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Executives

John-Paul O’Meara – Head, IR

Herbert Hainer – CEO

Robin Stalker – Chief Financial & Accounting Officer

Analysts

Andreas Inderst – Exane Ltd.

Jürgen Kolb – Cheuvreux

Michael Kuhn – Deutsche Bank GmbH

Chris Svezia – Susquehanna Financial Group LLP

Matthias Eifert – MainFirst Bank AG

First and foremost, let me tell you that we are

Bernd Muell – Landesbank Baden-Württemberg

And the sell-through rates have been phenomenal

Louise Singlehurst – Morgan Stanley & Co. International Plc

Adidas Group (OTCPK:ADDDF) Q2 2011 Earnings Call August 4, 2010 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the adidas Group conference call for the half year 2011 financial results. Today’s conference is being recorded. At this time, I would like to turn the conference over to John-Paul O’Meara. Go ahead, sir.

John-Paul O’Meara

Good afternoon ladies and gentlemen and welcome to our first half 2011 financial results conference call. Our presenters today are Herbert Hainer, adidas Group CEO, and Robin Stalker, Group CFO. They will be covering our strong first half financial performance, and giving you some insights into the various initiatives we have planned to continue momentum for the remainder of 2011. So, let’s get started and over to you, Herbert.

Herbert Hainer

Thanks JP, and good afternoon ladies and gentlemen, or good morning to the U.S. Since outlining our strategic vision for the company under the title of Route 2015 last year, we have wasted absolutely no time and come out of the starting blocks in typical adidas Group fashion: fast and focused.

The trajectory of our operational and financial performance over the last six months is clear proof that our short and long-term goals are not just ambitious aspirations, but very realistic, and very achievable. So let’s look at the facts. For the first half, we achieved new record sales of €6.3 billion, or a growth of 14% currency-neutral, as we drove significant market share gains in our key categories.

By rigorously employing our strengths in innovation and design as well as supply chain excellence, we have been able to maintain our gross margin at 48.8%, despite the external pressure from input cost inflation. In Q2, we even increased gross margin by 20 basis points.

As a result of this development, and unlike most others in our industry, we have been able to keep investing into our future growth, while at the same time keeping a vigilant eye on our overhead expenses to drive operating margin improvement. This investment, as I have said many times before, are critical at this early stage of our strategic plan to ensure we put in place the right building blocks to deliver the long-term quality sales growth and profitability improvements we are striving towards.

Taking this all together, the strong top-line increase and an operating margin expansion of 30 basis points to 8.4% has yielded a perfect first half, with earnings growth of 19%, just shy of €350 million. Looking deeper in the top-line, sales grew at double-digit rates in nearly all regions in the first six months. Revenues in Western Europe increased 10% currency-neutral, with strong sales growth in Germany, France, Italy and Spain.

In European Emerging Markets, Group sales increased 23% currency-neutral due to growth in most of the region’s markets, in particular Russia and the CIS. In Latin America, sales grew 11% currency-neutral with double-digit increases in most of the region’s major markets, in particular Argentina, which benefited from the Copa America football championship.

Without doubt, Greater China was our star performer so far this year, with currency-neutral sales up 38%, leading sales to a new record level of €552 million for the half year. Working closely with our local partners, we have put a lot of energy into getting our brands and our business just right in this market over the past twelve months. Today, unlike many of our competitors, which are carrying older stocks, and lots of it, our inventories in China are balanced and fresh.

Our wholesale partners are achieving significantly higher comp store sales with our brands compared to competitors and we are seeing limited effects on our business from discounting. Although the easy comparisons with the prior year are now over, momentum on the performance side is strong, particularly in running, outdoor and training.

In addition, the wider availability of adidas Originals and the continuing evolution of adidas NEO are allowing us to rapidly capture more of the lifestyle segment. Therefore, as long as there are no major macroeconomic shocks in the region, I am confident we will enjoy healthy growth rates in line with our medium-term aspirations in the quarters and years to come.

Turning to North America, with 15% currency-neutral growth in the first half, our Group is also flourishing in this critical market. And more importantly, the quality of the business is improving with each and every quarter. While sales growth moderated to 5% currency-neutral in Q2, as we had expected and communicated in May, all of the underlying trends for our brands were strong, which is confirmed by the market share gains you can see in the recent point-of-sale research data.

At adidas, sales were up 13% currency-neutral in Q2, our highest growth rate for this period in five years. All of our key categories – Originals, running, basketball and training – posted solid double-digit growth. And we continue to make great strides in improving our distribution mix, with strong double-digit growth in the mall and sporting goods channels. This is also creating further opportunities for us to refine our exposure to more premium retail channels.

For Reebok in North America, sales in the quarter were lower, as we outlined already in May, declining 15% currency-neutral. This decline was exclusively due to the large sell-in of toning products that had propelled sales up 31% in the prior year hit. If we exclude the toning category, Reebok revenues were up 24% in North America in Q2, highlighting the continued appeal of Zig, and the successful launch of the RealFlex franchise.

Gross margins in this market were also up for the quarter, which is a real testament to the Reebok team, who have successfully managed the developments in the toning segment with very little disruption to our business, or that of our retail partners. In terms of the future, I’m very confident in our ability to continue the positive trends for both brands and we will see solid growth rates in the remaining quarters of the year, obviously excluding the impact from the winding-down of our NFL licensed business at Reebok.

To finish up on the markets, let me make a comment on Other Asian Markets, and in particular Japan. Sales for the half-year were up 6% currency-neutral driven by strong growth in South Korea. I am also pleased to report that our business in Japan has shown considerable resilience, declining only 1% currency-neutral in the second quarter.

From a brand perspective, a large part of this success in Japan has been the resurgence of Reebok, where sales increased over 70% in Q2, driven in particular by toning. This helped to more than compensate for mid-single-digit declines at adidas, which was nevertheless much better than the underlying market. TaylorMade-adidas Golf also saw modest growth during the quarter due to the popularity of the R11 driver.

For the total Group in Japan, this means that we have significantly extended our market share during the period, which is a credit to the determination of our team in Japan. We also have to pay tribute to our retail partners, who have been very swift in reopening stores, with over half of the severely affected stores now operational again.

Barring any major setbacks, we are now unlikely to see the big declines of 15% to 25% we feared back in May. The spirit of the Japanese to recover from the disaster is inspiring, just as much as the Japanese ladies football team showed when they won the exciting FIFA Women’s World Cup Final in Frankfurt a few weeks ago.

For the second half of the year, we now expect sales in Japan to decline at the high-single-digit rate. Due to margin pressures, we nevertheless still expect profitability headwinds compared to our original plan for the year. As you can see with Japan, even in difficult times, there is still so much possible when your brands are strong and relevant. So let me spend a few minutes on the brand initiatives that have driven our Group-wide success in the first half.

At adidas, revenues increased 14% currency-neutral in the first six months, with a very strong 10% increase in Q2 versus the prior year World Cup quarter. With the exception of football, we saw strong double-digit growth in each of our key categories. In running, sales are up 25% year-to-date, with our strength in lightweight running and the successful global introduction of our new iconic ClimaCool Ride.

In basketball, momentum for the brand is accelerating, driven by the success of the adiZero Rose, the Crazy 8 and the introduction of the lightest shoe in the game, the adiZero Crazy Light in June. The sell-through of the Crazy Light has smashed all of our targets, with double-digit sell-through rates at every mall account.

In training and outdoor, sales were up 15% and almost 40% year to-date, with second quarter Outdoor sales up well over 50%, and our Terrex platform more than doubling compared to the prior year. Today, we are at the forefront of innovation in the outdoor industry. Just a few weeks ago in Friedrichshafen, we again won the OutDoor industry award, making it a hat-trick of victories for adidas Outdoor. This time, the 2011 TERREX Fast R, an ultra-light, fast hiking boot, stole the accolades.

Turning to adidas Sport Style, we had a phenomenal quarter with sales growing 34% currency-neutral, the highest Sport Style growth rate since Q4, 2005. Year-to-date, Sport Style sales are up 30% with growth in every market, most at double-digit rates. The key driver of this success continues to be the diversity of our offering and our ability to re-create and re-invent our unparalleled product heritage, continuously invigorating iconic styles that resonate and speak to our consumers like no other brand.

Turning to Reebok, sales are also up 14% year-to-date and 5% in the quarter, despite the double-digit Q2 decline in North America, which I already mentioned. Exporting the new Reebok globally is leading to very solid momentum for the brand, with international sales up 19% for the quarter.

Toning footwear was a key driver of Reebok’s global growth, and despite double-digit declines in the U.S., global sales in that category are up double-digit year-to-date. Furthermore, I’m confident that the worst of the U.S. toning inventory issue with our main competitor in this space is coming to an end, and we have received good feedback from our U.S. retailers on the next generation of our toning footwear. Therefore, I’m confident that toning will stabilize into a sustainable, value-adding category as part of the larger trends towards exercise and healthy living.

Reebok’s energy efficiency platform, ZigTech, continues to show robust growth, particularly in North America, Asia and Russia. The popularity of the distinctive style is magnified by the customization frenzy we have seen on YourReebok.com. In less than a quarter, the number of personalized styles has doubled to over 2 million.

We are also very encouraged by the uptake of RealFlex, particularly as it is establishing itself as a dual gender shoe. Taking all of our brand initiatives together, we continue to see solid improvements in average selling prices and margins for the brand, with footwear ASPs up 15% this year, and gross margins advancing 1.6 percentage points.

Finally, let me spend a moment on TaylorMade-adidas Golf, the jewel of the golf industry. Over the past decade, not only have we grown significantly, we have transformed our golf brands into industry leaders, despite headwinds from a stagnant golf market.

We are outmaneuvering the competition on all fronts. Our rise to the top of the leader board is founded in being faster and more consistent in developing ground-breaking innovations to meet the high demands of the golf consumer and retailers.

Our 17% currency-neutral sales growth in the first half proves the point. The game of golf is witnessing a revolution with TaylorMade’s sensational white R11 metal woods. None of our competitors would have either the credibility or audacity to transform the color of the game. The R11 is already a force on the world’s major professional tours, having secured 20 wins so far this year. The consumer has also overwhelmingly voted yes, with our U.S. market share standing at over 40% in the category.

So ladies and gentlemen, for the first half of the year, no matter which way we break down our results – by segment, by region or by brand – all facets of our business are excelling. I will be back in a few moments to give you an update on what we have in store for the remainder of the year. But first, I’ll hand you over to Robin to go through the financials and the second quarter in more detail.

Robin Stalker

Great. Thanks very much Herbert. And good afternoon ladies and gentlemen.

As you have just heard, the first half of 2011 has seen the Group achieve many new milestones in terms of growth and operational performance. Let me now walk you through how this has translated into our financial performance, weighing up the positive and negative influences we have seen during the period and the trends you can read out of these for the remainder of the year.

Starting with the top line. In sharp contrast to previous quarters, currency movements are now having a significant negative impact on Group sales in reported terms. This is due to the year-over-year depreciation of currencies such as the U.S. dollar, the Chinese renminbi, the British Pound as well as various emerging market currencies like the Turkish Lira, the Argentinian Peso against the euro.

As a result, Group sales increased 5% in reported terms to €3.1 billion in the second quarter compared to 10% on a currency-neutral basis.

For the year-to-date period, sales grew 13% in euro terms to more than €6.3 billion with only a one point negative impact from currencies. For the remainder of the year based on current spot rates, we will face similar pressures on currency translation as in the second quarter.

Now every region grew in the second quarter with a particularly strong performance in Greater China, where sales increased 41%. Similarly sales in European emerging markets increased 21% on a currency-neutral basis as we continue to expand our market share in Russia, CIS. Revenues in this key attack market increased 30% on a currency-neutral basis.

In North America, Group currency-neutral sales for the second quarter increased 5%. The strong performance at adidas Sport Style and adidas Sport Performance, which grew 24% and 9% respectively, more than offset declines at Reebok as already discussed.

In Western Europe, as well as Latin America, second quarter Group sales growth decelerated slightly to 5% and 8% on a currency-neutral basis respectively. This is mainly a reflection of the importance of the 2010 FIFA World Cup for those two regions, which positively impacted the prior-year quarter development.

Finally in other Asian markets, adidas Group grew sales 6% currency-neutral mainly due to strong sales growth in South Korea and Southeast Asia, and only a slight decline in Japan.

Now by segment, currency-neutral wholesale revenues increased 6% in the second quarter and 13% for the first half year. Second quarter growth was driven by higher sales in all regions except European emerging markets. Greater China was exceptionally strong growing at an impressive 47% rate. Gross margin for this segment was down 150 basis points for the quarter and 60 basis for the first half to 41.5%. A more favorable product mix as well as clearance sales helped mitigate the headwinds from rising input cost.

In addition, shifts within the regional sales mix positively impacted the wholesale gross margin development. While the adidas brand wholesale gross margin declined 80 basis points, the Reebok wholesale gross margin was up 40 basis points in the first six months of 2011, another clear sign of the brand’s improved product assortment and distribution.

Despite the gross margin headwinds, our wholesale segmental operating margin expanded 10 basis points to 32.3% in the first half of 2011 as we leveraged our strong top-line growth. In the Retail segment, comparable store sales growth in second quarter was an impressive 13%, and contributed the largest part to segmental revenues, which increased 20% to €681 million. Russia/CIS continues to be the growth engine for Retail, with comparable store sales increasing almost 30% in the second quarter.

For the first half year, currency-neutral Retail sales increased 21%, driven by an impressive 15% comp store growth, with adidas up 15% and Reebok up 13%. All of our store formats showed double-digit growth rates year-to-date, including an 18% comp store sales increase at concept stores.

Retail gross margin improved 70 basis points to 65.8% for the second quarter and 160 basis points to 63.7% in the first six months. Reebok in particular saw a strong gross margin increase of 260 basis points for the quarter and 450 basis points for the year-to-date period.

At the end of the second quarter, we operated 2,335 stores, a net increase of 65 stores versus December last year. During the period, we opened 152 new stores and closed 87 stores, while 73 stores were remodeled. In addition, 110 concept stores were reclassified as other retail formats during the period.

Coming now to the segmental operating margin for Retail, our efforts to become a world-class retailer and to deliver healthy, sustainable growth continue to bear fruit. Segmental operating margin for the second quarter increased 80 basis points to 25.3%, and 2.0 percentage points to 20.8% in the first half.

Finally, in Other Businesses, currency-neutral sales grew 12% in the second quarter and 13% year-to-date as all segments recorded higher sales. The performance at TaylorMade-adidas Golf was outstanding, with currency-neutral sales increases of 13% and 17% for the quarter and the six-month period respectively.

Both the quarterly and first half gross margins were up 60 basis points, as we benefited from improved product margins at Rockport and Reebok-CCM Hockey. The segmental operating margin remained stable in the first half at 28.0%. Higher operating expenses as a percentage of sales due to increased sales and marketing working budget spending for the first quarter launch of the R11 at TaylorMade-adidas Golf offset the gross margin expansion. In the second quarter, segmental operating margin increased 80 basis points.

Now moving to the Group’s gross margin, I hope you share my enthusiasm about what we achieved on this important metric. In the first half of 2011, Group gross margin remained stable at 48.8%. However, second quarter margin increased 20 basis points to 49.2%, which is an extremely satisfying development particular in light of industry pressures. In line with our previous communication, the negative impact form higher sourcing costs increased as we progressed through the period, hurting gross margin by around 130 basis points for the quarter and around 120 basis points year-to-date.

We’ve identified several positive margin drivers which helped to offset the negative impact. Firstly, the most important positive catalyst was the over-proportionate growth of sales in our Retail segment, which carries higher margins. Secondly, we had less clearance compared to the prior year as a result of more current levels of inventory.

Thirdly, we benefited from positive regional mix effects, which was mainly a result of the over-proportionate growth in higher-margin markets such as Greater China and Russia.

And finally, Group gross margin was impacted by the improvements in our product assortment leading to a higher-priced sales mix, particularly at Reebok.

Now in terms of the outlook for margins, the impact from input cost pressures will continue to increase in the second half of this year and into the first half of 2012. And while short-term pressures on gross margins continue, there has been some easing in the commodity markets, particularly in relation to cotton prices, which should start to provide some relief in the second half of 2012, especially on the apparel side. Therefore, we maintain our gross margin guidance for 2011 of between 47.5% and 48.0%.

Now let’s move below the gross profit line, and other operating expenses increased 4% for the quarter and 10% year-to-date. As a percentage of sales, however, other operating expenses were down 60 basis points and 1.1 percentage points, respectively.

For the quarter, sales and marketing working budget expenditures declined 2%, which mainly reflects the non-recurrence of activities at the adidas brand to support the FIFA World Cup from last year. For the first six months, our marketing investments were up 10% primarily as a result of the global launch of the “all adidas” campaign. As a percentage of sales, marketing spend declined 40 basis points to 13.1% year-to-date.

Other operating income was down 25% for the quarter, and decreased 50% in the first half, the latter mostly reflecting two one-off effects in the first quarter of 2010 related to the settlement of the lawsuit and the sale of a trademark. Royalty and commission income decreased 9% in currency neutral terms and 11% in reported terms in the first half of 2011.

Taking all these factors together, Group operating profit increased 17% in the first six months to €532 million. This translates into an operating margin of 8.4%, up 30 basis points from the prior year, a proof point of our ability to leverage the Group’s top-line momentum. In the second quarter, operating margin expansion was even higher, rising 50 basis points to 7.1%.

Turning now to the non-operating items of the P&L. Net financial expenses increased 41% in the first half compared to a year ago. Key to this development were negative exchange rate variances, where we were hit by a negative swing of €21 million for the period, which more than offset 11% lower interest expenses. The first half year tax rate came down from – sorry, came down 200 basis points to 27.5%, which is due to a more favorable regional earnings mix as well as tax rate reductions which has been enacted in the UK for measuring deferred tax assets and liabilities.

Therefore, net income attributable to shareholders for the first six months increased 19% to €349 million, the highest net income figure our Group has ever achieved in a first half year. This translates into basic and diluted EPS of €1.67.

Moving to the balance sheet and cash flow, discipline remains on top of our agenda. At the end of June, Group inventories were up 26% currency-neutral to €2.4 billion. Despite this strong growth rate, I am not concerned about our inventory position as we are still comparing against extremely low base from the prior year, when inventories actually declined 10%. To match our higher sales base and also in preparation for future growth opportunities, we have been rebuilding our inventory levels over the past 12 months.

Therefore, moving into the second half of 2011, you should expect the gap between the Group sales growth rate and inventory growth rate to narrow in line with future sales growth expectations.

Accounts receivable increased 9% on a currency-neutral basis or 1% in reported terms to €2 billion, which compares to a 10% increase in Group sales. And accounts payable increased 15% currency-neutral or 10% reported to €1.6 billion reflecting the growth in inventories.

So in summary, we were able to maintain a very healthy ratio of operating working capital as a percentage of sales at 20.7%. The current level marks an improvement of 100 basis points year-over-year. While we may lose some basis points due to the planned growth of our business, I’m very confident that our tight management of working capital will ensure we continue to maximize cash flow generation as we go through 2011 and beyond.

And finally, ladies and gentlemen at the end of June, our net debt stood at €863 million, equating to a decrease of €227 billion or 21% versus the prior year. This represents the ratio of net borrowings over 12 months rolling EBITDA of 0.7, which means we are comfortably within our target corridor of a ratio of below two times. For your interest, at the end of the prior year period, the ratio stood at one time.

Now having provided you with the detailed overview of our second quarter and first half 2011 financials, I’d just like to spend a moment on a technical accounting matter and an announcement we made yesterday evening regarding the details review about 2009 financial statement.

For those of you not familiar with this official body, the DPR is the German financial reporting enforcement panel. It was set up in Germany in 2005 to review the corporate accounting of companies listed on the regulated market. The body strives to review the accounting of each of the DAX 30 members by a random sample every three to five years. Last time adidas AG was reviewed was in 2005, 2006 for the 2004 financial statements.

Now for 2009 in the course of this examination, the enforcement panel was satisfied with the consolidated financial statements for 2009 and the respective accounting treatments with the exception of two points. First, the reorganization of the statements and its relation to the levels of which the impairment test were carried out. And second, the disclosure of the Group management report for 2009 not leading the reader to recognize that Reebok brand made a loss of approximately €160 million for the financial year.

On the first point, the DPR is challenging the difference between the segmental reporting and the definition of our cash generating unit as reported in the notes for the purpose of impairment testing. They have not challenged the outcome of our impairment test which were carried out in both the new and the old reporting structures, as we explained in the notes to the financial statement.

On the second point, the DPR believes the reader on our 2009 annual report cannot gauge that Reebok made an operating loss of approximately €160 million for 2009. Up until the nine-month period of 2009 we had reported an operating loss of €130 million for the formal Reebok segment. This new information, therefore, should not be a surprise to those who actively follow the company.

Neither of these points requires any change or restatement to our consolidated financial statements for 2009, 2010 or indeed the current fiscal year.

So ladies and gentlemen, this concludes my comments for today. We are on a great track to achieve all of our goals for 2011. Now back to Herbert to take you through our initiatives and outlook for the remainder of the year.

Herbert Hainer

Thanks very much, Robin. No matter which retailer I speak to or which market share statistic I read, our product sales was stronger than they have ever been and our market shares are increasing virtually everywhere across the globe.

Therefore, we can look out with confidence to the remainder of the year. As always, our success will be driven as exceptional product offerings and marketing concepts we have at our disposal. At adidas at the end of August, the IAAF World Championships in South Korea will serve as a great platform to push off the next wave of our lightweight running offensive with the introduction of the adiZero Feather and the adiZero Prime.

In football, we already kicked off the season with the introduction of our various partners’ home jerseys such as Bayern Munich and Real Madrid, and later this year, we’ll begin our build up to UEFA EURO 2012 taking place in Poland and the Ukraine.

In Originals, we are poised to change the way consumers shop for our brand, with the introduction of a first-of-its-kind iPhone app to our industry. The adidas Originals App uses 3D image recognition, whereby the user can take a photo of any shoe – old, new, or even from a different brand – and the application responds with the closest, most relevant matches from our current range. This gives consumers the chance to find the best replacement for their favorite old footwear, to find adidas shoes most similar to shoes that might have caught their eye somewhere, or to simply play around and explore the different styles of adidas Originals in a fun way.

At Reebok, we will continue to exploit the tremendous platforms we have created over the last 18 months. For Zig, we have new campaigns and product introductions such as the ZigFly or the ZigDynamic, each offering different takes on highly breathable, lightweight and responsive footwear for running and training. And we are also extending Zig into baseball cleats as well as into trail running with the Zig Wild.

For RealFlex, we have a big push underway for back-to-school and year-end with a broadening of the assortment, including kids, and the expansion into new doors, all of which is leading to significant increases in volumes.

In addition, we are also starting to commence our revitalization of Reebok Classics. In July, Reebok together with Swizz Beatz launched our new Classics “Reethym of Lite” Campaign, the first Reebok Classics campaign in 10 years. And some of the related new product introductions, like the Kamikaze, are already proving to be very popular.

Finally at TaylorMade-adidas Golf, a key strategy for the brand is to replicate our dominating lead in metal woods in the other important golf categories. Therefore, in the third quarter, we are intensifying our efforts specifically in the irons category. Over the past 12 months, we have already claimed the top spot in the U.S., with our market share currently above 20% in this category. The next generation of irons, the R11 series, which were launched live on the web last weekend, will help us assert our lead over the competition in the sport’s second most important club category.

As you can see, ladies and gentlemen, we have a lot underway to keep momentum for the Group going strong through to the end of the year. Turning now to the guidance, after the strong first half performance, we are amending our full year top and bottom-line forecasts, despite the increased headwinds from foreign currency translation into the euro, which we currently see from the movements of various currencies Robin spoke about earlier.

In addition, the prospect of an NBA lockout is also something that we need to bear in mind as having a potential impact on our basketball business. Nevertheless, we are increasing our sales growth guidance and now expect around 10% currency-neutral growth for the year. This will be driven by strong performances in markets like Greater China and North America, continuing robust sales in our own retail stores and a less pronounced decline in Japan compared to what we feared in May.

We continue to project the Group gross and operating margins in a range of 47.5% to 48% and 7.5% to 8% respectively. As a result of the higher topline expectations and our profitability development in the first half of the year, we forecast earnings per share to improve at a rate approaching 15%, to a level between €3.10 and €3.12, thus eclipsing our 2008 pre-crisis record high of €3.07.

And I’m pleased to report this means 2011 will be a record year for us in terms of sales and earnings. With that, ladies and gentlemen, I thank you for your attention and Robin and I are happy now to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will take our first question today from Andreas Inderst of Exane BNP Paribas. Please go ahead.

Andreas Inderst – Exane Ltd.

Yeah, thank you. It is Andreas Inderst from Exane BNP Paribas. Great quarter, well done. My first question on Reebok, we have seen a certain slowdown in sales growth in the second quarter. You expect an acceleration as I understand in the second half of the year. Could you provide us, is it guidance, in terms of sales and maybe in this respect, can you elaborate on your comment that you see the toning segment as a sustainable growth category. What do you expect for the year? And also for the conditioning and for the flex shoe, what could be the growth potential of these two categories in 2011 and – mid-term?

My second question is on the NBA lockout, is there a plan B? How can you prepare for potential lockout, how flexible is your marketing budget to react to a potential lockout?

My third question is relating to inventory, you already mentioned that your inventory is quite clean on a global basis, but are there any regions where you see a bit of an overhang, I would guess that Japan is maybe a candidate at this stage, but maybe you can give us here some insight. Thank you.

Herbert Hainer

Okay, Andreas. Let me start with your first question on Reebok, Q2 sales down. As I have said already in my speech, if you would exclude tonings then the Reebok sales would be up 24% in the quarter compared to 23% growth in the first quarter. So the second quarter would be as strong as the first quarter. And you might remember that the second quarter 2010 was a big month or the big quarter for our toning introduction at that time. So therefore, don’t worry on that, this is what we have already announced in May and this is exactly how it was coming in.

In terms of toning, when I say I think revenues are stabilizing, what I still see is that consumers out to want to have toning shoes, retailers who want to have toning shoes, but you have to inspire the consumer with new innovative products, which we are doing. We also get a lot of accolades from our retailers how we have handled the situation with EasyTone in terms of pricing, in terms of inventory, in terms of how we have worked together with the retailers and you might have seen that we didn’t have big inventories on EasyTone in the trade in the last six months compared to some of our competitors.

On Flex, Flex we have just introduced, I think, six weeks ago in the U.S. and we started once again in U. S., as we have done with other key sectors Toning and Zig and then in the second half, we roll it out to the rest of the world. All what we hear so far from the retailers in the U.S. is very encouraging, sell-throughs are very good.

And what really is interesting and very pleasing for us is that it be seen as a dual gender shoe. 60% of the sales for Flex are going to women so far and this is really encouraging because Toning was more a women shoe as you might remember, Zig was more a man’s shoe and now we have shoe which goes to both genders, and this give us better potential. We don’t give any guidance for Toning or for Flex for the second half. Second question NBA lockout.

So first and foremost, we had the situation already with the NFL. And obviously with our SLB business and with our factory in Indianapolis, which is providing mainly the buckles that merchandise for both leagues. In terms of license business, we are very flexible, which we have shown in NFL in the – luckily the NFL is back in game again. With the NBA, we do the same. We have the raw materials, but in a limited way.

So that if they don’t start to play, we are on the safe side from the inventory side. In terms of marketing working budget, obviously, the NBA contract is locked, but all that we do around in terms of advertising et cetera is completely flexible. And if they don’t play, then we don’t make any advertising.

Last, but not least, our inventory around the world. Yeah, this is definitely clean especially in China. As I’ve mentioned in my speech, the aging is very good in our inventory. The only thing where we have a little bit more inventory than we would like to have is Japan as we have said because of the disaster. But although this is not really worrying me. I’m just coming back from Japan spoken to 60 or 70 retailers and they are quite pleased how we have reacted and how we have helped.

And you can see it in the results, minus 1% in the second quarter, which was also a positive surprise to us. So, overall, I must say I’m very happy with the business at the moment and how we’re staying. We are growing in all the markets around the world, we are growing these older brands, and I do believe we haven’t had a better platform in the last 10 years than where we are in the moment.

Operator

Our next question today comes from Jürgen Kolb of Cheuvreux. Please go ahead.

Jürgen Kolb – Cheuvreux

Thanks very much. Three quick questions really. Following-up on Andrea’s question, maybe on these unit sales when it comes to Reebok, Zig, EasyTone and maybe Flex, maybe any indications that you can provide us with in terms of unit sales that are possible there in terms of EasyTone. Where are we in 2011, maybe around 8 million pairs, would that be a fair assumption or below 6 million, or any kind of additional information would be helpful here.

Secondly, I think Robin you mentioned FX swing effects in the financial expense line H1 over H1 about $21 million. Assuming that the currencies stay where they are right now for the second half, would that be a number we should also be looking at for the second half?

And lastly, on the gross profit margin side, you’ve been now mentioning for quite some quarters that lower closeout sales provided a nice support to the gross profit margin, maybe any hint as to how high usually as a percent the closeout sales be? And do you approach some kind of an anniversary level where you cannot further improve that level, and how was it for the second half trending? Thank you.

Herbert Hainer

Yeah, Jürgen, hi. Jürgen, I understand that you’re keen of getting some more numbers on Toning, Flex and Zig, but we don’t give out any porridge. You can be sure that they all significant for us as you can see in the results, but we don’t give any porridge numbers out.

Robin Stalker

(inaudible) the FX that I was talking about the swing in financial expenses, that’s because of the spot rate translation of balance sheet items that are denominated in non-euro currencies. So when we had a positive in there in the first six months of last year, we’ve got a negative now, if the currencies stay where they are same, where they are at the moment there shouldn’t be any further positive or negative over the next couple of quarters, right.

And as far as the gross margin goes, clearance was particularly important last year, because we had obviously deliberately tried to reduce our exposure in inventories because of the uncertainties in the market at that time.

So, clearances is always a part of the noble business that we have, we don’t ever give out the particular percentage. Obviously, we try and keep it as low as possible. But I think, the key point in the margin that you should be thinking of for the future is the translation impact of currencies, because that obviously has the largest impact for us going forward.

Jürgen Kolb – Cheuvreux

Okay. All right. Thanks.

Operator

Our next question today comes from Michael Kuhn of Deutsche Bank. Please go ahead, sir.

Michael Kuhn – Deutsche Bank GmbH

Yes, good afternoon, gentleman. Also three questions from my side. First of all, also a follow-up on currencies, obviously with the negative topline effect in this quarter, but with a positive implication in the mid-term for your gross margins, I would be interested in the hedge rates that you’ve currently locked in for next year and to what amount in terms of overall processing volume you’ve locked in that hedge rate?

Second question on markets share gains. You’ve mentioned market share gains in essentially in all major markets where you are present in, any indication to what – or what the amount of those market share gains were in percentage points? And where you took market share from?

And thirdly, we see an ongoing strong momentum in sports style, both in retail and in wholesale. Could you give us an indication of what Neo contributed, what Originals contributed and what dynamics we should expect for the remainder of the year? Thank you.

Robin Stalker

Okay, Michael. I will handle the currency. In terms of our hedging, you’re absolutely right. The strength of the euro would help us in the future with hedge rates, unfortunate it’s not that much. We are tracking this year probably around the USD1.36 hedge rates for 2012, we’re over 70%, 75% hedged already and we would expect that to be a good couple of cents better than that, around the USD1.38 at the least.

Herbert Hainer

The second question to the market share gain, this is simply because we are growing faster than most of our competitors in most of the regions and in most of the countries. Where we do have market share data is from U. S., where our market share for both brands be it in footwear close to 7%. So this is now a combined market share of a little bit over 13% and is growing.

The last question, where do the style growth coming from, this is around 50% of the Neo business and around 30% from the Originals business.

Michael Kuhn – Deutsche Bank GmbH

Thank you.

Operator

Our next question is from Chris Svezia of Susquehanna Financial Group. Please go ahead.

Chris Svezia – Susquehanna Financial Group LLP

Good afternoon gentlemen, I have a couple of questions. I guess first, just want to circle back to Reebok and North America. When I think about what’s been going on here in the second quarter for the Reebok business looking at point-of-sale data, a lot of your stronger sellers have been Zig product, RealFlex product et cetera.

So I understand if you take out toning that you are still up over 20%, but I’m just kind of trying to work into number a little bit here, given the fact that it was down I think you said 15% for the business, but you have so many other new products quarter-over-quarter, year-over-year that our top sellers that are very strong, just wouldn’t think it would be down that much. So I’m trying to understand that a little bit, maybe some puts and takes.

Secondly, on the Reebok business, just curious, we have sort of reached out to some retailers just in terms of our checks, seen some additional cadence on some the Zig product, anywhere of 20% to 30% off on some of that, I’m not sure if that’s just inventory management or just making room for some of the new product that’s coming in. I wonder if you could address that as well.

And thirdly, a lot of brands are starting to work closely with retailers in terms of shop-in-shop concepts, whether it’s within the malls or within the sporting goods channels, refreshing and updating or expanding. I’m just wondering if you can maybe talk to some of the things that maybe you guys may or may not be doing there as well. Thank you

Herbert Hainer

Okay, Chris, let me start with the first question on Reebok. What you have said is correct. The Zig and the Flex was the driver, and Toning – please have in mind that in the first – in the second quarter 2010, we were up 31% because of the toning introduction at that time, so you can imagine that this was a high-volume which we brought into the market at that time because it was more or less pipeline filling in the whole U. S. market with toning. And this what we are running against it.

Therefore I said if you would exclude toning, then our business would be up 24% and it’s now getting more and more pillars in 2010. We only had toning, now we have Zig, now we have Flex. And as I said, Toning in my opinion will definitely remain as a business. I also have said in my speech that especially in Asia we have a very good Toning business, be it in Japan, be it in South Korea, be it in Russia. And also what we see in the U.S., there is a very good response from the consumer to the new toning product, which we are bringing to the market.

Second question, Zig. As far as I know and I’ve spoken to my guys just a few days before in the U.S., it’s only the old styles of Zig which are discounted. The new styles for example in Zig which we brought in, especially with Finish Line up $10 up versus the previous retail prices. And the third question was on. Sorry Chris, what was your third question?

Chris Svezia – Susquehanna Financial Group LLP

So actually can I just ask a follow up to that real quick. Just what would you think in terms of growth for the Reebok brand as we kind of go forward? Does it stabilize, do we turn to growth in the back half of the year for the North American business relative to Q2?

Herbert Hainer

Yes, this is definitely our plan, no doubt.

Chris Svezia – Susquehanna Financial Group LLP

Okay. And then the third question was just a lot of brands are starting do more shop-in-shop, one-off sort of concepts, whether it’s Dick’s, within the malls et cetera, just curious what you guys are thinking about in terms of the opportunities there?

Herbert Hainer

Yeah, definitely I mean when I just take the two key channels for us which is on one end the mall and the other one the sporting goods, I think we have more than ever be it shop-in-shops or be it special corners with the Foot Lockers, the Finish Lines, the Dick’s or the Sports Authorities and a lot of other guys, just think about when we did the Reebok thing with Finish Line when we changed the whole store into a Reebok store for several weeks.

This will happen again in the second half, we have special white walls within the Foot Locker stores where we showcase our Originals, we have special shop-in-shops with Dick’s for both brands, be that adidas and Reebok, and especially also with Sports Authority for adidas. Yeah, this is definitely where we see part of our growth coming that we ever a better presentation of our product to the consumer, wider presentation therefore we better sales.

Chris Svezia – Susquehanna Financial Group LLP

Okay, thank you very much guys. Best of luck. Thank you.

Operator

(Operator Instruction) We will now take our next question today from Matthias Eifert of MainFirst. Please go ahead.

Matthias Eifert – MainFirst Bank AG

Yes, hi, Matthias Eifert from MainFirst. I also have a quick question about Reebok. I mean, you have extremely – a lot of success now with Zig and also the Flex, and how should we think about Reebok more of the two, three, four year view? Is there another technology platform on the horizon or is the next big focus the relaunch of the classics? Second question would be about the Neo, we’re hearing, you’re saying that you also plan to open Neo stores outside India and China. Have you done this already? And if so, how is the feedback on that, you plan for the rollout of these stores?

And the third question would be the use of your cash. If you keep your run rate of the declining net debt, you’re going to be net cash positive by the end of the year. Any thoughts on share buybacks or do you focus more on increasing the dividend?

Herbert Hainer

So Matthias, let me start with the first one, the three to four year view on the Reebok. First and foremost, let me tell you that we are

A, quite happy that we have three key platforms on the footwear side now and of course we will further build these platforms out, because we want to have it for the long term and make it real franchise and not just for the short-term and we see a lot of potential there. But besides of that we are building now the Reebok business in a much broader form.

The next one is, as you said already, the revitalization of Reebok Classics where we had a big launch two weeks ago in New York with Swizz Beatz. All that I’ve heard so far has been very promising. So this will be the next category, which is down now below 20% of our total business and it was in the former time 30%, 35%. This gives us a big opportunity and a big potential.

And the other part is apparel business where we will come up building the apparel business above the license business which we have today into real apparel business, which Reebok is still lacking and this will be the three to four year view. And this is where we see the growth potential in terms of the product type. Besides of that we still have a lot of markets where we are not as good as we can be and therefore the growth potential is coming from two sides. On the one hand, the product side, as I just pointed out, and on the country rollouts as well.

Second question on Neo. The big bulk of our Neo stores is in China as we have started two years ago when we called it Essentials. We have around 700 stores there. The new Neo collection is doing very well, as I have said before, around 50% of our sales increase is according to Neo, but the biggest bulk is coming out of China. We are starting now with a test phase in Germany where we will test around 10 stores in a much more mature market and seeing then within the next, I would say, 12 to 24 months how this works and then decide on the further rollout, how fast we go, where we go, et cetera.

Matthias Eifert – MainFirst Bank AG

Okay.

Robin Stalker

And in terms of use of cash, Matthias, nothing new in that. You know our first priority is obviously to continue to pay down debt. We want that flexibility. You’ve seen that we’ve increased our dividend payout ratio policy and have every expectation we would continue to move in the right direction with that. We have no plans whatsoever at the movement for any sort of share buyback.

Matthias Eifert – MainFirst Bank AG

Okay. Thank you.

Operator

We will now take our next question from Bernd Muell of LBBW. Please go ahead.

Bernd Muell – Landesbank Baden-Württemberg

Yes, good afternoon, gentlemen. Three quick questions also from my side. Mr. Hainer, you were commenting on Japan and saying that you were seeing lower profitability probably in the second half of this year due to margin pressure. Just as a clarification, does that refer to your previous statements of overall and some high input cost or is that due to special situation in Japan? The second question, perhaps you can again comment on the back-to-school business in the U.S. Do you see any special trends and what product in particular do you see very well-positioned in the market?

And lastly, perhaps also I was a bit curious you were – after your first quarter results call you were commenting on the new adidas SuperBoot that you have in line for the UEFA championships, perhaps any more update with regards to the product? Thanks.

Herbert Hainer

Okay, Bernd. Let me start with the third question on adidas SuperBoot, yeah, we just have launched the new brand of that, but this is for – the season is starting right now, our product offering for the European championship will start to be launched first in December when we come up with the official ball and then from there on we are bringing on a monthly basis new products, be it jerseys, be it football boots, et cetera, into the market. But this is too early in the moment for us to talk about the European Championship.

Bernd Muell – Landesbank Baden-Württemberg

Okay. Just curious.

Herbert Hainer

Sorry?

Bernd Muell – Landesbank Baden-Württemberg

I was just curious.

Herbert Hainer

Yeah, yeah. So the second question, back-to-school business in the U.S. Yeah, we have a lot of products going into that where we have high hopes, for example, Zig and Flex which I spoke already on Reebok where we do believe, and also the retailers, because they all of the huge volume of product that they will be quite successful. But also on the adidas side, you might have seen that we have for the first time launched a basketball shoe in June of the basketball season which was the adiZero Crazy Light, the lightest basketball boot in the industry.

And the sell-through rates have been phenomenal

75% sell-through after 45 days which we have never seen before in a basketball boot. This will continue. Then our original offerings in the U.S. is coming to play, so we are even given the circumstances which we have seen in the last few days in the U.S. we are fairly optimistic for the back-to-school business in U.S. for our brands.

And the first question was on Japan, the lower profitability, yeah, this is because of the situation in Japan. You might think that a lot of retailers had problems directly after the disaster, around 300 stores have been destroyed, power outages, et cetera, et cetera. And obviously we are working closely with the retailers as I have said before to help them as well. But we want to continue our market share gain in the Japanese market and we have all the hopes for that to all what I know. And this according with a little bit more inventory, as I said before we have a little bit pressure on our margin in Japan. But we will still be very profitable in Japan. Let me just also clearly point out Japan has always been a very profitable market for us.

Bernd Muell – Landesbank Baden-Württemberg

Okay. Thanks a lot.

Operator

Our final question today comes from Louise Singlehurst of Morgan Stanley. Please go ahead.

Louise Singlehurst – Morgan Stanley & Co. International Plc

Hello, good afternoon. Three questions from me as well, please. Firstly, just in terms of the U.S., obviously great momentum which we can see on the weekly data, I mean can you talk about how the competitors are reacting, are they also putting through new lightweight product and is there any challenges on new product coming in at lower price points?

And secondly, I remember at the end of last year, you were talking about targeting the high school age group, what things are you doing differently and how do you feel about that going into the all-important back-to-school season for Q3 also in terms of product launches?

And then my final question, Robin you kindly reminded us of the losses at Reebok in 2009, can you give us any update in terms of benchmarking where we are today versus 2009? And are we back to kind of breakeven terms for this year? Thank you.

Herbert Hainer

Okay, Louise. Coming to your first question, how is the competitors’ reaction? Definitely I think you could get more out when you talk to our competitors what they are doing, because honestly in terms of the lightweight products, I don’t see any reaction so far. I think we’re the clear leader, you might remember we have started with F50, the lightest football boot, we were following with the Crazy Light, adiZero, the lightest basketball boot.

We are continuing now with running as I said with the adiZero Feather, which we’re introducing at the IAAF World Championship in Korea. And I think this is part of our success which we are celebrating that we are more innovative than some of our competitors in the moment.

Second question on the high school product introduction, we’re doing, I think I’ve spoken already about the product introduction. And it’s clearly all what we’re doing big in terms of advertising, big in terms of product offering, big in terms with which distribution channels we’re working is targeted towards this high school kids. And this you have seen already in some of our advertising that we have tweaked a little bit and all what we hear is that the responses is very favorable.

Robin Stalker

And Louise, I’m really happy to report that obviously there is significant improvement in the profitability of Reebok. I can’t unfortunately specify it on a bottom line, because as I think you know, we do not run our business any longer on that basis and we do not allocate any of the joint operating model costs that we have between the two brands.

But what I can say, as evidence as you’ve seen, the gross margin development over the last few years, which has been a significant improvement for Reebok. And again in the last six months of this year, you see the gross margin improving another 160 basis points. That should give you a good confidence about the right trajectory of the improving profitability of Reebok.

Louise Singlehurst – Morgan Stanley & Co. International Plc

Thank you.

John-Paul O’Meara

Sorry, gentlemen, that concludes our call for today. Just before we finish, I would like to remind you that we are hosting an Investor Trip to Russia in October, October 10 and 11 with Herbert Hainer. For those who would like to join us, and it’s filling up pretty fast, please make sure you register by August 15, so we can make sure you can get a visa in time to join us. With that, thanks very much and enjoy the rest of the day.

Operator

Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect.

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