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Executives

John Paul O'Meara - VP, IR

Herbert Hainer - CEO

Robin Stalker - CFO, Member of the Executive Board

Analysts

Michael Kuhn - Deutsche Bank

Matthias Eifert - MainFirst Bank

Andreas Inderst - Exane BNP Paribas

Andreas Riemann - Commerzbank

Allegra Parry - Cantor Fitzgerald

Antoine Belge - HSBC

Rogerio Fujimori - Credit Suisse

adidas Ag (OTCQX:ADDYY) Q2 2013 Earnings Conference Call August 8, 2013 9:00 AM ET

Operator

Good day, and welcome to the adidas Group Conference Call for First Half Year 2013 Financial Results. Today's conference is being recorded.

At this time, I would like to turn the conference over to John Paul O'Meara. Please go ahead sir.

John Paul O'Meara

Thanks operator and good afternoon ladies and gentlemen. Our presenters today are Herbert Hainer, adidas Group CEO; and Robin Stalker, Group CFO. To allow for ease of comparison, all sales and revenue-related growth rates will be discussed on a currency-neutral basis, unless otherwise specified.

So with that, I hand the call over to Herbert.

Herbert Hainer

Yes, thanks JP and good afternoon or good morning ladies and gentlemen wherever you are. I am very pleased to report that we were able to deliver record earnings per share for the Group of €2.29 for the first six months, which is an increase of 6% compared to a year ago. The financial highlight of the first half has to be our strong gross margin development, which increased 2.1 percentage points to 50.1%. This result is a clear measure of success of our Route 2015 strategy to drive quality growth across all of our business activities. It shows that we are focusing on the right categories, and that our innovations are resonating with the consumer, all of which is supporting considerable improvements in our product and pricings.

It also shows that we are improving execution across all of our channels of distribution. The strengthening of our operation of KPIs in owned retail and the strong growth of e-commerce are particular standouts in this respect. And finally, the strong gross margin performance shows that our industry leading inventory management is again proving to be a winner.

In the first half and the second quarter, sales were flat compared to the prior year. In reported terms, sales declined 4% in the second quarter and 3% year-to-date, considering the material challenges we faced from currency headwinds. The difficult comparisons related to last year's major sporting events, and the continued soft trading environment in Europe, this is the solid result, including many highlights which underpin the strength and potential of our business globally.

(Inaudible) so then the emerging markets which continue to be a fantastic source of opportunity for our Group. In general, while economic growth rates have also slowed in many of these economies, conditions for our Group have remained very strong, as these nations become more and more consumer driven.

In fact, we even saw some modest acceleration in several of these markets in the second quarter, with Latin America at the top of the list. Supported by the 2013 FIFA Confederations Cup, sales growth in the region accelerated to 21% in the second quarter.

We have been investing constantly in our brands in the region over the past few years, raising our game at the point of sale, in anticipation of a strong reception to two of the world's biggest sport events; 2014 FIFA World Cup and the 2016 Olympic Games; and the results are paying off, as our brands connect and resonate perfectly with this consumer base, known for its high energy and passion for sports.

Another bright spot for our Group continues to be Greater China, where sales were up 6% in the quarter. Comparable store sales also remain very strong, at 11% in the second quarter and 9% in the first half. The Chinese consumer has clearly voted that adidas is their preferred sports and sport lifestyle brand, and this is leading to significant market share gains, as we once again close in on market leadership in the region.

In a recent survey (inaudible) of more than 60,000 consumers in China, adidas ranked the highest of all clothing and footwear brands in the top 20 most powerful international brands.

However, everything in the emerging markets has been perfect in the first half. In European Emerging Markets, we have had some issues to overcome, due mainly to softer conditions in Russia and the CIS.

Firstly, given the rapid pace of overall retail space expansion, with many new malls coming onstream every year, we have seen traffic dynamics deteriorate in some locations. On top of a cooler consumer environment, this has negatively impacted our comp store sales growth performance in the first six months. On a positive note however, due to improvement in our operational performance, we have seen a strong margin development in this already highly profitable market.

With trends beginning to stabilizing [recently] given the strong pipeline for the second half, I expect comp store sales growth to move back towards positive territory by the end of this year.

In addition, our entire store network will also begin to benefit from considerable IT and infrastructure investments we have been carrying out in Russia, in order to speed up and improve our operations. You will see this coming [through] more powerful in 2014. We recently opened 49,000 square meter distribution center in Chekhov, close to Moscow, which will ultimately consolidate six warehouses into one location, is a great example of some potential upsides we still have operational in this market.

Staying on this uptick of tricky markets, Western Europe is also proving more challenging this year, with sales for the first half down 9%. But there were some bright spots, such as France, Poland and the Nordics, sales were down in most other major markets. The U.K., Spain and Italy were particularly weak, down strong double digits. But ladies and gentlemen, let's not forget, that this region benefitted the most from last year's major sporting events.

While it is hard to isolate all of the football related event sales, products related to the London 2012 Olympic Games definitely had a considerable impact, accounting for approximately 3 percentage points of the decline.

In terms of the underlying trends, I am confident we will turn the corner in Western Europe in the second half. Already in the second quarter, we have seen some good signs of an inflection, as for example, our own retail comparable store sales increased 2% after being down 4% in the first quarter.

Discussion with our wholesale partners have also moved into more constructive territory, as excitement builds ahead of the 2014 FIFA World Cup, and the strong reception to our latest products in Running and Originals, as well as at Reebok.

Moving on with North America; also, I would have liked to have seen better growth rates, I am satisfied that our brands continue to move in the right direction. Group sales in North America were up 1% in the first half and down 2% in the second quarter. The latter was mainly due to sales declines at TaylorMade-adidas Golf, owing to a more challenging golf market, and I will come to that in more detail in a few minutes.

While adidas sales were flat in Q2, and up 3% in the first half, as strong growth in running and training was offset by declines basketball. The latter was mainly due to [Latin] strong growth in footwear from the prior year. As Reebok sales in North America in the quarter, excluding the NFL impact were up 1%.

As we move into the second half of the year, I fully expect trends to improve for both brands, with a strong lineup of new innovations hitting the market in time for the back-to-school and the holiday seasons.

Finally, to complete, a look at the global picture in other Asian markets, Group revenues improved considerably from the first quarter decline, and were up a healthy 7% in the second quarter. This was a result of strong growth in South Korea, India and Australia. Earlier this year, I called out the significance of 2013 as a year, where we will define what groundbreaking innovation really means.

Looking at our results by brands, there is clear evidence that we are fully on-track, which in turn has allowed us to deliver such strong improvements in product and pricing mix. At adidas, running personifies exactly this, with the category taking on a whole new dynamic, spearheaded by our mission to create products, that gets the highest level of energy returned to the runner.

This Boost, which we spoke about extensively last quarter, we know we have something special. Following its highly successful launch and the continued strong performances in our other key running franchises, such as Supernova, Response and ClimaCool, sales in the category are up 14% year-to-date and 16% in the second quarter.

Outdoor is another example, where several years of award winning innovation continues to provide our position up the league table, of the leading outdoor brands in the world. In the second quarter, sales in the category were up 25%. Even in Football, despite half prior year comparisons, we were able to build in last year's success with strong growth of 6% in football footwear, as Nitrocharge has already become the newest 1 million unit adidas franchise.

And finally for adidas, innovations transcends more than just technical products. It is also the basis for continuously challenging ourselves to create the unexpected for today's highly demanding lifestyle consumers. Indeed with adidas Originals, we have the longest and most consistent track record of any brand in our industry, and once again in Q2, sales did not disappoint, increasing 8% driven by strong growth in the emerging markets, and high demand for our action sport styles, where sales almost doubled.

In addition, adidas Sport Styles sales increased 9%, driven by strong growth of 12% at the adidas NEO line. With NEO, we are really encouraged with the strong fan base we gathered rapidly for the label across the globe.

So now moving over to Reebok; we enjoyed a solid return to growth in the second quarter with sales increasing 11%. This means brand sales are now down only 4% in the first half. Excluding the NFL impact, sales are up 1% in the first six months. But even more important, the brand's gross margin again improved considerably, expanding 4.1 percentage points to 39.4% in the first half, which is also the highest first half gross margin that we have achieved since we acquired Reebok in 2006.

Also, we still have some considerable growth to do, to turn all markets around, I am confident that Reebok will show currency neutral sales growth for the full year. And key to this success is the strong product foundation, the close connection we are creating with the fitness consumer. As we gain credibility by building on our existing partnerships, such as with CrossFit and through new associations with exciting grassroots events like the Spartan Race or (inaudible).

Also with the significant improvement in the brand and product architecture we have implemented over the past 18 months, we are delivering a more consistent brand look and feel to our key target consumers. This is also visible, as growth becomes much more diversified, the Fitness Training and Classics showing 13% and 21% respectively in the quarter, and solid growth in both footwear and apparel.

So finally, let's take a look at TaylorMade-adidas Golf, which endured a slightly more challenging second quarter. Here, there are a few things to note. Firstly, the golf market has been considerably weaker this year, due to a late start to the season in many countries. As a result, rounds played around the world, have declined on average at a double digit rate. With courses starting to play later, this had a knock-on impact on trends at retail. Right now, this is particularly visible in metalwoods, where retail sales are down at the high single digit rate in the first half. As the dominant market leader in this category, with a market share of close to 40%, we are unfortunately not immune from this.

Secondly, considering our growth of 20% last year, and 16% the year before, we were expecting that this year would be more about consolidating our position before the next push forward. And that push forward, is not too far away, and I look forward to coming back to this and some of the other exciting plans we have for the rest of 2013 in a few minutes.

But before that, let me hand over to Robin, to complete our discussion on the first half.

Robin Stalker

Great. Thanks very much Herbert, and good afternoon ladies and gentlemen. As you just heard, our Group delivered a solid performance in the first half of 2013. And so for my comments today, I want to focus on three topics; firstly, an update of our key financial KPIs for the Group; secondly, a review of the performance in our various channels, and finally, I will wrap up with some further details, to help you better understand the various currency impacts affecting our results this year.

Let's start with what is clearly the key financial highlight for the first half, our gross margin development. As you have already heard, our Group gross margin increased 2.1 percentage points to 30.1% in the first six months, or by 1.8 percentage points in the second quarter, also to 50.1%.

If we move to the first quarter, this development was primarily driven by product and pricing mix, as well as regional and channel mix, which more than offset the negative FX from a less favorable hedging rate. Now the negative FX from hedging amounted to 1.3 percentage points in the second quarter, and 70 basis points in the first half. For the second half of the year, I expect the negative impact to be even more pronounced than in the first six months.

Moving over to the operating expenses, again, we showed good discipline in managing our costs, considering further investments into the Group's own retail activities and infrastructure, where in particular, we considerably expanded our store network globally. This resulted in another operating expenses increase of 1% of the quarter, and year-to-date. The overall sales and marketing working budget expenditure decreased 5% and 1% for the second quarter and the first half respectively.

As a percentage of sales, other operating expenses were up 1.9 percentage points, and 1.5 percentage points respectively, and also as a percentage of sales, sales and marketing working budget decreased 20 basis points to 13.2% for the second quarter, and were up 20 basis points to 12.4% for the first half.

As a result of the modest growth of expenses and the strong gross margin improvement, Group operating profit increased 4% in the first six months to a new record level of €693 million. This translates into an operating margin of 9.7%, up 70 basis points compared to a year ago. In the second quarter, operating margin expanded 10 basis points to 7.4%.

Turning now to the non-operating items of the P&L, net connection expenses decreased 26% in the first half compared to a year ago. This mainly reflects a 33% decrease in interest expense, due obviously to lower gross borrowings. The first half tax rate increased to slight 10 basis points to 27.5%, but well in line with our guidance for the year, where the tax rate increased to a level between 28.0 and 28.5%.

As a result, net income attributable to shareholders for the first six months increased 6% to €480 million, which translates into a basic and diluted EPS of €2.29. Second quarter net income attributable to shareholders, as well as basic and diluted earnings per share, increased 4% to €172 million, and €0.82 respectively.

Looking at the balance sheet and cash flow development, we continue to manage our capital diligently. At quarter end, this [increase] remained on par with the prior levels, on a currency neutral basis. As a result, the Group's operating working capital, as a percentage of sales, also remained at a very low level of 20.3%.

The combination of our tight control of working capital with our strong operational performance, led to another period with significant cash flow generation. This is reflected in the 70% year-over-year decline in net debt from €380 million, to a level of earning €94 million. Now taking all of our results together, we have seen a strong increase in our equity ratio of 2 percentage points to 47.5%.

Let's look at the statements; the currency neutral wholesale revenues decreased 1% in the second quarter and 2% for the first half, as sales growth at adidas Sport Style was more than offset by revenue declines at Reebok and adidas Sport Performance. Gross margin for the segment was up 2.8 percentage points for the quarter, and 2.7 percentage points for the first half, driven by pricing, as well as a more favorable product and regional mix.

In the retail segment, revenues in the second quarter grew 5%. For the first half, sales increased 6% as a result of growth of both adidas and Reebok. Comparable store sales were down 2% for the quarter, and 1% for the first half. Now as in Q1, the decline in comp store sales is due to the difficult trading environment in Russia-CIS at the beginning of the year, given the overall weakness in traffic, and consumer sentiment. Beyond Russia-CIS, retail trading was robust during the second quarter, with all other regions showing comp store sales increases in Q2.

By brand, adidas comp store sales were down 1% for both the quarter and first six months, while Reebok comp stores decreased 3% and 1% for the quarter and first half respectively.

Our e-commerce business continues to do extremely well, with sales increases accelerating to 79% on the second quarter. For the first half, our e-commerce business was up 74%, breaking the €100 million level for the first time in a six month period.

Retail gross margin increased 2.5 percentage points to 65.4% for the second quarter, and about 1 percentage points to 63.2% in the first six months. Positive effect from a more favorable pricing and product mix, as well as less clearance activities, were the main contributors to the margin increase.

Our commitment towards the Group's retail expansion is underpinned, looking at the number of store openings during Q2, as we have added 84 stores to our retail portfolio during the quarter. As also explained, the increase in the segmental operating expenses as a percentage of sales of 3 percentage points for the quarter, and 2.5 percentage points for the first half.

At the end of the second quarter, we operated 2,542 stores. Of the total number of stores, 1,437 were adidas, 356 were Reebok-branded, and then the addition of the adidas Group retail segment operated 749 factory outlets. During the first six months, we opened 248 new stores and closed 152 stores, while 55 stores were remodeled.

Let me now spend a minute on other businesses; sales decreased 4% in the second quarter, as a result of the difficult trading conditions in the global golf market, which resulted in TaylorMade-adidas Golf sales decreasing in many regions such as Western Europe, other Asian markets, and North America. All other segments grew during the second quarter.

For the first six months, revenues of other businesses were up 2%, driven by sales increase of the TaylorMade-adidas Golf from the first quarter, and from (inaudible).

The segment of quarterly gross margin decreased 1.9 percentage points to 43.4%. For the first six months, gross margin was down 0.5 percentage points to 44.0%, mainly due to lower product margins at TaylorMade-adidas Golf, which more than offset the positive effect from higher product margins at Reebok, and at Reebok-CCM Hockey.

So wrapping up for the day, let me comment now on the significant challenge we are facing this year from currency movements, and in particular, currency translation. As I am sure you are well aware, currency such as the Japanese Yen, Australian Dollar, Brazilian Real, Argentinean Peso, British Pound and the Russian Ruble have all weakened considerably versus the euro in a relatively short period of time. As you can see, in the second quarter alone, this cost us 4 percentage points from our top line growth. It also implies a considerable double digit €1 million negative impact on our operating profit in the first half.

Based on current spot rates, the impact on translation in the second half of the year, is likely to show even further deterioration. And I currently state that we may see between a 5 to 6 percentage point impact on our reported top line results, relative to our achieved currency neutral sales growth.

Now while this is a considerable headwind to our reported figures in euros, we should let this distract from the strong underlying operational improvements we have seen in our business this year.

With that in mind, now let me hand you back to Herbert, who will go into more detail on how we are shaping up to accelerate growth, as we move through the balance of the year.

Herbert Hainer

Thanks Robin. Given our solid start to the year, we can therefore reconfirm the [methodology] of our full year targets, with only some minor tweaks to reflect recent development. Given the lackluster trading environment in Europe, as well as the unfavorable development of several currencies versus the euro, as Robin just has mentioned, it is fair to say that our absolute goals for the year are more challenging to reach, than when initially announced.

As a result, we have widened the range for our currency needs to a full year sales forecast, which we now expect to grow at the low to mid single digit rates. In terms of phasing, we expect a stronger Q4 than Q3.

Given the health of our inventories in the market, the continuous desirability of our brands and the strong first half improvement, we now expect to achieve a gross margin of 48.5% to 49%, compared to our initial target range of 48% to 48.5%.

Due to the faster pace of new store openings, we also expect operating expenses as a percentage of sales to increase compared to our previous guidance of a modest decline. Nevertheless, due to the strong gross margin development, our operating margin target of approaching 9% for the full year remains unchanged. Taking it altogether, we continue to forecast net income attributable to shareholders to increase at the rate between 12% and 16%, to a new record level of between €890 million and €920 million. This means, that while you should be wary of currency developments as Robin clearly explained, from a strategic and operational perspective, we can look forward to the beginning of a period of increasing momentum for the Group.

Our powerful brand engine, the clear market share wins in the emerging markets, and the excitement building throughout the world ahead of the 2014 FIFA World Cup are all feeling the slow but steady improvement in market sentiment; and we will be doing everything possible to spur consumer appetite, leading from the front with an accelerated pace of product launches and marketing campaigns.

adidas Running will again be front and center. By now, I am sure most of you have already heard about our latest major innovation, Springblade, featuring 16 forward-angle plates made out of a high-tech polymer. It is the first running show, with individually tuned blades engineered to help propel runners forward. Springblade is truly another game changer is so many respects. Not only does it live up to the promise of explosive energy return, but it's futuristic and iconic look is ideally suited for our long term target to win with the high school kids.

Introduced at retail in the Americas last Thursday, the social buzz ahead of the launch was electric, and so are the early sell-throughs. Springblade has broken all of our e-commerce records, and is already among the top selling shoes with our retail partners. In fact in the last week, traffic to our adidas.com site in North America has almost doubled.

Therefore, when I look at our capacity plans for boosting Springblade combined for the next 18 months, I am convinced that this year of running is just the beginning of a long term upward trend for us in the world's most important footwear category.

In other categories, there is also plenty of excitement. Basketball, while we had a rather quiet second quarter, momentum is said to return to the category. Throughout the summer, we have been busy activating the brand around the world with our growing roster of top NBA stars. On the Quick versus the Fast Tour, featuring John Wall, Ricky Rubio, Damian Lillard, Jrue Holiday and Mike Conley, we were busy promoting the crazy Quick and the (inaudible) basketball team. Derrick Rose traveled the world, exciting fans with some new (inaudible) from day one.

With Football, the new club season is kicking off, where we welcome many new teams and heroes to the brands, such as Flamengo in Brazil, and German star Mesut Özil. And if you have not seen it yet, check out the new Speed of Light campaign capturing the football genius of Leo Messi like you have never seen before. Film captures and analyzes Leo's movements to reveal the secret of his movement on the pitch, as well as the life-in-motion design of the new Adizero F50 Messi boot, which he will wear in the first part of the season.

Over the coming months, you will be hearing and seeing a lot more on football, as we accelerate our activations ahead of the 2014 FIFA World Cup, but we will be telling you more about in the third quarter, be assured that we have a lot of fantastic innovations in store for 2014.

As one key (inaudible), we recently announced that we will be introducing the adidas miCoach Smart Ball. The Smart Ball has been designed to improve technique, power, spin and accuracy through an automated digital coaching system. Of the three years of development, we created a ball with in-built sensors that track its movement and feeds the information back to the player through an app on the phone.

At Reebok, the pace of new product introductions has also picked up, heading into back to school, including the Reebok One Series performance footwear, and apparel collections. The ATV19+ versatile running shoe and strong uptick in Classics, particularly in the franchise side, and the retro basketball. In particular, our Shaq product has been flying off the shelves, and the campaign we have created with Shaq and Tyga is the most viewed ever on Foot Locker's YouTube channel, with 6.5 million hits to-date. And we will continue to drive momentum in core Classics, as we celebrate 30 years of the Reebok Classic leather, which underpins the great heritage and authenticity of Reebok footwear.

In addition, we will also continue ramping up our connections as leaders and trendsetters in the fitness industry. Our strategy is to build long lasting relationship with the best fitness instructors in the world, and the key enabler of this, is the Reebok One platform, which is already proving to be a huge draw, already acclimating over 5,200 members.

Following up in the same context, today, I am happy to announce another exciting collaboration for Reebok in this respect. Reebok has entered into a new partnership with the largest provider of group exercise programming in the world, Les Mills. This partnership will be an important component of Reebok's studio category moving forward, which we kicked off in [June] this year, with the launch of (inaudible) 10 franchises.

Les Mills has a history that takes back to 1968, and today has more than 100,000 instructors worldwide. Their product includes programs such as BODYPUMP, BODYCOMBAT and GRIT, some of the most popular group workouts in the world. Reebok will have a lot more to announce in the coming months about the Les Mills partnership, but this is clearly another great example of how partnering with the very best in the fitness industry, it can ensure we are front and center, where our target consumers are most active.

Also in terms of showcasing the new Reebok positioning and product (inaudible) of the consumer, for those of you in Europe, we will open our first Fit Hub store in London on September 12, which is a continuation of the global rollout of the Fit Hub concept, [Bianca], for all of our future controlled space initiatives for the brand.

Finally, to come to full circle on the brands, I told you in the first part of my speech, that the next push in Golf is coming, and well it is already here. At the end of July, we introduced our new and longest Driver ever, SLDR, featuring more effective and easier to use movable weight technology, it is already the number one Driver on tour. In addition, we also will continue to drive market share gains in footwear, thanks to the extension of the (inaudible) platforms, and I expect an acceleration in sales growth from adidas Golf, as the first fruits of our combined efforts come to life.

So ladies and gentlemen, to wrap up for today, the message is quite clear. From an operational and strategic perspective, our Group is in perfect shape. At Adidas, we are growing strongly in our key strategic categories, and our pipeline is packed. We have successfully brought Reebok back to growth and the path is set and clearly defined to drive sustainable long term success. We are the undisputed leader in golf, with an unparalleled track record, and yet everything takes (inaudible). And we have a strong balance sheet, giving us the firepower to invest organically in our operations in the long term global (inaudible) of health, fitness and sport.

Although, there a few speed bumps out there, our game plan is providing winning results. We are focused on the consumer, and we are focused on the quality of our business.

In December, I look forward to welcoming you here to Herzo, where we will have our final update session on Route 2015.

And with that, thank you very much, and now Robin and I will be happy to answer all your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we take our first question from Michael Kuhn of Deutsche Bank. Please go ahead.

Michael Kuhn - Deutsche Bank

Good afternoon gentlemen. Few questions from my side, firstly on pricing environment. You mentioned price increases in the first half. I would be interested in quantification of such statements, and also looking into the second half and currency headwinds pricing increases could be one part of the reaction. How do you see the environment at the moment and the potential for further price increases? Then secondly, on your so-called key attack markets, Russia, China, U.S. and all three with a relatively modest growth in the first half of the year, maybe some impressions what dynamics you expect into the second half of the year, and what drivers do you expect behind a -- expected recovery and especially I would be interested in the performance of adidas in the U.S. at the moment, because there seems to be some weakness lately. And finally, you mentioned the combined production capacity of Springblade and Boost into next year, that's one of the drivers for the running category, it would be interesting to get an insight on how many units you plan for those categories? Thank you.

Herbert Hainer

So Michael let me start with the first question on price increases. I guess your question was, in the difficult environment, are we able to bring price increases to the market, and how will this look like? I think as you have seen with Boost, with Springblade, with ATV, just to name a few of the products, not to forget Nitrocharge, whenever we bring innovative products to the market, we are able to charge higher prices; because the innovation is so strong, that consumers are demanding this product and ready to pay the price.

Of course, we also have areas, where we have to be more conscious on pricing and be more aggressive. But we definitely will play this mix, according to the consumer needs and demands, and we definitely will keep an eye on our strong gross margin going forward.

When you said in our key markets, U.S., Russia, and you mentioned also China, the results are not so good, and let me first and foremost make it clear, that in China, I am very happy with the result, plus 6% and compared to all the others that you might have seen, this is excellent.

In U.S. and in Russia, we have two different sentiments. In Russia, definitely there is an economic slowdown, there is no doubt. There are more malls built, that means more square meters, and therefore traffic in some of the malls is down, and as we are by far the clear market leader, and therefore more or less stores in every other key malls. This is impacting us. But we have ramped up our product offerings, bringing also more innovations to the Russian markets, the Boost, Springblade at the end of the month of August, is already in the second quarter, and although the weather turned better, that we have already positive comp growth, and definitely to see improved trends in the second half.

In the U.S., I think the second quarter was marked by the slower sales of the basketball market. Obviously, Derrick Rose was not able to play in the -- affecting the first half of -- in the background of the basketball season, this didn't help. We also had a lot of new product in the first half of 2012, which made the comparables a little bit tougher. But nevertheless, for the U.S., the same counts as I said for Russia, we are bringing a lot of new product into the market, the second wave of Boost has already started at the end of June. Now we introduced Springblade in the last week as a result, I am sure you have seen already, they are outstanding not only on income also, but our retail partners where we launched. We will further continue with Originals and with Basketball, and then with Football during the second half of the year.

In China, I think we will continue to grow, even there, it also becomes a little bit more challenging, but the research within the 60,000 consumers which I mentioned within my speech, clearly showcases that since 2009, when the tough crisis was in the market, we are doing quarter-by-quarter the right steps to win the hearts and minds of the consumer in China back, and therefore, we are going forward with much more success, and most of all, the other brands which are competing in the Chinese market.

And last but not least, on volumes. So for boost, we have sold already around 500,000 pairs in the first half, and planning another 1 million pairs for the second half, and for Springblade, we will give you the numbers later in the year for 2014, because we have a (inaudible) approach, now we have started in America, we have started in Brazil. Now we are going at the end of the month to Russia, and then continue in 2014, in the rest of the world.

Michael Kuhn - Deutsche Bank

Just one quick follow-up on pricing. Any comment possible on the effects of price increases in the first half of the year?

Robin Stalker

Michael, I think as we have seen in the last few quarters, we have obviously had some benefit from price increases, but it's also the product mix, it's also the regional mix of some of the country mix that is helping us maintain a good margin, despite making a hedging development.

Michael Kuhn - Deutsche Bank

Okay. Thanks.

Operator

Our next question comes from Matthias Eifert of MainFirst. Please go ahead.

Matthias Eifert - MainFirst Bank

Yes hi, Matthias Eifert from MainFirst. First, a question is about Russia. Can you update us there about your store openings there are the moment, where do you stand in terms of store counts, and if I take your comment into account in terms of payout from IT investments, consolidation of the warehouse infrastructure there, it sounds like you might be even able to increase the profitability there going forward, and I think you have already quite a high level of profitability there or would it be already a good result, if you are able to maintain the high level of profitability there? It would be interesting to hear thoughts about Russia?

Second about Reebok, I was quite surprised about the strong growth rate you have shown us already in the second quarter, and from recent discussions, and also discussions with (inaudible), I thought the progression would be a bit more -- the buildup would be a bit slower, and the development more gradual, and the 11% growth with the U.S. is already very remarkable, and so where has been the super high growth rate to get to that number, and was there a bit of a -- kind of a sell-in ahead of your launches, and what should we expect going forward in terms of growth rates there, and also related to Reebok, it would be interesting to hear, why the wholesale gross margin at Reebok is just at the level of 26.6% in the second quarter, compared to the adidas brand at nearly 43%. Is that a high share just coming from the U.S. or some effects like Latin America, where you still work with the distributor? Can you explain why there is still such a big difference there in terms of gross margins compared to the adidas brands, that would be my questions for you?

Robin Stalker

Thanks Matthias.

Herbert Hainer

Hi Matthias, let me start with Russia first. Russia is a very profitable market for us, as you know, and we are by far market leader, and we definitely think that there is still lot of opportunities out, by our internal work and optimizing what we are doing. Therefore, we have introduced a complete new IT system in Russia over the last 12 months, which will help us to be better connected to all our stores to get faster the data what is selling, and therefore, combined with that, we have build a new warehouse that we can faster replenish, and we want to have a more or less, never out of stock in our stores, because we found out that this is something which can be optimized, if we have the products permanently available in our stores, which is also not always the case. And we are permanently working further in investing in becoming more sophisticated and even more professional in Russia, and this will definitely help us drive our growth and the profitability in Russia.

I think to store openings, Robin, do you have the exact number?

Robin Stalker

We have 96 stores opened for the whole Group net over the last six months, and the majority of that will be in Russia. We have a total there at the end of the six months of about 990 stores, Matthias.

Herbert Hainer

Including Reebok.

Robin Stalker

Including Reebok.

Herbert Hainer

That's including Reebok yeah. So this brings me to Reebok, to your second question and the second quarter. I mean, it's nice to see, the 11% Matthias, but we shouldn't have overestimated. The second quarter is a smaller one. We are happy with the increase, there is no doubt, but what I am even more happy is, that we definitely see that Reebok brand is coming back into the mind of the retailer and the consumer, by the individual steps we are taking, and I elaborated in my speech to a lot of them, be it the ATV product, be it the Shaqnosis, be it now the Reebok One, which we introduced, but also when you see that we are able today, that a company like Les Mills is connecting to us, this clearly shows you that they have confidence in what we are doing and what the Reebok brand can do for them, because you can be sure they have clearly analyzed before they went into a partnership with us. So now we have crossed it, we have Les Mills, we have Spartan Race, we have (inaudible). These are the most spectacular and fastest growing development in terms of fitness in U.S. and starting to travel around the world, and the apartment with it. So therefore I am really happy about the way going forward.

I know that we still have a lot of work to do to bring this to life in all the markets around the world, but the signs which we see, which we get from the market, also from the retailers, for our -- selling for 2014 is definitely encouraging.

And last question was on the --

Robin Stalker

Looking at the gross margin Matthias, I mean, for the total including both terms. We have the same mindset, which is excellent, considering where they are and what Herbert has just said, yes, there are differences between wholesale and retail. But it does get in the wholesale, we have got the joint venture in Brazil, and I think that would probably account for most of the difference.

Matthias Eifert - MainFirst Bank

Okay. Great. Thank you.

Operator

The next question comes from Andreas Inderst of Exane BNP Paribas. Please go ahead.

Andreas Inderst - Exane BNP Paribas

Yeah, good afternoon everyone. I have three questions. The first one on your visibility. How good is your top line visibility for H2? May be you can share with us your order backlog for the second half of the year, and what's your expectations for the like-for-like development in own retail? My first question. The second question on owned retail, you seem to be quite confident in your own retail business, given your store roll out plans, which doubled the number you initially planned. How come, what has changed in your perception, why have you doubled the number of retail stores in the current market environment? And my third question is on the lifestyle offering, very pleasing development in the second quarter, compared to some of your competitors, what is your blend to keep the momentum going in the second half of the year and 2014, maybe you can share with us a few initiatives? Thank you.

Robin Stalker

So Andreas, first question visibility for the second half of the year, obviously we have good visibility, because you know we have all our preorders for the second half in, but we don't give any backlog numbers, I think several years. But be aware what we told you in terms of sales development, you can be sure that we have brought the backlog into it.

Second question, on retail business, our perception has not changed. We are definitely encouraged several years by our retail business. Still we are learning day-to-day how to operate it better, but when you look around the world, we have now close to 2,500 stores around the world, and we are quite successful; and especially with, as I said before, what we do in Russia, that we get more visibility, we have started with our franchise partners in China, if you might remember what I told you in 2010, that we get better visibility, that we can faster react and harmonize our systems to have a better offering and less inventory, and this is what is encouraging, and obviously, when our opportunity is there for good locations, then we take it, and we get more and more offerings from the big mall providers, because they see what the other's brand can do, and therefore they are offering us their locations.

This goes along with the third question, the lifestyle offering. I think we were able in the last seven, eight years, to make, especially the adidas brand, very cool, by focusing on one hand on the performance side, and being there, the most innovative brand, but also capturing the lifestyle consumer through a lot of different activities, be it our collaborations with the big designers like Stella McCartney or Yohji Yamamoto or be it our original owned store rollout plan, where we go to the coolest and hottest places in the big cities. This obviously we will continue to do. You have seen it in our numbers, plus 8% in the first half. So I think we understand this business in the mean time, very well, and this is what we will continue to do. You have seen also with our new offering now, where we go to new consumer target group, and we are undefeated, by of course, great product, but also by ambassadors like Selena Gomez or Justin Bieber, and this resonates once again with the consumer.

Andreas Inderst - Exane BNP Paribas

Okay. Thank you.

Operator

The next question comes from Andreas Riemann of Commerzbank. Please go ahead.

Andreas Riemann - Commerzbank

Yeah, good afternoon. Andreas Riemann, Commerzbank. Coming back to retail again, a few questions here. Comp store growth was down significantly in Eastern Europe. You already mentioned less traffic, but my question would be, did lower comp store growth often affect off tough comps into the Euro 2012 in this region? I could think it actually looked better in the second half, because of this comp effect? And also given more competition and less traffic, and in Russia you mentioned, do you see the need to close some stores in Russia, and another one on the 84 openings, that's a big number indeed. So my question would be what regions did you open these 84 stores, and is this sustainable? Also do we expect few openings in the coming quarter? That's it from my side.

Herbert Hainer

Yup Andreas, your anticipation is right that we had tougher comp store sales in the first half, especially in Russia and CIS and mainly in the Ukraine, where the European Championship obviously helped us a lot in the first half of 2012, as the European Championship was in Ukraine, together with Poland, and we were the sponsors of the Ukraine National Team. But as I had said, I feel already positive comp store growth coming back in the last few weeks, because we are activating our stores in a different way, with new innovative products. As I said, there was also (inaudible) a little bit, that we definitely operated better.

We are closing stores of course, because malls go out of fashion, new malls are coming up. This would be a permanent process. And I think --

Robin Stalker

You are right Herbert, as I said in my prepared comments that we closed over 100 something stores in the period, and all of the stores were reopened, Andreas, about 80% of those were in the European Emerging Markets, in others where there is a lot of activity, obviously Latin America. I think at the moment, you should accept that we are probably going to be opening a little bit more than we had originally planned for this year, but probably not quite the lift that we have had in the first half.

Andreas Riemann - Commerzbank

Okay. Thanks.

Robin Stalker

Welcome.

Operator

The next question comes from Allegra Parry of Cantor Fitzgerald. Please go ahead.

Allegra Parry - Cantor Fitzgerald

Yes. Good afternoon. I have three questions please. Firstly on the full year guidance, on the amendment to sales outlook. I was wondering if you could give us a little more detail around how that affects the various segment's guidance that you have given previously. Secondly, on Reebok, the strength is in Fitness and Classics, I was wondering if you could update us on how much those categories represent, and perhaps comment on what's still a negative territory? Then lastly, if you could give us an update on where you stand, in terms of your hedging rate and position for full year 2014 please? Thank you.

Robin Stalker

Okay Allegra. Let's start with one of the last one, which is the hedging rate. I think last year, we enjoyed a hedging rate of around about 1.38 and for this year, we are probably around at 1.32, and looking out, and we are fairly much along those lines for the next year in any case, with majority of that now hedged. So there shouldn't be major differences in 2014 on that level.

Your first question was about sales outlook, and whether this had an impact on the sales. Not really much of a change there, and then just -- (inaudible) we did really was, provide the range a little bit and I think, they were reflecting also on TaylorMade's development, that would probably be the only major impact there. And your second question was something about categories, which I am afraid I didn't quite hear?

John Paul O'Meara

Last point was on Reebok, (inaudible), I think your question was how much is it of our total business, it's approximately 50% of our total business.

Allegra Parry - Cantor Fitzgerald

So is that both of those categories together?

Herbert Hainer

This is for both categories, yes.

Allegra Parry - Cantor Fitzgerald

Okay. And can you may be comment on how the other categories performed, that you didn't mention?

Herbert Hainer

In Reebok or in Adidas or --?

Allegra Parry - Cantor Fitzgerald

Sorry, I was referring to Reebok, so besides these two strengths, can you just give us a sense for how the other categories are performing, and how you are repositioning those?

Herbert Hainer

Good we don't have so many more categories, we have the apparel business, because under training, we put a lot of apparel and footwear together, as you know, but I can specifically talk to apparel, which is getting better and better, when you see the collections, especially Delta, the Go Outside collection, etcetera, this gets real interaction. We still have to [work at it, to] get better presentations in the stores for our Reebok apparel collection, but the products are really great, it's getting better and better.

What else do we have? ATV, I spoke already, which is the running category, and with Reebok One, we are bringing new running products to the market. But I think this is more or less what we have in categories.

Allegra Parry - Cantor Fitzgerald

Great. Thank you very much.

Herbert Hainer

You're welcome.

Operator

The next question comes from Antoine Belge of HSBC.

Antoine Belge - HSBC

Yes, good afternoon. It's actually Antoine Belge with HSBC. Three questions if I may, with overall -- in terms of input costs, in particular, wages in China, what's to confront, is it growing at double digits, and what's your outlook in the second half of, (inaudible) 2014? And so I mean, you mentioned that -- second question, the fourth quarter would be stronger than usual, can you may be comment about the lifecycle, especially for World Cup related products, especially may be compared to four years ago to produce World Cup. Is it that, compared to the previous World Cup, you will be delivering a bit more in Q4 than you did, or are there sort of specific factors? Finally, my third question would be on China, and more specifically on the Neo brand, can you remind us with how the -- what is Neo bringing to you in China specifically? Thank you.

Robin Stalker

Okay. For the input costs, yes obviously it's a significant part of our calculations for future earnings, and I think for 2013, we have been very favorable with what we had last year, and that's obviously helping us generate these higher gross margins. There hasn't been a lot of significant wage increases actually announced yet, you are absolutely right, when they come there, they are normally double digit. We are -- I have noticed, that there will be likely negative pressures coming in the second half of 2014, but I haven't got any details of that for you at the moment.

Herbert Hainer

Let me just add to the wage increases, what Robin said. I mean, it has the positive and the negative side. The negative side is the (inaudible) costs getting higher, but in the positive side, there is more and more Chinese consumer getting income, which can buy our products, which on the other hand, will fuel the future growth. You asked about the lifecycle product for Football, there is no general change in the lifecycle. So we will introduce in the fourth quarter, the jerseys of all the teams which will compete at the World Cup. We count that we will have between eight and 10, obviously Germany, Spain, Russia, Argentina, Colombia, Mexico, Japan, etcetera, and these jerseys normally run for two years. But obviously, from October, November, when we introduce them, until the World Cup, this is by far the strongest period.

The same is true for the Official Match Ball, which we introduced in December, and then we are permanently introducing on a monthly basis, new football footwear on different dialog, say 50 (inaudible), etcetera. But from a lifecycle perspective, there is no major change.

And last but not least, you asked about the Neo brand in China. The Neo brand in China is no different, and that's what the Neo brand should be all around the world. This should excite the younger consumer, the 14 to 19, mainly female driven consumer, which we don't access so far in a bigger way. And we do believe with this offering, we definitely will create -- will open a new consumer group to us, and also buying the consumer in the earlier stage to our brand, which also should help us in -- when they grow up, and getting to all the other different parts of our collection beat, style beat, performance (inaudible) etcetera.

Antoine Belge - HSBC

Second, maybe just a clarification, maybe -- could you quantify how much is Neo in terms of your total sales in China?

Herbert Hainer

We don't give any specific sales number for Neo, I only can tell you that, out of the 7,000 stores around 1,000 is of Neo.

Antoine Belge - HSBC

Thank you very much.

Herbert Hainer

You're welcome.

Operator

The next question comes from Rogerio Fujimori of Credit Suisse. Please go ahead.

Rogerio Fujimori - Credit Suisse

Hi everyone. Two questions please. Robin, could you update us on the raw material cost inflation outlook emphasis on where we were earlier this year, and my second question is on football sales. Would it be possible to give us an idea of the revenue base in the first half, just to help us to basically compare this with the two different targets you set for next year? Thanks very much.

Robin Stalker

Okay. So actually we have been, just in the previous question I think, quite pleased, there has been a lot of stability this year over the significant increase we saw last year. Unfortunately, it will stabilize at a fairly high level of the raw material costs. As I said also, for the first half of next year, we think good stability continues, but we are at a risk of having raw material price increases or wage increases at least, in the second half of the year. But I have no significant quantification of those (inaudible).

Herbert Hainer

And Rogerio, your second question on football sales for the first half, yeah, we don't give that numbers, but I told you I am happy that we were able to increase our total football sales by 6% in the first year. Obviously, (inaudible) was down, because we didn't have any new introduction on the jersey, which we had last year at the same time for the European Football championship. But what I definitely can give you is, that our target for next year is to reach €2 billion in football sales, and this will be by far the highest number which we have ever achieved.

Rogerio Fujimori - Credit Suisse

Thank you very much.

Herbert Hainer

You're welcome.

John Paul O'Meara

So that completes our call for today, and we will be reporting our Q3 results on November 7 and in the next few days, you will receive an invitation to join us here in Herzo for what promises to be a very exciting event in December. With that, enjoy the rest of your summer.

Operator

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

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