Adidas AG, Nine Months 2014 Earnings Call, Nov 06, 2014

CONTENTS
Adidas AG
CALL PARTICIPANTS
PRESENTATION
QUESTION AND ANSWER
DB:ADS
FY Nine Months 2014 Earnings Call Transcripts

Thursday, November 06, 2014 2:00 PM GMT
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S&P Capital IQ Estimates

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COPYRIGHT 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014
Call Participants
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EXECUTIVES
Herbert Hainer
Chairman of Executive Board and
Chief Executive Officer
John-Paul O'Meara
Senior Vice President of Strategy
Robin John Stalker
Chief Financial Officer and Member
of Executive Board
ANALYSTS
Adrian Rott
Deutsche Bank AG, Research
Division
Andreas Inderst
Exane BNP Paribas, Research
Division
Cedric Lecasble
Raymond James Euro Equities
Chiara Battistini
JP Morgan Chase & Co, Research
Division
Christopher Svezia
Susquehanna Financial Group,
LLLP, Research Division
Ingbert Faust
equinet Bank AG, Research
Division
Julian Easthope
Barclays PLC, Research Division
Jurgen Kolb
Kepler Cheuvreux, Research
Division
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Copyright 2014, S&P Capital IQ, a part of McGraw Hill Financial.
Presentation
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John-Paul O'Meara
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 rate or growth rate will be discussed in the currency neutral
basis unless otherwise specified.
So with that, let's get started and over to you, Herbert.
Herbert Hainer
Chairman of Executive Board and Chief Executive Officer
Yes, 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 top line growth in the majority of our key categories end 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 sport, 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 have 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 growth and responsibilities in our marketing and sales organization to speed up in
decision-making. We have staked talent, both internal and external, to revive momentum and growth in
North America. We've 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 vigor 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 for
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 EUR 150 million compared to the prior year level. While the sport has
structural challenges with declining participation levels, the biggest headwind to a faster recovery is the
amount and slow liquidation of old inventories in the marketplace.
Therefore, we have remained laser-focused on inventory management taking a leading and responsible
role for the industry clean-up. We purposely choose not to trade sales for the second half of 2014 despite
being up against a successful launch of the SLDR driver last year.
We also completed some major elements of some restructuring program we announced in August during
Q3: commencing the closure of our adidas Golf facility in Plano, Texas; and reducing our Golf segment
global workforce by around 15%.
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These actions amounted to a charge of around EUR 10 million in the third quarter. As a result, all of
these steps, I'm confident we will stabilize and grow certain 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 the inventory reduction significantly impacted our margins. And therefore,
our results by around EUR 100 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 1,100 stores. While 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 and 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 rate in 2014 and to continue reducing absolute levels of inventory in 2015.
Finally, a quick word on currencies. In total for the first 9 months, negative translation effect wiped out
around EUR 550 million of revenues from our Group's result. Taking the effect of translation as well as less
favorable hedging rates, which impacted the Group's gross margin by 50 basis points, operating profit was
impacted by roughly EUR 150 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 brands in all regions. Our efforts to
drive more leverage on store costs also yielded a very satisfactory 2 percentage point reduction 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 9 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
EUR 2 billion in sales this year, and the World Cup has been our most successful event activation ever.
In running, sales for the first 9 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.
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In Originals, after a difficult start to the year, sales recovered sharply, growing 9% in the quarter. The ZX
Flux remains a top seller and key franchises, such as the 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.
And 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 jump 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're driving our own control space agenda. Sales increased at a double-digit rate 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 include 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 U.S., this is mainly related to the old footwear closeout, as well as preparations to rationalize
the brands 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 have 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 chance -- change in leadership in our North American
organization this year, taking high-caliber talent from various parts of our group and adding key external
talent, particularly in design, as you have might read. We also have been very active getting back on the
field of play, whether it be investments in the established or young NBA talents or the return of the 3Stripes 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 facing
into the first major wave of World Cup product launches last year, we have plenty to play for in the fourth
quarter.
And some highlights to look out for include the first expansion 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 Damien Lillard. We will have our largest ever winter power marketing
campaign, Open All Winter, supporting our most technologically advanced climate heat products. Originals
will introduce several new products, including Pharrell Williams and Nigo collaborations, as well as a bold
new silhouette born from some of the brand's most creative minds, the adidas Originals Tubular. And we
also have a few product and partnership surprises to come at Reebok, which we will announce short 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 EUR 650 million for 2014.
And for 2015, we are also very confident that we will maintain a solid growth trajectory, and despite our
football comparisons, we expect sales to grow at the mid-single-digit rate 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've spoke already a little
bit earlier, we will give you a more specific quantification of our 2015 plan in March 2015.
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So ladies and gentlemen, this is it for my side. Let me now hand you over to Robin, and he'll give you
much more details on the financials.
Robin John Stalker
Chief Financial Officer and Member of Executive Board
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 top line momentum. Before 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 measures.
In the third quarter of the first 9 months, sales increased 9% and 6% respectively, with every region
except North America posting sales gains. In particular, the emerging market 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 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 adidas
where revenues grew 14% driven by a 32% sales increase at adidas Originals and Sports 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 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, while 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 9
months or 1.9 percentage points in the third quarter to 47.4%. And 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 in 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 promotional activity, as well as the negative effects from the ruble devaluation resulted about 50 basis
points 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 partially 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. Some modest operating overhead leverage gains in the quarter were
offset by an increase from sales and marketing working budget expenditure, which was up 10% currency
neutral for the third quarter and 11% currency neutral in the first 9 months.
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Turning now to the nonoperating items in the P&L, net financial expenses decreased 66% in the third
quarter or 31% in the first 9 months compared to a year ago, driven by a positive EUR 9 million positive
swing in exchange rate effects in the third quarter, as well as obviously, lower interest expenses.
The first 9 months tax rate increased to 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 EUR 282 million and
21% to EUR 630 million for the first 9 months.
Now by segment. Wholesale revenues increased 8% in the third quarter and 6% for the first 9 months,
mainly due to high single-digit growth at adidas sports performance led by the Football, Running and
Training categories.
Sales at Reebok were slightly above the prior year level, driven by 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 9 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 9 months. Comparable store sales were up 6% for the quarter and 8% for
the first 9 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 9 months. Reebok
comp store sales were down 2% in the third quarter and remained stable for the first 9 months. The
lower performance here was entirely related to the Reebok factory outlet business, which Herbert already
mentioned.
Revenues in our eCommerce business accelerated again during the quarter, with sales doubling in the
third quarter. For the first 9 months, our eCommerce business was up 78%. Retail gross margin decreased
3.4 percentage points to 58.1% from the third quarter and 3.2 percentage points to 59.4% in the first 9
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 9 months.
At the end of the third quarter, we operated 2,822 stores, a net increase of 211 stores versus September
2013. Of the total number of stores, 1,569 were adidas, 426 were Reebok-branded, and in addition, the
adidas Group Retail segment operated 827 factory outlets.
During the first 9 months, we opened 277 new stores and closed 195 stores. 89 stores were remodeled.
And 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 9 months, revenues of other
businesses was down 17%.
The segmental gross margin remained virtually unchanged at 35.3% in the third quarter. For the first 9
months, gross margin was down 3.9 percentage points to 37.7% due mainly to lower product margins at
TaylorMade-adidas Golf as a result of the high 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
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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 EUR 543 million
compared to EUR 180 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 2 Eurobonds, marking our first Eurobond offering since July
2009. The 7-year Eurobond of EUR 600 million matures on October 8, 2021, and has a coupon of 1.25%.
The 12-year Eurobond of EUR 400 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 markets. This offering allows us to benefit from current low-cost financing opportunities in the
Eurobond market to secure 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 EUR 1.5 billion shareholder return program, which comes on top of our annual
dividend.
As announced this morning, we will commence the first tranche of up to EUR 300 million tomorrow.
So with that, ladies and gentlemen, I'd like to thank you for your attention, and Herbert and I are now
very happy to take your questions.
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Question and Answer
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Operator
[Operator Instructions] We will now take our first question from Julian Easthope from Barclays.
Julian Easthope
Yes, 3 questions, if I may. First, in terms of TaylorMade-adidas Golf. There's quite a level of decline I would
assume is just destocking with the sellout, I assume a bit better. So I just wondered if you had a 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 guidance to where the underlying market might be and what will happen once the destocking
slows. Just in terms of Russia. After the EUR 100 million cost of the both different -- EUR 100 million cost
of EBIT this year, is it still profitable? And I guess the last question comes back to Reebok and TaylorMade.
So there has been 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.
Herbert Hainer
Okay. Let me start with the first question and the third, and I think Robin will talk on the profitability
of Russia. So TMaG, 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 TaylorMade-adidas Golf standpoint, we're getting into 2005 with a much
cleaner inventory in metal, woods and iron, and then we will come back with the launch of new product
introductions starting with driver in January 2005, a new driver, and then continue during 2015. The Golf
market in general, it generally will not have solved all the problems, as I said before, so 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 industry, the Golf industry and the Golf business will be healthier going
forward than it is in the moment. But as I said, structural problems will not be solved overnight. Your third
question concerning TMaG and Reebok, yes, there were a lot of speculations but you will understand that
we do not comment on any rumors or speculations.
Robin John Stalker
And Julian, in terms of Russia and the profitability, we've always -- although we don't talk about specific
market profitability, we've called out that Russia is one that had been -- has been one of our most
profitable, and it's clearly down on what it has been. But it's still, and I can confirm, it's still profitable for
us, and it's a market that we have a long-term confidence and good expectations in.
Julian Easthope
And just one sort of 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 on the 5th of March?
Robin John Stalker
No, Julian. We'll give you the date as soon as we can, but it's likely to be at the end of March.
Operator
We will now take our next question from Andreas Inderst from Exane BNP Paribas.
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Andreas Inderst
Exane BNP Paribas, Research Division
I have 3 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? That's my first question. Then my second
question, you indicated on Russia decline on EBIT of roughly EUR 100 million, is it for the first 9 months or
the full year? And 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 and input costs. What's your expectation in terms of growth
rate or decline year-on-year in 2015, given the decline in input costs in recent months?
Robin John Stalker
Okay, Andreas, thanks very much. And yes, you're absolutely right to call out the costs and -- 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 FX 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, the beginning of this year, put the 5 key European
markets together. And we continue to pursue, a contest where we believe we will, also in the future, take
cost out of the business, and it is definitely a focus for us. In terms of Russia and a EUR 100 million that
we mentioned in the prepared comments, yes, that refers to the 9 months. And yes, it is obviously with
the continuing weakness of the ruble, and the outlook for 2015 is going to be more of a headwind for us,
but we can't give specific from that until we have a little bit more visibility on that, and we will try and do
as best as we can in March. And thirdly, in terms of FOBs, we still think there's a continued pressure on
FOBs or input pricing. It may not always be from the raw materials, but definitely, labor is -- continues to
be a likely to be a negative for our industry. And don't forget, when you're looking at the raw materials,
even though oils gone down, we're talking about we use all derivatives, obviously, so there's a timing lag
sometimes in the change of the oil price for that. So I think you should expect we'll have a conservative
view on FOBs, and likely to still be some pressure in that in our industry next year as well.
Operator
We will now take our next question from Chiara Battistini from JPMorgan.
Chiara Battistini
JP Morgan Chase & Co, Research Division
Just a couple of questions from me please. First on your gross margin, on adidas wholesale, specifically,
which was actually the major drag to the Group gross margin. I was wondering whether you could provide
more color on what caused that pressure, if it was just FX or more. And then in terms of marketing spend,
that was up 10% again in quarter 3, should we assume this to be the new growth run rate for this cost
line, please?
Robin John Stalker
Okay, Chiara. So the pressure in the wholesale gross margin, obviously, we have the input price that's
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 product.
And the third point is that we have the devaluation impacts in markets where the hedging is not done, and
that is the Argentine peso and the Brazilian real. And then the second question was about 10% increase in
MWB. We called out, as part of our second quarter announcement, that we're 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're seeing here is likely to be consistent
for this year, for the total 2014 year.
Chiara Battistini
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10
JP Morgan Chase & Co, Research Division

Perfect. And just if I may, a follow-up on gross margin and following up also on the previous question
on the input cost and how we should think about it into 2015. How should we think about overall gross
margin into 2015, weighing the fact that this year was penalized by ForEx meaningfully so and hedges
and into next year, where ruble will continue to be a headwind? But then I would assume you should also
benefit from easier base and lower drag from TaylorMade fees.
Robin John Stalker
Yes, and I think that is a good summary. Obviously, in the FOB increases, in whatever we try and mitigate
for this with the continued improvements and the efficiencies in our supply chain and manufacturing
processes, and also, obviously through price increases, and that's not always possible. We are not too
concerned about this for next year, and as you say, we're in a situation where it's not just the ruble. We've
got a lot of markets, and we benefit from channel and product mix, as we have done in the previous years
also.
Operator
We will now take our next question from Cedric Lecasble from Raymond James.
Cedric Lecasble
Raymond James Euro Equities
Cedric Lecasble from Raymond James. I have 2 follow-ups please. One follow-up on the marketing
expenditure. When you decided to raise your marketing expenditure, especially in the developed market,
can 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 sales in 2015? So that would be
on marketing expenditure, and the second question is on your working capital. Could you explain 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 forward?
Herbert Hainer
Frederic (sic) [Cedric], let me start with the first part of your question number one and why do we
increase our marketing spend, and this is 2 main points: on the one hand, because we see a lot of
momentum in several areas, as we said, be it Original, 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 under spend, 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 4 of the 6 NBA drafts. We have a collaboration with Kanye West, with
Pharrell, and we will definitely make more noise in this market. Therefore, these are the 2 main reasons
why we spend more.
Robin John Stalker
And we've quantified that and the increasing point of sale and what have you as being about a percentage
point for each year. That's '14 and '15-year. We normally spend about 12% to 13% of sales on MWB, and
we've said that there would be in the range of 13% to 14% in the future. And then your last question
about working capital. Yes, the working capital deteriorated a little bit this time because of the decrease
in payables but nothing special. That's just related to the timing. Obviously, the time in World Cup product
and when we pay it, that year-over-year is different. But we are still very focused on further improving
our working capital, and I think the best call out I can make here is look at what's happened with the
inventory now. That's the key mover in our working capital, or it has been over the last few quarters.
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That's what we're focused on. We hope, by the end of the year, to have even a further improvement in the
inventory growth.
Operator
We will now take our next question from Jurgen Kolb from Kepler Cheuvreaux.
Jurgen Kolb
Kepler Cheuvreux, Research Division
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? Then on NEO, also apparently a strong performance.
How much further do you want to stretch NEO here, really? And again, another category, Winter more
pronounced. You have no concerns that you might overstretch that category a bit? And lastly, on Reebok,
the warehouse -- or sorry, the factory outlet consolidation. So remind me, how long will that take? When
will we be finished with that? And 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?
Herbert Hainer
Yes, 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 at all. The reason why we are consolidating
our factory outlets in the U.S. is twofold: on the one hand, we definitely want to carve out more the
positioning of the training and fitness brand in the U.S, which we do around the world, and we are growing
with Reebok everywhere outside of the U.S., so we definitely have to be more focused in the U.S. to bring
the message across; and secondly, I do believe we have -- simply, we just have too many factory outlets.
We do want to have a real business with -- in connection with the consumer and not the majority of our
business on factory outlets, and this is why we consolidate it. Second question on NEO. NEO is doing
extremely well, and we get great feedback from the young consumer base, especially from the female
consumer. And 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. And
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, and it's not just the sales. It's also the qualitative feedback, which we
get, is definitely encouraging. And we will carefully see, but there is definitely more potential, as I said.
And last but not least, our online business. You might remember in the Route 2015 plan, this has been
one of our strategic targets, and we said we want to do at least EUR 500 million. Of course, we will
overachieve the EUR 500 million until the end of 2015, and this is by consistent investment into people
and into our systems. We have now 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: be
it conversions, be it how we drive traffic to the site, be it what articles we choose, et cetera, and we are
absolutely convinced that this is just the starting point. I mean, even if we do EUR 500 million, this is
just less than 2% of our total revenues for adidas and Reebok, and we definitely want to get to higher
percentages with our eCommerce business.
Operator
We will now take our next question from Chris Svezia from Susquehanna Financial Group.
Christopher Svezia
Susquehanna Financial Group, LLLP, Research Division
A couple for 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 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
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12
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 3 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 an impact? The other question I
have here is 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 do you prevent a similar play-out 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 move forward and how you are hedged?
Herbert Hainer
Okay. Let me start with the first question. When you say Boost is not resonating with the consumer in the
U.S. than in the rest of the world, then it's true to a certain extent, but we also have some very positive
signals. For example, in running. When you go to the running specialty stores, then our Boost shoes are
selling very well. When you go to the normal sporting goods or especially to the mall, we have then -we definitely have work to do. There is no doubt. We just have launched the new Rose basketball Boost,
which is a Boost shoe for $140. I think it is 10 days ago, and we pushed 20% in the first 2 days. So we're
definitely making inroads with Boost. There is no doubt. At the New York Marathon, as I have said in my
speech, the first 2 guys in the men's running, Kipsang and Mutai; and lady, Keitany, they all were wearing
Boost. All won the races. So we're definitely 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're spending
more marketing working budget that we can communicate it with the consumers, especially in North
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. And third question was on the Golf business.
When you look to the Golf business in the last 10 years, and our key success factor for becoming clearly
the #1 in the Golf business was because we have been the most innovative Golf company and we brought
out the innovation speed on the metal, wood or on the iron side on a permanent and consistent way, and
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 too much, is still in
the retail drag, and this is decreasing step-by-step. But we definitely will energize the market with new
product innovations, which we're bringing out in 2015. And as I said, we have started a week ago with
irons, and we follow with new drivers in January and it will continue during the course of the year, then
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.
Robin John Stalker
And in terms of FX and 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. And 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.
Operator
And we'll take our next question from Ingbert Faust from equinet.
Ingbert Faust
equinet Bank AG, Research Division
Two questions from my side. One follow-up on Boost. Can you can confirm the 8 million pairs of shoes in
2014 and I think for 2015, it was 15 million? Just a confirmation, if that's possible. And the second thing,
on your outlook for 2015, mid-single-digit sales growth and the past proportionate profit growth where we
have, if I'm correct, around EUR 80 million restructuring costs in 2014. Is this above proportionate profit
growth indication? Is that adjusted for the EUR 80 million? Or is it just in the reported figures?
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13
Herbert Hainer
So point number one, yes, I can confirm the 8 million in 2014 and the plan for 2015 is 15 million.
Obviously, we have not done it yet because the year is ahead of us, but all what we see is definitely
confirming that we are achieving our targets.
Robin John Stalker
And in terms of the profitability, our guidance was in accordance with the reported, and I don't quite know
where you get your EUR 80 million restructuring from. What we've talked about so far is the restructuring
in the first -- sorry, in the third quarter for TaylorMade, which is around EUR 10 million.
Ingbert Faust
equinet Bank AG, Research Division
Okay. I thought there were additional costs this year for TaylorMade and for the Russian operations, so
one-off effect in the area of EUR 80 million, but I might have been mistaken.
Robin John Stalker
No, what we communicated in the second quarter, I'm happy to repeat, was our expectations for the
second half included, obviously, the poor trending 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 the TaylorMade, and that's what I said about EUR 10 million and already
booked in the third quarter.
Operator
We will now take our next question from Adrian Rott from Deutsche Bank.
Adrian Rott
Deutsche Bank AG, Research Division
Again on Golf, please. I'm just curious to hear what the sort of new normal at TaylorMade would look
like in your view, so I mean, it's quite some time since we've seen an EBIT margin for the brand, and
obviously it's that the segment should be profitable again next year. But what's the sort of the mid-term
target corridor, considering the structural changes in the industry and also your new set-up post the
changes at Adams workforce and so on? And secondly, briefly on U.S. again. So obviously, TaylorMade is
U.S. heavy, but can you lever it again on how you're seeing adidas and Reebok trends brand selling? And
yes, that would be it from my side.
Herbert Hainer
So let me start with the second question, the U.S. Obviously, as I said before already, when we look
to the adidas and to the Reebok performance, especially in the third quarter with 12% and 7% up,
then we are quite satisfied with the exception of America. As I said, we are stagnating in America. I'm
positive for 2015 that we are growing again in 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 a growth in 2015, but one that will not happen overnight,
so we have now changed the management. We are investing. We want to have a 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 U.S. 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. And as I said,
we're bringing in a much more new innovative products, and you will see already some. And as I said, the
new drivers are coming in January next year, so not far away from today. This should be less clearance
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14
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, will be there in 2015 again and then will be growing, going
forward.
Adrian Rott
Deutsche Bank AG, Research Division
Yes. All right. But I mean if -- correct me if I'm wrong but I think 2006, 2008, TaylorMade was sort of
delivering a 8% to 10% EBIT margin, and I mean, there's a big gap between turning Golf profitable again,
and are we ever getting back to those margins? So what's your base case assumption in the mid-term for
TaylorMade and Golf?
Herbert Hainer
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 the 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.
John-Paul O'Meara
So with that, ladies and gentlemen, that completes 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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15
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Adidas AG, Nine Months 2014 Earnings Call, Nov 06, 2014

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Adidas AG, Nine Months 2014 Earnings Call, Nov 06, 2014

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CONTENTS

QUESTION AND ANSWER

FY Nine Months 2014 Earnings Call Transcripts

S&P Capital IQ Estimates

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

Question and Answer

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

JP Morgan Chase & Co, Research Division

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

ADIDAS AG FY NINE MONTHS 2014 EARNINGS CALL NOV 06, 2014

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