your important accounts which is always quite interesting. I think there were a couple of comments in there I'd like you to comment on, the first one being that you said at one point, and to quote, to be fair and frank, we have also made a few executional mistakes towards the Route 2015. So I would be interested to see if you could expand on those.

 And lastly, you do actually say at the end, even if it does take a little longer to achieve every goal outlined in the plan. I just wondered whether this was a one-year or two-year delay you would expect in achieving Route 2015.

 And the second question I have comes back to Japan. Last year, you would have hedged rates from the previous year. But also Japan has seen such a huge currency hit. I just wondered what you have done to offset that.

 And the last question, coming back to currency as well, back in 2009 you had a massive hit on the ruble. I think it cost you EUR200 million in terms of EBIT I think you said in one of your reports. Now, you obviously managed that incredibly well afterwards. So I just wondered whether you could take the lessons learned from that and what you actually did to offset that -- whether they could be applied to the currency movements we have today. Thank you.

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 Herbert Hainer,  adidas AG - CEO   [20]
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 Yes, let me start with the first question on the executional mistakes. There is no doubt that the Russian warehouse interaction was definitely something which was completely internally done. We had not been alert enough that warehouse shift from a very old manual warehouse to a much more automated warehouse in Russia with a retail model which we don't have in any other countries where we have 1000 stores with shipping back at the end of the season product into the warehouse. Then that they have to be repackaged and sent out to the factory outlets again or to where ever we want to send them. This was definitely underestimated and not managed well as we have indicated already in our call in November.

 I think also on the TaylorMade side the first six months when we shipped all the product to the markets we should have been more careful already in this period that we don't overload the market because it is costing us in margin in the third quarter.

 These are the two main things when we talk about executional excellence or mistakes in that case.

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 Robin Stalker,  adidas AG - CFO   [21]
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 The Japan hedging, yes we definitely have been continuing the hedging in Japan, and the simple fact is that they have had to increase prices as well in the countries where basically -- presumably that was economically desirable according the government to do that sort of thing in any case. But we have over time been increasing the pricing in Japan. And that is the only thing we can really do to compensate for that currency decline.

 Similar sort of thing with what happened in 2009 with Russia. We still suffer, obviously from because we do not hedge really or we do a very limited hedging because of the cost of it. Therefore the Russian ruble -- we are having to buy the ruble in the market at the time they require the product. That was only, however, one of the reasons why we had the significant hit in 2009.

 The other reason was because so much of our cost base was at that stage also denominated in dollars. And what the biggest lesson we had out -- coming out of that was to ensure that the vast majority of our costs, and here I'm talking also about rental agreements, that we can have them also denominated in rubles rather than dollars. And that will help us this period as well. And bartered does not help, however, help us in terms of the cost of the product that they are buying in an unhedged form in dollars.

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 Herbert Hainer,  adidas AG - CEO   [22]
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 And concerning your question on the 2015 targets, I think it is fair to differentiate between the operational achievements and then the absolute financial numbers.

 In operational terms, I think that we will achieve most of our goals, if not all, at the end of 2015. Unfortunately, as Robin has already outlined, through the currency devaluation, it is much more difficult on the absolute number and year. This might delay the achieving of our goals in euro terms by one or two years.

 But we do, in my opinion, the right things operationally as we will drive sales in 2014 by high-single digits and are definitely looking forward also in the outgoing years very positive with all the product pipeline which we have.

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 Julian Easthope,  Barclays Capital - Analyst   [23]
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 Okay, thank you very much. Very helpful.

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Operator   [24]
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 Andreas Inderst, Exane.

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 Andreas Inderst,  Exane BNP Paribas - Analyst   [25]
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 I have two questions, the first one on your risk profile. What kind of measures can you take to further de-risk your business model overall? That is my first question.

 The second question is in case the situation in the Ukraine and Russia will escalate, what kind of measures can you take in the very short term? Maybe you can give us a few examples.

 And my third question was related to TaylorMade. I estimate your EBIT margin must have declined by over 300 basis points with TaylorMade. You answered an earlier question only on the top line, but what kind of margin and recovery can we expect in 2014 for the TaylorMade product? Thank you.

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 Robin Stalker,  adidas AG - CFO   [26]
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 I actually think, although we always are trying to improve our risk management, I think we have got a pretty good risk model, being a truly global organization, and multi-national with also a very broad portfolio of brands. That is probably the best way to mitigate and manage risk. At least we are spreading it around.

 We have a very good risk modeling and also risk reporting within the Group. And I think is the multi-nationals we did to try to keep on top of this. We hedge as much as we can. I've mentioned there's a couple of areas where it has not been economic to do so. And we have a very solid management of our balance sheet, and so, we are not exposed to considerable risk in that area.

 So I think at the moment we are probably doing all the things that we can at least identify to manage risk. And I think that is what you're seeing also coming through in a pure operational form -- that operationally extremely good performance over the last few years.

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 Herbert Hainer,  adidas AG - CEO   [27]
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 Concerning the Ukraine and Russia, obviously we are monitoring the situation quite carefully. And we are in daily contact with our management in Russia. And we look at our individual store base if the conflict would be bigger.

 But let me also assure you that first and foremost we have less than 10% of our Russian business in the Ukraine. And obviously, we're looking in the moment especially in the Island of Krim we have around 10 stores there. All the stores are open. They are all operating. But we have daily contact and we could definitely reroute product, inventory, et cetera relatively fast in preparing for that.

 But on the other hand, we obviously want to do business there because as I said before, we haven't seen any negative impact and for the people or what we hear is this daily routine how they live their lives there.

 The last question was on TaylorMade and the margin improvement. I thought I had already given an indication in my first answer that because of the cleaning up in the third quarter 2013 we had a bigger margin hit which I would not expect in 2014 because we will ship less volume into the first quarter and then build it up when the seasons all around the world have started that we have less inventory, better sell through. And obviously, this should be an increase in the margin.

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 Andreas Inderst,  Exane BNP Paribas - Analyst   [28]
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 Okay, good, thank you.

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Operator   [29]
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 Andreas Riemann, Commerzbank.

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 Andreas Riemann,  Commerzbank - Analyst   [30]
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 Andreas Riemann, Commerzbank. Three questions from my side.

 First one on retail, like-for-like, it was plus 3% for the Group. Probably like-for-like was negative in Russia, I assume. So was like-for-like positive in all other regions? And with regards to Reebok and retail, Reebok doing quite well but Reebok retail was only flat with regards to like-for-like in Q4. Why is Reebok only flat that the LFL level?

 Western Europe, question number two, the business recovered nicely in Q4. Maybe can go through the regions -- any countries that stick out here? Or any countries you are not happy with within Western Europe?

 And the third one, to Herbert, I'm trying again on 2015 target. You already said some growth might be achieved, yes. So my question is is it fair to assume that the 11% of margin growth assumption for 2017, also bearing in mind that your new contract is running into 2017? That would be my three questions.

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 Robin Stalker,  adidas AG - CFO   [31]
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 So I will answer the first one. In terms of -- you are right; we are up 3% like-for-like in retail. Reebok's less positive performance is largely due to the factory outlet performance at [branding]. Actually, at the end, a very possibly a good sign because the quality of their products getting better and better and more concept store or in line sales. And that is I think all I have to say the first question.

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 Herbert Hainer,  adidas AG - CEO   [32]
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 The Reebok retail? Okay, very good. So then let me come to Western Europe. Obviously we had two standout countries in Western Europe which was Germany and Spain for sure helped by the football World Cup because as you know we had the German national team and the Spanish national team under contract. But also with our Brazuca balls and with the running category as I have already mentioned before, which helped.

 Coming to the last question, the extension of my contract and the length doesn't definitely -- hasn't anything to do with the 11%. And as I said before, don't forget we didn't have only the one target for 2015 which was 17, 11%. We had a lot of other targets. We wanted to move the Reebok margin over 40%. We wanted to move the dividend payout to the upper end of the 40% range. And a lot of this is happening or is close before achieving already. The dividend payout ratio is at 37.4%; the Reebok margin is at 39.7%. And we still have 18 months to go to achieve it.

 On the 11%, it definitely depends on the currency movement. And it is hard to predict what this will look like in 18 months to go. As I said before, what we have to do as a management team is to drive our operational business, drive growth on the one hand and be very cost conscious on the other hand by improving processes and systems. And also as you know, we do a consolidation of warehouse. We are bringing Europe 1 together, consolidation of countries, et cetera, et cetera. We look at our cost base.

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 Andreas Riemann,  Commerzbank - Analyst   [33]
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 Okay, and the answer with regard to question 3, just on like-for-like, the question was whether all other regions except for Russia were positive with regards to like-for-like, that is right?

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 Robin Stalker,  adidas AG - CFO   [34]
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 Yes, that is correct.

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 Andreas Riemann,  Commerzbank - Analyst   [35]
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 Okay, thanks.

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Operator   [36]
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 Philipp Frey, Warburg Research.

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 Philipp Frey,  M.M. Warburg & Co. - Analyst   [37]
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 On Western Europe again, in the last two quarters, your key competitor reported low double-digit growth rates in the market and has now over 20% backlog growth. And can you a bit elaborate on what you see as the key reasons for your underperformance in the level of confidence that you have two turn it -- well, I understand plus 200% sounds promising, but can we also assume in H1 to see a potential increase in the wholesale business in Western Europe?

 And secondly, can you a bit elaborate also -- you mentioned or you spoke a bit about a 2015 target on the margin targets. Would you see this margin upside mainly as a function of operating leverage, or are there some projects that you can share details of like timeframe of execution and saving volumes or anything like that with us that would contribute to your margin improvement?

 And lastly, on marketing, you have seen modest increases in the marketing working budget and percent of sales that you are expecting. Is it a function of the currency exposure in your marketing budget? Or is there also a corresponding increase in percentage of sales in the advertising portion of your marketing budget?

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 Herbert Hainer,  adidas AG - CEO   [38]
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 Let me start with the first one on the European market and as you called it, underperformance. This has mainly to do with the comparables which we had for 2012. Remember, we are the sponsors of the European football championship in 2012. We had a big push for that. We have been a partner and sponsor of the London organizing committee and therefore, we are outfitting the whole team [tribe]. And with all the merchandising license rights which brought us a big boost in sales. It was in total EUR100 million for the Olympic merchandising program and 80% to 90% of that was in 2012, which was definitely a key factor.

 Obviously, in football we have a fierce competition going on, but in all fairness I think it has been the first two comparables and items which I mentioned.

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 Robin Stalker,  adidas AG - CFO   [39]
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 In terms of the question, Philipp, about our margin and our operating leverage, let's put it firstly in the context that's one of the key goals of our 2015 strategy is to fundamentally improve the long-term sustainable profitability of the Group. And I think over the last few years you have seen us made considerable progress in this. And indeed, even with all the pressures in 2013, we were able to increase the margin by 70 basis points.

 So we're not quite where we wanted to be by the end of 2013, but we have done a considerable amount. And we're very close to that. And I think it's the same sort of thing about how if it is in 2014.

 We will continue to work on all the initiatives that we believe make us more efficient and take costs out of the organization to further improve sustainably the operating margin. And a lot of these initiatives we had already commenced. And I mentioned to you those over the previous years. And some of the investments in the first few years will be coming to fruition in the last couple of years of the 2015 plan, so there is that to look forward to. But there's obviously also other things that we continue to look at to become even better.

 And we have announced recently the Euro 1. We have announced jam. We continue to look at programs where we believe we will get the -- [that opens] not just the existing programs but more therefore, yes, operating leverage.

 Your last question was on marketing and the slight increase in that for 2014. The thing here is just look at the World Cup is basically the reason for the slight increase in 2014 over 2013 the marketing bucket.

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 Philipp Frey,  M.M. Warburg & Co. - Analyst   [40]
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 But is there also on advertising? Is the ad [play] really the media volume that you are buying also increasing basically, or --?

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 Robin Stalker,  adidas AG - CFO   [41]
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 It is also the communication activities for that event, yes.

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 Philipp Frey,  M.M. Warburg & Co. - Analyst   [42]
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 Okay. Thanks a lot.

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Operator   [43]
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 Michael Kuhn, Deutsche Bank.

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 Michael Kuhn,  Deutsche Bank - Analyst   [44]
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 Also three questions from my side. First of all, on Russia once more and on store openings, there seems to be ongoing pressure due to lots of malls openings, to open new stores. Once again, the guidance looks like 250 net openings. My question would be, what does that mean for your profitability in Russia and also for operating expenses in the retail channel as a whole?

 Secondly on China, not that much comment around that market as of late. It seems to grow quite steadily at a high-single-digit rate. Is set also a development that we should expect into 2014 and probably beyond 2014?

 And then lastly, more from a housekeeping perspective, what is your current euro/dollar hedge rate into this year and for the parts that you have hedged into next year? And what could be an operating working capital ratio at the year end in 2014? Thank you.

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 Herbert Hainer,  adidas AG - CEO   [45]
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 So the first question to the opening of malls, yes, this is definitely correct. And therefore, we address our store base. This means we are closing stores which had been in the right location five years ago but the right location might not be right again. And we definitely will go into the new malls if they are premium malls and if they are in the right location with the better equipment and more consumer attractiveness.

 This is a permanent game which our management in Russia is doing on an ongoing course. And this definitely doesn't have any significant impact on our profitability going forward. Because with the 1000 stores you can imagine that this is [increasing] process where you always have to refurbish, close, or reopen in new areas where consumers trends are.

 China, yes, we're happy with our development in 2013. And we definitely can assume that this development will go on in 2014, and we definitely do not intend to stop there.

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 Robin Stalker,  adidas AG - CFO   [46]
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 And in terms of dollar hedging, this year, 2014 was just over the 1.33, and looking out into 2015, although we are not extensively hedged yet for 2015, but the indication at the moment is now 1.37.

 And in terms of operating working capital, well it is our goal, obviously, to further improve it. I think we are around the 20.9 -- we are not bad. And the increase this year, as I said, was mainly because of the increase in the inventories and part of that was because of Russia. So we would expect to get that back. And so, we would look to have a slight improvement at the end of this year in the operating working capital as percentage of sales.

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 Michael Kuhn,  Deutsche Bank - Analyst   [47]
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 Okay, thanks a lot.

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Operator   [48]
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 Antoine Belge, HSBC.

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 Antoine Belge,  HSBC - Analyst   [49]
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 It is Antoine Belge from HSBC. Three questions. First of all, on 2015, the margin evolution even though the basis for 2014 would be lower, (inaudible) still expect a 160 basis points improvement year on year.

 Second question, regarding the FX impact in your 2014 guidance, are there some negative FX impact as the financial income results as well?

 And finally, I think in the press release just also mentioned some input cost pressures appears so I would like to confirm actually what [method] you compared to three months ago when you gave the initial guidance so [overall] have you seen any worsening element in input costs? Thank you.

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 Robin Stalker,  adidas AG - CFO   [50]
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 Thank you very much for those. So in terms of margin, as I was saying in one of the previous answers, it is our goal to continue to work on things that improve our operating margin. In naming a number, the 1% I can tell you at the moment exactly what that will be in 2015, that is too early. We will have a lower base, but there's a lot of things that we're doing to fundamentally improve the operating margin. And so our goals are still in place, and they are still what we are aiming for.

 In terms of the financial exchange rate impact and the financial results, yes we had EUR18 million in 2013 versus last year when it was EUR7 million so that was a deterioration of the EUR11 million.

 And in terms of the input cost, we haven't seen anything significant, no significant deterioration in the last three months. Our guidance I think is still the same as we gave last year, but there is input pressure that is largely coming from labor. But that is obviously reflected in the guidance that we are giving you.

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 Herbert Hainer,  adidas AG - CEO   [51]
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 So in the (inaudible).

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 Antoine Belge,  HSBC - Analyst   [52]
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 Yes, just in terms of what kind of inflation year on year are you are expecting for labor.

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 Robin Stalker,  adidas AG - CFO   [53]
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 For labor where?

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 Herbert Hainer,  adidas AG - CEO   [54]
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 Could be -- our cost didn't -- manufacturing countries are going up low percentage points because of labor. But the labor increase in some these markets are significant. But in our FOBs it is a smaller part, obviously, because the majority of our cost of raw materials.

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 Antoine Belge,  HSBC - Analyst   [55]
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 Thank you.

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 John Paul O'Meara,  adidas AG - VP, IR   [56]
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 Ladies and gentlemen, that completes our call for today. And I'm sure we will see you on the road over the next few weeks. And we are in Paris and London next week and the States the two weeks after that. And our next communication will officially be on the 6 of May for the Q1 results.

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Operator   [57]
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 That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may disconnect at this time.






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