adidas AG (OTCQX:ADDDF) Q4 2013 Earnings Conference Call March 5, 2014 9:00 AM ET
John Paul O'Meara - Vice President, Investor Relations
Herbert Hainer - Chief Executive Officer
Robin Stalker - Chief Financial Officer
Cedric Lecasble - Raymond James
Jurgen Kolb - Kepler Cheuvreux
Matthias Eifert - MainFirst
Julian Easthope - Barclays
Andreas Inderst - Exane
Andreas Riemann - Commerzbank
Philipp Frey - Warburg Research
Michael Kuhn - Deutsche Bank
Antoine Belge - HSBC
Good day, ladies and gentlemen, and welcome to the adidas Group Conference Call for the Full Year 2013 Financial Results. For your information, today's conference is being recorded.
And at this time, I would like to turn the conference over to John Paul O'Meara. Please go ahead.
John Paul O'Meara
Thank you, operator, and good afternoon, ladies and gentlemen, and good morning to those of you following us from the date. To allow for ease of comparison today, all sales and revenue-related growth rates will be discussed on a currency-neutral basis, unless otherwise specified. In addition, all comparisons will also exclude goodwill impairments losses, which Robin will discuss in detail in his presentation today.
So, let's get started, and I'd like to hand over now to our CEO, Herbert Hainer.
Yes, thanks JP, and good morning or good afternoon, ladies and gentlemen, and welcome to the call also from my side. Before we turn to the results of the past financial year, I would like to briefly comment on yesterday's decision of the Supervisory Board with regard to the early extension of my executive post contract until March 2017. I am pleased that the Supervisory Board has expressed its confidence in me by extending my contract to another two years.
The generation change, which has already begun with our management team, is a process we tend to complete carefully and diligently. And yesterday's decision gives the company sufficient time to ensure a smooth transition at the helm of the adidas Group and to optimally facilitate the process of succession for the company.
In addition, we'll do everything in our path to successfully execute against our strategic business plan, Route 2015. At the same time, we will be define our new long-term strategy together with the next generation of company leaders in order to prepare the adidas Group for another era of growth and success. And I'm very much looking forward to the next few years. It will be the exciting period for our group.
The first things first, let's now turn our attention to the 2013 financial year. In a marathon, every inch of every mile counts. And in this spirit, I am pleased to report that we duck deep in the final stretch of the year and regain the level of gross momentum more typical of our high performance (agenda).
After (I've led) performance in the first nine months, we had an exceptional first quarter with sales growing by 12%. This drove operating profit up almost fourfold, compared to the prior year to new first quarter record of EUR 98 million.
The strong revenue finished to the year, which was above our expectations, ensured that we comfortably met our revised full year targets from September, despite a further worsening of currency exchange rates, which caused us (negative) nine percentage points on the top line in the first quarter.
For the full year, this translates into sales growing 3% on a currency-neutral basis, or declining 3% in reported euros to EUR 14.5 billion. Gross margin increasing 1.5 percentage points to a new record level of 49.3%. Operating margin expanding 70 basis points to 8.7%. Finally, net income attributable to shareholders growing 6% to EUR 839 million, well within our September range of EUR 820 million to EUR 850 million. This result, ladies and gentlemen, is a clear testament to the persistent energy we exercised in making the most out of a challenging year in several areas.
As a recap, three key items in particular impacted our results versus our initial expectation; negative currency developments, distribution constraints in Russia/CIS, as well as the stall in global golf market.
I'll discuss later two of these three issues in detail in nine months results call and while the impacts are significantly in terms of our profitability and top line achievements. In the end, the devaluation of major currencies versus the Euro was simply the factor that was too significant in magnitude to cover operationally. However, as we are taking as it is we cannot and should not overlook the powerful underlining operational progress we're making with our brands. This is where I want to focus my attention today with you, because ultimately that's how we move in.
And the best place to start, this is our fastest growth engine of the year running, because our 2013, as you might remember is the Year of Running, and this was exactly that. Sales grew an impressive 17% we are by far -- we hope that's the most talked about brand in the category right now. The Boost, Springblade, and the miCoach Smart Run watch or established families such as Supernova or Essentials, adidas is winning and is winning big.
In the first quarter alone, sales increased 31% in the category, and the most important greatest thing is we're only at the beginning. This is important as running is the authenticator of footwear and apparel technologies in our industry. If running is the authenticator of the industry, then football is the authenticator of what is it is to be adidas. If anyone goes in doubt about our leadership in the category, then our 35% growth in the first quarter should easily settle any debate.
Our growth was fueled by a fantastic start of our World Cup (product) campaign and a very good Christmas sale. Throughout the quarter, adidas excited football fans around the globe with its colorful Samba collection, including a net boot from each of our key ranges, adizero f50, Predator, Nitrocharge and 11Pro.
We also launched a 2014 Fifa World Cup kits of leading national football federations, including reigning champion Spain, Argentina and Germany. The kits are inspired by passion and vision of next-generation football fans. The shirts that teams will wear in Brazil this summer are 50% lighter than any previous adidas jersey.
Brazuca, the official match ball for the World Cup was also favorite amongst Christmas shoppers around the world. In addition to this, Brazuca is the first ball with its own Twitter account followed by already more than 100,000 fans worldwide.
(Low waist) is showing up more relevant commercially in our own retail stores, where we're already enjoying phenomenal sell-throughs of federation jerseys and the official match balls. In the early weeks of the year, sales of these items were up over 200%, compared to the last World Cup in 2010.
In the so-called non-event year and were playing against the tough comparisons with our Euro 2012 success, we increased our football revenues by 4% in 2013. So, forget all you may have heard or written about the weak adidas performance in football in 2013. We are leading in this category that is so close to the adidas DNA. And yes, we are leading into Germany too. We are the clear number one in the football overall business, and we are also leading in terms of market shares footwear based on what consumers tell us about their preference in football. According to the latest NPD data, we are a solid six percentage points ahead of the number two.
If there is fierce competition out there for market shares, football, footwear, absolutely, as it is the case in all other major sporting categories. In almost all football markets, the two largest brands holding 80% to 95% share depending on which market you look at. While this tells us something about the performance of all other competitors out there, let me assure you of one thing, wherever we might be second place, we will attack and we will be back in market share.
Another category whether it's fierce competition is in the sports lifestyle and again of the mid single-digit growth is the first nine months, adidas Originals & Sport Style sales accelerated in Q4 to 12%. This means we finished the U.S. 5% sales growth is revenues well in excess of EUR 3.2 billion.
As strategically important, adidas NEO label grow continuing to win the hearts and minds and the volumes of teenagers around the world. Working with them, growth year-over-year is a testament to the effect it is more and more young consumers are in love with this young and fresh label without generating almost EUR 700 million in favor to this label, which is impressive by any standard.
Taking it all together, it was a very good influence to the year for adidas with 10% sales growth in the fourth quarter and 2% for the full year. Our diligent focus on driving quality growth was fueled by innovation and strong channel management, also once again paid off for the brand, which can't be seen in this strong two percentage point increase in the gross margin.
Moving over to Reebok, I'm pleased to report a similar story. The strongest, we returned Reebok to growth in 2013 with sales increase in 2% for the year and 9% at the first quarter. For the year, excluding the NFL license impact that's still burdens the first quarter basic reached 4%. And after this tremendous increase in gross margin or four percentage points to (59.7%), we (inaudible) the Reebok gross margin is at this narrowed level.
We are now touching distance of our Route 2015 goals to lift Reebok's margin above 40%. And I am confident the gap in margins between the brands will continue to narrow further over time. Why? Because we are on a clear, consistent and sustainable growth path, growth in 2013 pull out debt from 2012 and we are accepting those categories that fit perfectly with our positioning for Reebok as the fitness brand.
The sales in 2013 increasing 18% at fitness training 30% in Classics and more than 300% in studio or be it from a small base. We also continue to bring our unique Fit Hub concept to new markets which is an important long-term strategic investment, drive a common presentation of Reebok around the world.
In December for example, the first Reebok Fit Hub CrossFit box opened in France, located in one of premier shopping destinations, Avenue De L'Opera in Paris. This original and innovative concept combined the Reebok retail store and the CrossFit to it.
Finally, to wrap up of the brands, let's have a look at TaylorMade-adidas Golf. As you know in the third quarter we took swift action to clean up the market following a slower year for the golf industry. While it costs us some margin to do so, it was the right thing to do. As a result we were able to swiftly swing back to action in Q4 reminding the consumer and the competition, just how powerful an industry leader as we are.
The time period when many equipment manufacturers are seasonally required, TaylorMade excited the industry with the launch of SLVR in jet speed, two extremely popular drivers that both played extensively on the PGA Tour. This together with good market share increases in (inaudible) respectively allows us to grow 25% in the fourth quarter and finish the year with sales increase of 3%.
Before I hand over to Robin, let me quickly run through the geographical performance for again, the message from the fourth quarter is very positive, there is good momentum improvement in nearly all of our markets. Let me start in European emerging markets where sales grew 4% for the year. National CIS office plays a central role in this region, and as we've discussed several times this year has a fair share of challenges. Also, sales made from our distribution center hiccup. The good news is we have put our own operation initiatives behind us during the fourth quarter of this trend improving during the last weeks of 2013. Sales in Russia grew 8% in Q4.
Operationally, the market has also started well in 2014. The recent winter Olympic Games in Sochi shows the world how passionate Russia is about sport. And we are already looking forward to playing a major role in the build up to the 2018 FIFA World Cup in Russia. Nevertheless, we cannot ignore the significant weakness of the Russian Ruble since the beginning of the year as well as the current uncertainty in the regions both of which have added considerable risk to us in euros. Robin will take up this topic in more detail in this overall discussion on currency.
Ultimately, in the emerging markets, 2013 was an outstanding success. Latin America, which will have a lot of attention in 2014, we led from the front with sales growth of 19% for the full year and 32% in the fourth quarter. This was driven by the rising anticipation excitement as of the World Cup in Brazil, but it also reflects our continuous investments and improvements in this vibrant part of the world.
Moving on to greater China, we continue to keep both our major competitor and the local brands on the back foot in 2013. Our revenues increased at very consistent rates throughout the year driving 8% in the fourth quarter and 7% for the year.
Our local management team continues to execute this excellence blending their view in the correct fitness of adidas which is deep understanding of Chinese consumer. All regions confirms that we are one of the hottest brands in China right now with some fantastic rare footprint being over 7600 stores in more than 1000 cities.
In other Asian markets, sales increased a strong 50% in the fourth quarter and 5% in 2013, driven by strong growth in South Korea, India and Australia. North America developed lower than our initial expectations, is a 2% increase. There some lifestyle trends moved against us and we suffered from lower growth and expected in adidas basketball due to the unfortunate injury of our star athlete Derrick Rose.
Development at TaylorMade also impacted this development, nevertheless, trends pick up in the fourth quarter with a strong end for the year for brand adidas where sales increased by 10%. Running and football were standout categories growing 40% plus in this period.
Finally, sales investment Europe also finished the year positively with growth of 3% in the fourth quarter. For the year as a whole, sales went down 6%. This was largely related to the absence of UEFA Euro 2012 and the London 2012 Olympic game. We led that heading about to two percentage point impact on the (inaudible). It is also due to the continuously negative economic planet and lack of consumer confidence in most European markets especially in Southern Europe. And lastly, it is also result of a fierce competitive settle from market leadership in this important region.
Ladies and gentlemen, this wraps up our operational performance for 2013. We may not have reached all our ambitious targets at the end of original assessment year as we are proud that we ended on a high note in Q4 in May 2013, another year of records for the adidas Group. And we have every attention to strive for the same again in 2014.
But before I come to that, let me hand over to Robin to give you more details on our financial results and how currencies are affecting these results.
Great. Thanks very much, Herbert, and hello, everybody. As you have just heard operationally it has been a good year for our group and further progress on several key Route 2015 strategic initiatives.
This is extremely encouraging as we stay diligent and focused on delivering long-term sustainable growth and margin improvements. The foreign exchange and macro economic environment has and will unfortunately continue to leave its mark on our financial statements. I will spend a few time on this at the end of my comments today. But first let me complete the review of the key 2013 and Q4 financials. Starting with our gross margin, where once again, I am proud we reached at the industry benchmark for margin management achieving a 1.5 percentage point increase to 49.3% for the year. This performance was driven again by more favorable products and pricing mix as well as improved regional and channel mix, which will then offset negative effects from the less favorable hedging rate as well as lower margins at TaylorMade-adidas Golf.
The negative hedging effects amounted to 70 basis points while the impact of marked up TaylorMade-adidas Golf reduced the group's gross margin by 30 basis points for the full year. With the exception of TaylorMade-adidas Golf, gross margin increased at all brands and chains. For the fourth quarter, gross margin declined by 10 basis points excluding higher year run off effects related to Reebok India on a like to like basis the group to gross margin would have been up 40 basis points in Q4.
Looking at our operating expenses, other operating expenses as a percentage of sales were up 1 percentage point to 42.3% for the full year. This was mainly due to the accelerated pace of our own retail roll out as well as ongoing investments in the group's infrastructure throughout the year. The decreased leverage due to the lower top line growth are originally expected also contributed to this development.
Sales and marketing were combined as a percentage of sales increased 30 basis points to 12.4%. As a result of the strong gross margin improvement, group operating margin expanded to 70 basis points to 80.7%. On the fourth quarter other operating expenses as a percentage of sales decreased 2.5 percentage points due to solid operational leverage in that quarter. This drove operating margin for the quarter up 2 percentage points to 2.8%.
Again, in the fourth quarter we added 129 stores to our retail portfolio bringing our mid openings for the year to 294. With the end of 2013 our retail segment operated 2740 stores. Of the total number of stores 1557 were adidas and 404 were Reebok branded.
In addition, we operated 779 multi-branded factory outlets. So, in summary in 2013 we opened 534 new stores, 240 stores were closed and 127 stores were remodeled. Retail revenues grew 8% or EUR 3.4 billion representing 24% of total group sales. While comp store sales were down 1% for the full year, they turned positive in the fourth quarter rising 3% in the period.
On a brand adidas comp store sales were up 3% for the quarter and remains stable for the full year. Reebok comp store sales remained unchanged for the quarter and were down 3% for the full year.
Our e-commerce business continues to do extremely well with sales increasing 59% in the fourth quarter and 64% for the full year to EUR 250 million.
Now moving back to the P&L looking briefly at the non-operating items, next dimension expenses decreased 2% to EUR 68 million for the full year. Our net interest expenses were down 23% due to lower gross borrowings. This good progress was offset by higher negative exchange rate variances, which increased to EUR 18 million from EUR 7 million in the prior year. By the way, the full year tax rate decreased 30 basis points to 29.0%.
Moving over to the balance sheet; operating working capital as a percentage of sales increased 90 basis points to 20.9% compared to prior year. At year-end inventories grew up 13% on a constant neutral basis. This was as a result of our expectations for growth in the coming quarters as well as higher inventories in Russia/CIS due to distribution center issues during the second half of 2013. The latter accounted for around two thirds of the total increase. However, as I stated at the end of the nine months period, we expect this to normalize during the course of the year, due to adjusted inventory buying levels for that margin. The other balance sheet impact as a result of our annual impairment test, we have impaired goodwill and recorded 52 million Euro pre tax charge as of December 31, 2013.
Goodwill on our balance sheet declined 6% to EUR 1.2 billion with two thirds of the decline related to the impairment and the rest due to currency movements. Looking at the specifics which are probably almost a surprise, within the wholesale cash generated in Iberia, goodwill impairment losses of EUR 23 million. Within the retail cash generating North America, goodwill impairment losses of EUR 29 million to be recognized. The goodwill of these two cash generating units is completely impaired. Impairment losses remained at gross by adjusted growth percentage and an increase in the country specific discount rate.
As in the prior year where the impaired group would have 265 million Euro, the impairment also 52 million Euro is non-cash nature and does not affect the adidas group's liquidity.
And turning to capital structure, we ended the year with a net cash position of 295 million Euro compared to the 448 million Euro last year. Higher working capital requirements as well as the higher dividend payment and higher capital expenditure were the primary drivers for this development. Nevertheless, taking everything into account our equity ratio increased a strong 1.8 percentage points to 47.3% at year end.
As a result of this strong balance sheet, at our annual general meeting we will propose a dividend of 1.50 Euro. This is in line with our shareholder return policy to continue progress on increasing our payout ratio within the course of 20% to 40%. With 2013, this represents an increase in payout ratio to 37.4%.
And finally, ladies and gentlemen, before I hand back to Herbert, let me give you some insight into how currencies have impacted our result in 2012 and a look into the implications for 2014.
Accumulated for the 12 months, currencies wiped down around EUR 750 million from our top line result or five percentage points in growth. Throughout the year, the effect was sequentially worse with a peak of 9 percentage points in Q4. To give a few examples, the average rate of the Japanese Yen was 21% lower versus the Europe. The Argentine pays with 20% lower. The Brazilian, they are 12% lower. The Australian dollar and Turkish Lira are 9% lower. And the Russian Ruble and Canadian dollar, 6% lower versus the year over.
Unfortunately, these uncontrollable and unavoidable negative effects will continue in 2014. From today's perspective looking into 2014 taking a simple calculation of the day to day averages and applying the current spot rate for the rest of the year which you can all do yourselves by the way, the picture looks just as clean. For example, the Argentine Peso has already devalued another 32% versus the Euro, the Turkish Lira 17%, Russian Ruble 15%, and the Brazilian Real, Australian dollar, Canadian dollar, all 11% and even the Japanese Yen a further 7%, and of course (inaudible) as well.
Taking all this into account, it didn't stay as they are, we will see at least the same kind of translation negative as we saw in 2013 to mid single-digit to 70 point negative impact on growth. On top of that we will see additional gross margin pressures given the sharp weakening of currencies such as the Argentine Peso and the Russian Ruble already so early in 2014. This is because these markets have open exposures against the U.S. dollar related to our U.S. dollar outsourcing cost, which leads market (inaudible).
Taking all of the foreign exchange related impacts together, the impact on operating profit goodwill will be in a region of EUR 150 million to EUR 250 million, obviously while on aggregate there is very less that we can do in the short-term to compensate to these massive currency issues. Rest assured we will diligently pursue measures to combat the negatives over time. For example, we will make commercials in from a consumer environment can bear it we will selectively increase prices. In certain markets where currency trends persist, we may choose to strategically prioritize our investments or change our business model. And in other cases, we may choose to observe the negatives for a period of time to protect and nurture our longer term potential.
So based on what we know today we have best reflected the current situation in our guidance range for 2014, which Herbert will outline in a moment. So ladies and gentlemen, let me wrap up by saying while the currency situation is not pleasant. Fundamentally, we are very encouraged by the underlying development of our brands. Our strong margin delivery despite all of our challenges underlying our focus on driving long-term sustainable or profitable growth in the group. We will continue to work hard over the next months to master the economic environment. And we can do so with confidence given the strong pipeline of products and brand stories we have at our disposal. And to give you more details on that let me now hand it back to Herbert.
Thank you very much, Robin. Let me now talk, ladies and gentlemen about our operational outlook for the year which Robin previously said looks extremely promising. 2014 is a big sports year, there is no doubt about that. And as you would expect from a leading sports company, we will live up to the occasion to lift our gains and strive o achieve new heights for the adidas group. It contains this imagination, we have everything we need to be successful. And we will do it, with determination, speed and with leadership. These are reported in the portfolio and it will be united as portfolio.
As the official sponsor of supply and license for 2014 FIFA World Cup, we will utilize the biggest stage the world of sports can offer to drive new record sales in the category. In the field of play, adidas will be represented by eight federations. This eight means, include the number one to four of current FIFA world ranking Spain, Germany, Argentina and Columbia. Our latest footwear innovations will be the worn by the lights of Lionel Messi, Xavi, Robben, Schweinsteiger, DeRossi, Benzema, Oscar, Alfred, just to name a few.
In the coming months we will also bring up an array of additional innovative products including the adidas miCoach Smart Ball and the adidas Samba branded the first every football shoes with knitted upper that will be at retail in mid march. And every launch will be paired to stunning new communication activities.
There is no doubt that we will see an exciting World Cup and I can't wait until the Brazuca starts to roll on June 12th. Our ambition has not changed. Our goal is to achieve new record sales in our football category being the first spread to reach EUR 2 billion in sales with football performance product only.
In running we will continue to be focused on the expansion of some highly successful (Boost) franchise, now getting more than 8 million payers in the category of 2014 as well as a further global roll out of Springblade to new markets.
Basketball will see the introduction of Boost with the launch of D-Rose 5.0 in the second half of 2014. Furthermore, we will leverage our own current visibility to top NBA players such as Derrick Rose, Jeremy Lin, Dwight Howard, Damian Lillard, John Wall and Ricky Rubio. The origin of the re-launch of (inaudible) flux are said to be the major interest retail in 2014 with strong early (inaudible).
In addition, we can look forward to new collaborations as Japanese (inaudible) risk and retail overall as well as new collaborations with Brazil (inaudible) company and British retailer top shop. Of the successfully piloting adidas NEO outsourcing in Germany in 2012 and 2013, we will extend our (inaudible) by opening stores in Poland and the Czech republic in 2014 as you continue to drive towards our long-term target to grow NEO into a 1 billion Euro business, first NEO store in Poland opening stores in Warsaw in February 20. The group will also following the successful hit in Germany to open some more stores here.
For Reebok, our category approach will drive quality for the brand again in 2014. As we leverage our strategic collaborations, this cross fit, this broader range (inaudible) all of this consumer access points gives us exciting opportunities to reach our consumer right where he or she does his port of fitness being in the gym and the studio or at new forms of community-based events such as CrossFit Games or the 2014 Spartan Race series. And we have product (inaudible) to match these great activities. (Inaudible) 9.0, our new revolutionary industry first shoe for (inaudible) Series, new running innovations such as the (inaudible) new walking shoes, Skyscape, which we just launched with Australian top model, Miranda Kerr, our footwear offering is a big step forward compared to seeing 2013.
And after that significant increase in debts to our performance in (inaudible) Reebok ONE Series collection as well as new tennis designs for studio, we have some fantastic opportunities to build on the succession of apparel we started to enjoy in 2013.
In addition, we will also continue our successful partnership with top icons and celebrities such as Alicia Keys, Shack O'Neil and (Pagon) to drive key athletics business as well as bring back legendary iconic Reebok products such as the (inaudible) which celebrated 20th anniversary this year. While the growth market overall is likely to remain difficult in 2014 TaylorMade-adidas Golf were sustained and extended clearing this leadership. We once again have great innovation to leverage our focus in 2014 is on driving strong sales force. Therefore for the first months of the year we will focus on ensuring strong point of sales results for the volume shipped in Q4. And shipped -- selling this year more towards the second quarter to be better in line with the peak selling seasons.
To look at great product initiatives, but to truly leverage that to the fullest, we will step up our gain with the consumer connecting and executing this excellence at every opportunity. In this respect, 2014 will see several new initiatives commenced in the areas of digital and own retail.
Majority of our communication activities today happen in social media. (Inaudible) space, where our core target consumers engaging with brand content will bring greater consistency, increase speeds and drive parallels of friend activation online. Adidas will be investing throughout the year in establishing digital newsrooms around the whole globe. This will allow to better coordinate the brand's online presence as well as leverage and magnify key trend initiatives all year around.
Reebok is also creating a global digital center at its headquarters in Canton. This center and its team will engage the fifth generation consumer in the social world enabling Reebok to be part of the conversation in real time. In addition Reebok is also opening the so- called Reebok Production Studios to allow the brand and become a constant creator of exciting and relevant content.
Similarly as announced at our Investor Day 2014 will see the beginning of a new environment where our brands are trying to be our old retail stores, given as a clear goal was only to drive our levels of consumer service to elevate our story experience to fully represent the image and aspiration of the brand. The adidas brand is introducing its first new retail concept in six years with the introduction of the so-called HomeCourt performance and the neighborhood concept, Originals.
Our HomeCourt premier began on the first of January at the remodeled adidas Brand Centre in Beijing, our largest adidas store in the planet. HomeCourt features sport in passion in every single element of the store with architecture, communication, presentation tools and products, and this already hitting (inaudible) of consumer. We failed in the first weeks of (inaudible) three opening up 40% compared to the prior year.
In the course of 2014, HomeCourt will be introduced in 25 stores globally. The next curtains will be lifted in April and adidas will open its first South American HomeCourt store in Rio de Janeiro, Brazil, followed by Europe debuting in the U.K. at Bluewater in Kent and Harrods in London.
First of all (inaudible) new retail concept for Original neighborhood in March 2014. We will also experiment with single category stores such as outdoor women and kids mainly in our key markets China and Russia.
In addition, we will also continue to run our (inaudible) to further test acceptance to consumer and we will expand the Reebok (inaudible) content. In total we plan total net openings across all content for around 250 stores in 2014. So there is a lot happening already and a lot to look forward to in 2014.
With the successful performance of our brands in the various retail channels and markets around the world mean for our 2014 and the Route 2015 objectives. Well, I'll be on track operationally in the environment and unfortunately it serves that more challenges than we had anticipated with adverse currency movements being the most significant one.
Excluding currencies, I am convinced that we will achieve most, if not all, operational target we set ourselves within -- moving to '15 strategic business plan. Nevertheless, the currency situation as it is right now with respect to significant risk to achievement of our goals as Robin has already outlined in detail.
We have reflected this situation in our guidance range for net income (inaudible) to shareholders of EUR 830 million to EUR 930 million. We have to give you a wider range here because current market volatility makes it hard to predict what the final influence of currency will be in our result. Where we can inflate our performance, we will pursue our goals with determination and focus. And as Robin explained earlier, currency deterioration is a sector that influence at least in the short-term is limited.
Nevertheless, we have a proven track record and we know we can deliver big results when it comes. We will try high single-digit growth currency-neutral sales growth in line with our strategic plan in 2014 and we definitely want to continue to drive this kind of approach also in the future.
In Euro terms, we will grow our bottom line at a much faster rate than the top line. As long as currencies don't reverse materially from today's standpoint, I am confident that you will achieve the double-digit compound annual earnings growth rate over the Route 2015 period. Don't forget, since 2010 we have already generated 14% compound annual earnings growth rate. This is an exceptional return given discount and uncertain global economic environment.
Before I close, today's brings with it an end to an era at the adidas group. As you all know, Erich Stamminger has decided to dedicate more time to his private life and his last day with us is objected today. Erich and I have worked side-by-side for more than 20 years, and I can only appraise his fine sense for building our brands.
On behalf of everyone at the adidas group, let me thank Erich for leadership expertise and the many contributions he has made to the success as a group and its brands in the last decades. At the same time, I am pleased to welcome Eric Liedtke to the executive front, most of you saw in action at our Investor Day. Eric will be charge of global brands. And under the membership of Erich Stamminger, Eric has already contributed to the extremely positive development of the adidas brand in the recent years.
Ladies and gentlemen, let me summarize. We are a high performance company and we want to achieve more for ourselves and for you. We are sure we are ready, willing and able to do this as it's clearly visible in our strong fourth quarter performance. So there is one message that they would likely to take presentations that it is the following. We are growth company and despite all challenges the next few years will be operationally very successful for the adidas group.
We will make sure we do what is right for the long-term success of our group. We will make core decisions and pursue our goals with determination and focus. Our currencies will interfere with our financial results. They will not deter our willpower to follow the mission as a group to be the leading sports company in the world. We are here for the love of sport. This is our passion. We will continue to work in a way that make us proud of the results. Now, I am convinced that we have everything in place to reach new heights, break records and drive long-term sustainable volume.
With that, ladies and gentlemen, Robin and I are now happy to take all your questions.
Thank you. (Operator Instructions) And we'll take our first question from Cedric Lecasble of Raymond James. Please go ahead.
Cedric Lecasble - Raymond James
Yes, good afternoon, gentlemen. I'd have some main question on how do we reconcile your gross margin trend and your EBIT guidance trend? We understand that forex currencies are real headwinds today, but at the same time your gross margin guidance is not that negative. So, it's more reflected on the EBIT guidance, so could you explain us maybe a little more why OpEx will play against the company more than expected in 2014?
That's the first question. And the second question, could you update us on your running phase and your sales in running, and maybe give us in percentage of sales, on percentage of the adidas brand? That would be very useful, thank you.
Cedric, thank you very much for those three questions. The currency is obviously playing a role throughout the whole P&L. And so, this particular guidance that we are giving, however, what we are pointing out is that we lose all the leverage. If we lose so much on the top line, it's not just so much with the gross margin softness, it is really the operating margin softness, because we don't get the full benefit of decreases in costs, because so much of our (headquarter) costs and indeed some of our long-term contracts are obviously denominated in euros and dollars. So, let's say that's a part of the reason.
And in terms of the FX movements within the gross margin, it has a lot to do with the hedging. We hedge basically for all of our markets 12 months in advance. For those markets, where it has in the past anyway, being not economic to hedge, it hasn't been possible really to hedge, and I'm calling out here particularly Argentina and Russia. They were exposed when there has not been hedging, because they have to buy in the market and the dollars, whatever, definitely has an impact on the margin. But I think our net margin guidance, 49.5 to 49.8 gives us a good indication that we are still expecting the trend in our margin really to be positive.
Yes. Let me answer the second question on running. Please understand that we don't give our absolute numbers for our running category, but let me tell you that in the first quarter, our running business was up by 34% and that definitely more than convinced that going forward for the next years we will see double-digit growth on the running category. Why? Because first and foremost, I think we have proved we have the unique technology which first and foremost, nobody else has. And this, so exceptionally better than what is out in the markets that we get so many positive comments either from the specialty running stores, from the running call group that, as I said in my speech already, we will rent up to 8 million pass in running in 2014 and to even more going forward.
The two success, one part is Springblade, it is -- miCoach Smart watch, which gives us absolutely credibility, and I can tell you that we have never been better and never had higher market shares in the running category above EUR 100 than we have to-date, and this will continue. And this also follows our strategy that we start from the top convinced real runners with the best product and then we will (put it) down.
Cedric Lecasble - Raymond James
We will take the next question from Jurgen Kolb of Kepler Cheuvreux. Please go ahead.
Jurgen Kolb – Kepler Cheuvreux
Thanks very much. Three questions from my side. First, in your annual reports you talked about the North American market again that you see substantial potentials increase in market share there, and you had talked about improved distribution and highest share of specifically developed products for that market. Now, the growth in market share in 2013 as we know didn't work out, so what is changing now for '14 and maybe also for '15 that makes you confident that you can finally use that potential and show developing market share there, first of all?
Secondly, on TaylorMade, you indicated that you certainly lost some market share because of some cleaning of inventories, do you think you can recover that lost margin entirely in '14, or is that a process that will probably also last into '15?
And lastly, on the FX impact and the mid-term strategies, Robin, I hear you say you partly changed the business model, what does that exactly mean? And selective price increases, in what countries do you specifically look at that? So, maybe some elaboration on these individual strategies, thanks.
Yes, Jurgen, let me start with the first question, North America. As you remember in the first two years of our Route 2015 plan, '11 and '12 we grew double-digit in North America, and we were pleased with the result. Unfortunately, this didn't continue in 2013, as you rightly pointed out. The main reason has been that there is a certain shift in the fashion part of the business towards more performance-related lifestyle to U.S., so going a little bit away from the originals.
And the second point is that, unfortunately it was a whole year, Derrick Rose Martell didn't play at all. He didn't play the back season 2012-13, and then he came back in October (inaudible) the game. And obviously this is not helping our basketball business. There is no doubt the potential for us in North America is much bigger. We make good intros into the market. We increased our margin. We increased our profitability. We grow; our DI is definitely good to be more. I don't see a fast change in this fashion shift as I said, but going forward, we will bring in an array of new products (inaudible) that I definitely see starting in the second half of 2014, and then going into 2015; definitely much more potential. Running will help us, no doubt. I am sure football or soccer will help us in U.S. and then hopefully all our guys will be back in October when the new basketball season will start.
Second question, to TMA (achieve), yes, there is no doubt that the leading position which we have in TMA (achieve) being the TM market leader in Netherlands and in Ireland, in the meantime this will continue, no doubt, and we will keep our market share. Of course, we all, not just TaylorMade, all has hoped for better 2013, but when it started that badly in the first half, especially in North America, product had been already shipped to the market. I think we have been the first one, who realized that there is too much product into the market, and we took especially Q3 to clean up the market and this obviously (has hurt) our margin to a certain extent as well.
Going forward, as we've said already, we will try to be more closer to the market demand and the sales through numbers with our shipping patterns. And therefore, you can expect for the first quarter, lower net sales in 2014 for TaylorMade, and then from the second towards the first quarter ramping it up again because we want to make sure that the product (inaudible) in the first quarter which we shipped in the last quarter of 2014. But I'll look at year about our SLVR driving dollar at that speed is definitely very successful.
In the area of service and the business model, obviously this is an ongoing thing. We look at each of our operating units and consider what we should be doing here better than evolve questioning investment, what we are investing, do we invest and rollout in certain market? It will involve looking at the mix of product that we want to sell in the market, maybe there are opportunities for local sourcing or where do we actually buy the products from, the types of distribution that might include more income or whatever. And of course, we continue to look at what can we do to be more efficient on our cost base, and you've seen us across the market, you have seen Euro One initiatives that we announced last year, and also look at (Vi-Jon) in America. And these are the sort of things that we will continue to do to look at improving our business models and improve the profitability in these markets.
In terms of price pieces, yes, this is a sensitive issue obviously, because clearly as I said, the consumer needs to be in a situation to be able to pay or to be able to (port) into this. And therefore, obviously Asian markets where there is a high inflation. But we do have opportunities if you think of some of our own retail areas where we have more flexibility perhaps on the pricing and we've heard some (private) comments about the very attractive and somewhat higher margin release higher priced product offerings that we now have in the market that we believe we can further perhaps see opportunities with price increase there. But this would be something taken on a case-to-case basis depending on the individual country situation.
Jurgen Kolb – Kepler Cheuvreux
Understood. Just one quick follow-up, have you already terminated maybe the opening of one or some stores specifically in Russia, because of these Ruble issues?
Yes. I think that's fair to say we have reviewed our opening strategy in those sorts of market, yes.
Jurgen Kolb – Kepler Cheuvreux
Okay. Very good, thanks very much guys.
Your next question comes from Matthias Eifert of MainFirst. Please go ahead.
Matthias Eifert - MainFirst
Yes. Hi, I'm Matthias Eifert from MainFirst. First question on the guidance again, Robin, you mentioned up to 250 million negative EBIT impact from currency this year. Do we understand that correctly that you have factored that into the lower end of your guidance range for EPS? What you've given and then you come up with the current spot rates or would that low-end allow even a small deterioration from a currency standpoint from today's levels? That would be my first question.
Secondly, can you go a bit more into detail into Russia, where you fully backup in the fourth quarter in terms of your delivery from the new distribution center, or it's just where there are still some issues at the beginning of the quarter. Can we assume that maybe in Q1 you are back to a 100% and then have a more stronger growth rate? And on the same page, do you have with the retail performance there in terms of like-for-like? And can you explain also a bit more about the adidas 3% like-for-like in the fourth quarter which was quite nice? Was it all driven by World Cup product already, or was there really an underlying improvement in the fourth quarter? Thank you.
Okay, Matthias, I'd start with -- and yes, you are absolutely right, I can confirm that the raise that I gave you of what we estimate could be the impact in a 150 to 250, and the EBIT line is what we have taken into consideration, and giving the net income guidance of the (830 to 930). And yes, we do certainly hope that covers also sort of some further deterioration that maybe possible. But at the moment, it's the best estimate we can give. Obviously, we don't know exactly where we will land, but that's why we have such a large or wide range that we present.
And in terms to Russia, Matthias, I happily can confirm that the warehouse is fully functionally and is distributing flawlessly the products we've once sold in Russia. How the first quarter will compare to the last quarter, and what influence? This is I can't give you exactly, because even when in the third quarter when we had difficulties, we were delivering close to 1 million pieces a week, but it was not to the extent that we expected in the executables and may not. But this is over, we are happy that it's fully working now. And I can tell you that 2014 started well in Russia. So far, we don't see any negative impact from the political situation. Obviously, it will be well if it would be solved fast and peacefully, because the longer it goes, the more nervous consumer gets, and nervous consumer is never good for your business. And so far, I must say, we haven't seen any negative impact.
The adidas performance in the fourth quarter is plus 3%, it's coming from different sources, be it football, be it running, which I said already. And you look at even higher if we're looking that as I said taking outdoor because of so warm climate in most parts of the world was holding us back a little bit, but the main drivers have been running and football.
Matthias Eifert - MainFirst
Excellent. Very helpful, thank you.
Our next question comes from Julian Easthope of Barclays. Please go ahead.
Julian Easthope - Barclays
Thank you very much, good afternoon everyone. I'll just ask three questions relatively. And I'll just start with the -- much of the EBIT in your reported account is still quite interesting. I think, so there are a couple of points in that I'd like you to comment on. The first one is that you said at one point, quite to be fair and frank, we have also made a few executional mistakes towards the Route 2015. So, is it just safe if you could just expand on these? And lastly you do actually say at the end, even as it does take a little longer to achieve goal outlined in the plan, I just wondered whether this is sort of one-year or two-year delay you would expect in achieving Route 2015?
And the second question I have, that comes back to Japan, last year you would have hedged the rates from the previous year, but also Japan has seen such as huge currency hedge, I just wondered what you have done to offset that?
And the last question, coming back to currency as well; and back in 2009 you had a massive hit on the Ruble. I think it cost you 300 million I think you said in one of your calls. And you obviously managed incredibly well after it, I just wondered whether you could take free lessons learned from that, and what you actually did to offset that, whether they could be applied to these cozy reasons we have today? Thank you.
Yes. Let me start with the first question on the executional mistake. And there is no doubt that the Russian warehouse introduction was certainly something which was completely internally done. We had not been alert enough that warehouse shift from a very old menu, (inaudible) warehouse in Russia with retail model, which we don't have in any other countries where we have a thousand stores shipping back at the end of season's product into the warehouse, and then they have to be repackaged and send out to the factory outlets again or to wherever we want to send them. This was certainly underestimated and not managed well as we have indicated already in our call in November.
I think also on the TaylorMade side for the first six months when we shipped all the product to the market we should have been more careful already in this period that we don't overload the market, because (inaudible) margin in the (third) quarter. These are the two main things when we talk about executional excellence or mistakes in that case.
For the Japan hedging, yes, we definitely have been continuing the hedging. In Japan, the simple fact is that they've had to increase prices. It's one of the countries where basically, presumably that was economically desirable, coming to the government to do that sort of thing in any case that we have over time an increase in the pricing in Japan. And that's the only thing we can really do to compensate to that currency decline.
And similar sort of thing with what happened in 2009 with Russia, we still suffer obviously from, because we do not hedge really or we do very limited hedging because of the cost of it. Therefore, the Russian Ruble, we're having to buy the Ruble in the market at the time they required the products, so that was only however one of the reasons why we have a significant hedging in 2009.
The other reason was because so much of our cost base was denominated in dollars. The biggest lesson we have coming out of that was to ensure that the vast majority of our cost, and I'm talking also about regional agreements, we could have been also denominated in Rubles rather than dollars. And that will help us in this period as well and that does not help, however help us in terms of the cost of the product that they are buying in an un-hedged form in dollars.
And concerning your question on the 2015 targets, I think it's fair to differentiate between the operational achievement and then the absolute financial numbers. In operational term, the things that we'll achieve most of our goal, if not all, at the end of 2015, unfortunately, as Robin has already outlined the currency devaluation, it is much more difficult on the absolute number. And yes, this might delay the achieving of our goals in Euro terms by one or two years, but we do in my opinion the right things operational as it will drive sales in 2014 by high single-digit and they're definitely looking forward also in the upcoming years very positive result of product pipeline which we have.
Julian Easthope - Barclays
Okay, thank you very much, very helpful.
Our next question comes from Andreas Inderst of Exane. Please go ahead.
Andreas Inderst – Exane
Hi, good afternoon, everyone. I have two questions. And the first one on your risk profile, what kind of measures can you take to further de-risk your business model overall. That's my first question.
The second question is, in case the situation in Ukraine and Russia will escalate, what kind of measures can you take in the very short-term? Maybe you can give us a few examples.
And my third question is related to TaylorMade, I estimate your EBIT margin must have declined by over 300 basis points with TaylorMade, you answered an earlier question only on the top line, but what kind of margin recovery can we expect in 2014 for the TaylorMade product? Thank you.
Andre, I actually think although we're always trying to improve our risk management, I think we had a pretty good risk model and being a truly global organization, multinational (inaudible) also a very broad portfolio of brands, that is probably the best way to mitigate and manage risk at least with (inaudible).
We have a very good risk modeling and also risk reporting within the group. And I think it's -- as a multinational, we try to keep on top of this. We hedged as much as we can. I mentioned there is a couple of areas which have not been economic to do so, and we have a very solid management of our balance sheet. And so, we are not exposed to consider risk in that area.
And I think at the moment, we are probably doing all the things that we can at least try to manage risks and I think that's what you are seeing also coming through in a pure operational form that operationally, extremely a good performance over the last few years.
Concerning the Ukraine and Russia, obviously we are monitoring the situation quite carefully, and we are in daily contact with our management in Russia. And we look at our individual store base if the conflict would be bigger. But let me also say that first and foremost, we have less than 10% of our Russian business in Ukraine. And obviously we are looking in the moment, especially on the (Ireland), we had around ten stores there, all the stores are opened and operating, that we had daily contract and we could definitely re-route product inventory etcetera relatively fast in preparing for that. But on the other hand we obviously want to do business there because as I said before we haven't seen any negative impact and because the people -- what we hear, this is daily routine how they live their lives there
The last question was on TaylorMade and the margin improvement, I saw that had already given an indication that in my first answer that because of what really happened in the third quarter 2013 we had a bigger margin hit, which I do not expect in 2014 because we will ship less volume into the first quarter and then build it up, and the season all around the world have started that we are letting inventory better sell-through and obviously there should be an increase in the margin.
Andreas Inderst – Exane
Okay, good. Thank you.
Andreas Riemann of Commerzbank has the next question. Please go ahead.
Andreas Riemann – Commerzbank
Yes, good afternoon, I'm Andreas Riemann from Commerzbank, three questions from my side, first one on retail like-for-like was less 3% for the group, probably like-for-like was negative in Russia, I assume, so was like-for-like competitive in all other regions, and with regards to Reebok and retail; Reebok doing quite well. And Reebok retail was only flat with regards to like-for-like in Q4. Why was Reebok only let at the level?
Western Europe, question number two, business recovered nicely in Q4. And maybe you can go through the regions. Any countries that's big out here or any countries you are not happy with within Western Europe?
And a third one to Herbert, I'm trying again, on 2015 target. You always had some goals might be achieved here. And so my question is it fair to assume that the 11% up margin goal assumption for 2017, also bearing in mind that your new contract is running until 2017? That will be my three questions.
So, I'll answer the first one. In terms of Q4, yes, you're right; we're up 3% like-for-like in retail. And Reebok less as to performance largely due to the effect on the performance in the brand, and that's actually at the end, they're possibly a good sign. The quality of the products getting better and better more (concept) store or inline sale. And that's something going to say for the first question.
Did you answer Reebok retail?
Very good. So, then let me come to Western Europe. Obviously we had to send out countries in Western Europe, which was Germany and Spain, which we were helped by the Football World Cup because as you know we the German National Team and the Spanish National Team on a contract, but also with our Brazuca balls and with the running category as I had already mentioned before.
Getting to the last question, the extension of my contract, again the length doesn't definitely have anything to do with the 11%. And as I said before, don't forget we didn't have only the one target for 2015, which were 17 and 11, there are a lot of better targets. We wanted to move the Reebok margin over 40%. We wanted to move the dividend payout to the upper head of 40% range. And a lot of this is happening or is closed before achieving already. The dividend payout ratio is 37.4%. The Reebok margin is at 39.7%. And we still have 18 months to go to achieve this.
On the 11%, it definitely depends on the currency movement, and it's hard to predict what this will look like in the 18 months to go. And as I said before what we have to as the management team, is to drive our operational business, drive growth on the one hand and be very cost conscious on the other hand by improving processes, and also, as you know we do a consolidation of warehouse, we're bringing Europe One together consolidation of countries, etcetera. Look at our cost paid.
Andreas Riemann – Commerzbank
Okay. And if it's -- and the answer with regard to question three, and just on like-for-like -- and the question was whether all other regions except for Russia were positive with regard to like-for-like, is that right?
Yes, that is correct.
Andreas Riemann – Commerzbank
Okay. Good, thanks.
Then next question comes from Philipp Frey of Warburg Research. Please go ahead.
Philipp Frey - Warburg Research
Good afternoon, gentlemen. On Western Europe again, in the last two quarters, your key competitor reported a low double-digit growth rates in the market and has now over 20% backlog growth. And can you bit elaborate on what you see as the key reason for your underperformance and the level of confidence that you have to turn it? Well, I understand plus 200% sounds promising, but it can be also assume in each -- want to see a substantial increase in the wholesale business in Western Europe?
And secondly, can you bit elaborate, also you mentioned -- we spoke a bit about the 2015 targets, the margin target, would you see these margin upsides mainly as a function of operating leverage or are there some projects that you can share details with like timeframe of execution and saving volumes or anything like that with us that would contribute to your margin improvement?
And lastly, on marketing, you see modest increase in the market working budget in percent of space that you are expecting. Is it a function of the currency exposure in your marketing budget, or is there also a corresponding increase in percentage of space in the advertising portion of your marketing budget?
Okay, Philip. Let me start with the first one in the European market, and as you called it underperforming, this has mainly to do with the comparables which we have for 2012. Remember, we were the sponsor of the European Football Championship in 2012. We had a big push for that. We have been partner and sponsor of the London Organizing Committee and that we're outfitting the whole team to be. And we hold a merchandising license which brought us a big boost in sales. It was a total 100 million for the Olympic merchandising program. And the 80% to 90% of that was in 2012, which was definitely a key sector. Obviously, football, we have a fierce competition there going on. But in all standards I think it has been the first two comparables in the items which I mentioned.
In terms of the question that Philip had asked; our margin and our operating leverage, let us put it firstly in the context that one of the key goals of our 2015 strategy is to fundamentally improve the welcome spend and profitability of the Route. And I think over the last few years we've seen a considerable progress in this. And indeed even with all the pressures, in 2013, we are able to increase the margin by 70 basis points.
So, we're not right where we wanted to be by the end of 2013, but we've done a considerable amount, we're very close to that. And I think it's a same sort of thing about our efforts in 2014. We will continue to work on all the initiatives that we believe make us more efficient and take cost out of the organization to further improve sustainably the operating margin. And a lot of these initiatives we had already commenced, I had mentioned to you this over the previous year. And some of the investment in the first few years will be coming to provision in the last couple of years of the 2015 plan. So, that's we to look forward. But there is obviously also other things we continue to look at to become even better. And we've announced recently the Euro One; we've announced (Vi-Jon). We continue to look at programs where we believe we will get (offers), not just the existing programs and therefore, yes, operating level.
Last question was on marketing, and a slight increase in that for 2014, and good. And yes, just look at the World Cup, it's basically the reason for the slight increase of '14 over '13 marketing budget.
Philipp Frey - Warburg Research
Yes. This was on advertising, really the media volume that you are buying also increasing basically your --
It is also the communication activity for that event, yes.
Philipp Frey - Warburg Research
Okay, thanks a lot.
The next question comes from Michael Kuhn of Deutsche Bank. Please go ahead.
Michael Kuhn - Deutsche Bank
Good afternoon, gentlemen. Also, three questions from my part. First of all, on Russia once more and on store openings there seems to be an ongoing pressure due to lot of malls openings to opening new stores. And once again the guidance looks toward 250 net openings. My question would be what does that mean for your profitability in Russian and also for operating expenses in the retail channel as a whole?
And secondly, on China, not that much comment around on that market. As of late, it seems to grow quite steadily at a high single-digit rate. Is that also a development that we should expect into 2014 and probably beyond 2014?
And then, lastly, more from housekeeping perspective. What's your current euro/dollar hedge rate into this year and for the parts that you hedged into next year? And what could be a operating working capital ratio at the year-end in 2014? Thank you.
So, the first question to the opening of malls here, this is definitely correct, and therefore we trust our store base. It seems we are closing stores which has been right in the right location side years ago but the right location that might not be right again. And we carefully will go into the new malls if they are premium malls and this end the right location with the better equipment and more consumer attractiveness. This is a permanent gain which our management in Russia is doing on an ongoing course. And this definitely doesn't have any significant impact on our profitability going forward, because there are thousand stores, you can imagine that this is a briefing process where you always have to refurbish, close or reopen anew areas where consumer trends are.
In China, yes, we are happy with our development in 2013 and we definitely can assume that this development goes on in 2014. And we definitely do not intend to stop them.
And in terms of the dollar hedging this year 2014, which is over the 133 and looking out into 2015, although, we're not extensively hedged yet for 2015 but the indication of them is about 137. And in terms of operating working capital, and while it is our goal obviously to further improve it, I think we're on the 20 to 20.9. We're not bad. And the increase this year as I said was mainly because of the increase in the inventories and part of that was because of Russia. So, we'd expect to get that back. And so we'd look to have a slight improvement at the end of this year in the operating capital expenditure side.
Michael Kuhn - Deutsche Bank
Okay. Thanks a lot.
The next question comes from Antoine Belge of HSBC. Please go ahead.
Antoine Belge - HSBC
Yes. Hello, this is Antoine Belge of HSBC. I have three questions, first of all, on 2015, the margin evolution, even though the basis for 2014 will be lower, we can still expect the one of them 50 basis points improvement year-on-year?
Second question regarding input effects in part year or 2014 guidance, are there -- is there some negative effects impact at the financial income results? And finally, in the press release, you also mentioned some input cost pressure. So, you like to confirm lastly what you compare to three months ago when you get the initial guidance. So, they all, obviously, many sort of worsening element in input cost? Thank you.
Okay. And thank you very much for those. So, in terms of marginal, I said in one of the previous answers. It is our goal to continue to work on things that improve our operating margin. We're aiming around the 1%, I can't tell you at the moment exactly what that will be in '15 year, that's too early. We still have a lower base, but we got a lot of things that we're doing to fundamentally improve the operating margin. And so our goals are still in place and they're still what we're aiming for.
In terms of the financial exchange rate impacting the financial results, yes, we had 18 million in 2013 versus last year, 7 million. So, that was deterioration of 11 million. And in terms of the input cost, we haven't seen anything significant -- no significant deterioration in the last three months. Our guidance, I think it's still the same as we made last year. But there is input pressure that is largely coming from Labor. But that is obviously reflected in the guidance that we're getting at.
So, ladies and gentlemen that's -- sorry, you asked what?
Antoine Belge - HSBC
Just in terms of the -- what kind of inflation year-on-year are you're expecting for label?
The labor, where?
Our costs in our manufacturing countries are going up lower percentage points because of the labor, but the labor increases in some of these markets are significant. But in our effort, this is a small part of this, because the majority of our costs are raw materials.
Antoine Belge - HSBC
So, ladies and gentlemen, that completes our call for today. I'm sure we'll see you on the road over the next few weeks. We are in Paris, London, and next week in the States, the two weeks after that. And our next communication will officially be on the 6th of May for the Q1 results.
That will continue today's conference call. Thank you for your participation. Ladies and gentlemen, you may disconnect at this time.
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