Q2 2015 adidas AG Earnings Call
Aug 06, 2015 AM CEST
ADS.DE - adidas AG
Q2 2015 adidas AG Earnings Call
Aug 06, 2015 / 01:00PM GMT
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Corporate Participants
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* Sebastian Steffan
adidas AG - VP IR
* Herbert Hainer
adidas AG - Group CEO
* Robin Stalker
adidas AG - Group CFO
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Conference Call Participants
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* Antoine Belge
HSBC - Analyst
* Adrian Rott
Deutsche Bank - Analyst
* Chiara Battistini
JPMorgan - Analyst
* Julian Easthope
Barclays - Analyst
* Louise Singlehurst
Morgan Stanley - Analyst
* Piral Dadhania
RBC - Analyst
* Volker Bosse
Baader Bank - Analyst
* Zuzanna Pusz
Berenberg - Analyst
* Dan Homan
Citi - Analyst
* Chris Svezia
Susquehanna Financial Group - Analyst
* Simon Irwin
Credit Suisse - Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the adidas Group conference call for the first half-year 2015 financial results. Today's conference is being recorded.
At this time, I would like to turn the conference over to Sebastian Steffan. Please go ahead, sir.
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Sebastian Steffan, adidas AG - VP IR [2]
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Thank you very much, Tali. Good afternoon, ladies and gentlemen and welcome to our first-half 2015 financial results conference call. Our presenters of today are Herbert Hainer, the adidas Group CEO; and Robin Stalker, the Group's CFO.
As always, to allow for ease of comparison, all sales and revenue related growth rates will be discussed on a currency-neutral basis, unless otherwise specified.
In addition, all figures will refer to the Group's continuing activities, due to the divestiture of the Rockport business segment.
Lastly, all figures will be discussed, excluding goodwill impairment losses, unless otherwise stated.
As you know, we have a lot of topics to cover today, so, without any further ado, over to you, Herbert.
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Herbert Hainer, adidas AG - Group CEO [3]
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Thanks, Sebastian; and good afternoon, ladies and gentlemen.
When we introduced our new strategy creating the new, at the end of March, we told you that it will take time to see all of our investments paying off and the full benefit coming through. But we also promised you that this new approach, together with our fresh organizational set-up, will show first positive results already this year.
The second quarter is, without any doubt, a proof positive to that. I am really pleased to see how well adidas and Reebok are resonating with their respective consumers, which is clearly reflected in the second-quarter performance.
Reebok with its 6% top-line improvement, now has nine consecutive quarters of growth in the books.
After a very successful start to the year in Q1, adidas grew a strong 8% in the second quarter, which is even more impressive considering the record World Cup-related sales we were comparing against.
This is also reflected in the praise key adidas products, such as Boost, our new football silos Ace and X; the Superstar; and Kanye West's Yeezys have received from sneakerheads, as well as vertical sports and lifestyle media around the world.
I will come back to these success stories in more detail during today's presentation.
In addition, there were a lot of other areas where we made some major progress over the last couple of months. Last week, for example, we completed the divestiture of Rockport, which will allow us to focus our resources on our core competency: sport; and on the highest potential opportunities for our Group to drive sustainable and profitable growth.
Yesterday evening after market close, we announced the acquisition of Runtastic, an Austrian-based health and fitness app company, helping us to further strengthen our digital activities.
In June, we finished the second tranche of our share buyback program. Only nine months after launching our shareholder return program, we have already concluded 40% of the total EUR1.5 billion that we intend to distribute to our shareholders.
Unfortunately, there is also one area that is still not performing according to our expectations. Clearly, the business development of TaylorMade-adidas Golf has not lived up to our initial projections over the last couple of months.
And while we are, of course, going to provide you with more detail on the other topics, that I mentioned before, let me start elaborating on the challenges which we are facing with our golf business, and what we are doing to change it for the better.
2014, as you will remember, was a very tough year for the golf industry in general. This overall weakness hit us, as market leader, particularly hard.
After we had taken some painful measures to resize our business and postpone most product launches to pave the way for a healthier retail environment, we expected the market in our business to return to growth this year.
And while the number of rounds being played reversed their downward trends recently, suggesting that the overall environment has, indeed, improved somewhat, the situation at the point of sale remains more challenging than we had initially projected.
At the same time, our two major product introductions, the R15 and the AeroBurner, did not resonate as well with the golf consumer as we would have hoped.
As a result of these developments, our sell-through rates were not as strong as expected, leading to earlier and more pronounced promotional activity, which is clearly reflected in the 26% top-line decline during the second quarter, as well as significant margin pressure.
I know this development is disappointing for you. But rest assured that we as a management team are just as disappointed about this development as you are.
The current performance has shown that we need to go much deeper in order to bring TaylorMade-adidas Golf back on track. This is exactly why we will make every effort to develop the right measures to drive the turnaround of our golf business.
To support us in this, we have engaged with an investment bank for the purpose of analyzing future options for our golf business, in particular the Adams and the Ashworth brands.
But we are, of course, not going to wait for these results before starting to react to the challenges. In fact, over the last few weeks we have not only a developed the major turnaround plan, we have also already started to implement it, as we are fully aware that you don't have any time to lose.
The major cornerstones of the plan that goes way beyond our initiatives from last year are the following.
Firstly, we will enhance TaylorMade's pricing, promotion and trade patterns. This includes maximizing list prices on future launches. In the past, our pricing has too often been driven by historical levels, rather than robust consumer research and in-depth analysis to test price-point decisions.
As a result of that, TaylorMade's core portfolio of drivers is priced below competitors product, despite still being the clear market leader in metal woods.
In addition, we have to change our entire launch pattern, understand the optimal product life cycle, and ensure that the organization sticks to it.
This way we will improve the overall conditions for subsequent product releases, reduce the risk of excess inventory, and sharpen our perception in the eyes of both consumers and retail partners.
Another area that we are going to tackle more aggressively is TaylorMade-adidas Golf supply chain and product expenses, which have increased over the last couple of years as a result of increases in labor costs and supply chain overheads.
By renegotiating contract manufacturing rates and selectively adjusting the product, in terms of components, designs and cosmetics, we will reduce input and conversion costs, which will drive a meaningful increase in the product margin across all categories.
This, by the way, has immediate impact for our next major metal wood launch alone, which is planned for September. We have already identified savings potential in the low single-digit million euro range, and this is for one single product only.
Just imagine the potential we have when applying this approach to all future launches across all product categories.
Other initiatives in this area will include measures to increase productivity in club assembly and ball manufacturing, and the complete elimination of air freight to ship our product.
Furthermore, we will reprioritize the global marketing spend by significantly reducing investment in non-priority markets.
In addition, we will reduce our marketing investment by limiting product launch frequency, focusing our media spend on top-tier products and sharpening our portfolio of players.
In total, this will have an impact in a mid-double digit million euro range per year when in full swing.
And last but not least, we will generate significant operating overhead savings. These strict cost saving efforts will include a reduction of personal expenses by reshaping the organization.
In fact, we already began the process in July and rebalanced our workforce by 6% to immediately increase operational efficiency. This measure is a difficult, yet necessary step, in order to lead TaylorMade-adidas Golf into a successful future.
Other initiatives aimed at reducing our core cost base are a consolidation of warehouses around the globe; the optimization of shipping policies with our retail partners; as well as the creation of shared service centers.
The implementation of all these measures continues as we speak. The outcome will and has to be a more nimble, more creative and profitable company.
When talking about our golf business, you should also keep in mind one thing. Even in this challenging market, our footwear and apparel business as with adidas golf grew in the first half and continues to deliver solid returns.
To me, this is a clear testament to the strong positon adidas enjoys in sport.
Robin will speak about our outlook for the full year in more detail a little later. But let me make one point very clear. The weaker than expected performance of TaylorMade-adidas Golf will not put the Group's top and bottom line guidance for 2015 at risk.
TaylorMade-adidas Golf is a small part of our business and, as mentioned before, momentum at our core brands adidas and Reebok is exceeding our initial expectations.
As a result, our commitment to achieving a mid-single digit top-line improvement and to increasing the bottom line between 7% and 10% stands firm. I have absolutely no doubt that we will achieve these goals that we had communicated at the beginning of the year.
As we will now take a more detailed look at the Group's overall performance during the second quarter, you will see why I am so optimistic going into the second half of the year.
The key financial results of the second quarter were as follows.
Sales were up a robust 5%. In euro terms, sales were even up an impressive 15%, an increase by more than EUR500 million to EUR3.9 billion.
We recorded another quarter with strong growth in adidas and Reebok as revenues increased 8% and 6% respectively.
The gross margin decreased 0.9 percentage points, to 48.3%. While high input costs and negative currency effects also played a role here, more than half of the decline is due to lower product margins at TaylorMade-adidas Golf.
Operating margin was down 40 basis points to 6.0% a direct consequence of the gross margin decline.
The net income from continuing operations improved 2% to EUR146 million.
As always, while Robin will discuss the financials in more detail in a few minutes, let me have a closer look at our brand performance during the second quarter and first half respectively.
Overall, there is no doubt that the adidas and the Reebok brands had an excellent second quarter. The strong Q2 performance is even more impressive, considering the difficult comparison the adidas brand faced, due to the non-recurrence of the very strong FIFA 2014 World Cup-related revenues, generated in the second quarter of last year.
In this regard, of particular note is the double-digit sales increase we witnessed in Western Europe and Greater China, as these two markets had already seen double digit growth rate in the prior-year period.
And let me remind you, ladies and gentlemen, that Western Europe was a key improvement area for us 18 months ago. The second-quarter results now clearly show that our efforts in our home territory are paying off.
One word on China, as there was a lot of noise about the future economic development of this huge market place recently. For our sector, we clearly don't see an end of the China growth story. Instead, more and more Chinese consumers are attracted by sport and the sporting lifestyle, and they are willing to spend on strong international brands, such as ours.
Talking about strong growth rates. The performance in Latin America during the second quarter has also exceeded our initial expectations. Here as well, you have to take into account that the 2014 FIFA World Cup took place in Brazil; right in the heart of this region.
In addition, we should not forget that Latin America is currently facing some bigger macroeconomic uncertainties.
Turning to the categories, revenues in the running category increased 2% during the second quarter and 7% year to date, driven by double-digit sales growth in apparel and mid-single digit growth increases in footwear.
The [Red Leather] was strongly supported by the successful launch of the Ultra Boost, the greatest running shoe of all time. Feedback we are receiving from both our consumers and our key retail partners is overwhelming.
In particular the all-white version of the Ultra Boost was named as the best all-white sneaker of 2015 and several sneaker blogs and sold out in just three days.
Overall we sold more than 5 million pairs of Boost in the running category during the first six months, and there is no doubt we remain fully on track to sell 11 million Boost running shoes by the end of 2015.
We are very satisfied with the development of our Boost franchise, and I definitely do believe that the best is yet to come.
In the football category, sales declined in both the second quarter and in the first half, mainly as a result of tough comparisons from the in surge in World Cup-related apparel sales last year.
On the football footwear side, however, sales during the second quarter increased a strong 17%, supported by the highly anticipated and very successful introduction of our new football franchises Ace and X, which are featured in the new BETHEDIFFERENCE football reset campaign.
We unveiled Ace and X during the UEFA Champions League final in Berlin, where we have also opened the Berlin Base, our first urban football center.
The Base is set to become the next must-visit spot for our football consumers in Germany. We will utilize the venue as an open-source location for upcoming football players to get involved in projects such as the testing and development of unreleased products.
In training sales increased 6% and 7% for the second quarter and the first half, respectively driven by a high single-digit growth in the apparel business.
In particular, our women's apparel business recorded solid growth during the first half of 2015 with our Stella sport collection resonating extremely well with female consumers and retail partners alike.
At adidas Originals, the strong performance from the first quarter even accelerated in Q2, with revenues increasing 37% during the three-month period. During the first six months, revenues were up 33% versus the prior-year period.
The adidas Superstar in general, and the Supercolor collections by Pharrell Williams in particular, are resonating tremendously with the lifestyle consumer. Consequently, sell-through rates spiked across all channels across the globe, creating halo effects far beyond the product itself.
During the second quarter, we also launched the Yeezy 350 Boost, our second shoe developed in collaboration with Kanye West. The hype around this launch exceeded even our own expectations, as sneakerheads around the globe formed long queues in front of our stores to be amongst the lucky ones to buy a pair of this outstanding franchise. The shoe, which literally sold out in minutes, went for as much as $10,000 on eBay.
And let's not forget the huge successes around the other Originals footwear franchises, such as the ZX Flux, the Stan Smith, or the Tubular, which continue to do extremely well. adidas Originals is a great success story that is set to continue.
At the same time, you can rest assured that we will be very careful and make sure we limit availability of the product to prevent the sub-brand from overheating.
At adidas Neo, the momentum we are seeing is just as strong as at the adidas Originals, with sales growth also accelerating compared to the first quarter. Revenues at adidas Neo grew 43% during the second quarter, and 29% in the first half, driven by strong double-digit sales growth in most markets.
Revenues in both footwear and apparel increased at strong double-digit rates supported by the Selena Gomez summer collection, which again delivered huge engagement levels and activation amongst young fashion consumers.
Moving over to Reebok, where the positive trends from the previous quarters continued throughout the second quarter with revenue up 6% for the quarter, and 8% for the first six months. As mentioned before, the second quarter represents the ninth consecutive quarter of growth, a clear testimony that the brand is resonating well with the fit generation.
With the exception of North America and Russia/CIS, sales increased strongly in all markets, especially in emerging markets, such as Greater China, Latin America, and MEAA, where sales grew at strong double-digit rates each.
In addition, from a category perspective, Reebok's growth is directly linked to key fitness categories with strong growth in important training, running and studio categories.
Classics also continues to show robust momentum, supported by the launch of Ventilator Day Glo campaign featuring US hip-hop superstar Kendrick Lamar.
And with that, ladies and gentlemen, let me now hand you over to Robin to take a closer look at the individual market performance, and walk you through the financials.
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Robin Stalker, adidas AG - Group CFO [4]
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Great. Thanks very much, Herbert; and good afternoon from my side, ladies and gentlemen.
As Herbert's just mentioned, the adidas and Reebok brands continue to enjoy a strong momentum across the globe. My comments today will, therefore, mainly focus on how our business developed from a market segment perspective and how this, ultimately, impacted our financial results throughout the various P&L items.
Let's turn to Western Europe first where both adidas and Reebok were able to maintain the strong momentum from the beginning of the year.
Despite challenging World Cup comparisons, sales grew by 12% in the second quarter on top of a 14% increase in Q2 last year. At adidas, strong double-digit increases at Originals and Neo were able to more than offset the non-recurrence of prior-year World Cup-related revenues, increasing -- leading to an increase of 12%.
At Reebok, where sales grew 9%, the increase was driven by growth in nearly all categories with Reebok's core categories, training and studio, being particularly strong during the second quarter, growing at double-digit rates each.
From a market perspective, the main contributors to the sales increase were the UK, France, Italy and Spain, with revenues growing at double-digit rates each.
The strong performance during the second quarter also lifted revenues for the first half, up 12% versus the prior-year period with double-digit increases at both adidas and Reebok.
Sales in North America remained stable during the second quarter as sales growth at adidas was offset by declines at Reebok. adidas revenues increased 2%, driven by double-digit growth at Originals, and significant increases at Neo, where revenues more than doubled. Excluding the World Cup effect in 2014, adidas sales grew at a mid-single-digit rate in the second quarter.
Reebok revenues were down 9% during the second quarter as high single-digit growth in the training category was more than offset by sales declines in the walking category and in Classics.
In addition, Reebok continues to be negatively impacted by the process of streamlining the brand's own retail activities in North America.
Despite further increases in the segment's sales and marketing working budget, in order to gain relevance in the marketplace and increase our visibility, we were able to achieve our goal of leading North America back into profitable territory.
This development was supported by 0.4 percentage points increase in gross margin, as we were able to offset a less-favorable product mix, once again caused by the impact from last year's World Cup, by a more favorable pricing mix.
Moving over to Greater China where trends in the sporting goods industry, and for the adidas and Reebok brands in particular, remain very healthy; and our second-quarter performance is nothing but proof of that.
Sales in the second quarter are up 19%, as a result of a 19% increase at adidas, and a 57% growth at Reebok. Growth at adidas was mainly due to double-digit increases in the training and running categories, as well as at Originals and Neo. The sales increase at Reebok was driven by significant growth in Classics where revenues more than doubled.
As a consequence, revenues in Greater China were up a strong 20% during the first half of 2015, compared to the prior-year period, with double-digit increases at both adidas and Reebok.
In Russia/CIS, in line with our expectations, the second-quarter performance was significantly impacted by the low levels of consumer confidence and consumer spending, putting pressure on the market's overall economic activity.
As a result, revenues in the second quarter decreased 14% with sales declines at both adidas and Reebok. While sales at adidas decreased 16%, due to declines in most categories, revenues at Reebok were down 8%, mainly due to double-digit sales decreases in the running and walking categories, as well as in Classics.
Top-line development during the second quarter was also negatively impacted by the further rationalization of the segment's own retail store network, with 64 net store closures during the second quarter. Since the start of the year, we have closed a total of 92 stores net in the market, representing close to 10% of the Russia/CIS total store count.
This, in turn, has helped us bring operating expenses down by 27% during the second quarter as we remain focused on further reducing operating overhead costs, predominantly in the form of sales expenditure and lease payments.
Going in to the second half of the year, there is no doubt that we will continue to do what it takes to safeguard this segment's profitability in 2015. The agile nature of our business model gives us exactly the operational flexibility we need to have in order to win this challenge.
Revenues in Latin America improved a strong 9% in the second quarter, on top of a 33% increase in the prior-year period, as revenues at adidas were up 7%, and Reebok sales increased 22%.
Growth at adidas was supported by double-digit sales increases in the training category at adidas Originals and at adidas Neo, as well as a high single-digit improvement in running.
Sales increases at Reebok were driven by double-digit sales growth in the running, training, and walking categories, as well as in Classics. From a market perspective, the segment's top-line development was driven by double-digit sales growth in Argentina, Chile and Peru.
As a result of the strong second-quarter performance, revenues in Latin America for the first six months grew 8%, with brand adidas up 6% and Reebok up 19% respectively.
In Japan, sales in the second quarter decreased 6%, while revenues at Reebok grew 27% during the quarter, driven by significant growth in the running category as well as in Classics.
Sales at adidas were down 8%. The sales decline at adidas was mainly due to double-digit decreases in the training and football categories, with the latter once again reflecting the non-recurrence of World Cup-related revenues.
Excluding the positive World Cup effects in the prior-year period, adidas brand revenues in Japan grew at a low single-digit rate during the second quarter.
Looking at the first-half performance, revenues in Japan were down 1% as growth of Reebok was more than offset by the sales declines at adidas.
In MEAA we continue to see robust momentum with sales up 16% in the second quarter, and 12% during the first half as both adidas and Reebok grew at double-digit rates.
Whilst sales at adidas increased 14% in Q2, mainly as a result of double-digit sales increases in the training and running categories, as well as at adidas Originals and adidas NEO.
Reebok revenues grew 23% driven by double-digit sales increases in the training and running categories.
From a market perspective, the main contributors to the segment sales increases were the United Arab Emirates, South Korea, Turkey and India.
To finish on the segments, let me spend a minute on other businesses.
Herbert has talked a lot about the current challenges TaylorMade-adidas Golf is facing, and it should not come as a surprise those challenges have also had a meaningful impact on the overall performance of other businesses in both the second quarter as well as the first half.
Revenues of other businesses were down 14% in the second quarter, or 8% in the first half, as double-digit sales growth at Reebok-CCM Hockey and other centrally-managed businesses was more than offset by the significant decline at TaylorMade-adidas Golf.
Gross margin of other businesses decreased 5.9 percentage points in the second quarter to 30.8%, or 3.2 percentage points in the first half to 34.2%, due to significantly lower product margins at TaylorMade-adidas Golf.
Consequently, other businesses recorded an operating loss of EUR40 million during the second quarter, compared to an operating profit of EUR2 million in the prior-year period.
As a result the operating margin for other businesses decreased from 0.6% in the previous year to a negative 10.9% in the second quarter of 2015.
For the first half, other businesses recorded a negative operating margin of 6.1%, compared to a negative operating margin of 2.7% in the first six months of last year.
Turning now to our Group performance, and starting with the P&L.
Our Group gross margin decreased 90 basis points in the second quarter to 48.3%, or 40 basis points in the first six months to 48.8%.
The gross margin development during the second quarter was primarily impacted by lower product margins at TaylorMade-adidas Golf, caused by ongoing promotional activity in the marketplace.
In addition the devaluation of several emerging market currencies year over year, and particularly the Russian ruble, as well as the unfavorable development of input costs, as a result of the increase in labor costs weighed on the Group's gross margin, more than offsetting the positive effects from a more-favorable pricing and channel mix.
Moving over to operating expenses which increased 13% in the second quarter, or 14% in the first six months, partly due to negative currency effects. The increase in operating expenses mainly reflects higher sales and marketing [working] budget investments which grew 9% and 17% for the second quarter, and the first half respectively.
On that note, let me make it very clear that we remain fully committed to further invest in our brand, targeting even stronger brand visibility and desirability towards our consumers.
As a percentage of sales, other operating expenses were down 0.6 percentage points, and 0.7 percentage points respectively.
Sales and marketing working budget investments as a percentage of sales decreased 70 basis points to 14.0% for the second quarter, and were up 10 basis points to 13.8% for the first half.
Reflecting the Group's top-line expansion and the operating leverage we achieved, the Group's operating profit increased 14% to EUR596 million in the first six months of 2015. This translates into an operating margin of 7.5%, down 20 basis points versus the prior year.
Turning to the non-operating items in the P&L, in the first half of 2015 net financial expenses decreased to EUR9 million, versus EUR28 million in the prior year. This development was due to positive exchange rate variances, as well as the non-recurrence of negative exchange effects from the prior year.
The first-half tax rate increased 290 basis points to 31.8%, mainly due to the non-recognition of deferred tax assets related to TaylorMade-adidas Golf, for which the realization of the related tax benefit is not considered probable.
Net income from continuing operations excluding goodwill impairment losses increased 14% to EUR401 million in the first half of 2015. This translates into basic underlying diluted earnings per share of EUR1.96, up 17% compared to the prior year.
Looking specifically for a minute at the retail part of our business, revenue grew 8% in the second quarter, and 11% for the first half. The strong performance during the first six months was mainly due to double-digit growth at adidas.
Reebok revenues continue to -- grew at a low single-digit rate.
Comparable store sales were down 2% during the second quarter, due to the difficult trading environment in Russia/CIS given the overall weakness in traffic and consumer sentiment.
For the first half comparable store sales were up 1% with growth across all regions except Russia/CIS.
By brand adidas comp store sales grew 2%, while Reebok comp store sales were down 6%.
Our e-commerce business continues to do extremely well, with sales up 56% in the second quarter and also for the first half.
Retail gross margin increased to -- a strong 2.9 percentage points to 63.4% for the second quarter and 1.5 percentage points to 61.8% in the first six months.
While the devaluation of the Russian ruble negatively impacted these results, the positive effects from a more-favorable product and pricing mix provided significant tailwinds to the overall retail gross margin development.
As a result, the operating margin for our own retail operations was up 450 basis points to 23.3% during the second quarter, and up 370 basis points to 20.0% for the first half, benefiting from the increase in gross margins and leveraging lower operating expenses as a percentage of sales.
In terms of our store development, at the end of the second quarter we operated 2,846 stores, a net decrease of 67 stores versus 2, 913 at the end of 2014. Of the total number of stores, 1,582 were adidas and 422 were Reebok branded. In addition we operated 842 factory outlets.
During the first half we opened 112 new stores and closed 179 stores, while 39 stores were remodeled.
Looking at the remainder of the year we will continue to carefully manage our store base. We currently anticipate a net decrease of our store base of around 40 adidas and Reebok stores in 2015.
While we plan to open around 270 new stores, depending on the availability of desired locations, approximately 310 stores will be closed over the course of the year, primarily in Russia/CIS.
Around 100 stores will be remodeled.
Finally, let me talk about our balance sheet and cash flow development.
At quarter end operating working capital increased 8%, as both inventories and account receivable on a currency-neutral basis, reflecting our expectations for growth in the coming quarters.
As a percentage of sales however, operating working capital decreased by 0.4 percentage points to 21.6%, as operating working capital grew at a slower pace than the Group's top line.
Now, as you know, on March 5 we announced the commencement of the second tranche of our share buyback program.
Within the second tranche until June 15, 2015 we bought back 4,129,627 shares, corresponding to 1.97% of the Company's nominal capital. The average purchase price per share for the second tranche was EUR72.65.
The total number of shares bought back so far within the framework of the share buyback program amounts to 9,018,769 shares, this corresponds to 4.31% of the Company's nominal capital.
Now, as a result of the utilization of cash for the share buyback program, we ended the quarter with net borrowings of EUR957 million compared to net borrowings of EUR454 million a year ago, an increase obviously of EUR503 million year over year.
Consequently, the ratio of net borrowings to EBITDA increased to 0.6 versus 0.4 in 2014.
So ladies and gentlemen, to wrap up; based on our robust financial performance during the first half of 2015, and considering the various initiatives that are upcoming in the second half of 2015, we are optimistic about our outlook for the remainder of the year, and we reconfirm our full-year guidance for 2015.
We continue to expect sales to increase at a mid-single-digit rate on a currency-neutral basis in 2015.
The Group's top-line development will be driven by the ongoing robust momentum at both adidas and Reebok.
In particular in markets, such as Western Europe, Greater China, and MEAA where revenues are now expected to grow at a double-digit rate each.
This, as well as the further expansion and improvement of the Group's controlled space initiatives, will more than offset the non-recurrence of sales related to the 2014 FIFA World Cup, as well as the continued weakness at TaylorMade-adidas Golf, where currency-neutral revenues are now forecast to decrease versus the prior-year level.
We continue to forecast gross margin to be at a level between 47.5% and 48.5%, as we expect improvements during the second half of the year as a result of more favorable pricing and product mix, at both adidas and Reebok, together with a more-favorable channel mix.
Last but certainly not least, we continue to anticipate net income from continuing operations to increase at a rate of 7% to 10%, thus outpacing the Group's expected top-line development.
With this in mind, let me hand back to Herbert, who will now give you more details on what to expect from the next quarters.
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Herbert Hainer, adidas AG - Group CEO [5]
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Thanks very much, Robin.
Ladies and gentlemen, with the strong momentum at adidas and Reebok in mind, let me now share with you some of the initiatives, which we are planning for the remainder of the year.
There is no question at all that our product and marketing pipeline is just as loaded as it was during the first six months. I have already highlighted the introduction of our two new football franchises: Ace and X. When these new boots hit the retail at the beginning of the third quarter, the reaction from both consumers and retailers is simply outstanding.
As already communicated during our first IR tutorial workshop, we are seeing a double-digit increase in demand in our football footwear business, based on exactly those franchises. This is a clear proof point that the game of football is changing, and that we are driving this change with the adidas football revolution.
This proves once again the adidas brand is and will always be ahead of the game in football.
And while I am absolutely confident we will see Ace and X perform well on the pitch and bring our visibility to new heights, I am equally excited to see Manchester United and Juventus Turin finally playing in three stripes, starting with the 2015/2016 football season.
Last Saturday we reunited with Manchester United, one of the most popular and successful football teams in the world, and unveiled their new home jersey. The initial response has really blown us away as it has exceeded all expectations in both the club's and our own brand channels.
The Old Trafford megastore saw a record demand for a non-match day, almost 50% up on the previous record. The Man U e-com channels formed United Direct, so equally high demand, 4 times up on the previous record kit launch.
The adidas brand is experiencing unprecedented demand in both our own stores and e-com channels and our wholesale partners experienced the biggest-ever launch day on Saturday.
This success confirms again that Man United is not just a football club. With its more than 650 million fans globally, it is, without doubt, one of the world's most supported sports symbols. This special club has not only a rich history, but also a reputation for success and the unexpected.
We are immensely proud to be part of that history and to be returning once again as a partner.
To finish on football, earlier this morning we introduced, Create Your Own Game, to support our newly launched products and partnerships featuring some of the world's most-admired football players, such as Lionel Messi, James Rodriguez, Gareth Bale and Thomas Mueller.
In this third chapter of the adidas Sport 15 campaign, which underlines the brands, leadership and passion for sport, with a clear focus on football, we'll see a second part of the story being told in a separate spot that launches at the end of this month.
I am absolutely convinced that this campaign is going to resonate just as well with the football consumer as once before. It will help us to further elevate the brand.
And while I am not able to share any details with you yet, just as a reminder, we are just 10 months away from the UEFA Euro 2016. So be prepared to see some major product launches towards the end of this year.
As you know, North America is and remains the focus area for us, and our firm goal is to win the US consumer by increasing credibility in the US sports. In this regard winning the locker rooms is crucial for our future success.
Therefore, I am happy that just recently we integrated our primary technology into American football, as we have launched the new official uniforms with several universities, amongst others, Arizona State, Nebraska, Miami and UCLA.
This is part of our overall effort to lift our relevance towards the US consumer, which is already paying off. Over the last couple of months, we have increased our market share in American football by 4 percentage points.
American football is just one example. We have also brought back the adidas brand to other US sports. In baseball, we recently launched a complete new bat featuring the rocket ball technology, which has already revolutionized performance in golf clubs and hockey sticks. The bat, which delivers a perfect mix of power, speed and accuracy, has created quite a buzz for us since its launch in [June].
Further adding to our visibility in baseball is our improved roster of players. adidas athletes, Kris Bryant, Dellin Betances, Mike Moustakas and Justin Upton were named for this year's MLB All-Star Game.
In particular, Kris Bryant, who took part in the MLB All-Star Game after having started his professional career just three months ago, is becoming the rock star in baseball. At the age of 23, Bryant ties Chicago Cubs legend, Ron Santo as the youngest all-star in the franchise history.
Currently, Kris ranks number two in the MLB in overall jersey sales and number one from fanatics.com in retail sales for the month of July.
Last week, adidas and the Pac-12 Conference announced a three-year partnership that makes adidas the official athletic apparel and footwear partner of the conference, and all Pac-12 championship events.
The Pac-12, which consists of 12 colleges, including Arizona State and UCLA, both championship events in American football, basketball, cross country, swimming and diving, wrestling, golf and other important sport activities.
This new partnership continues to highlight our commitment to the US college sport and our focus on aligning with schools teams and students athletes.
Pac-12's rich athletic and academic tradition and consistent success on and off the field makes them a perfect fit for the adidas family, and we look forward to our brand appearing on field and on court, starting this season.
Now, allow me to switch to our game changing Boost technology. Since its introduction back in 2013, the Boost technology has redefined the footwear industry. We started in running, and the success we are seeing is just as visible as the 53 major marathon wins with the adidas Boost.
We have also integrated this great technology into other key categories, such as basketball, training, baseball, golf and tennis.
To bring this great innovation even closer to our consumers, we will start creating interactive mobile experiences at premier US running events by introducing the Boost experience by adidas. It is an interactive showroom celebrating adidas products and technologies, with an objective to build awareness through education for the Boost technology.
Taking runners beyond the traditional consumer journey the store experience offers, this space provides several unique touch points, including an interactive kinetic wall with Boost capsules that move in response to foot traffic, or a try-on area where consumers can try on the latest in the Boost footwear, such as the Ultra Boost.
As you know, controlling our own destiny is absolutely crucial for our point-of-sale activation and we are fully committed to further increasing consumer experience across the market.
Therefore, our team in China has just opened the first sportswear collective store, located in Chengdu. This newly opened 700 square meters of retail space is designed to bring consumers the most up-to-date sports trends that can easily be turned into everyday lifestyle wear.
Following our goal to first develop sports in China and encourage a passion for an active lifestyle, we are bringing the latest product innovations closer to sports lifestyle [faster and bending] from the court, the pitch and field to the street campus and the mall.
Coming to lifestyle, where we are enjoying fantastic momentum with adidas Originals driven by great product introductions, such as the customized [athletics], like Star Wars collection; or the second launch of our collaboration with Kanye West, the Yeezy Boost 350.
Our biggest footwear franchise at Originals in 2015, however, can only be the iconic Superstar (inaudible) various creative drops, such as the Supercolor collection by Pharrell Williams.
Building on to the success of the Supercolor, where we have sold out each and every one of the 50 different color ways, we recently introduced the next exciting collaboration with Pharrell, the Super Shell.
With this special product line, Pharrell has collaborated with creatives from around the world to bring a new chapter of the Superstar to life by changing the styles of the front part of the Superstar with various graphics or pictures.
At Reebok we have just launched the Reebok Crossfit Nano 5.0, a training shoe that features Kevlar material with full protection and durability. Best platform to showcase and celebrate this and all of our other new Crossfit product is no doubt the official Reebok Crossfit Games, as we are outfitting every athlete with apparel, footwear and accessories during the course of the finals.
The 2015 Reebok Crossfit Games marks the fifth year of our partnership and evolution with Crossfit. Year after year we are getting more inspired and excited by the limitless potential that Crossfit offers and we look forward to continuing to evolve our product to service the ever-growing Crossfit community.
Another partnership at Reebok which I'm equally excited about is the UFC. Recently, UFC and Reebok unveiled the first ever UFC fight kit, which will be worn by every athlete that steps into the Octagon.
UFC athletes represent some of the toughest and most-dedicated humans in the world and Reebok is proud to develop the first-ever dedicated kit to support and enable their greatness.
This launch is truly a landmark moment for Reebok's partnership with the UFC, as well as the sport as a whole.
Turning back to TaylorMade-adidas Golf, as I have mentioned before, we are carefully and diligently reviewing the current situation with the TaylorMade-adidas Golf and need to find answers to some very important questions over the next couple of weeks.
At the same time, however, one thing is already clear: TaylorMade-adidas Golf has always been at the forefront of the game from an innovation point of view.
While the most recent product introductions might have lacked major innovations in the eye of the consumer, I can promise you that we have one of the most-promising innovations in the last few years in our pipeline, which we will introduce to the market in a very meaningful way in the course of the third quarter. This product will definitely make a difference.
Before I come to the end let me quickly refer back to yesterday's announcement with regard to the acquisition of Runtastic.
In line with our strategic business plan, creating the new, this acquisition is a clear reinforcement of our commitment to inspire and enable athletes of all levels to harness the power of sport in their lives.
As you know, at the adidas Group we aim to create the future of sport and, as such, we are absolutely convinced that digital technologies provide new capabilities and insights to help athletes take control of their sporting destiny, whether improving their performance, sharing their experiences or creating their own great social moments of sport.
The acquisition, which closed yesterday at an enterprise value of EUR220 million, will add considerable value on our journey to deliver new world-class digital sports experiences.
In addition, it offers the opportunity to grow a highly engaged athlete user base and leverage the power of our broad product portfolio.
Let me just share some facts and details around Runtastic with you. Runtastic is a leading health and fitness app company. Founded in 2009 and headquartered in Austria, Runtastic has shown tremendous growth in a short period of time.
The company has already made 70 million registered users and more than 140 million app downloads worldwide, and it's growing at a pace of over 140,000 new downloads each day.
As such, Runtastic has a strong and industry-leading market position, offering 20 apps across endurance, health and fitness activities and available in 18 languages, Runtastic has extensive global reach.
To accelerate growth the company has been aggressive in rolling out customized language versions, which is proving to be a major competitive and first-mover advantage. In the US alone Runtastic is already counting close to 10 million registered users.
So why did we decide to further strengthen our digital activities with this acquisition? The adidas brand was the first in the industry to comprehensively bring data analytics to the athlete.
With the case of continuous investments in sports science, sensor technology, wearables and digital communication platforms, there is no other sports company which has done more to innovate sports and change the game through technology.
adidas' variety of digitally enabled products such as balls; wrist devices; apparel; shoes; web and phone apps goes unmatched. No other sports company has the diversity of sports and fitness activity coverage and understanding of data related to athletes' physiology and motion in play.
On the other side, as one of only two global leaders in our industry, we are also at the forefront when it comes to digital brand commerce. We create the most exciting products and stories. We have a wide CRM base, as well as leading content creation and activation platforms, such as our global news room.
So simply speaking, we are listening to our athletes and consumers, and we have built the skills and ability to understand their needs.
And now, with the cutting-edge digital experience of Runtastic, we are delivering best-in-class digital sports experience to our consumers.
Runtastic's fast pace and high energy will speed up the adidas Group's ability to reach both partners, combined vision to make sport inspiring and part of everyone's life, creating unexpected sport experiences that will resonate and clearly stand out in a crowded and constantly changing landscape.
I'm very excited to welcome Runtastic and I'm absolutely convinced that the company, its management and all its employees will contribute greatly to out multi-faceted vision for a digitally-powered future of sport.
With that, ladies and gentlemen, let me thank you for your attention. Now, Robin and I are happy to take your questions.
==============================
Questions and Answers
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Operator [1]
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(Operator Instructions). Antoine Belge, HSBC.
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Antoine Belge, HSBC - Analyst [2]
------------------------------
Three questions if I may. First of all, I think you mentioned that the -- what's happening at TaylorMade won't affect the overall guidance. Can you be a bit more precise in terms of what you expect in terms of operating losses for the golf business in 2015? I think last year the loss was in the sort of EUR100 million. Do you expect a wider loss this year?
Second question, I think you mentioned the UEFA, the Euro 2016 around the corner and also the Olympics. Is it possible to tell us already if you expect Q4 this year to be already impacted a bit like in the last world cup we had a strong Q4, a strong Q2, less in Q1; so if you could flag any sort of timing impact that we should be aware of?
And also with regards to the cost of the Brazil Olympics do you expect them to be higher than the one in London? I think Swatch mentioned that they were expecting a bit of a less expensive spending for the next Olympics.
And finally, the dollar hasn't really moved in the right direction, since we last spoke. So do you -- looking at the current rates, do you think that the gross margin in 2016, can be at least flat year-on-year with the current level of the dollar? Thank you.
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Herbert Hainer, adidas AG - Group CEO [3]
------------------------------
Okay, Antoine, let me start with the first one, TMaG. As I said during my speech already there are several factors, which have influenced our development.
First and foremost, I think that our two introductions, the AeroBurner and the R15 are not selling through as well as we have expected. They are selling through okay, but not to the level which we have expected.
Then there is definitely still the market challenged. Even rounds are played not going down, which is good; but units sold are still down in the first six months.
I also have to say that our competitors have become better over the last 12 to 24 months, and they are catching up to the advantage which we have.
Yes, we will make a loss in 2015, but definitely not wider as we have had in 2014.
Second question, Euro 2016. Yes, absolutely, you can expect already in Q4 that we introduce the new jerseys of our teams, which are contributing in -- or in France, I have to say.
But we're also bringing in new football collections. As you know, we are the sponsor of the Euro 2016, so we're bringing in the new match ball, etc., etc. This will start already in Q4.
Third question, Olympics in Rio next year. No, our costs by far not as high, as this time, we are not sponsoring. You might remember that, in 2012, we have been sponsor of LOCOG, and, therefore, have spent already upfront a lot of money. This time, we are not the sponsor of the Rio Olympic Games.
Of course, we are sponsoring our national federation, but not the games by itself.
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Robin Stalker, adidas AG - Group CFO [4]
------------------------------
And for the last question, in terms of the gross margin development for 2016. It's too early for us to give any specific guidance on this at the moment, we're not fully hedged yet. We'll do that as soon as we can, obviously.
But it's clear that, with the development of the currencies, there will be a pressure on the margin in terms of the hedging rate alone. But if you look at periods where we have had this development in the past, also, we have been probably the best in our industry at being able to mitigate this.
We'll continue to do whatever we can to mitigate this as best we can. Even if you look at the half-year results we've just presented today, we've had over 2% or 2.5% of negative headwinds, in terms of FOB and pricing pressure. But we've been able to compensate that, at least for the largest part.
I think it's important to note, however, that as we manage our expectations for 2016 and our improving profitability goal that we have, we do not intend to cut back on our investment in marketing, or anything like that. We will manage our gross margin as best we can. We'll give you guidance on the details of that, closer to the end of this year.
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Antoine Belge, HSBC - Analyst [5]
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Thank you. Just a follow up on that subject. Which are the areas of your business where you still see potential for price increases to mitigate the impact? And where are the areas where you think it's been more difficult than in the past to increase prices?
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Robin Stalker, adidas AG - Group CFO [6]
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There are obviously differences in particular markets, and there are obviously differences in some of the basic products we have. But quite genuinely, we believe that we have opportunities across the board with price increases.
We'll have to be obviously sensitive to the market, and it won't be one particular rate for everybody obviously. But we are very confident there is considerable opportunity to continue to mitigate these pricing pressures with price increases.
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Antoine Belge, HSBC - Analyst [7]
------------------------------
Thank you very much.
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Operator [8]
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Adrian Rott, Deutsche Bank.
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Adrian Rott, Deutsche Bank - Analyst [9]
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Number one, please, on West Europe and LatAm. I guess you're quite pleased with the performance, and both regions certainly ahead of my expectations.
But just be good to elaborate maybe a bit further on what's behind the strong growth here, specifically on Western Europe. Has this been -- mainly been driven by new product and volumes, or is it related to pricing and general initiatives? That would be great.
And then also, for LatAm, you mentioned strong growth in retail. Would also be interesting to hear the -- about the contribution of pricing, because, if I remember correctly, you've started to raise prices in some LatAm countries in Q1 already, whether it has been similar in Q2?
And then, secondly, on gross margins, again. You stated that half of the decline is basically due to TaylorMade, so still some declines at adidas and Reebok as well. You mentioned labor costs and FX. Could you just split up again, a little bit further, what's been happening in terms of mix pricing, and whether mid-season sales have played around here -- a role here as well?
And then, lastly, quickly, just on own retail. New guidance for net store closures is only 40 for the full year, rather than 60. Is that mainly driving the upgrade in your full-year guidance for retail growth? Thanks very much.
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Herbert Hainer, adidas AG - Group CEO [10]
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So Adrian, let me start with the first one, Western Europe. As I have said in my comments, Western Europe was definitely a key area for us when we spoke 12/18 months ago. We are very pleased with our development, especially when you think that also, compared with last year where we had the German DFB jersey, where we sold a huge amount.
It is broad based. I told you that football is doing very well. It's training; it's, of course, Originals; but really broad based. When I look at the future, which means the next six months, then I'm even as excited as we have been for the first six months.
We are, more or less, growing in every country in Western Europe. The biggest challenge, as I have just said, is in Germany, because of the big comparisons. But even here, we are doing quite well. But in France, England, Spain, Italy, this is quite exciting.
It's coming from new product introductions; better distribution channel; execution; stronger marketing; and, of course, also price increases, where we do believe we have price elasticity, because we are bringing new better products to the market.
The same is similar to Latin America. I must say, this is even more surprising, because when you imagine that, last year, we had Argentina; we had Mexico; we had Colombia; all our World Cup participants, where we had strong sales.
And I think this is the 10th or 12th year in a row where we grow a high single or double-digit. In Q2, we grew 34% in last year. And now, again, we are growing at a high mid-single digit. This is quite an exciting time. Once again, although this is a mixture of the initiatives, which I have just spoken about.
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Robin Stalker, adidas AG - Group CFO [11]
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Adrian, for your second question, addressing gross margin, the development, yes, we are down 90 basis points for the quarter. That's -- 50 basis points is specifically due to the poorer margins at TaylorMade.
On a gross basis, we've had FOB increases of around about 1.2 percentage points. We've had also price increases, particularly we think with the FX impacts through Russia, and what have you, also around 1.4%. But we've been able to compensate the vast majority of that with price increases, and also with our pricing mix. The pricing mix has been favorable.
So of that 40 basis points that's not TaylorMade, net-net, 50% of that's probably FOBs and 50% of it's probably pricing.
In terms of your third question, retail. No, it is definitely not correct that our confidence and increased guidance for retail comes from the fact that we're only closing a net 40 stores now, instead of 60.
The major reasons for this is the continued positive development of e-commerce. But also, as you've seen from our profitability development in retail, retail is doing well for us, and it's not because of the net closures.
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Adrian Rott, Deutsche Bank - Analyst [12]
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All right. Thanks very much, gentlemen.
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Robin Stalker, adidas AG - Group CFO [13]
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You're welcome.
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Operator [14]
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Chiara Battistini, JPMorgan.
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Chiara Battistini, JPMorgan - Analyst [15]
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The first question on golf. And your statement in this morning's release, that you're exploring options, especially for the smaller brands. If you could elaborate further. And especially on TaylorMade, if the opportunity of a good disposal came up, if you would consider that?
The second question on Russia. Firstly, if you could give us like for like in Russia for quarter 2. And on the gross margin, I've noticed that gross margin in Russia was down just 100 basis points in quarter 2, which was much better than what I was expecting. So if you could comment on what measures you took to protect the gross margin so well.
And finally, on marketing as percentage of sales. I see that the decline in marketing as percentage of sales in quarter 2, comes mainly from the adidas brand. So I was wondering whether this is just operating leverage coming through, or rather your decision to start cutting marketing as percentage of sales. And then, how are you thinking about that, thinking about full-year 2016, please? Thank you.
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Herbert Hainer, adidas AG - Group CEO [16]
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Hi, Chiara. Let me answer your first question on TaylorMade-adidas Golf. Yes, I have said, we definitely will explore all future options in the golf business.
Obviously, we are first looking at the non-core assets of Adams and Ashworth. But as I said, we are looking at all options. And this could also include that we have to take hard cuts, and this could be that we also talk about a disposal of TaylorMade. But we have not taken yet a decision, because we still have to do some more analysis.
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Robin Stalker, adidas AG - Group CFO [17]
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And in terms of your second question, Chiara, we have what is the like for like for Russia. Russia like for like is down 15%.
You said the gross margin hadn't deteriorated as much as you had anticipated, yes, that's great. But it's also, unfortunately, due to some of the hedging -- or sorry, not hedging, some of the currency effect is also at a Group level.
But in terms of the Russian business, you might recall that we've quoted Martin, and he said this also when he was here in March, that they've been very successful in putting up prices, which has helped mitigate some of that.
And your third question, I'm just trying to remember. You suggest that marketing was up in the second quarter. I don't believe that's --
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Chiara Battistini, JPMorgan - Analyst [18]
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No, down, down at percentage of sales.
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Robin Stalker, adidas AG - Group CFO [19]
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Down, but I think it is actually up. We have increased our marketing working budget 9%, I think, in the quarter year over year.
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Chiara Battistini, JPMorgan - Analyst [20]
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By percentage of sales it's down, no?
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Robin Stalker, adidas AG - Group CFO [21]
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But it's a small percentage on a percentage of sales and, obviously, we're getting leverage out of this and that's what we've guided to as well for the full year.
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Chiara Battistini, JPMorgan - Analyst [22]
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Perfect. Then maybe if I can just follow up on the like for like for Russia, minus 15%, if that's for quarter 2, not for H1?
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Robin Stalker, adidas AG - Group CFO [23]
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Yes, that's correct, yes.
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Chiara Battistini, JPMorgan - Analyst [24]
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And would you be able to give us the mix between pricing and volumes, or?
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Robin Stalker, adidas AG - Group CFO [25]
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No, I can't give you that; I don't have that. But they've done what they've been able to do in the market with pricing but, obviously, we can't compensate for everything with pricing. There's, obviously, a volume impact as well.
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Chiara Battistini, JPMorgan - Analyst [26]
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That's perfect, thank you very much.
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Robin Stalker, adidas AG - Group CFO [27]
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Welcome.
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Operator [28]
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Julian Easthope, Barclays.
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Julian Easthope, Barclays - Analyst [29]
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I think a couple of my questions have been asked already. But I was just going to come back to the comments in the press the other day that you're looking to sponsor James Harden in the basketball category.
As I see it, Nike actually reported last year that they had about $3.7 billion of income from basketball and you're clearly a tiny fraction of that. Is it actually possible, do you think, for you to compete within the basketball category in total?
And, in fact, do you actually need to be within that category? I know it's a big category, but it's so dominated by Nike that is it not just putting an awful lot of money behind something where it's going to be incredibly difficult to compete, given the dominance of the main player? Thank you.
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Herbert Hainer, adidas AG - Group CEO [30]
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Okay, Julian, this is Herbert. Yes, this is correct, we have invited James Harden to join our brand. We definitely do believe that basketball is a sport where we have to be in. We always have been. This goes back into our history with a lot of players, Kareem Abdul-Jabbar just to name one of them.
You know that basketball is a big sport in the US, but not only in the US also in China, for example. We definitely want to compete in basketball and, therefore, we will build our roster of athletes. We have already great athletes. Just think about Andrew Wiggins which we took last year and he became Rookie of the Year; with Damian Lillard; John Wall; Derrick Rose.
We definitely want to be competitive in this area. This is a tough place in the US but we definitely think that we have the right to play there.
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Julian Easthope, Barclays - Analyst [31]
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Okay, thank you. Can I ask a really nerdy question, just coming back to Chiara's question on the Russian margin? Did you say that some of the FX on the ruble was actually taken at the unallocated level? Because according to my numbers at least, your unallocated gross profits actually fell just a little bit, so it didn't seem to have made that much of a difference at that level. Is that where it's actually taken?
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Robin Stalker, adidas AG - Group CFO [32]
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No, in fact we haven't hedged, so there's nothing. For the stuff that we have hedge, we had some small hedges in the past, they would have been all at headquarters. But in this period, there's no hedging in the ruble, so there was nothing in the headquarters in this [boat].
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Julian Easthope, Barclays - Analyst [33]
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Okay, thank you.
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Robin Stalker, adidas AG - Group CFO [34]
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Welcome.
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Operator [35]
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Louise Singlehurst, Morgan Stanley.
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Louise Singlehurst, Morgan Stanley - Analyst [36]
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Three questions from me; I'll be typical on the three questions. Firstly, can you just talk about cost savings? I think Herbert alluded to a few comments earlier on in the call.
And following on, on the sponsorship and asset question, are there ways that you can take away some of the spending from older areas where you're obviously prioritizing some of the new relationships, such as the James Harden point made previously?
Then secondly just on golf, can you help us think about the EBIT losses and the contribution of Ashworth and Adams in the context of the overall golf division. I know they're relatively small on the revenue contribution, but what they are in terms of the EBIT loss.
And then finally on Runtastic, can you just talk about the integration process there and how we should think about the revenue opportunity? Obviously, there's the usual subscription, but how you're integrating that across the sales opportunity for the broader Group? Thank you.
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Herbert Hainer, adidas AG - Group CEO [37]
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Okay, Louise, let me start with the last one on Runtastic. There is no integration. We will leave Runtastic in Linz, because we definitely do believe this is the cell of the digital nerds, who are together there. There are around 130 people highly engaged; they are a young workforce, and we don't want to bring them into the corporate life, to give them the freedom for creativity.
Of course, we will use all the synergies which we have between, for example, our miCoach system, our data, our science which we have. There's no other Company knows more about athletes as we, and combine it with the fast and reactive [tendency] Runtastic has.
Your first question on cost savings especially in the assets, yes, of course, we are dropping assets, as you know, which are smaller ones, which we have done already and announced; here in Germany, for example, the Bundesliga clubs of Bayer Leverkusen and Nuremberg.
We are also dropping assets left and right and to really focus on that what we think is important for the future. These are the creators, who are helping us in our new plan, Creating the New.
James Harden will definitely be a creator. As you know, he has been named NBP from his peers and he is a great player. He's an exciting personality.
We will see, but we're also looking around for other assets. Take Man United, which we are very happy. I said already before in comments how exciting the sales have been in the first few days. But, on the other hand, we also, as you rightly mentioned, have to cut on some other places.
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Robin Stalker, adidas AG - Group CFO [38]
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And, Louise, we don't break down the individual units of TaylorMade-adidas Golf in terms of profitability. But you must know that Adams and Ashworth is about 10% of the business there, so it's not all that significant.
Also, you should realize that when we're talking about golf and profitability generally, don't forget what Herbert said in his comments earlier today: that the adidas part of the TaylorMade-adidas Golf business, in terms of the footwear that we're selling, the apparel that we're selling, that's been performing better than the hard goods business, so just a small information for you.
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Louise Singlehurst, Morgan Stanley - Analyst [39]
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Okay, thank you.
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Robin Stalker, adidas AG - Group CFO [40]
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You're welcome.
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Operator [41]
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Piral Dadhania, RBC.
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Piral Dadhania, RBC - Analyst [42]
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Just one question from me. Just looking at the adidas brand within the context of Originals and sports style, it's obvious that your Originals and sports style business has clearly outperformed with growth of approximately 40% in the second quarter. That would suggest that the performance side of the business is under some pressure, probably partly due to a tough football comp.
Could you just share with us the actual growth or decline within the performance business and how you view the imbalance between Originals sports style and performance going forward? And whether we should see a normalization going forward?
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Herbert Hainer, adidas AG - Group CEO [43]
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First and foremost, it's correct that our Originals and our NEO business are developing very well. But I definitely think that it would be the wrong assumption to say that our performance business is not doing that well.
First and foremost, you have to have in mind that it's highly related to the comparing numbers of football against last year. As I have said in my comments, football footwear is up 17%. So it's the football license jerseys from the World Cup, which are bringing the result down.
Running is up 2%; training is up 6%, and training, as you know, is a big category. So performance is doing good.
Obviously, there are some minor areas like basketball, where we are slightly down, but the bigger areas they're all growing. This is definitely part of the comparison which we have for the first-half 2014, because of the World Cup.
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Piral Dadhania, RBC - Analyst [44]
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Right, thank you.
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Operator [45]
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Volker Bosse, Baader Bank.
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Volker Bosse, Baader Bank - Analyst [46]
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Starting with TaylorMade-adidas Golf, your original outlook was to return to growth in the current year.
Now having first half-year sales figures on hand, how do you adjust your full-year sales outlook for TaylorMade?
Second on Russia, how do you see the current trend and your full-year expectations in terms of sales year-on-year?
Third question on -- Reebok was down 9% in North America, you mentioned streamlining process of the factory outlet business in the US.
Is this something which will be finalized and concluded in the current year, so that we can expect then Reebok to be up also in North America from fiscal year 16 on?
And last final question is on your competitor Under Armour who just recently opened its European headquarter here in Munich, so how do you see or already feel the competition with the Under Armour in Europe? Thank you.
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Herbert Hainer, adidas AG - Group CEO [47]
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So TaylorMade I think I have mentioned all the reasons why we are not performing as we have projected, so I don't need to repeat them. We will have a decline 2015 on TaylorMade.
In Reebok in America, this is correct it is mainly by the closure of our factory outlet, but I think it's also fair to say that America is our toughest market, because we are growing everywhere in the world with the Reebok brand besides of America.
Obviously, it's our target in 2016 to get back to growth to the US, but it's still too early to talk about 2016. This we will do in November when we speak to you again.
And finally, Under Armour, we take every competitor serious, and it's not only Under Armour; we have ASICS; we have even Sketchers, etc., etc.
We take every competitor serious as we do, but we have our strategy, which we believe is successful. I definitely do believe that the first half and the second quarter, specifically, is a clear proof how we can drive our main brands, especially adidas and Reebok.
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Volker Bosse, Baader Bank - Analyst [48]
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Okay, thank you.
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Operator [49]
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Zuzanna Pusz, Berenberg.
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Zuzanna Pusz, Berenberg - Analyst [50]
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Just three questions on my side, first of all your comp store sales declined by 2% in Q2, so I was just wondering whether you could us more color on comp store sales growth by region, and perhaps most importantly whether you have seen declines anywhere else apart from Russia?
Secondly, maybe if you could just update us on the basketball business, how has the growth been in this quarter?
And finally, I understand that it's too early to speak about the potential impact of US dollar hedging next year, but would you be able to give us more or less the hedging rate you have secured so far? Thank you.
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Herbert Hainer, adidas AG - Group CEO [51]
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Zuzanna, let me start with basketball. Basketball was down minus 7% in the second quarter, but you should also have in mind that the second quarter is not a big basketball quarter; it starts now in third and the fourth quarter, when the NBA starts again.
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Robin Stalker, adidas AG - Group CFO [52]
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You were asking about the comp store sales, if we exclude Russia, comp store sales for the second quarter were actually 3% positive, because obviously Russia is a very big market for us in retail. For the half year excluding Russia it will be 5% positive.
Your last question about the dollar hedging, no, I'm not going to give an update on that at this stage.
We will do that in November, we are not fully hedged yet. Therefore, I think with the volatility it would be incorrect to give any indication, at the moment.
But we are considerably advanced and we will be giving this guidance, obviously, when we close end of the third quarter.
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Zuzanna Pusz, Berenberg - Analyst [53]
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Perfect. But if I may just follow up, so regionally you didn't see declines in any other regions apart from Russia, in terms of your comp store sales in Q2, just to confirm?
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Robin Stalker, adidas AG - Group CFO [54]
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Yes, I think the only one was North America, we've mentioned some of the -- in respect to that and also Latin America. But the major markets were all up; if you look at China significantly, Japan significantly, emerging markets and Western Europe are also mid-single digit up.
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Zuzanna Pusz, Berenberg - Analyst [55]
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Okay, perfect; thank you.
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Operator [56]
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Dan Homan, Citi.
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Dan Homan, Citi - Analyst [57]
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A couple of questions. First of all, on OpEx, just the sales and marketing growing slower in Q2 than Q1, was that a pull forward of the deceleration in marketing spend that you previously flagged, or is there going to be a further deceleration in the second half?
And then also on operating costs, was there any FX or hedging benefit in Q2 at all, any one-off benefit that we should be aware of?
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Robin Stalker, adidas AG - Group CFO [58]
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Yes, so in terms of MWBI, really, think you should just recall a comment we made earlier on this in terms of timing.
Obviously, last year it was an event year for us, major event World Cup, and so our expenditure was specific to that.
Obviously, we have the different campaigns for this year, not the event, and that is the only real reason why from, quarter to quarter, the trend and the marketing trend might be different.
Your second point about FX, the FX impact for the half-year on our OpEx is around about EUR160 million, but there's always pluses or minuses in certain of the non-balance sheet -- sorry, balance sheet non-euro denominated positions.
I think from this period there was a positive EUR15 million or EUR16 million, but that's something that is always very volatile depending on the rate movements at the end of the period.
Your last question I've forgotten, but you had a third question I think. Can you just repeat it?
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Dan Homan, Citi - Analyst [59]
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No, sorry, I haven't asked it. The final question was on Runtastic. I was just wondering if you could share any information about the growth over the last couple of years.
I noticed that EV when Axel Springer acquired a couple of years ago was EUR22 million, so wondering what's driven the 10-fold increase over the period?
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Herbert Hainer, adidas AG - Group CEO [60]
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Yes, it's definitely the growth of revenues, but even more the growth of users, which drives up the price.
You have heard that Runtastic has now 70 million users. 15 million monthly active users which is an even more impressive number. They have 140,000 downloads every day. And in total, they have now over 140 million downloads.
They are I think in 18 -- they have 20 apps in 18 different languages and are, I think, in 20 countries market leader, indeed, in France, in Italy, in Spain, etc. They have 10 million users in the meantime in the US and they have just gained 5 million users in the last two months, since we have started discussion.
They are permanently bringing out new apps, just launching next week a new app as well. Therefore, and for some other reasons we have decided to go with Runtastic, and obviously this is one of three key digital app companies. We are quite happy that we could partner this.
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Dan Homan, Citi - Analyst [61]
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Okay, thank you.
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Operator [62]
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Chris Svezia, Susquehanna Financial Group.
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Chris Svezia, Susquehanna Financial Group - Analyst [63]
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I guess, first, just on the -- I want to talk about running for the moment. Being up 2% I think in the second quarter, and I think [we're] up 5% year to date, why wouldn't that be maybe stronger just given all the momentum as pertains to Ultra Boost and just the Boost platform? Are you seeing declines in other categories within your running business that sort of mitigate that?
And maybe if you can just give us some thoughts about how you think the running business will play out for the balance of the year globally, and more specifically North America?
And then my last question just pertains to the guidance, I'm just curious, you're still guiding for mid-single-digit currency-neutral growth for the total Company, despite being up 7% year to date, and increasing your growth targets in a handful of key markets would seem to mitigate the pressure at TaylorMade.
So that would imply a low to mid-single-digit currency-neutral growth in the back half of the year, despite some Euro Cup shipments?
And then also just on the profitability side, it also just seems like it implies somewhat flattish profitability, despite some improvement in gross margin in the second half. Maybe you can just walk through that a little bit, if you could for us, in terms of understanding that dynamic? Thank you.
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Herbert Hainer, adidas AG - Group CEO [64]
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Yes, Chris, let me take the first question on running. I think your observation is quite right, but you have to have in mind that we told you beginning of the year that we had over inventories in -- especially in the US market.
We are quite careful, especially with our Boost technology, where we deliver it, how many quantities we give in. We wanted to make sure that we clean up market and bring the inventory down. Therefore, we have to be more careful with the volumes, which we're giving into the market, and this is the only reason.
As I have said several times, we think that, especially with Boost, we have a groundbreaking technology, and this should be a franchise for us for the future to come. Therefore, we are quite careful how many volumes we are giving into the market.
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Robin Stalker, adidas AG - Group CFO [65]
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In terms of our guidance, well, we're giving the best guidance we can, with the visibility we have at the moment. The only factor perhaps you might be missing is we have always called out that this is the year where we are investing in our brands.
We are obviously, with our new business plan, Creating the New, doing a lot of things to make sure that we're setting our organization up to continue to grow significantly, but also improve our profitability sustainably. This is a period where we also invest.
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Chris Svezia, Susquehanna Financial Group - Analyst [66]
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If I can just ask a follow-up on that, Robin. If you think about the third quarter versus the fourth quarter and some opportunity to get some early shipment as relates to Euro Cup product, would it be fair to say that fourth quarter should be, from a currency-neutral perspective, stronger versus the third quarter?
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Robin Stalker, adidas AG - Group CFO [67]
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The third quarter is always our biggest quarter. So the third quarter's our big quarter. It's probably fair to assume that the fourth quarter this year will be better than last year's, because of that event, yes.
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Chris Svezia, Susquehanna Financial Group - Analyst [68]
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Okay. All right. Thank you very much.
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Sebastian Steffan, adidas AG - VP IR [69]
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Thank you very much. We have time for one more last question here.
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Operator [70]
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Simon Irwin, Credit Suisse.
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Simon Irwin, Credit Suisse - Analyst [71]
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Just a couple of quick ones. Firstly, can you just talk about the Pump? There was a new product launch in Reebok and there's absolutely no mention of it whatsoever, which rings a few bells.
Secondly, can you just give us a few more metrics about Runtastic, in terms of revenue or anything useful like that?
Your comments would seem to imply that you don't feel the need to buy anything else in the digital/social sphere. Is that it as far as you're concerned?
Then very quickly, can you just talk a little bit through the new product launch in football? Is that going to change the natural phasing of 2Q and 3Q? Have you actually drag sales forward into 2Q, as a result of the new launches?
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Herbert Hainer, adidas AG - Group CEO [72]
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Okay, let me start with the first one with Pump, yes, damn (expletive), we forgot to mention Pump. Pump is an old technology of Reebok, which we re-innovated and brought to the market in 2105, which we will continue in 2016.
As we always have said, for the fitness and training brand, running, of course, is an important area and therefore the Pump technology plays into this category, and you will see, [first], new [drops] coming out of Pump going forward.
Second question on Runtastic, I spoke already a little bit before that Runtastic has a very good double-digit growth rates over the last years, and this will continue. Obviously, we don't talk about the exact numbers in the revenues, but what we are going you is the users and how this is increasing.
I've said it already, they have 70 million users now, around 15 million monthly active users; more than anybody else.
They're market leader in so many countries, 20 app site in different countries. 50% of their revenue is in Europe, around 12% to 15% in America, 25% in Asia, and the rest in Latin America; so also very internationally broad-based.
This is what I can give you in terms of numbers.
In terms of product launches for football, have in mind that with Ace and X, we just started in Q3. So obviously we have the majority of the new products coming in Q3. This will continue in Q4, because when the Europe is coming up, you know that we are start normally in the fourth quarter with our jersey launch, and then we bring new football boot concepts into the market.
Then going into 2016, you will see some new innovative products from us as well, up to the European Championship in 2016. But from a launch cycle, this is nothing really different than what we have done in the past.
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Simon Irwin, Credit Suisse - Analyst [73]
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Excellent. Thank you very much.
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Herbert Hainer, adidas AG - Group CEO [74]
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You're welcome.
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Sebastian Steffan, adidas AG - VP IR [75]
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Okay, ladies and gentlemen that actually completes our conference call for today. I would like to thank Herbert and Robin.
Our next reporting date will be November 5 for our Q3 numbers. But I'm sure that we're going to be in contact with you over the next couple of weeks, either over the phone or during our upcoming road shows in Europe and the US.
As always, if you have any questions, please do not hesitate to reach out to any member of the IR team.
With that, I would like to thank you for your participation and wish you a very good and sunny day. Bye, bye.
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Operator [76]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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