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Executives

John-Paul O'Meara –VP, IR

Herbert Hainer – Group CEO

Robin Stalker – Group CFO

Louise Singlehurst – Morgan Stanley

Simon Bowler – Citi

Matthias Eifert – MainFirst

Michael Kuhn – Deutsche Bank

Ingbert Faust – Equinet Bank

Allegra Perry – Nomura

Antoine Belge – HSBC

Cedric Lecasble – Raymond James

Thomas Effler – WestLB

Adidas Group (OTCPK:ADDDF) Q3 2011 Earnings Conference Call November 3, 2011 10:00 AM ET

Operator

Good day and welcome to the Adidas Group Conference Call for Nine Months 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. Please go ahead, sir.

John-Paul O'Meara

Thanks, operator and good afternoon, ladies and gentlemen. Welcome to our nine months 2011 financial results conference call. My presenters today Herbert Hainer, Adidas Group CEO and Robin Stalker, Group CFO. They will cover the key highlights of our nine-month performance, also focusing on the third quarter and give you insights into what we expect for an eventful 2012. So with that, I’ll handover to Herbert to go through his remarks.

Herbert Hainer

Yes, thanks, JP and hello, ladies and gentlemen. As you all have seen in our release this morning, the Adidas Group has once again excelled in the first nine months of 2011 as our brands and products resonate with consumers around the world like never before. The traction we have as we turn our Route 2015 strategic vision into reality, increasing our speed, consistency and consumer focus has enabled to achieve record financial results.

Currency neutral, sales increased 14% in the first months or 11% in euros to €10.1 billion. And despite the negative impact from input costs, we were able to maintain gross margin at 48.2% for the period. And by leveraging our operating costs, Group net income and the earnings per share has jumped 16% to €652 million and €3.12, respectively. Our powerful global presence is reflected in the strong and broad based sales growth seen in all of our geographies around the world, in particular, our so called attack North America at 40%, Greater China at 28% and Russia/CIS at 31%, really on fire. And even Western Europe, despite all the external pressure, we were able to grow sales by 10% taking significant market in several categories during the period.

At the same time, we also saw broad based currency neutral sales increases in all of our operating segments. Wholesale revenues increased 12% due to the growth in all geographic areas, in particular Greater China and North America. In retail, sales were up 21% currency neutral driven by an impressive 50% increase in comparable store sales.

And in other business, our sales are up 13% currency neutral. So, what’s behind all this success? Well, there is no doubt, the key driver is the unprecedented consumer appeal of our brand and this is not just by chance. Why? Because over the past 24 months, we have taken initiatives, steps forward from the ground [ph] and raised the bar in creating consumer excitement by establishing a whole new set of industry benchmarks in product innovation and communication.

And there is no better example of this than Adidas. As the pace of innovation has been blistering propelling sales up 14% year to date and 15% in Q3. No other brand in the world has the breadth, choice, diversity and heritage of the Adidas brand. And this is something we have proudly displayed this year with the launch of the all in campaign, the biggest globalized campaign we have ever initiated.

At the heart of this campaign is passion. The word synonymous with Adidas, love of the game, no matter the game. Another key aspect is its focus on connecting with the next generation. Like Adidas, this audience has many different perception [ph] and interests. So, to capture their attention, the campaign covers a wide spectrum of activities from the sport club to the street using iconic personalities such as Lionel Messi, Katy Perry, and David Beckham.

The analysis we have carried out on the campaign’s impact confirms we have significantly increased brand awareness and engagement. And surprisingly, digital played a major role in directing this impact. The power of connection, which are at the hearth of social media spread our brand message like wildfire, as fans shared, liked, posted, blogged, linked and tweeted about the campaign. As a result, we have seen a far high increase in fans and fields [ph] across various social media platforms compared to similar brands with now more than 20 million fans across all Adidas related Facebook pages and over 50 million views [ph] of the campaign on You Tube.

I am also convinced this campaign together with our industry leading innovations, particularly in lightweight technologies has been a big driver of growth for Adidas this year. This reflected by the double digit growth rate we have generated across nearly all of our core categories. So, to highlight a few, in running, sales were up 20% in Q3 and 23% year to date, with double-digit growth in both footwear and apparel. The adiZero Lightweight platform has seen phenomenal growth with footwear sales up over 65% in the first nine months.

The new adiZero Adios is also off to an incredible start with Patrick Makau setting a new world record in marathon in Berlin at the end of September. Also at the World Athletic Championships in Daegu, South Korea, Adidas athletes raked up 33 medals in total. The adiZero Brian made its debut in scintillating fashion helping speed sensation Sean Black [ph], Veronica Campbell and Sally Pearson 200 meters, 200 meters, and 100 hurdles gold respectively.

In basketball, sales were 11% in the first nine months driven by strong growth in North America where sales are up 20% year to date and 21% in the third quarter. The adiZero Crazy Light was one of our most successful footwear launches in basketball ever, with 75% of the product selling through in 45 days.

On the subject of basketball, there has been a lot of talk recently on the NBA lockout. So, here is how we see it. While the situation is certainly frustrating for everybody in the world, in particular the fans, basketball is not just about the NBA. It is a sport that is loved and played all over the world and there is a huge impact on fashion and street sales. The global game has never been stronger with the number of players participating growing at a rapid rate. In the US alone, more than 28 million people are playing this sport.

While we will certainly see some negative impact on sales of licenses apparel, we fully expect to continue capitalizing on the strong momentum we have in footwear which represents around 60% of our sales in the category. And here again, creating consumer excitement is what it is all about. A great example of this is our first ever interactive social media driven product in production for the adiZero Rose 2.0, the latest signature shoe for the youngest ever MVP winner Derrick Rose. With a dedicated marketing campaign, the Bull as a centerpiece, visibility of the product has spread like wildfire, already being viewed 2.8 million times on You Tube in just across few weeks.

And this won’t be all, you will see from us this year basketball. We have several more product introductions to come such as adiPower Howard basketball shoe which launches globally today. And by leveraging the halo effect [ph] from (inaudible) our star athletes over the summer, as well as the great on court [ph] presence we have with our college program and the international teams, I’m convinced our success in the category will continue with only limited disruption.

Finally, for Adidas and Sport Style, sales were up more than 20% for the fifth consecutive quarter, yielding 26% gross year to date. Success in Originals was driven by a dedicated all Originals and high flying iconic product sales such as the MEGA Vario which was the best selling original shoe for back to school.

In addition, the NEO Label continues to go from strength to strength, growing 40% in the quarter and over 50% year to date. NEO is now being distributed in almost 1,000 stores in China, 60 in India, as well as in 26 own retail stores in Russia and CIS.

Turning to Reebok, sales increased 9% currency neutral in the first nine months and 2% in the quarter. As expected growth returned in North America where sales increased 4% currency neutral which compares to a 15% decline in the second quarter. Strong gross rates of 22% in European emerging markets and 7% in other Asian markets were partly offset by high-single digit declines in Western Europe and Latin America.

In North America, huge demand for Sick and the highly successful launch of RealFlex enabled us to fully offset declines in the toning category. Excluding sales of Toning, gross in North America kept pace with the prior quarter rising 24%.

In addition, we are also extremely pleased with the interest we have started to generate in Classics. Our Rhythm of Life campaign has already had 3.8 million views on You Tube and has now been rolled out beyond the US in the international markets such as Russia, UK, South Korea and Japan.

Are we where we would like to be in Classics? Not yet, but the good news is we have turned the corner and I am satisfied that we are moving forward in terms of getting our new iconic product into important directional accounts, as well as driving up average selling prices which are up 35% in Q3 compared to a year ago.

Finally on Reebok, let me make a few comments on the FTC case as there has been some misinterpretation of the issue by the (inaudible) and the financial community. First of all, let me remind you about the motivation behind this category and the overall concept of toning. Like everything at the Adidas Group, the consumer is always at the heart of everything we do.

The idea to create a collection of toning products initially came from consumer research as to how we could better service the female consumer. In this research driven [ph] that exercising was the goal of toning was a need not being appropriately addressed. Looking at the FTC situation, the key sects of investigation and settlement thereof were related to the FTC’s allegations regarding a specific first generation EasyTone advertising campaign which we stopped using quite some time ago.

The allegation suggested that the testing we conducted did not substantiate certain claims used in the advertising. And in order to avoid a protracted legal dispute, we choose to settle with the FTC. However, settling does not mean we agree with their position, because we do not and more importantly, the settlement has not changed our attitude towards the viability of toning. We remain fully committed to the category and the reason is simple. The overwhelming enthusiastic feedback received from consumers has demonstrated that our unique Moving Air technology is leading in terms of functionality, design and comfort. And we will continue to serve and satisfy this important consumer need both today and in the seasons ahead.

So, finally, ladies and gentlemen, let me spend a moment on TaylorMade Adidas clothes which had another sensational quarter. The 16% currency neutral sales growth in the third quarter and 17% year to date, there is no denying the extent of market share gains we have achieved this year, with sales already reaching €840 million.

In the third quarter, we gain saw strong double-digit growth in metalwoods and irons driven by the R11 series in both categories. Footwear sales are also up almost 40% in the period. Product launches like our new Tour360 ATV Shoe which has multiple flex points in the forward allowing the foot to move more naturally and adept to any surface are creating a lot of fuss.

In addition, our visibility on Tour has been very strong throughout the year. With the popular Darren Clarke winning the Bridge Open and Sergio Garcia rediscovering his game with two successive wins in Europe over the last two weekends.

So, as you can see, ladies and gentlemen, with the desired brands, channels, geographies, all our promotional partners, we have a lot to be proud of in our record performance in the first nine months. With our clear focus on driving Route 2015 and the excitement building ahead of new year’s major events, there is plenty to focus [ph] going forward. But before I come to that, let me first hand over to Robin to give you more details on the key financials from the period.

Robin Stalker

Great. Thank you very much, Herbert and good afternoon, ladies and gentlemen. As you’ve just heard, we had remarkable sales growth throughout the globe and across our portfolio [ph] of brands in the first nine months.

Even more impressive, however, is the quality of our topline growth. Quality growth is a fundamentalities of our Route 2015 strategy. Now, focus on this has already been hugely significant in this fiscal year as it has allowed us to protect our margins against the significant input cost pressures, continue investing in our key Route 2015 growth target s and to generate new record levels of earnings for the year.

I’ll come to all of these points in my discussion in a minute. But first, to complete the picture on our performance to date, maybe finish detailing our topline development by giving you some more specifics on the third quarter. Our currency neutral sales growth of 13% in the third quarter clearly outpaced our major competitors.

Similar to the second quarter, currency movements again had a significant negative impact on Group sales in reported terms. So, therefore in euros, Group sales were up 8% to over €3.7 billion in the quarter.

Based on our currency should be moving in recent weeks, negative currency translation pressures will also persist in the fourth quarter, particularly from Latin America. However, the gap between currency neutral and reported sales should be less pronounced than in Q3. By geography, with the exception of Greater China, sales – growth rates accelerated in all the regions. The growth (inaudible) in this quarter was the European and emerging markets where sales increased 22% currency neutral. This strong performance was mainly driven by Russia, CIS which grew 23% currency neutral.

Our fastest growing region in Q3 was Latin America, propelled by the (inaudible) America, growth accelerated with sales increasing 18% currency neutral. Outstanding growth rates in Argentina and Chile were particularly noteworthy, and also in Brazil were sales were up at high-single digit paraded us, while Reebok declined mainly due to the timing of shipments compared to prior year.

In Greater China, third quarter Group sales were up 13% currency neutral. Now, the lower sales growth rate compared to the first half of the year relates to the much stronger prior year comparison as we returned to growth in the third quarter of 2010. The rest assured, that despite recent comments from local competitors, we remain very confident with regard to our prospects in Greater China, as we gain market share, expand our footprint to capture the rising affluence of the Chinese consumer, particularly the lower tier cities, as well as leverage increasing sports participation rates.

In North America, currency neutral group sales increased 13% in the third quarter with growth at all of our brands. Momentum at Adidas continued unabated with sales rising 17% led by Adidas Sport Style business which increased an impressive 58%. Reebok also returned to growth in the third quarter with sales increasing 4% as Herbert already mentioned. Furthermore TaylorMade Adidas Golf cemented its leadership position with sales expanding 24% for the quarter in this key market.

In Western Europe, sales increased 10% currency neutral due to growth in all of the region’s major markets. Spain and Italy saw double-digit growth rates during the quarter, with Germany and France up at a high-single digit rate and the UK also returning to growth as a strong increase in Adidas offset declines at Reebok.

Finally, in other Asian markets, sales grew a healthy 7%, reflecting strong increases in South Korea and Southeast Asia which more than offset a slight decline of 1% in Japan. Sales in Japan were again above our expectations for the quarter. Similar to Q2, this has largely to do with strong growth of 26% at the Reebok brand which almost fully offset a decline of 4% at Adidas.

By segment, wholesale revenues increased 10% in the third quarter with growth in all of our geographical areas. Gross margin for this segment decreased 150 basis points for the quarter to 40.4%. This development reflects the severe pressure we suffered from rising input costs which were only partly offset by more favorable regional sales as well as product mix. In the retail segment, currency neutral sales grew 21% for the quarter, driven by a strong 14% comparable store sales increase. In particular, Russia/CIS drove the overall development with comp store sales advancing 26% in the third quarter.

From a brand and store concept perspective, growth was broad based. Adidas and Reebok comp store sales increased 14% each in the third quarter and 15% and 13% respectively in the first nine months. Similarly, comparable store sales increased at double-digit rates in all store formats, with a very healthy 20% growth in our concept stores for the first nine months.

Retail gross margin expanded 140 basis points to 62.3% in the third quarter. The Reebok gross margin in particular saw very significant improvements of 7.6 percentage points for the third quarter. At the end of September, the Adidas Group retail segment operated 2349 stores, a net increase of 79 stores compared to December 2010. During the first nine months, we opened 225 stores and closed 146 stores, while 135 stores were remodeled. In addition, 110 concept stores were reclassified as other retail formats during the period.

Finally, our other businesses grew 13% currency neutral both in the third quarter and the first nine months, as all segments recorded sales increases. The gross margin for our other businesses decline 2.4 percentage points in Q3 to 42.9% and 40 basis points to 44.4% year to date. This development reflects improved product margins at Rockport and Reebok-CCM Hockey. These were, however, more than offset by lower gross margins at TaylorMade Adidas Golf as we needed to increase the portion of local sourcing due to strong demand.

Furthermore, the comparison with stronger margins in the prior year relates to the launch of highly successful Burner family of irons which also contributed to this development.

The segmental operating margin for other businesses at a lower rate compared to the gross margin, both for the quarter and the first nine months, coming down 40 basis points and 10 basis points respectively, reflecting efficiency gains at TaylorMade and Reebok-CCM Hockey.

Turning now to the Group’s gross margin where through hard work and discipline, we have set the standard in our industry this year. Like others, we have faced significant pressures from rising input costs. In the third quarter, the negative net impact from input costs was 3.2 percentage points and 1.9 percentage points for the first nine months. But through the strength of our brands, fast growth in the emerging markets and excellent execution of our sales and own retail organization, we have been able to fully mitigate these effects keeping our gross margin flat at 48.2% for the nine-month period and declining nearly 30 basis points to 47.1% in the third quarter. Particularly important have been improvements in our retail and Reebok gross margins which increased 1.5 percentage points and 1.2 percentage points, respectively in the first nine months.

In retail, we have benefitted strongly from our strategies to further improve and professionalize our retail operations. This is clearly seen in the tremendous comparable store sales which are up 15% year to date, driven by rising average ticket values which had a significant positive impact on profitability.

And at Reebok, strong product introductions through the Zig and RealFlex platforms and growth again in the high margin Classics category have ensured we continue to narrow the gap with the Adidas brand. This, as most of you will be aware, is a key source of our Group’s profitability improvement potential over the long-term. With regard to the gross margin outlook as previously announced, we do not expect any material relief from input pressures before the second half of 2012.

Now, moving below the gross profit line, other operating expenses increased 7% for the third quarter and 9% in the first nine months of 2011, clearly at a lower rate than sales growth. This translates into improvement of 50 basis points and 80 basis points as a percentage of sales for the quarter and year to date. Therefore, I can confirm our operating expenses as a percentage of sales will decrease modestly as we have guided throughout the year.

Marketing investments grew 5% in Q3 and 8% in the first nine months. As a percentage of sales, marketing spend declined 30 basis points to 12.3% year to date. For the fourth quarter, we will see a larger increase in marketing year over year to support the build-up to UEFA Euro 2012 and to support Reebok through the holiday period in particular, including comprehensive Zig and RealFlex campaigns in North America.

To round up my discussion on operating profit, other operating income increased 45% year to date, the latter primarily reflecting two positive one-time effects related to the settlement of a lawsuit and the sale of a trademark which you are probably already very familiar with last year.

Finally, currency neutral royalty and commission income decreased 9% in the first nine months. Taking all the aforementioned factors, third quarter operating profit increased 7% to €441 million, while year to date operating profit was up 12% to €973 million from €865 million in the prior year. This translates into a first nine months operating margin of 9.7% which is up 10 basis points year over year.

Turning now to the non-operating items of the P&L. For the first nine months, net financial expenses increased 10% to €73 million. Negative exchange rate variances which swung €15 million compared to the prior year more than offset a 13% decline in net interest expenses.

The Group’s tax rate for the first nine months came down 230 basis points to 27.4% which is due to a more favorable regional earnings mix as well as tax rate reductions which have been enacted in the UK for measuring deferred tax assets and liabilities. Therefore, net income attributable to shareholders for the first nine months increased 16% to €652 million, which is not only the highest net income figure our group has ever achieved in our nine months period, it is even higher than the Group’s record full year 2008 net income of €642 million, which translates into basic and diluted earnings per share of €3.12 compared to €2.68 in the same period last year.

Now moving over to the balance sheet, when it comes to working capital management, I believe we can be extremely satisfied with where we stand considering the growth of our business this year. Our ratio of average operating working capital to sales is at a similar level compared to the prior year at 20.9% which is close to our record months. For inventories in particular, we are right in line with our guidance. The growth rate is slowing to 20% currency neutral from 26% in the prior quarter.

Looking deeper, if you take into account, the value inflation on our inventories caused by input cost increases, then our inventories are actually only up in the low teens. Given the good ageing profile and our growth prospects for the fourth quarter and the year ahead, I do not believe there is anything to be concerned about here.

Completing the picture on working capital, accounts receivable increased 5% on a currency neutral basis to almost €2.3 billion, which compares to the 13% increase in Group sales. Accounts payable increased 8% currency neutral to more than €1.4 billion reflecting the growth in inventories.

Looking at the financing structure of our company, compared to the end of September 2010, net borrowings have declined 17% to €750 million. The ratio of net borrowings over 12 month rolling EBITDA now stands 10 basis points lower than the prior year at 0.8 times, comfortably within our target corridor of the ratio below two times. And I remain confident we are on track to end the year with net debt below the prior-year level. Finally, our equity ratio has also improved considerably increasing 2.4 percentage points to 46.9% over the last 12 months.

So, ladies and gentlemen, in summary, our first nine months results, maybe we’ll finish 2011 clearly exceeding our initial expectations for the year after already surpassing our 2008 record earnings mark after the first nine months. I can already confirm today 2011 will be another record year for the Adidas Group.

We now expect to achieve currency neutral sales growth due to rates approaching 12% for the full year. The increase in guidance is mainly related to the strong performance in our three key attack markets, as well as a less pronounced decline in Japan than originally feared. Gross margin will be between 47.5% and 48% and the operating margin will increase to a level between 7.5% and 8% as a result of lower interest expenses in 2011 due to a lower average level of net borrowing and the lower tax rate from the prior-year level of 29.5%.

We will achieve new record net income attributed to shareholders of around €660 which is 16% higher than 2010. This translates into earnings per share at a level of around €3.15 compared to €2.71 in 2010 and our previous guidance of €3.09 to €3.12.

With that, let me now hand you back to Herbert, who will give you some first indications of what to expect in 2012, as well as provide more color on a small, but very exciting acquisition we announced this morning.

Herbert Hainer

Thank you very much, Robin. So let me start with a small acquisition we announced this morning. Back in 2008, you might remember after about a six-month review, we launched a seven-year strategy to bring the Adidas brand back to summit in the outdoor category. Today, we are among the top 10 brands and also worldwide. And as part of Route 2015, we have already announced our ambitious organic goals to reach half a billion UN [ph] sales by 2015. Momentum in the category is currently very strong, being our fastest growing at Adidas in the first nine months, with sales increasing 40% approaching €300 million.

The continuing rise in popularity of our Terrex footwear and apparel offering, more than 50% growth in the emerging markets, as well as a good start into our outdoor relaunch in US, is yielding – just rewarded for our investment and focus into the category. When it comes to outdoor, like all performance related sport activities, credibility and technology are vital. While there is a lot Adidas can bring to the outdoor from the world of innovation and technologies our Group possesses, there are still several white spaces in our product and technology architecture.

The acquisition of Five Ten therefore is a perfect example of how we can help build out the holistic and credible to service the outdoor market.

For those of you who are not familiar with the brand, Five Ten leading performance sport in the outdoor actions sports community with a clear focus on climbing and mountain biking. It is a brand for outdoor athletes who like to live on edge which is reflected in its motto The Brand of Surprise [ph]

Five Ten has been at the forefront of innovation in the technical outdoor market since the days dealt [ph] a revolutionary high friction rubber compound was created in 1985. Five Ten will, amongst other things, allow Adidas expand into a market that is complementary to Adidas’ current product offering, most notably the technical climbing segment. We will also keep Five Ten independent brand, integrated primarily on the back office side with a clear focus to great synergies wherever possible.

The total purchase price is $25 million in cash at closing and contingent payment which are dependent on Five Ten achieving certain performance measures over the next three years. The transaction is expected to close in the next couple of weeks. In 2011, annual net sales are expected to be approximately $16 million euro, excluding its distributor business and Korea.

So, turning now to the bigger picture. 2011 has given a perfect start to our Route 2015 journey. The momentum we are gaining as we implement our strategies is especially pleasing as the external environment is not without its challenges, be it the economic uncertainty, stalling consumer confidence or struggling regional competitors. As we turn our attention towards the holidays in next year, our recipe for success in 2012 will be very simple, more of the same, more innovation, more speed, more consistency and more consumer focus.

Over the past few months, many of you have asked what happened and what will you change if you fall back into a scenario like 2009. Well, from our side, there isn’t really anything different that we are not doing already as part of our trial for operational excellence and the Route 2015. But what I can tell you, there is absolutely no doubt that the Adidas Group today is in a much stronger position compared to three years ago for several reasons.

First of all, Reebok which suffered a significant gross margin decline has become a much stronger brand with a clear and consumer relevant positioning supported by powerful product platforms.

Secondly, in Greater China, we are not facing any inventory oversupply challenges which was a key driver of the 16% currency neutral sales decline in 2009. Over the last 18 months, we have significantly rationalized and cleaned up our retail footprint and put then our inventory controls in place. Given the strong brand momentum and the market share gains we have seen over the past year, I see no reason why our success won’t continue in line with our Route 2015 guidance.

Thirdly, the Russian ruble devaluation versus US dollar cost us almost €200 million in profits in 2009, but we are still exposed to rapid movement in this currency. I believe we have taken the right steps that put us in a better position to weather any storms on that front.

Fourthly, in North America, where sales declined 10% in 2009, both of our brands, Adidas and Reebok are enjoying strong momentum, particularly in the critical [ph] mall-based retail channels. The strength of our product offering and the solid focus at our retail partners on managing inventory and profitability gives our Group in particular a great platform to continue to take market share.

Fifthly, we have significantly improved our balance sheet with a strong reduction in net debt and tighter control with inventories. Also, the professionalization of our retail and the expansion of our retail management programs are giving us improved early warning visibility.

Sixthly, 2012, unlike 2009, is an event year with UEFA Euro 2012 and the London 2012 Olympic Games both taking place in Europe, probably the region most at risk from economic pressure, we have a certain downside risk protection, given the importance of both these events for retailers and consumers alike. And there is no doubt that the key competitive advantage of Group is a tremendous experience and know-how we have gained from our long tradition of partnering with such major sport events.

And finally, it goes without saying, we will continue our track record and relentless drive to innovate and excite the consumer.

Now we will just be more visible over the next 12 months in football. As the official sponsor of UEFA Euro 2012 and with 16 qualified, the Ukraine, Spain, Germany, Russia, Greece, Denmark, the stage is set for us to again showcase why we are at the very heart of the world’s greatest sports. This starts and finishes with the best and the most innovative products.

And here, ladies and gentlemen, that Adidas will once again bring about a wave of change and new innovation to create excitement above and beyond anything you have ever seen before. As I in said [ph] in May, the first football boot with a brain, the adiZero F50 powered by miCoach will be available at retailers from November 15 onwards.

Not only is the 165 gram ultra lightweight boot the fastest in the game, this now also is the smartest, containing a data collection [ph] device, the miCoach Speed Pod in the sole, the user can wirelessly upload performance data like distance, sprint count and speed to the miCoach online platform. Users can then, among other things, analyze the performance, get personalized coaching from the miCoach website, compare themselves to the favorite Adidas football hero, share the stats with friends on Facebook, or play the miCoach football video game using their own real life abilities.

In addition, we will launch the new Official Match Ball at the draw for the finals in Kiev on December 2, as well as the home jerseys for our six qualified teams during the next two weeks.

And this is just the beginning. We will introduce new products each and every month in the lead up to the event, including the new Predator football boot. All in all, this European championship will mark our biggest ever football year, as we plan to eclipse the record the sales of more than €1.5 billion in the football category generated in the World Cup year 2010. And believe me, the wave of new innovation will not just be confined to football or Adidas in 2012. Rest assured, all of our brands, we will have plenty to talk about and you will see some of what’s in store when you joined us here in Herzo at the beginning of March for our full year results presentation.

Therefore, ladies and gentlemen, not only are we confident we will continue to perform well in 2012, we will get even stronger. And that is why we are already to give ambitious top and bottom line guidance for next year

(inaudible) if there are no severe economic shocks, we project Adidas Group sales to increase at the mid to high-single digit rate on a currency neutral basis and earnings to grow faster than sales at the rate between 10% and 15%, making 2012 another record year for the Adidas Group.

With that, I thank you for your attention. And Robin and I are ready now to answer all your questions.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Louise Singlehurst from Morgan Stanley. Please go ahead.

Louise Singlehurst – Morgan Stanley

Hello, good afternoon. Three questions from me, please. Firstly, just in terms of the guidance that you've given for 2012, the mid-single to high-single digit topline, can you give us some color by geography, what you're looking there for US, Europe and also touching on China as well? And then number two, just actually sticking with the theme of China, clearly it remains a very tough market for the local players. Can you just talk about the tone or the discussions that you are having with your partners in the region and your scope for expansion and taking market share as you push down into the lower tier cities? And then finally, just a question for Robin, please. Looking at the earnings guidance for next year, there is not a huge amount implied for operational margin next year in terms of it looks pretty flat versus 2011, can you just talk about the investment? Clearly, you've got a big event year, but what we should expect in terms of new product launches and what is going on at Adidas and Reebok? Thank you.

Herbert Hainer

Louise, this answers question number one, guidance on 2012, we will give you all the details when you are here in March next year when we do our full year presentation with 2011 and then explain all the details of the P&L and the balance sheet for 2012. Second question on China, we definitely don’t see any slowdown of our business in China. You have seen the results for the third quarter which has been very encouraging and this will continue into the fourth quarter and all what we know this will continue in 2012 as well. We are in close contact with all our retailers and one of them has just visited here in Herzo a few days ago, and they confirmed all that our products are selling through very well, our inventory decision is very healthy and the systems we have put in place to get early warnings of sell-throughs of inventory and then reacting on that with replenishment is working well. So we definitely are very bullish on the China going forward.

Robin Stalker

And the third, to answer the third question – the first question, you’ll get more details obviously in March on this, but one thing is clear, we are leveraging our topline growth, the quality growth we are going to have in the top and it’s just going to give us a better profitability and it’s all on track to bring us to the goal that we have of a sustainable operating margin, at least, 11% by 2015.

Louise Singlehurst – Morgan Stanley

Thank you. Just as a follow-up, in terms of Q3 performance, has there been any change in terms of European performance or any differences you would call out by country? I know you gave the overall growth for the quarter, but anything month on month? Thank you.

Operator

We will take our next –

Herbert Hainer

Sorry, let me first answer it, the last question. No, we haven’t seen any big changes in Europe month over month, it’s just the other way around. Our business in Europe is still continuing very well and broad based is not just Russia, it’s not just the emerging markets, it’s going through the all countries more or less in Europe and also the so called mature markets here in Europe, Germany or Spain, Italy. So, overall, the 10% you have seen is carrying on through the whole year and we are quite confident about our business in Europe.

Louise Singlehurst – Morgan Stanley

Okay. Thank you.

Operator

We will take our next question from Simon Bowler form Citi. Please go ahead.

Simon Bowler – Citi

Hi, good afternoon, everyone. Just two questions from me. First of all, on the gross margin, you mentioned you are not expecting to see any relief until the second half of 2012, I'm just wondering, given the declines that we've seen, the modest declines we've seen in the third quarter and the flat performance year to date, how much there is that you can do over the next nine months to offset those pressures or should we expect to see a slight acceleration in the gross margin declines? And then secondly, just a quick one on currency, you've mentioned the exposure to the Russian ruble, I was just wondering how much of a headwind, if any, the weakening that we've seen across the last quarter provided, whether that is something you could quantify? And also, in terms of your guidance, what future movements in that currency are assumed? Thanks.

Robin Stalker

Okay. And firstly on gross margin, we’ve been guiding throughout this year that obviously the second half of the year will be – we’ll suffer more of the FOB pressures in the first half, that’s certainly the case. While we’ve acknowledged continuation of the FOB pressures, we can and we’ll continue to have underlying ways of being able to mitigate the largest part of this through the development of our retailing through the geographical and product mix. So, nothing else to say about the margin development. In terms of the ruble, there hasn’t actually been much movement in the last months, this has been pretty immaterial. And we have conservative, but consistent expectations as we look forward to the future.

Simon Bowler – Citi

Okay, that was great. Thanks.

Operator

We will take our next question from Matthias Eifert from MainFirst. Please go ahead.

Matthias Eifert – MainFirst

Yes. Hi. Matthias Eifert from MainFirst. A few questions mostly on Reebok. First of all, can you give us a bit more detail about the weakness you mentioned in Europe and Latin America, what exactly and which countries and how will you plan to fix this? Also on Reebok, was there already an NFL impact on the North American business for Reebok to phase out and to hand over to Nike in that category? And talking about this, can you give us an update on the Reebok branded apparel business? How is that developing and also compared to overall sales and in regards to your expectations?

Herbert Hainer

Okay, Matthias. Question number one, Reebok in Europe and Latin America, first and foremost, in Latin America, it was only timing, because it deliveries into the market, mainly in the big ones, be it Mexico, Argentina Brazil. In Europe, we have different developments, Russia and emerging markets, they are doing still extremely well. In some other countries, Toning was – sorry, Sick was not as successful as it has been in the US, this has brought a slowdown, whereas we have seen first successes on Flex, so we definitely do believe when we roll out Flex next year on a broader scale in Europe that we are catching back.

The NFL didn’t have any influence at all so far. It’s anyway reported under SLD, but we don’t see any slowdown yet. And third point, apparel business, so as we have told you several times, we started on the footwear side this individual concept, Toning, Sick and Flex and the next one is Classics where we build a big program and push behind. Obviously, we'll be further developing apparel, but apparel will definitely be one of the next waves where we then put money behind and then push it forward.

Matthias Eifert – MainFirst

So then, more like 2013, if I understand you correctly?

Herbert Hainer

Of course, we have – as you might know, we have new head of apparel for Reebok that just joined us six months ago, which we know previous Adidas times and be further developing the programs, but the big push behind Reebok is definitely a scene later in 2012 and then in 2013.

Matthias Eifert – MainFirst

Excellent. Great, thank you.

Herbert Hainer

Very good.

Operator

We will take our next question from Michael Chung [ph] from Deutsche Bank. Please go ahead.

Michael Kuhn – Deutsche Bank

Good afternoon. Michael Kuhn from Deutsche Bank. Also, three questions from my side. First of all, back to Reebok, according to my calculation, it was down roughly 5% currency neutral, in the third quarter and the gross margin was down at about 1.5 percentage points. You said that timing issues played a role in the third quarter. So, I would be interested if we might see a turnaround into positive growth territory again in the fourth quarter and what you foresee in terms of margin development at Reebok at the upcoming quarters? And then secondly, on inventories, you said that you feel well with your inventory situation, nevertheless I would like to get some more details on the regional situation, if there's any region with a higher growth compared with others, and maybe some more details on both the price and the volume effects that drove up your inventories in the third quarter? And finally, not so much about details on your 2012 guidance, but more on the macroeconomic scenario that you had in mind when you gave the guidance, so what is your expectations for GDP growth next year so that you are able to deliver on that guidance? Thank you.

Robin Stalker

Hey, Michael, I’ll take first two. And so you are wrong, and your calculation is false. The third quarter Reebok sales development, currency neutral is a growth of 2%.

Michael Kuhn – Deutsche Bank

I'm sorry. I think about the wholesale only, wholesale, Reebok in wholesale.

Herbert Hainer

What that had been wholesale –

Robin Stalker

We are looking at it, let me finish my answer first. And in terms of the gross margin, is a positive development of 70 basis points for the Reebok brand. I’ll see if, while I am answering the second question, we can get to the wholesale figure for you. Inventory is not an issue. I mean, I think and it’s not a regional issue, we’ve seen a growth that’s fairly broad, is not any particular regional country that stands out in terms of the that growth. And you right, however, to identify that there is a percentage that’s coming from the increase in the price, as I said in my comments. And if the growth is a 20% and if we take out the currency effect, would be a high teen. So, this is almost a 10% impact through prices there.

Herbert Hainer

So let me answer the third question in terms of how is our guidance for 2012 based in terms of macroeconomic factors. First and foremost, we are looking to ourselves what kind of product innovations we are bringing to the market, what events are [ph] and how brands are positioned. And I think we have never been in a better position. When you look to 2011, for example, as a testament, that economy around the world definitely not in all countries in the best state and we are still growing 12%. So when I look to the macroeconomic figures, you have different pictures in China and Russia and Brazil and then in some other countries where obviously Greece and some other economies isn’t that good. But I definitely do believe that our industry has proven to be much more resilient to this development and especially our Group has shown that we can grow much faster. So, altogether our assumption for 2012 is based on the strong concept and the strong brand positions which we are facing in the market today in which now we will roll out in 2012.

Robin Stalker

Michael, I can complete the answer to your first question about, if you are just looking at Reebok in the third quarter for just wholesale, it’s down about 2% and currency neutral and that’s purely due to the Toning timing year over year and also the Latin American which Herbert spoke about earlier.

Michael Kuhn – Deutsche Bank

So we might see a return to growth in the fourth quarter?

Robin Stalker

We are not giving specific guidance on the individual parts of the fourth quarter, but yes, you might see a return to growth in the fourth quarter.

Michael Kuhn – Deutsche Bank

Okay, thank you.

Operator

We’ll now take our next question from Ingbert Faust from Equinet. Please go ahead.

Ingbert Faust – Equinet Bank

Yes, good afternoon. Good afternoon. Ingbert Faust here from Equinet Bank. I have actually one question left from my side, which is on the seasonality or the impact from the Olympic Games and from, in particular, the UEFA 2012 event, could you remind us when exactly you expect to see the impacts on your sales volumes? I assume that will already start in Q4, but could you give us a bit of an indication where you expect the impacts, Q4, Q1, Q2?

Herbert Hainer

So, you have two different scenarios. As the UEFA Euro 2012 is much more commercial as we introduce the jerseys for all the participating teams which running on the Adidas, then we the Official Match Ball, then we bring permanently new football boot concepts, be it the F50, Predator or the adiPure to market, whereas the Olympic is much more a platform to showcase our brands and our new innovative performance products on several aspects that is much less commercial. So, in football, we start already next week to launch the jerseys of the individual team, be it Germany, Spain, Russia, Greece, Ukraine, etcetera to the market , then we follow that with the new Predator, then on December 2, we launch the new ball and then we go into 2012. (inaudible) we launch the F50 and then we continue every month until the European Championship starts to introduce product concepts.

Ingbert Faust – Equinet Bank

Okay, thanks. And in terms of a bit more detail, probably, in terms of volumes, how it could be split? I know it's very difficult, but that would mean that Q4 could already see quite a reasonable impact, I assume?

Herbert Hainer

Yes, obviously, Q4 will have an impact on sales, but still will have an impact on investment, because we start to invest with all the activities I have just announced and the big push then also in terms of volume you see in 2012.

Ingbert Faust – Equinet Bank

Okay, thank you.

Operator

We will now take our next question from Allegra Perry from Nomura. Please go ahead.

Allegra Perry – Nomura

Yes, good afternoon. I have three questions, please. Firstly, on China, I was wondering if you could give us an indication of like for like trends from your retail partners and perhaps, any color on October? Secondly, in terms of Reebok, within the retail division, I was wondering how much of the gross margin improvement was stemming from lower markdowns and if there was the potential for further reductions going forward? And then lastly, within the Group figure, if you could, perhaps, give us some indication of the composition of like for like between price mix and volumes, please? Thank you.

Herbert Hainer

So, I think the first one on China. In China, we definitely see a like for like growth with all our key partners, as I have indicated before, we also see a like for like decline on some of the local plans with the retailers as you are aware as well. And I don’t think that we give any results for October yet.

Robin Stalker

And in terms of the question on Reebok, in terms of the margin development, everything is playing a role in the positive development of the margin. So, yes, there will be less markdowns, that’s correct, but it is also because the products that Reebok is bringing to market now is more attractive and can also justify a higher price point. We still got a major differential between the Reebok margins and the Adidas margins, so that potential I was talking about earlier, but you are right, that that all plays a positive impact. Your third point was about or question was about maybe, we could break down the price and volume of the increase in sales.

We can’t do that in a very sophisticated way. My estimate is, the pricings definitely obviously have – will better be at low single digit percentage.

Allegra Perry – Nomura

Okay. Thank you very much.

Operator

We will now take our next question from Antoine Belge from HSBC. Please go ahead.

Antoine Belge – HSBC

Yes, good afternoon. Antoine Belge, HSBC. Three questions. And first of all, I would like to come back on the evolution of SG&A in the third quarter. I think this morning you beat expectation for sales, but I mean, actually EBIT was in line because the SG&A ratio, even though declining, was still more than what we expected, can you come back to that and explain if – what has been the impact, maybe of, first of all, the expansion into retail and is there some initiative to support Reebok? And my second question is actually following on Reebok marketing, I think you mentioned some initiatives for Q4, and were those initiatives for Reebok in North America part of marketing plan, or is it something that you have decided more recently in the light of the more recent development at Reebok? And finally, regarding spring and summer, what's actually the reaction of your retailers, I mean if – on products excluding everything which is related to the events, sort of more the non-event product? Can you maybe comment on how your retailers are feeling for 2012?

Robin Stalker

Okay, Antoine, with the first point, I mean you are right, that we still have obviously a potential to further improve our leverage and definitely have work on our SG&A and that is a part of our goals in terms of delivering that improvement in profitability through 2015. And there is nothing particularly special about the third quarter and maybe we’ve not been able to reduce the cost as much as you anticipated, but there has been no major increase in the cost. I would say, however, that you are right to identify retail as an area where we will probably invest a little bit more faster rollout than was originally planned in those first nine months and you see part of that in the third quarter, obviously.

Herbert Hainer

Coming to the second question, Reebok advertising, you are correct, this is mainly in North America, for example, in basketball with John Wall and then the holiday season is coming up, but we also will further push in Russia, especially this whole winter program which we have in our stores in Russia which is a very important quarter for Reebok there as well. So these are the two key markets. Question number three, our retailers, all what I have seen and I spoke to a lot of retailers over the last two weeks, they are all quite happy what we have shown them. You can imagine that we have sold already the first quarter, this is done since weeks and we would not be here and giving you guidance already for 2012, because we would not be very optimistic about what we have so far in our books and what we have heard. All that I have heard for the upcoming European 2012 Football Championship and the product concepts which we have shown to our retailers, you can be sure that they are more than excited, and if you have the chance, please talk to some of the retailers, I am absolutely convinced they will confirm what I just said.

Antoine Belge – HSBC

Many thanks.

Operator

We’ll now take our next question from Cedric Lecasble from Raymond James. Please go ahead.

Cedric Lecasble – Raymond James

Yes. Good afternoon, gentlemen. Most of the questions have been answered already, but I would have two follow-ups on Reebok and the marketing expenditure. First, on Reebok, you mentioned some very different times in the US, obviously, about Toning and the new ramp-up in new products where you were quite optimistic on the relay from Zig and Flex. Could you help us a little bit understand how fast the new products might take off at the (inaudible) on what you can decently [ph] expect for Reebok growth going forward, maybe not next quarter, but in the next two, three quarters? And then, as well, the new product plans especially in the US? And the second question would be about marketing expenditure, is there any reason to expect something different from what we've seen in the past in terms of a percentage of sales for marketing expenditures? You have two big events at the same time. How can we do the math on this? Is there any reason to believe that it will be more expensive this time than it was in the past? You have some inflation on some costs relating to inventory [ph]? Thanks a lot.

Herbert Hainer

So, let me take your first one, even it was a little bit difficult to understand you correctly about the Police car which was –

Cedric Lecasble – Raymond James

Sorry about the police.

Herbert Hainer

Yes, no problem at all. So, I guess, the first question was concerning Reebok, the new product, how they resonate and how we go forward into 2012. So, we are extremely happy with Toning and Flex in the US, as I mentioned already Toning – Sick has not been as successful in some of the European countries, whereas in some others, Russia and emerging markets, they were quite successful. So, we – all the first assumptions which we get for Flex in the US, anyway, it’s selling very well through, but we have already started to tease some of the European market and the first result has been very encouraging. So, going forward, we will have a big rollout on Flex in Europe. We will further bring new Toning products in the US market, new technologies, further develop, and though without giving any detailed guidance for 2012, but we definitely will continue our growth path with Reebok, but not only in US, you will see it all over the world.

Robin Stalker

In terms of marketing, working budget, no, there's nothing that you should expect that would significantly increase, but the percentage that we spend on MWB, you know that over the last couple of years, we’ve – last year, actually, whether it’s been an event year or non-even year, there has only been minor changes in the percentage that we are spending on MWB. When it’s a large event, that tends to be what we spend our marketing on. And in the non-event years, we spend on other things, whether it’s a brand building or technologies or that sort of stuff [ph]. So, don’t expect any change in the percentage of MWB.

Cedric Lecasble – Raymond James

Okay. Just to be sure on Reebok, we've seen some negative trends in wholesale for a couple of quarters, what would be your reasonable vision of Reebok, going back to growth in the wholesale segment, what would be your reasonable assumption?

Herbert Hainer

Yes, when you talk about wholesale, then you also have to see that we dropping out of some of the retail channels and some of the customers where we have seen before with enterprise levels with less products. Now we are introducing products in a more sophisticated way with retailers who are picking up on our positioning and treating the brand well. So, therefore, it gives you a complete picture when you just look to the wholesale business, because on the other hand, we are pushing our business further in Russia, in emerging markets, in India and in Japan for example. So, don’t look just at the wholesale business, because this was the part which was more or less the big majority in the past which we had to clean up and get rid of price points and retail partners as well.

Cedric Lecasble – Raymond James

Okay, thank you.

Operator

We will take our next question from Thomas Effler from WestLB. Please go ahead, sir.

Thomas Effler – WestLB

Yes. Good afternoon, ladies and gentlemen. Thomas Effler from WestLB. Just two follow-up questions. First, on average selling prices, you were mentioning that this was quite positive for you so far, especially considering the new product introduction you expect, how do you see that average selling pricing developing? And second question, just a technical question, the acquisition of Five Ten, can we assume the cash out of the $25 million in the fourth quarter? Thank you.

Robin Stalker

Okay. So – and – well, the clear answer with average selling prices is we expect them to continue to increase and we’ve been doing that and supporting that obviously with the product – our product and the attractiveness of that product. So, expect that to continue. And in terms of the cash out for Five Ten, yes, I would mention that we expect this to close within a couple of weeks and so, the cash will be out at that time, so that is within the fourth quarter.

Thomas Effler – WestLB

Thank you.

Robin Stalker

You are welcome.

John-Paul O'Meara

So, ladies and gentlemen, that completes our conference call for today. Our next communication will be on the 7th of March when we report our full-year results for 2011 here in Herzo and we wish you all the best for the remainder of the year. Thank you and good bye.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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