Q3 2014 adidas AG Earnings Conference Call

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Q3 2014 adidas AG Earnings Conference Call
Nov 06, 2014 / 02:00PM GMT 

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

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Conference Call Participants
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   *  Julian Easthope
      Barclays Capital - Analyst
   *  Andreas Inderst
      Exane BNP Paribas - Analyst
   *  Chiara Battistini
      JPMorgan Cazenove - Analyst
   *  Frederick Woltz
      Raymond James - Analyst
   *  Jurgen Kolb
      Kepler Cheuvreux - Analyst
   *  Chris Svezia
      Susquehanna Financial Group - Analyst
   *  Ingbert Faust
      Equinet Institutional Services - Analyst
   *  Adrian Rott
      Deutsche Bank - Analyst

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Presentation
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 John Paul O'Meara,  adidas Group - VP, IR   [1]
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 Good afternoon, ladies and gentlemen, and welcome to our first nine months 2014 financial results conference call. Our presenters today are Herbert Hainer, adidas Group CEO, and Robin Stalker, Group CFO. To allow for ease of comparison, all sales-related growth rates will be discussed on a currency neutral basis unless otherwise specified.

 So with that, let's get started and over to you, Herbert.

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 Herbert Hainer,  adidas Group - CEO   [2]
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 Thanks very much, JP, and good afternoon or good morning, ladies and gentlemen. Our financial performance in 2014 has not lived up to our high standards. Although we have enjoyed encouraging and solid topline growth in the majority of our key categories and markets, significant negative headwinds from our golf business, weakening consumer sentiment in Russia/CIS and unfavorable currency movements have held us back from growing our bottom line.

 In any sports to reach your goals, tactics and desire are critical to compete and win. And we are here to do both and while certain external factors have gone against us over the last 18 months, we know we have to raise our game, especially in difficult conditions. Over the last months, we have acted quickly and urgently, implementing a series of initiatives to drive more consistent growth and more profitability for our group.

 So what have we done? We has been proactive taking decisive steps to stabilize the underperforming areas of our business, particularly at TaylorMade-adidas Golf. We have adjusted our investment plans to account for current market risks with Russia being a key focus. We have completed a major reorganization of roles and responsibilities in our marketing and sales organization to speed up decision-making. We have staked talent both internal and external through wide momentum and growth in North America. We have increased marketing spend, particularly in the developed markets. We are working swiftly preparing our next strategic plan, taking some powerful capabilities we have built during Route 2015 and applying them with more rigor and intent.

 And finally, we have adjusted our capital management and shareholder return policies. The current low interest rate levels are a good opportunity to reduce our cost of capital and ensure we are well-funded with future investments and shareholder returns.

 Before I get into the results of the last quarter, let me give you an update on some of these areas, starting with those that have most affected our results in 2014.

 TaylorMade-adidas Golf has been our weakest performer in 2014 with sales declining 29% and an operating profit deviating by around EUR150 million compared to the prior year level. But this board has structural challenges with declining participation levels. The biggest headwind to a faster recovery is the amount and slow liquidation of all the inventories in the marketplace.

 Therefore, we have remained laser focused on inventory management, taking a leading and responsible role for the industry cleanup. We have purposely chosen not to chase sales for the second half of 2014, despite being up against the successful launch of the SLDR driver last year.

 We also completed some major elements of the restructuring program we announced in August during Q3, commencing the closure of our Adams Golf facility in Plano, Texas and reducing our golf segment global workforce by around 15%.

 These actions amounted to a charge of around EUR10 million in the third quarter. As a result, all of these steps I am confident we will stabilize and grow sales and margins in 2015, returning the segment to profitable levels.

 Turning to Russia/CIS, a market that is highly prosperous for us but also facing significant near-term challenges. In the first nine months, sales in Russia/CIS increased 18%. While this is positive, negative effects from the Russian ruble, higher promotional activity as a result of weakening consumer sentiment and our efforts to accelerate inventory reduction significantly impacted our margins and, therefore, our results by around EUR100 million compared to our initial plan for the year.

 We have an enviable and strong position in Russia/CIS, being one of the most established and desired consumer brands with a wide-reaching network of over 1100 stores. And we firmly believe in the long-term potential of the market due to the rapid depreciation of the Russian ruble, which hit a record low today and the considerable risk of further deterioration in consumer spending. The short-term fundamentals of the business have changed materially. This warrants an even heightened level of capital and risk management as we plan for 2015.

 Therefore, we have and will continue working on accelerating our real estate and inventory management initiatives. This has resulted in net store closures in Russia/CIS of 27 stores since the end of June, and we have reduced our net opening plans even further to around 30 per year for 2014 and 2015.

 In addition, we continue to work hard on driving down inventory levels with an ambition to reduce inventories by a double-digit percentage rates in 2014 and to continue reducing absolute levels of inventory in 2015.

 Finally, a quick word on currencies. In total for the first nine months, negative translation effects wiped out around EUR550 million of revenues from our group's result. Taking the effects of translation, as well as less favorable hedging rates, which impacted the group's gross margin by 50 basis points, operating impact was impacted by roughly EUR150 million.

 While these issues have been a steady burden through the year, we definitely should not ignore the strong successes and improvement momentum in many other key parts of our business. In fact, we even saw some trends accelerating in the third quarter.

 Sales for the group increased 9% in Q3 and are up 6% year-to-date. Strong momentum continued for our brands in the emerging markets with European emerging markets, greater China, and Latin America increasing 19%, 13% and 16% respectively.

 Our business in Western Europe grew 10% as we continue to rebound in the region, driven by stronger product assortment in adidas football and running and continued double-digit growth at Reebok.

 In retail we also enjoyed another quarter of positive comparable store trends in all regions. Our efforts to drive more leverage on store costs also yielded a very satisfactory 2 percentage point reduction in operating expenses as a percentage of sales. In fact, our total concept store business, excluding Russia, will deliver record sales and profitability levels this year, which reaffirms our great confidence in the power and the value of this business model.

 At brand adidas, sales increased 12% in the quarter and 11% for the first nine months. In football, sales year-to-date increased 31%. The success of our sponsored teams and players at the World Cup, as well as new product introductions such as the Predator Instinct, will ensure we reach our aspiration of more than EUR2 billion in sales this year. The World Cup has been our most successful event activation effort.

 In running, sales for the first nine months are up 14% with a strong acceleration in the third quarter where sales increased by 20%. Our industry-leading boost technology continues to grab market share and mind share, being hands-down the best performing product on the world's major marathon scene.

 Just remember at the Berlin Marathon, adidas athlete Dennis Kimetto ran the fastest marathon in history wearing the super lightweight adizero Adios Boost. Since its launch, the adizero Adios Boost has won 27 major marathons and most recently completing the male and the female double at last weekend's New York Marathon.

 In originals, after a difficult start to the year, sales recovered sharply, growing 9% in the quarter. ZX Flux remains a top seller, and key franchises such as Stan Smith, as well as the first product launches in a series of new collaborations for example with Pharrell Williams and Rita Ora are driving heat for the Trefoil. Finally, the adidas NEO label also delivered another remarkable quarter with sales up 33% as we extended our product offering in key winter styles in footwear, jackets and denim.

 Let me come to Reebok. At Reebok we recorded our sixth consecutive quarter of growth with sales increasing 7%. The brand's positioning in fitness is resonating well around the world, particularly in markets where we are driving our own controlled space agenda. Sales increased at a double-digit rates in Western Europe, European emerging markets, other Asian markets and Latin America.

 On a category level, fitness training, walking and studio were the key drivers, increasing 25%, 30%, and 52% respectively. And I expect these trends to continue as we broaden our partnership network and product offering to new and upcoming fitness disciplines. This will also ensure that Reebok further increases its gross margin. While the brand's gross margin was down 1.4 percentage points year to date and 3 percentage points in the third quarter, this was all down to the challenges in Russia, as well as activities to streamline Reebok even more towards its fitness positioning in North America.

 In the US, this is mainly related to the old footwear closeouts, as well as preparations to rationalize the brand's factory outlet business in North America, which we plan to reduce by 20% over the next 12 months.

 Speaking about North America, regaining our form in this market is a top priority on our group's agenda. And we had made this market a key priority for all our senior management in the Company, and as I mentioned earlier, we have carried out a significant change in leadership in our North American organization this year, stacking high-caliber talent from various parts of our group and adding key external talent, particularly in design as you have must read.

 We also has been very active cutting back on the field of play, whether it be investments in established or young NBA talents or the return of the 3-Stripes footwear to the NFL. We will share more specific details on our future plans as part of our strategic update plans for the second half of March 2015.

 So, ladies and gentlemen, as you can see, while it has been challenging in 2014, there are many achievements we can also be very proud of. Attention now turns to completing the year. Despite phasing into the first major wave of World Cup product launches last year, we have plenty to play for in the fourth quarter.

 Some highlights to look out for include the first extension of our Boost offering into new running models and categories. We will fully leverage the return of the NBA with a series of new icon products for Derrick Rose, John Wall, and Damian Lillard.

 We will have our largest ever winter apparel marketing campaign, Open All Winter, supporting our most technologically advanced ClimaHeat products. Originals will introduce several new products, including Pharrell Williams and Nigo collaborations, as well as a bold new silhouette formed from some of the brand's most creative minds, the adidas Originals [2.0].

 And we also have a few product and partnership surprises to come at Reebok, which we will announce shortly before the end of the year.

 Therefore, with plenty to look forward to, I can reiterate the top- and the bottom-line guidance we gave you in July of mid to high single-digit currency-neutral sales growth and net income to shareholders at a level of around EUR650 million for 2014. And for 2015 we are also very confident that we will maintain a solid growth trajectory, and despite tough football comparisons, we expect sales to grow at the mid-single-digit rates on a currency neutral basis. We will also grow our earnings at a faster rate than the top line.

 However, as there are still a number of moving parts, most notably the continued volatility of the Russian ruble, which I already spoke already a little bit earlier, we will give you a more specific quantification of our 2015 plan in March 2015.

 So, ladies and gentlemen, this is it for my side. Let me now hand you over to Robin, and he gives you much more details on the financials.

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 Robin Stalker,  adidas Group - CFO   [3]
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 Great. Thanks very much, Herbert, and good afternoon, ladies and gentlemen. As you've just heard, our group had a solid third quarter with robust topline momentum.

 But for my comments today, I want to focus on the following topics: firstly, a look at our performance trends by region and channel; secondly, a review of the moving parts in our margin development; and finally, an update on our balance sheet and recently announced capital management measurement measures.

 In the third quarter of the first nine months, sales increased at 9% and 6% respectively with every region except North America posting sales gains. In particular, the emerging markets continued to do extremely well with sales in European emerging markets, Latin America and greater China increasing 19%, 16%, and 13% respectively.

 In Latin America the group was able to keep the strong momentum from the previous quarters with revenues up 16% in the third quarter. This was driven by a 17% sales increase at adidas and an 11% growth at Reebok. Comp store sales grew 17% in the third quarter.

 In greater China sales grew 13%. Of particular note is clearly the strong development of brand at adidas where revenues grew 14%, driven by a 32% sales increase at adidas Originals and Sport Style. Our retail expertise continues to pay dividends in the market with revenues up 32% during the quarter, driven by an 18% comp store sales increase.

 In European emerging markets, group sales increased to 19% in the third quarter. Sales growth was once again broad-based across the various markets with strong double-digit increases in Russia/CIS, the Middle East and in Africa. In Russia/CIS, sales in the quarter were up 16% with comp store sales at the prior year level.

 In Western Europe sales were up 10% in the quarter, driven by double-digit increases in Germany, Spain, France, and Poland. Several key performance categories, amongst others, football, running, and basketball, all grew at double-digit rates on Originals, and Sport Style was up 8%.

 In other Asian markets, we saw ongoing strong momentum at both adidas and Reebok with sales growing 11% and 33% respectively. TaylorMade-adidas Golf remained challenged with sales down 39% in the quarter. So, as a result, group revenues and other Asian markets grew 6%.

 Finally, from a regional perspective, in North America group sales declined 1% as sales growth at adidas was more than offset by double-digit sales declines at TaylorMade-adidas Golf and Reebok. At adidas football and running were once again standout categories, growing 45% and 12% respectively.

 Moving on now to the profitability, group gross margin decreased 1.3 percentage points in the first nine months or 1.9 percentage points in the third quarter to 47.4%.

 Now the main reasons for the decline in the third quarter were higher input costs negatively impacted the margin by about 80 basis points; increased clearance activities, as well as negative currency effects on wholesale, the latter mainly in Latin America, also impacted margins by 80 basis points; lower margins in Russia/CIS related to the high levels of promotion activity as well as the negative effects from the ruble devaluation result in about 50 basis points of headwind; and finally, less favorable hedging rates accounted for around 40 basis points of the group's gross margin decline in the quarter.

 These impacts were partly offset by an improved product and channel mix.

 Now below the gross profit line, other operating income and expenses increased 7% in euros or 9% currency neutral in the third quarter. So modest operating overhead leverage gains in the quarter were offset by an increasing sales marketing and working budget expenditure, which was up 10% currency neutral from the third quarter and 11% currency neutral in the first nine months.

 And now to the nonoperating items in P&L, net financial expenses decreased 56% in the third quarter or 31% in the first nine months compared to a year ago, driven by a positive EUR9 million positive swing in exchange rate FX in the third quarter, as well as obviously lower interest expenses.

 First nine months tax rate increased 110 basis points to 28.8% due to a less favorable earnings mix. And net income attributable to shareholders for the third quarter declined 11% to EUR282 million and 21% to EUR630 million for the first nine months.

 Now by segment, wholesale revenues increased 8% in the third quarter and 6% for the first nine months, mainly due to high single digit growth at adidas Sport Performance, led by the football, running, and training categories. Sales at Reebok were slightly above the prior year level, driven sales increases at fitness training, walking, and fitness running.

 Gross margin for the segment was down 2.1 percentage points for the quarter and down 90 basis points for the first nine months as the positive effect from a more favorable product mix was more than offset by negative currency effects following the devaluation of currencies such as the Argentine peso and Brazilian real, as well as higher levels of clearance.

 In the retail segment, revenues continue to grow at a strong double-digit rate, up 20% in the third quarter and 21% for the first nine months. Comparable store sales were up 6% for the quarter and 8% for the first nine months with growth across all regions and store types.

 By brand adidas comp store sales were up 8% for the quarter and 10% in the first nine months. Reebok comp store sales were down 2% in the third quarter and remained stable for the first nine months. The lower performance here was a entirely related to the Reebok Factory Outlet business, which Herbert already mentioned.

 Revenues in our e-commerce business accelerated again during the quarter with sales doubling in the third quarter. For the first nine months, our e-commerce business was up 78%. Retail gross margin decreased 3.4 percentage points to 58.1% for the third quarter and 3.2 percentage points to 59.4% in the first nine months. Our performance in Russia/CIS heavily impacted these results with the impact of promotional activity and product mix as well as currency devaluation in that market accounting for around 2.5 percentage points of that decline in both Q3 and year-to-date.

 Now, on a positive note, segmental operating expenses as a percentage of sales decreased 2 percentage points to 38.3% in Q3 and 40 basis points to 41.9% in the first nine months. At the end of the third quarter, we operated about 2822 stores, a net increase of 211 stores versus September 2013. Of the total number of stores, 1569 were adidas, 426 were Reebok branded, and in addition the adidas group retail segment operated 827 factory outlets.

 During the first nine months, we opened 277 new stores and closed 195 stores. 89 stores were remodeled.

 Finally, coming to other businesses, revenue in the third quarter decreased 12%, driven by a 36% decline at TaylorMade-adidas Golf, as Herbert already mentioned.

 For the first nine months, revenues of other businesses was down 70%. The segmental gross margin remained virtually unchanged at 35.3% in the third quarter. For the first nine months, gross margin was down 3.9 percentage points to 37.7%, due mainly to the lower profit margins product margins at TaylorMade-adidas Golf as a result of the highly promotional environment in golf, as well as the timing of product shipments.

 Finally, let me spend a minute on our balance sheet and cash flow development. At quarter end, operating working capital as a percentage of sales increased 1.3 percentage points to 21.9%. This development was driven by an 8% decrease in accounts payable. Although clearly impacting our margins, our strong focus on inventory management in markets such as Russia is definitely paying off as inventory growth rates more than halved to 7% from 16% at the end of June.

 In terms of cash flow development, we ended the quarter with net borrowings of EUR543 million compared to EUR180 million a year ago. Higher capital expenditure, including the purchase of the Spartanburg warehouse, was the main driver of this development.

 So to wrap up, since we last spoke, we have taken some significant steps with regard to our capital structure. In October we successfully issued two Eurobonds, marking our Firsteuro bond offering since July 2009. The seven-year Eurobond of EUR600 million matures on October 8, 2021 and has a coupon of 1.25%. The 12-year Eurobond of EUR400 million matures on October 8, 2026 and has a coupon of 2.25%.

 The successful placement of our bonds reflects our group's high credit quality and our excellent access to the capital market. This offering allows us to benefit from current low-cost financing opportunities in the Eurobond market to six-year attractive long-term financing and reduce our cost of capital.

 In addition, given our expectations for future cash flow development and current low share price levels, we also announced a EUR1.5 billion shareholder return program, which comes on top of our annual dividend. As announced this morning, we will commit the first tranche of up to EUR300 million tomorrow.

 So with that, ladies and gentlemen, I would like to 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). Julian Easthope, Barclays.

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 Julian Easthope,  Barclays Capital - Analyst   [2]
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 Many thanks and good afternoon, everyone. Three questions if I may. First in terms of TaylorMade-adidas Golf, there's quite a lot of decline I would assume is just destocking with the sellout I assume a bit better. So I just wondered if you had the sort of take as to what the sellout is like within the retailers relative to the destocking that took place. Just give some sort of guide as to where the underlying market might be and what will happen once the destocking slows.

 Just in terms of Russia, after the EUR100 million cost to the EBIT this year, is it still profitable? And I guess the last question comes back to Reebok and TaylorMade. I've seen all sorts of commentary about whether or not these may actually be sold in due course. I just wondered if you could give us your take as to whether that is a possibility? Thank you.

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 Herbert Hainer,  adidas Group - CEO   [3]
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 Okay. Let me start with the first question and the third, and I think Robin will talk on the profitability of Russia. So TM-AG, the sellout situation, as I have said in my speech, we bring definitely much less product into the market to help the retailers cleaning up the inventory, which has piled up over the last 18 months. Obviously this is the result of a 36% decline in the third quarter because we don't bring in so many products, but we start now in Q4 launching our new irons, which we just did last week, and we definitely do believe that from a TaylorMade-adidas Golf standpoint, we are getting into 2005 with a much cleaner inventory in metals, woods, and irons, and then we will come back with the launch of new product introductions, starting with drivers in January of 2005 and then continue during 2015.

 The golf market in general, it generally will not have solved all the problems. As I said before, we have to deal with the declining participation rate in some areas, but overall from an inventory standpoint -- and I also do believe from a mindset of the golf industry -- and the golf business will be healthier going forward than it is at the moment. But, as I said, structural problems will not be solved overnight.

 Your third question concerning TM-AG and Reebok, there were a lot of speculations, but you will understand that we do not comment on any rumors or speculations.

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 Robin Stalker,  adidas Group - CFO   [4]
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 And Julian, in terms of Russia and the profitability, you know, although we don't talk about specific market profitability, we called out that Russia as being one of our most profitable, and it's clearly down what it has been, but it's still -- I can confirm it's still profitable for us, and it's a market that we have a long-term confident in and good expectations in.

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 Julian Easthope,  Barclays Capital - Analyst   [5]
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 Brilliant. Thank you. And just sort of one final thing for clarification, when you talk about your Investor Day looking at your longer-term planning, will it actually be on the day of the full-year results from 5th of March?

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 Robin Stalker,  adidas Group - CFO   [6]
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 No, Julian. We'll give you the date as soon as we can, but it's likely to be at the end of March.

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 Julian Easthope,  Barclays Capital - Analyst   [7]
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 Okay. Thank you very much.

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Operator   [8]
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 Andreas Inderst, Exane BNP Paribas.

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 Andreas Inderst,  Exane BNP Paribas - Analyst   [9]
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 Hello, everyone. I have three questions. The first one on your cost structure. Given all the headwinds you are facing and acceleration -- accelerated decline in the Russian ruble, don't you think your operating cost basis is too high, and what are your measures to tackle these issues, is my first question?

 Then the second question, you indicated on Russia a decline on EBIT of roughly EUR100 million. Is it for the first nine months or the full year? Based on current FX rates, what would decline look like or the negative impact look like in 2015?

 And my final question is on FOBs, on input costs. What's your expectations in terms of gross rate or decline year on year in 2015 given the decline in input costs in recent months? Thank you.

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 Robin Stalker,  adidas Group - CFO   [10]
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 Thanks very much. And yes, you are absolutely right to call out costs, but you can be assured that that is exactly a key focus for us, but it's not new. We have been focused on this for some time, and a lot of the efforts that we undertook as part of the Route 2015 were to get our whole organization less complex and more streamlined, and we've been doing that. We've been consolidating warehousing above market. We've been consolidating services above market. We've been addressing the structure of marketing and sales. We just recently at the beginning of this year put the five key European markets together, and we continue to pursue concepts where we believe we will also in the future take costs out of the business, and it is definitely a focus for us.

 In terms of Russia and the EUR100 million that we mentioned in the prepared comments, that refers to the nine months. And it is obviously with the continued weakness of the ruble and the outlook for 2015, it's going to be more of a headwind for us. But we can't give specifics on that until we have a little bit more visibility on that, and we will try and do that as best we can in March.

 And thirdly, in terms of FOBs, we still think there is continued pressure on FOBs or input pricing. It may not always be from the raw materials, but definitely labor continues to be -- likely to be a negative for our industry. Don't forget when you are looking at the raw materials, even though oil has gone down, we are talking about we lose the oil derivatives obviously. So there's a timing lag sometimes in the change of the oil price for that. So I think you should expect or have a conservative view on FOBs are likely to still be some pressure there in our industry next year as well.

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 Andreas Inderst,  Exane BNP Paribas - Analyst   [11]
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 Okay. Thank you.

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Operator   [12]
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 Chiara Battistini, JPMorgan.

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 Chiara Battistini,  JPMorgan Cazenove - Analyst   [13]
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 Good morning. Hi. Thank you very much for taking my questions. Just a couple of questions from me, please.

 First, on your gross margin on adidas wholesale specifically, which was actually a major drag to the group gross margin, I was wondering whether we could provide more color on what caused that pressure -- if it was just on effects or more?

 And then in terms of marketing spend, it was up 10% again in quarter three. Should we assume this to be the new growth run rate for this cost line, please? Thank you very much.

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 Robin Stalker,  adidas Group - CFO   [14]
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 Okay, Chiara. So the pressure of the wholesale gross margin, obviously we have the input price that has affected all of our channels in this quarter -- that was about 80% of the total group -- sorry, 80 basis points for the total group deterioration. And then in wholesale, we've been continuing to clear certain products, and the third point is that we have the devaluation impact in markets where the hedging has not done. And that is the Argentine peso and the Brazilian Riau.

 And the second question was about the 10% increase in MWB. You know, we called out as part of our second-quarter announcement that we are investing more, particularly in the developed markets and that we are expecting our marketing investment to increase by about a percentage point in 2014 and 2015. And so that run rate that you are seeing here is likely to be consistent for this year and for the total 2015 year.

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 Chiara Battistini,  JPMorgan Cazenove - Analyst   [15]
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 Perfect. Thank you very much. And just if I may, a follow-up on gross margin -- following up also on the previous question on the input costs and what we should think about into 2015. How should we think about our gross margin in 2015, weighing the fact that this year was penalized by ForEx and meaningfully so and hedges and into next year where the ruble will continue to be a headwind, but then I would assume you should also benefit from an easier base and lower drag from TaylorMade, please?

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 Robin Stalker,  adidas Group - CFO   [16]
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 Yes. And I think that's a good summary. Obviously in the FOB increases, what have you, we try to mitigate this with the continuing improvements and deficiencies in our supply chain and our manufacturing processes and also obviously through price increases. That's not always possible. We are not too concerned about this for next year, and as you say, we are in a situation where it's not just the ruble. You've got a lot of markets, and we benefit from the channel and product mix as we have in the previous years also.

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 Chiara Battistini,  JPMorgan Cazenove - Analyst   [17]
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 Thank you very much.

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Operator   [18]
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 [Frederick Woltz], Raymond James.

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 Frederick Woltz,  Raymond James - Analyst   [19]
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 Hello, gentlemen. I have two follow-ups, please. One follow-up on the marketing expenditure, when you decided to raise your marketing expenditure, especially in the developed markets, could you tell us why you decided to do that, what's your analysis, and what will be different from what you already did in the past? And just to double check, the 100 basis points is a split between 2014 and 2015, or should we assume a new significant increase in percentage of savings in 2015? So that would be our marketing expenditure.

 And the second question is on your working capital, could you explain to us what happened on payables? You had a big decline in payables in the quarter year on year. Could you maybe tell us what has changed or if something has changed and how you see working capital going? Thank you.

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 Herbert Hainer,  adidas Group - CEO   [20]
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 Frederick, let me start with the first part of the question number one and why do we increase our marketing spend? This is two main points. On the one hand, because we see a thought of momentum in several areas as we said -- be it Originals, be it NEO, be it football, be it running where we do believe we have to make fast trains faster, and on the other hand, we also see in markets like America that we are underspent, and as we have said, North America is a top priority for us going forward, and we invest in people, we invest in designers, in design studios. As you have might read, we invest in ambassadors. We have signed four of the six NBA drafts. We have collaborations with Kanye West, with Pharrell. And we will definitely make more noise in this market. Therefore, these are the two main reasons why we spend more.

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 Frederick Woltz,  Raymond James - Analyst   [21]
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 And we have quantified that and the increase in point of sale and what have you as being about a percentage point for each year -- the 2014 and 2015 year. You know, we normally spend about 12% to 13% of sales on MWB, and we have said that there would be in the range of 13% to 14% in the future.

 And then your last question about working capital, the working capital deteriorated a little bit this time because of the decrease in payables, but nothing especially that is just related to the timing. Obviously the time (inaudible) products and when we pay it that year over year is different. But we still are very focused on further improving working capital, and I think the best call out that I can make here is look at what has happened with the inventory. Now that's the key mover in our working capital. It has been over the last few quarters. That's what we are focused on. We hope by the end of the year to have even a further improvement in the inventory growth.

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 Frederick Woltz,  Raymond James - Analyst   [22]
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 Okay. Thank you.

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Operator   [23]
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 Jurgen Kolb, Kepler Cheuvreux.

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 Jurgen Kolb,  Kepler Cheuvreux - Analyst   [24]
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 Thanks very much. The first one on the online business, another very strong quarter. Could you please give us some indications what happened there? Why the online business continues to take off? Have you put additional money in there, or what drove the success there?

 And then on NEO, also apparently a strong performer, how much further do you want to stretch NEO here really? Again, another category -- winter more pronounced -- you have no concerns that you might overstretch the category a bit?

 And then lastly on Reebok, the Factory Outlet consolidation, so remind me, how long will that take? When will we be finished with that? The general idea behind it is that just because Reebok has declined in the overall business and you just downsized it to the reality or what was the idea behind it? Thanks.

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 Herbert Hainer,  adidas Group - CEO   [25]
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 Jurgen, this is Herbert. Let me start immediately with question number three because you said Reebok overall business has declined, which is not the case of all. The reason why we are consolidating our factory outlets in the US is twofold.

 On the one hand, we definitely want to carve out more of the positioning of the training and fitness brands in the US, which we do around the world. We are growing with Reebok everywhere outside of the US. So we definitely have to be more focused in the US to bring the message across. And secondly, I do believe we have simply we just have too maybe factory outlets. We want to have a real business with a connection with the consumer and not the majority of our business on factory outlets, so this is why we consolidated.

 The second question on NEO, NEO is doing extremely well, and we get great feedback from the young consumer base, especially from the female consumer. You might remember when we launched NEO this was one of the target consumer groups where we said we are not strong enough with the 13- to 19-year-old, especially female consumer. So far we are only in a few countries where we sell NEO. This is China. This is Russia. We have some test stores in Germany. We have a little bit of business in America. Believe me, we are quite careful how we roll it out because we don't want to stretch the brand too far.

 But on the other hand, the positive feedback from the consumers -- it's not just the sales. It's also the qualitative feedback which we get. It's definitely encouraging. And we will carefully see, but there is definitely more potential, as I said. And last but not least, our online business -- we might remember in the Route 2015 plan, this has been one of our strategic targets that we said we want to do at least EUR500 million. Of course, we will overachieve the EUR500 million until the end of 2015. This is by consistent investment into people and into our systems.

 We now have one platform for all our businesses around the world. We have a lot of people sitting in Amsterdam who are experts in the digital business in all the different functions -- speed, conversion speed, how we drive traffic to the site, feed, what articles we choose, etc. And we are absolutely convinced that this is just the starting point. And even if we do EUR500 million, this is just less than 2% of our total revenues for adidas and Reebok, and we definitely want to get to a higher percentage of our e-commerce business.

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 Jurgen Kolb,  Kepler Cheuvreux - Analyst   [26]
------------------------------
 All right. Understood. Thanks very much.

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Operator   [27]
------------------------------
 Chris Svezia, Susquehanna Financial Group.

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 Chris Svezia,  Susquehanna Financial Group - Analyst   [28]
------------------------------
 Thank you, everyone, for taking my questions. A couple from me. First, just on North America, I'm just curious we continue to see some challenges just in terms of share losses in some key categories -- running basketball and lifestyle. It seems like in our conversations with retailers, Boost doesn't translate or has not translated as well as other markets around the globe.

 So I'm just curious how you plan to address sort of the product pipeline marketing point-of-sale in North America to have more consistent product sell-through in this region.

 The second part to that question is the new hires that you made -- the three gentlemen -- I assume they have non-compete. So I'm just curious if that's true and when they actually start and when they can actually have impact.

 The other question I have here, just on the Golf business, I'm curious your comments, Herbert, about seeing improving sales and margins next year. And given the fact that there's continued consolidation here in North America and just the overall challenges with the market, I'm just curious how you prevent similar playout versus last year where you sold in a lot of product in Q4 last year only to have the challenges sort of unfold. So I'm just curious how you protect that.

 And very lastly here, just on FX, just how do we think about FX as it pertains to the gross margin as we look forward and how you are hedged? Thank you.

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 Herbert Hainer,  adidas Group - CEO   [29]
------------------------------
 Okay. Let me start with the first question. When you say Boost is not resonating with the consumer in the US than in the rest of the world, then it is true to a certain extent, but we also have some very positive signals. For example, in running, when you go to the running specialist stores, then our Boost shoes are selling very well. When you go to the normal sporting goods store, especially to the mall, we admit we definitely have work to do. There is no doubt.

 We just have launched the new Rose basketball boot, which is Boost shoe for $140. I think it was 10 days ago, and we pushed 20% in the first two days. So we definitely are making inroads with Boost. There is no doubt. At the New York Marathon, as I have said in my speech, the first two guys in the men's running (inaudible), they all were wearing Boost and all won the races. So we definitely are making huge headwinds around the world with Boost, but there is definitely more work to do in America. But this is also what I said before why we are spending more marketing on working budget, that we can communicate it with the consumer, especially in America in a deeper and broader way.

 When it comes to the new hires, yes, your speculation is also right. We will see them actively in the second half of next year.

 Third question was on the Golf business. When you look to the Golf business in the last 10 years, key success factors will be becoming the number one in the Golf business was because we have been the most innovative golf company. We brought out innovations on the metal, wood or on the iron side on a permanent and consistent way. This is what we will do in 2015 as well.

 We do believe -- first and foremost, let me also say that we at TaylorMade-adidas Golf we have a very clean inventory. So the inventory, which is still -- much is still in the retail trade. This is decreasing step by step, but we definitely will energize the market with new product innovations, which we are bringing out in 2015. And, as I said, we have started with irons and we follow with new drivers in January, and it will continue during the course of the year that all our restructuring is done in 2014, which will not hit us in 2015. So the one makes us confident on the top line side. The other one makes us confident on the bottom line because we will definitely have a better cost structure. And we do believe by having cleaned most of our inventory this year that the margin will go up next year again.

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 Robin Stalker,  adidas Group - CFO   [30]
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 And in terms of the FX on the gross margin, Chris, the key here is obviously the dollar euro, although we are subject to the other payers that we hedge as well. Here the hedge rate for 2015 is slightly better than what it has been for 2014. So it should be a slight positive for us.

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 Chris Svezia,  Susquehanna Financial Group - Analyst   [31]
------------------------------
 Okay. Thank you very much, gentlemen. Appreciate it.

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Operator   [32]
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 Ingbert Faust, Equinet.

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 Ingbert Faust,  Equinet Institutional Services - Analyst   [33]
------------------------------
 Yes, good afternoon. I have two questions from my side. One followup on Boost. Can you confirm the 8 million pairs of shoes in 2014, and I think for 2015 it was 15 million, just a confirmation of that?

 And the second thing, on your outlook for 2015, mid-single-digit sales growth and the pass-through portion of profit growth, why we have, if I am correct, around EUR80 million restructuring costs in 2014? Is this above proportionate profit growth indication? Is that adjusted for the EUR80 million, or is it just in reported figures? Thank you.

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 Herbert Hainer,  adidas Group - CEO   [34]
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 Well, point number one, yes, I can confirm the EUR8 million in 2014, and the plan for 2015 is EUR15 million. Obviously we have not done it yet because the year is ahead of us. But also what we see is definitely confirming that we are achieving our targets.

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 Robin Stalker,  adidas Group - CFO   [35]
------------------------------
 And in terms of the profitability, our guidance says in terms of reported -- and I don't quite know where you get your EUR80 million restructuring from. All we have talked about so far is the restructuring -- sorry, in the third quarter for TaylorMade, which is around EUR10 million.

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 Ingbert Faust,  Equinet Institutional Services - Analyst   [36]
------------------------------
 Okay. I thought there were additional costs this year for TaylorMade and for the Russian operations. So a one-off effect in the area of EUR80 million, but I might have been mistaken.

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 Robin Stalker,  adidas Group - CFO   [37]
------------------------------
 What we communicated in the second quarter, I'm happy to repeat, was our expectations for the second half included obviously the poor training of the business in terms of margin in both Russia and also in TaylorMade-adidas Golf, and we used that to explain why the total year for 2014 would be down. But the restructuring is just in TaylorMade, and that's, as I said, about EUR10 million and already booked in the third quarter.

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 Ingbert Faust,  Equinet Institutional Services - Analyst   [38]
------------------------------
 Okay. Thanks for the clarification.

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Operator   [39]
------------------------------
 Adrian Rott, Deutsche Bank.

------------------------------
 Adrian Rott,  Deutsche Bank - Analyst   [40]
------------------------------
 Hi, everyone. Thanks for taking my questions. Again on Golf, I'm just curious to hear what the sort of new normal at TaylorMade would look like in your view. So it's quite some time since we have seen an EBIT margin for the brand, and obviously it's that segment should be profitable again next year, but what's the sort of midterm target corridor considering the structure changes in the industry and also your new setup post the changes at (inaudible) and so on.

 And secondly (inaudible) again, so obviously TaylorMade is US heavy, but can you lever it again? Are you seeing adidas and Reebok trends brand selling? That would be it for my side. Thanks.

------------------------------
 Herbert Hainer,  adidas Group - CEO   [41]
------------------------------
 So let me start with the second question, the US. Obviously as I said before, already when we look to the adidas and to the Reebok performance, especially in the third quarter, it was 12% and 17% up. Then we are quite satisfied with the exception of America. As I said, we are stagnating in America. I am positive for 2015 that we are growing again, and adidas Reebok will be more flat. Because, as I said, we are closing factory outlets, having cleared a lot of product and want to come back to more regular sales in Reebok. But for adidas, I definitely expect the growth in 2015. But wonders will not happen overnight. So we have now changed the management. We are investing. We want to have quality distribution. We have to spend more for Boost, as we just said before. But we definitely want to build a sustainable growth business in the US.

 The first one was to TaylorMade. Yes, I think you were asking why we are confident in growing our profit in 2015 and going forward? First and foremost, we will have a lower revenue base in the future as we had in 2012 and 2013, but we definitely will have less clearance sales. As I said, we are bringing in much more new innovative products, and you will see already some -- as I said, the new drivers for coming in January next year, so not far away from today. This should give less clearance sales. This should give us a better margin. And on the other hand, we will have an improved cost base as I said, and therefore, our profitability will grow. We'll be there in 2015 again, and then we will be growing going forward.

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 Adrian Rott,  Deutsche Bank - Analyst   [42]
------------------------------
 Yes. But correct me if I'm wrong, but I think 2006, 2008 TaylorMade was sort of delivering a 8% to 10% EBIT margin. And that's a big gap between turning golf profitable again. Are we ever getting back to those margins? What's your base case assumption in the midterm for TaylorMade and Golf?

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 Herbert Hainer,  adidas Group - CEO   [43]
------------------------------
 Yes, this is definitely correct what you said with our margin. This is definitely our target, and we will get to that. As I said on a lower revenue base, that all the measures which we are doing helps the revenue business, which gives us higher margin, lower cost base, and this is definitely bringing us back to the margin, which we had in the past.

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 Adrian Rott,  Deutsche Bank - Analyst   [44]
------------------------------
 All right. Thanks. Great.

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 Herbert Hainer,  adidas Group - CEO   [45]
------------------------------
 So with that, ladies and gentlemen, that does complete our call for today, and thank you very much for your attention. Our next communication will be on March 5 for our full-year results. So enjoy the rest of the year and the holiday season.

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Operator   [46]
------------------------------
 That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.




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