Executives
JP O’Meara – Head, IR
Herbert Hainer – Group CEO
Robin Stalker – Group CFO
Analysts
Andreas Inderst – BNP Paribas
Matthias Eifert – Mainfirst
Jürgen Kolb – Cheuvreux
Michael Kuhn – Deutsche Bank
Antoine Belge – HSBC
Emily Tam – Morgan Stanley
Cedric Lecasble – Raymond James
Adidas Group (ADDDF.PK) Q1 2012 Earnings Call May 3, 2012 9:00 AM ET
Operator
Good day, ladies and gentlemen and welcome to the Adidas Group Q1 2012 Financial Results Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to JP O’Meara. Please go ahead, sir.
JP O’Meara
Good afternoon, everyone and hope you are all doing well today. And we will have our first quarter conference call and our presenters will be Herbert Hainer, Adidas Group CEO and Robin Stalker, our Group CFO. They will give you more detail on our outstanding first quarter performance and update you on our outlook for the remainder of the year.
So with that I’ll hand over to the Herbert.
Herbert Hainer
Yeah, thanks very much, JP and good morning or good afternoon, ladies and gentlemen. We started the second year of our Route 2015 strategic plan exactly like the first, setting up blistering pace, leaving the competition in our wake. With currency neutral sales increasing 14% or 17% in euro terms to over €3.8 billion, we recorded our fifth straight quarter of double-digit revenue growth.
Group operating margin improved 1.1 percentage points to 10.7%, driving earnings per share up 38% to a new first quarter record of €1.38 or €289 million in net income. And our balance sheet continues to be in top shape with net debt down 30% year-over-year and operating working capital as a percentage of sales remaining close to record lows at 20.7.
So what’s behind this period of unprecedented growth and success the group is enjoying? Well, I think it’s quite simple. It’s a result of our focus and consistent investment into our brand channels and markets plus it’s our disciplined approach to managing our market opportunities during this period of economic uncertainty. In this respect, it is striking when looking at our results set in several regions we’ve been able to decouple from many of some macro issues and industry headwinds.
It has been a lot of work, but our (inaudible) execution in everything we do and the attention we give to understanding local market dynamics is clearly evident in our performance around the world.
So let me take you through three examples of this seen in our first quarter. First let’s look at Greater China. With growth of 26% currency neutral, there is no doubt that we’re gaining share in this key market. And first, because we have rebuilt our business patiently and with discipline since 2009, second, we’ve kept the razor-sharp focus on the quality of distribution, optimizing the number and type of stores as well as the locations. And third, we have refined our product offering, brand marketing and visual merchandising to matter more sophisticated and matured Chinese consumer.
And I can assure you, our strong brands in greater China will continue. Feedback from our partners clearly shows that Adidas is the brand with the most momentum. This fact is also verified by our own retail store development where traffic is high and comparable store sales increased 10% in the first quarter. Another example is Western Europe. Here in our home market, our success is driven by our deep understanding of how to execute in a mature market, by continuously leveraging our strength.
With revenue gross of 7%, we have not only secured but build on the significant market share gains of last year. We are achieving this by paying close attention to where the consumer shops putting the right product in the right channels, improving consumer interaction, through high-quality end store and shopping initiatives, as well as best-in class customer replenishment programs.
This is particularly the case in the UK and Poland, which as you know, has the backdrop of the world’s biggest sporting events this summer. Sales in these markets are up 19% and 35% currency neutral respectively, putting us on a clear trajectory to achieve market leadership positions in these countries, using the event platform as a capital for our strategic plan.
And finally in North America, our business remains very strong. Sales of Adidas and TaylorMade-Adidas Golf increased 10% and 33% respectively. With Reebok, excluding the impact from the various license changes and toning, sales were up 5% currency neutral.
More importantly, you can see that our presence in retail particularly in them all, improves each and every quarter. This is visible in the market share gains of all our brands and validates that our strategies to win over the next-generation consumer are in full swing. Adidas is in particular, has seen a very strong growth in footwear market share, which now stands at the double-digit level and sell-in momentum was strong in Q1, with footwear sales up 22%. These three markets gives us some great examples of just how well we are executing across the globe. But this is of course – but this of course would not be possible without being able to excite consumers and customers, with the ultimate in product innovations and brand experiences.
So, let me spend a few minutes in the brands and the categories.
At Adidas, currency neutral sales increased 16%, our eight consecutive both of double-digit growth. But even more impressive is the fact that Adidas sales are up at double-digit rate in all regions. All of our core categories continue to gain momentum. Those set our touch by the major sportive event have definitely been key highlights. Football is obviously, it’s a top of the list with sales increasing 23%.
And looking forward, conditions are perfect for us to extend our market share lead with some very significant product introduction and brand activation events now hitting the market.
For example, the best selling good in the market, the adizero f50 will be joined on field this Saturday, by the new entirely anticipated brand – which launched on Tuesday. On May 19, we will witness on all Adidas we’ve definitely find between two of European football heavyweights Munich and Chelsea. We also have just started introducing the new jerseys and match balls for the 2012, 2013 club season. Today for example, we are representing the third-generation of league match ball, the fabric of which we have sold more than 1 million balls in Germany, since its introduction in 2010.
In all of this is even before the main event the European football championship kicks off in Warsaw. Our Olympic related product results are doing very well, with the team should be offering designed together with Salomon cotton exceeding all of our expectations.
Another important category for us is especially when Olympic year is running. Things were up 16% driven by the continued success of our light weight adizero offering, where sales are up over 40% and the introduction of our most reasonable running shoe to date, the new plamo cool deduction which has team sales in our claim of franchises jump over 80%.
Given the close relation between running and the Olympics, we are also very visible in the market as our marketing installments Are You Ready To Run and We All Run.
In Basketball, we also continue to see robust sales stores with foot wear, when particular happen very strong 23%. The adizero light to weighting just 9.5 ounces and nearly 10% lighter than the nearest competitive basketball shoe was launched at the US$140 price point just over a week ago is our brand momentum enables us to move up the price ladder.
And to wrap up on Adidas in auto and Sports Style, gross rate showed no sign of slowing versus the prior year, increasing 45% and 24% respectively. In particular where we – we are very satisfied with our new development where sales were up almost 30% in the quarter. I’m also pleased to report even though it is early days yet, our eight test stores in Germany are showing very encouraging signs, with traffic exceeding expectations and the stores achieving our goals in terms of selling to a higher number of goals.
Moving over to Reebok. Sales declined 7% currency neutral, in line with our expectations. However, excluding the impact from shifting to reporting of US related NHL sales to the Reebok CCM Hockey segment, the end of NFL license and excluding toning, Reebok franchise increased 10% currency neutral. The NFL impact, however, was also small in the quarter as the contract just ended in March.
Also Reebok has some challenges to overcome in Western Europe this year due to the weak economic environment and its retailers currently focus on the major sporting events, we nevertheless continue to see good progress in most other regions. North America sales were up 5% on a like-for-like basis and excluding toning and profitability improved markedly due to a better price mix and an overall stronger product offerings. In all other regions, sales were up for the quarter as we expanded performance related offerings like Zig and the RealFlex and introduced seven new classic products. On the latter, we’re now starting to see some decent traction with global classic sales up 7% currency neutral.
Taking all these sectors together, this is having a positive impact on margins with an improvement of 60 basis points in the brand’s gross margin. Therefore, while I would have liked to have been able to show more top line growth, our progress as a brand continues. Looking forward, our plans for 2013, we’ll include some major products and technology launches and we will be sharing more on this with you (inaudible) Investor Trip in September.
So to finish on Reebok and as you will have seen on Monday’s announcements, unfortunately we discovered commercial irregularities in our Reebok business in India. As there has been some misinterpretation, to be clear, this issue only relates to Reebok and its legal entity in India and has nothing to do with adidas brand or the Adidas legal entity in that market.
Due to the sensitivity of the ongoing investigation, we cannot comment further than we already did on Monday. However, let me assure you that we have and will continue to vigorously pursue a course of action to protect our Group’s interest. The situation in India although unfortunate, will allow us now accelerate plans to improve this specific underperforming part of our business which was already in the scope of our Route 2015 profit enhancing initiatives. Under the new leadership team, which was announced at the end of March, we will now accelerate it more aggressively, restructure our business activities in India, including significant changes to our commercial business practices.
The implementation of new commercial initiatives and terms could result in a reduction of our Reebok franchisees store base with partners by about one third as we focus on maximizing our future profitability in the market. These, along with other planned actions could lead to additional one-time charges in the remaining quarters of 2012 and an estimated amount of up to €70 million. Rest assured, our goal is to begin 2013 with a clean sheet in this market.
Finally for today, I want to finish on the part of our business that often gets overlooked by the media and the financial community. TaylorMade-Adidas Golf. Our performance at TaylorMade-Adidas Golf in the first quarter was simply breathtaking. With 32% currency neutral growth, the segment achieved its highest growth rate in almost nine years. This is even more significant as it comes on top of 20% growth last year.
So what’s behind this success? Well, ladies and gentlemen, it’s an innovative product lineup we have for today’s Golf across all categories. Sales grew at double-digit rates in all club categories. Apparel and footwear with metal boots up 28% and irons growing an amazing 64%. Our U. S. market chain metal boots was a staggering 50% in the first quarter at retail. And the gap our closest competitor in irons has also expanded to now eight points with a share of almost 26%.
Even more importantly, the strong increase in sales allowed TaylorMade-Adidas Golf to double its operating profit compared to a year ago. After achieving our goal to become the largest and the best performance golf company, we now are ready to pursue an even greater ambition, to be the best golf company in the world across all geographies, products and customer demographics.
In line with this goal, we have found the perfect fit with our planned acquisition of Adams Golf. The proposed combination of TaylorMade-Adidas Golf and Adams Golf brings together two highly complementary sets of brands, combining TaylorMade-Adidas Golf focus on the younger and the low to mid handicap golfer with Adams golf focus on game improvement as well as senior and women golfer. The total transaction cost is around €53 million and we expect the deal to close later this quarter.
So ladies and gentlemen, looking at the big picture, we are right where we want to be. We are maneuvering through this still challenging economic environment in a diligent way, while at the same time ensuring we capture the opportunities that will deliver on our promise to secure long-term quality growth and enduring success for our Group. All in all, there is no doubt that these results confirm the outstanding momentum and global power of the Adidas Group.
Let me now hand you over to Robin to take you through the financials and update his outlook in more detail.
Robin Stalker
Great. Thank you very much, Herbert and very good afternoon, ladies and gentlemen. So as Herbert outlined, we enjoyed an exceptional start 2012 with strong growth throughout the Group. And as you’ve already been able to digest our headline figures over the past few days, I’m only going to focus on a few topics today, which from my perspective, include three important takeaways. First, our strong margin development despite significant gross margin pressures. Second, the power of this Group and our potential to leverage. And thirdly, the competitive advantage we are gaining from our balanced approach towards inventory management.
First starting with margins. Just as in other quarters, higher sourcing cost poses quite a challenge alone eating up 4.7 percentage points of Group gross margin in the first quarter. However, through focus and execution throughout the value chain, we were able to lessen the impact to only 70 basis points.
The biggest offsetting factors were, firstly, the over-proportionate growth of sales in our retail segment, which carries high margins. Secondly, we had a more favorable product of regional sales mix, the latter mainly related to strong growth in higher margin markets such as Greater China, and finally, our hedging also provided some tail wind. However, I do not foresee this continuing throughout the year, in fact, it will be a slight negative in the coming quarter.
Now despite the Group gross margin decrease, our operating margin improved to considerable 1.1 percentage points versus the prior year coming in at 10.7%. This resulted in Group operating profit increasing 30% to €409 million. Now, while higher other operating income and royalty and commission income contributes to this development, more importantly, we were again able to leverage our strong top line growth to bring down other operating expenses as a percentage of sales by 1.6 percentage points to 38.4%. This was the fifth consecutive quarter our operating expenses increased at a lower rate compared to sales, a testament, I believe to our efforts to improve and leverage our investment.
Looking at our segments, retail again was our top performer with segmental operating margin increasing by 1.1 percentage points to 16.6%. This confirms that the strategies and initiatives we are putting in place to drive retail excellence continue to bear fruit. For the quarter, sales and marketing working budget expenditures increased 2% amounting to €426 million. As a percentage of sales, the ratio came down 1.6 percentage points to 11.1%. For the full year, I expect this metric to be at a similar level versus 2011, that’s around 12.7%. As the most of end years, our marketing spending this year will be focused on the event quarters, which are here the Q2 and Q3.
To complete the P&L picture, our net financial expenses decreased 32%, which is mainly a reflection of an 84% increase in interest income as well as a 74% decrease in negative exchange rate effect. The first quarter tax rate came down one percentage point to 25.5%, which was predominantly due to more favorable regional earnings mix. But please note that for the full year, I continue to expect that our tax rate to be slightly above the 2011 level of around 28.5%. As a result, net income attributed to shareholders increased 38% to €289 million. This translates into basic and diluted EPS of €1.38, that’s up from €I a year ago.
Now although we issued a convertible bond in mid-March for an aggregate and nominal amount of €500 million, there was no diluted effect in the first quarter. And while I am on the subject of this extremely successful bond placement, let me help you with your future calculations and how to calculate an eventual dilutive effect. While it is clear, you will need to adjust the number of shares by 5.99 million, don’t forget you will also have to add back an after-tax amount of around €9 million to net income attribute to shareholders. This means that the convertible should only be about 1% dilutive.
Now looking briefly at revenues by segment, currency neutral wholesale revenues increased 10% driven by growth in all regions expect North America. Other Asian markets and greater China performed exceptionally well growing at 29% and 27% on a currency neutral basis respectively. In the retail segment, sales grew 16% on a currency neutral basis or 20% in euros terms to €693 million. Our comparable store sales continue to drive our retail performance posting a 9% currency neutral increase with North America and Latin America being the outstanding highlights as comp store sales increased here 17% and 14% respectively.
At the end of the first quarter, we operated 2,422 stores, a net increase 21 stores or 1% versus December last year. During the period, we opened 110 new stores and closed 89 stores while 30 stores were remodeled. In addition, 58 concept stores were reclassified as stores in other retail formats and one concept store was reclassified as a factory outlet.
Finally the pinnacle of our Q1 performance by segment was that of our other businesses, where sales rocketed 32% currency neutral. This outstanding performance is mainly a result of the phenomenal 32% sales increase that you’ve heard from Herbert at TaylorMade-Adidas Golf. Sales of Reebok CCM Hockey also increased strongly at 69% currency neutral supported by the NHL license shift from Reebok. But even excluding this effect, Reebok CCM Hockey sales soared at a strong double-digit rate. Ruffle sales also improved versus Q1, 2011 with growth of 7% currency neutral.
Looking out of the balance sheet, ladies and gentlemen, we also have some really positive news to share with you today. The hard work and extra discipline we have instilled throughout the organization on working capital management since the economic crisis began, is now turning into what I consider a real competitive advantage. At the end of March, our Group inventory growth rate again slowed to 13% currency neutral from 16% in the prior quarter. In addition, the inventory aging profile continue to improve.
Considering our consistent efforts to balance inventory management between planning for growth and keeping markets and channels clean and fresh, I believe we are in the industry’s best and healthiest inventory position. This will ensure we can capitalize on our tremendous product pipeline, which will allow our brands to continue to excite consumers and customers around the world.
The last point of the Q1 results, the strong operating cash flow generation over the last 12 months contributed to a meaningful reduction of net borrowings. At the end of March, our net debt stood at €640 million equating to a decrease of €274 million or 30% versus the prior-year. In addition, our equity ratio has also improved considerably, increasing 2.9 percentage points to 48.1% at the end of the first quarter.
Taking into account this exceptionally strong first quarter financial performance, which was better than we had initially expected. The continuing strong momentum of our brands in key markets, as well as the negative impact from potential one-time charges related to our planned restructuring activities at Reebok India, we are in a position to increase our outlook for 2012.
Full-year sales are now expected to grow at a rate approaching 10% on a currency neutral basis compared to our original projection of a mid-to high single digit increase. This is as a result of an increase in sales expectations in wholesale and other business. Despite first half input cost pressures, we continue to forecast a stable gross margin compared to the prior year. In addition, operating margin is expected to increase to a level approaching 8% despite the negative one-time charges of up to €70 million.
Putting it all together, net income attributed to shareholders is expected to increase at a rate of between 12% and 17% to a new record level of between €750 million and €785 million translating into basic earnings per share of €3.58 and €3.75. This is also above our initial guidance in which we had projected an increase of between 10% to 15%.
In summary, our strong start to the year is a testament to the consistent investments we have made in building brand equity. This is clear across our brand and channels, in our industry leading growth rate and into the direction of our margins. And with our strong balance sheet and clean inventories, we have all the resources we need to continue driving forward with our Route 2015 ambition.
Now Herbert and I will be happy to take your questions.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions). We will take our first question from Andreas Inderst from BNP Paribas. Please go ahead.
Andreas Inderst – BNP Paribas
Yeah. Good afternoon, gentlemen and congratulations to a strong start to the year. My first question is on brand Adidas excellent momentum ongoing, positive momentum, I have to say, you said your market share is now over 10% in North America and you also nice market shares in Europe. Can you share any market share targets, maybe for the next two years and what are the biggest operational risks you see in North American – in the North American market and the European market for brand Adidas?
It’s my first one. And the second one on India, I assume you have sales significantly less than $300 million in India, yet your one-off costs will be around €70 million or up to €70 million, that’s quite a lot, maybe you can celebrate a little bit more, what you want to achieve there? And maybe you can split or provide a phasing off the one-offs through the year and related to that, what will be the EPS guidance excluding your €17 million one-offs? Thank you.
Herbert Hainer
Okay, Andreas. So let me start with the first one, market shares North America and Europe. Obviously we haven’t given out any market share target, but there is no doubt that especially in North America, as I always have said, we have still a lot of potential, in my opinion, and we are concentrating on building our business on a sustainable solid platform with key pillars in basketball, in running, in training, in football, as you know, and obviously you see the first results same as through to Europe, even we have some economical challenges in Europe as you know, I think results of plus 7% in the first quarter are quite exceptional.
And this will definitely continue as we have now the European Championships ahead of us, the Olympics. So overall I just can’t just conform what you mentioned, we have extremely strong momentum with brand Adidas and I definitely foresee it’s going forward.
Concerning to India, I think you will understand that we have an ongoing investigation there and therefore we cannot comment on any individual items. But you have asked – we definitely believe that in three months from now when we do the second quarter call that we can give you more details on India.
Andreas Inderst – BNP Paribas
And what’s the guidance actually on EPS excluding all your one-offs?
Robin Stalker
Andreas (inaudible) I can answer that. When we have given you the guidance, we have clearly said what we think may be one-off, at the moment we can’t qualify that any better, as Herbert said, we’ll be in a better position, no doubt, to talk about this in the second quarter, we have taken the best estimate, we haven’t – we’ve given you the guidance on that basis.
Andreas Inderst – BNP Paribas
Okay. Good. Thank you.
Operator
We will now take our next question from Matthias Eifert from MainFirst. Please go ahead.
Matthias Eifert – Mainfirst
Yes, hi. This is Matthias Eifert from MainFirst. First question on the Reebok gross margin improvement, was it purely an effect of shifting the NHL business to CCM or is it even up executing that effect, as I would assume has a lower gross margin? Secondly on North America, the – your wholesale sales was down 2%, is that all driven by the Reebok toning effect? And can you give us a bit more detail on that because I want to understand how that fits together with your comment about the market share gains. And lastly, can you give us a bit more detail on your strong growth in Style? Was that equally shared by NEO and Originals or is there a big difference in terms of those growth rates?
Herbert Hainer
Okay, Matthias, I’ll take the first couple. So we are really pleased with the underlying improvement or continued improvement of the Reebok gross margin. And there is definitely an underlying improvement, not just although you’re correct, it has been helped by the shift of the hockey product into the – or the NHL product into CCM Hockey, it’s a fairly small amount. So there is definitely an underlying improvement. And you can see that through the mix in the faster growth in the retail segment with higher margins. So that’s definitely continuing the way we wanted to and we closed the gap, I think the first quarter Reebok to Adidas about normally you’d get about eight percentage points.
Robin Stalker
Okay. In terms of the wholesale business, yes it did – this was impacted by the shift. But otherwise, I don’t think there’s anything material in that number.
Herbert Hainer
And to answer your third question, Matthias, on Style, I mean, as you’re following us quite some time, you’ve seen that over the last couple of years we were very successful in driving our Style business mainly through Originals and once again, this is a big driver. Also we are very happy with our new business which is up 30% in the first quarter, but it is too small yet to have this big impact. So it’s still the underlying original business of course, coupled with NEO and Style growing.
Matthias Eifert – Mainfirst
Excellent. Thank you.
Operator
We will now take our next question from Jürgen Kolb from Cheuvreux. Please go ahead.
Jürgen Kolb – Cheuvreux
Thank you, very much. First of all on Japan, I think you experienced a very nice rebound in the first quarter there. Just help us again the drivers of that, obviously some kind of a jump from the tragic events last year there, but it should also have a very positive impact in the second quarter, as I think your stores are now all open. So the rebound in Japan should also materialize in Q2 and Q3, if I’m right here.
Secondly, on the input cost again, very strong increase there, any additional comment that this might now has peaked and you’re expecting this pressure to ease in the coming quarters? And then lastly on Reebok, you mentioned new product range to be launched next year, is there also new marketing campaign this year that you’re planning to issue in order to give the brand additional support, maybe here specifically in Western Europe or your plans for Reebok for the rest of this year, Western Europe, but also in the US? Thank you.
Herbert Hainer
Okay, let me take the first and the third one and Robin will answer the input cost. Japan, I mean you know that we have a very strong business in Japan, we are clear market leader and as you have seen in 2011, our sales decreased by only 4% during the whole of the year. So our business is quite solid and this is also reflected in the first quarter here. Sales in the second part of March, the comparable has helped as a little bit, but overall it is because of our strong business in Japan. And this will definitely continue within the next quarter and during the year.
Third question on Reebok, we (inaudible) launched a few week ago a new campaign, the Sport of Fitness has arrived and we will drive this further and we see, especially on our new products, the RealFlex, very good sales through the gross – the world, also in Europe, Zig is still doing very good in the US, Japan, Korea. So the concept is definitely working, obviously in the moment we are fighting against the strong comparables EasyTone from last year, but the overall business is definitely going in the right direction and you will see that especially in 2013 spring, we are coming with new product concept and definitely exciting merchandise which we bring to market.
Robin Stalker
And the simple answer, Jürgen, for the input prices, although we still don’t have a crystal ball for the future years, definitely for this year we think this increase has peaked in the first quarter and we are guiding obviously to continued – it would be around what it was the end of last year for the full year 2012, the same is now behind us this peak.
Jürgen Kolb – Cheuvreux
Okay. And a quick kick one on hedging, where are we spending in terms of hedging into the dollar right now, if I may ask?
Robin Stalker
So for 2012, obviously for the (inaudible) about 137, we are about 50% or so hedged for next year and that’s a little bit worse, obviously probably around about the 135.
Jürgen Kolb – Cheuvreux
135, very good. Thank you, gentlemen.
Herbert Hainer
You’re welcome.
Operator
We will now take our next question from Michael Kuhn from Deutsche Bank. Please go ahead.
Michael Kuhn – Deutsche Bank
Yeah. Good afternoon, gentlemen. Also a couple of questions. Firstly, your royalty income was up quite significantly year-over-year. I think the quarterly formations, Adidas was the major driver behind it. I would be interested in what products drove that development and what we should expect over the upcoming quarters?
Secondly, on your opening plans in your store network, there are quite some fluctuations right now. Could you give us an indication what we could expect for the different store categories by the end of the year? And also for e-commerce sales and may be an indication, what your e-commerce sales were in the first quarter? And finally, I would be interested in, let’s say, a clean Reebok growth figure. Obviously, you gave us a figure ex-toning and ex the license business, but maybe just underlying development because I think it’s fair to include toning, because I think that’s essentially the underlying development. Thank you.
Robin Stalker
Okay. Mike, yes, you are correct, the royalty increase, the royalty income increase is largely because of revenues from Adidas products and this is – particularly in this year related to the product for events where we have licenses, obviously. In terms of e-commerce, the e-commerce sales is growing considerably, this quarter up about 60% and I think you also had a question about the underlying Reebok growth. I think Herbert mentioned it will be 10% after we exclude toning, but if we only account for the shift of the NHL and the NFL, then we have a decrease of 5%.
Michael Kuhn – Deutsche Bank
And any indication of the current size of e-commerce?
Herbert Hainer
No, we don’t. Michael, we don’t publish any figures for the e-commerce business.
Michael Kuhn – Deutsche Bank
Okay. And then one follow-up. I think the question was asked already. And nothing on the investigation in India, but you could you shed some light how – yeah, what sales you actually have in your Indian operation, to have a, let’s say, context for the potential one-off?
Herbert Hainer
So, Michael, as we have said, you will understand that we don’t comment on the India case because this is the ongoing investigation. In terms of size, we do not publish any numbers for individual countries, but I can tell you that India is not within our three biggest countries in Asia, which is China, Japan and Korea.
Michael Kuhn – Deutsche Bank
Okay. And then one very last question regarding your guidance. You’ve given a one-off number to us and an operating margin item approaching 8% fee strip outs, the one-off effect, we’re probably at around 8.5% while approaching and 8.5%, is that a fair assumption to use a clean number and could you thereby derive an operating leverage for this year of about 90 bps?
Robin Stalker
Michael, I understand the calculation, we’d love to have it confirmed, but we’re not going to do that at the moment. I think you’re identifying a couple of areas, we are seeing this company is delivering leverage, that’s a take and we obviously, in this year have some one-offs. Exactly how high those one-offs are, we will be able to quantify better for you as we through this year and I am sure that we’ll confirm in our good underlying improvement in our profitability. But we cannot do anything at the moment, we’ve just given to you guidance today.
Michael Kuhn – Deutsche Bank
Okay. Thank you very much.
Robin Stalker
You are welcome.
Operator
We will take our next question from Antoine Belge from HSBC.
Antoine Belge – HSBC
Yes, Antoine Belge, HSBC. Two questions, first of all, can you come back a bit on the performance in Greater China, which was very strong? How consistent can we be that’s – this close has been reflected in the strong sell-out and just fitting through the distribution in China. Second question on SG&A, I think you mentioned that’s – quite rightly that’s over the last couple of quarters you’ve been showing some leverage.
What about Q2 and Q3 on the back of the year end? Shouldn’t we expect to hear there could negative leverage with – I don’t know, spending on the back of the events? And finally, regarding the margin of the Group in the US, I know that you don’t disclose margin by geographies, but in your guidance for 2012, where margin overall are increasing. What would be the contribution of margin in the US? Do you expect those to increase because of Reebok, I mean, this year could be a bit more flattish in terms of margin in the US? Thank you.
Herbert Hainer
Okay. So let me start with the first one, China. Obviously we have seen China is the star in the first quarter, but also when you look back into 2011, we have been growing already by around 20%. And remember two years ago we told you that we will patiently build business back off the financial pieces in China, with much more sustainable in healthier business model and this was, what we have done, especially the key counts where we connected our sales with IT systems that we can read fast and better what happens in the store.
So therefore, the sales numbers were better our inventories cleaner, we can monitor it closer and this 26% increase was not just a lot of, we will continue to see good growth going further in China. Inventories in a very healthy, good rating in low position. And – have never been more pleased to see China business than into moment and then also I do see for the next year that we can grow our business double-digit there, the independent marking of the U.S, yeah.
We also told you already in the past that we do believe they are raising our profile and therefore raising our average selling prices, we spend in more innovative products. We does drive for better margin and I think the (inaudible) basketball show is the best example. Is a light show in the basketball industry has a high demand by the consumer, therefore, we can raise prices and therefore we get better margins and we will continue to do so.
Robin Stalker
And in the terms of SG&A, I mean there is always going to be fluctuations from quarter to quarter depending on timing and marketing and that’s going to be the cases, if you are also but, I think I had pointed to the full year guidance. I mean the point is that we are giving more leverage, our operating expenses and which you will see throughout this year and definitely by the end of this year. You will be able to reflect upon that being include EBIDTA to an improvement in our operating margin.
Antoine Belge – HSBC
Okay. Thank you very much. Maybe just a follow-up on inventories as the whole. I mean there is other very decent evolution in Q1. Is it something that’s more there any one of there and what should we expect in terms of inventory gross especially compared to your top line gross guidance?
Robin Stalker
I mean, this is the balance we are trying to keep it I was trying to refer in my prepared comments but obviously want to be able to be in a position to quickly service the consumers that lead in our product. But at the same time manage our working capital as efficiently as possible. And I think we have shown the whole group has the focus on this and that we are continuing to improve this. You have seen this come down, as a percentage of growth over the last several quarters. But the quality of the inventories should be as clean as possible and I think you can see as always, we’re trying to have further improvements in that and it would definitely no one of in the first quarter that led to this good figure.
Antoine Belge – HSBC
Okay. Thanks.
Operator
We will now take our next question from Emily Tam from Morgan Stanley. Please go ahead.
Emily Tam – Morgan Stanley
Hi, good afternoon. Three questions from me as well. Firstly, can you please give us an update on how the retail rollouts of NEO is going? And also what you have – you have anything further planned for this year? And if you have any further comments on add-on – on the performance of the existing Germany stores?
Secondly, with regards to China, it’s the way you’re taking market share (inaudible) now in terms of sell-out trends in China where your wholesale is, would you be able to give us some color in terms of how you’re doing versus your local and also the domestic competitors? And do you think the growth can continue to come from store based expansion, especially the high (inaudible). And just lastly on Reebok, do you think that Reebok can continue to sustain its market share in the US this year and also going forward? Thank you.
Herbert Hainer
Okay. Let me start with NEO. As I have said in the speech already, we have opened eight out of the 10 planned stores in Germany and we the other two will follow in the next weeks. So all the first indications that we see so far are quite exciting, but still I think it’s a little bit too early to already conclusions as of yet.
But we are very happy with the frequency, with the traffic, with the goals as I said, which are coming into our store, we get extremely good comments when we do our market research about the freshness, the youngness, the colorfulness of the brand. And this all indicates that the assumptions, which we took when we entered into the NEO business are the right ones. But, as I also said, we definitely will use 2012 to test in Europe new store format, Magical Mirror, as you might have seen, new product concepts that we have prepared before we roll it out in Europe.
By the way, as you know, we have close 2,000 source in China and NEO and this is also going in the right direction. Second one just brings me immediately to China. Honestly, I do believe we are not only gaining market share compared to the local competitors, I think also to the international competitors because I don’t think that the market is growing by 26% and especially you know (inaudible) small international brands have a hard time.
I can just repeat what I said before, I think, I have done a – we have done our homework in China. We have a complete new team installed 2.5 years ago and they are working according to plan and this definitely pays off. And last, but not least, the Reebok in US, I think and this will be confirmed when we you talk to retailers that the last 34 months, we have done a very good job in the US, exciting consumer was new concept for Reebok, bringing new consumer spec to Reebok with EasyTone Bringing new consumers back to Reebok with EasyTone, with Zig, with Flex, Flex by the way is selling extremely good and the Zig is doing well in the US. Classics is now starting to rebuild you that we have taken with piece and the contracting these helping us especially in the celebrity music scene.
So all what we see is going in the right direction. As I said, EasyTone we have strong comparisons for the first six months of six years. But in general, I definitely think the business here is going in the right direction.
Emily Tam – Morgan Stanley
Thanks very much.
Operator
We will now take our next question from (inaudible). Please go ahead.
Unidentified Analyst
Thank you. Two quick ones is from me. The first, I appreciate it varies a lot by brands and market. Could you give us some kind of indication of the average selling choice increase versus volume increase within the Q1 sale got 14%. And the second one, you haven’t made any comment on the Reebok joint-venture situation in Latin America which impacted I guess, sales in Q4. Could you give us some indication of what’s going on there and it’s not part of the reason on improvement of Q1 versus Q4. Thank you.
Herbert Hainer
Robin Stalker
Andrew, I don’t have any kind of where you on the average selling price. They’re improving obviously but I can’t break that down for you.
Robin Stalker
And on the Reebok joint-venture in Latin America, obviously we don’t break it out separately but you have seen our business in Latin America in the first quarter on Reebok is good, it’s growing. So we’re working closely with our joint-venture partner and things are going accordingly to plan nevertheless. I think it’s also fair to say that we have some hurdles with tariffs and import duties in Brazil and Argentina which does make our life easier.
Unidentified Analyst
Okay. Can I – just a very quick follow-up. In terms of the inventory growth, could you give us some indication of the volume versus price increase within that.
Robin Stalker
Yeah. Obviously, the input price increases just immediately brings our inventory value up. So I can’t say exactly the number what it would be in quantity, but in quantity it’s definitely much lower than the 30% in value. And this also indicates quite clearly a good inventory management because when you see that on the volume we’re growing, 17% and we are bringing our inventory down quarter by quarter. I think and having by the way a very, very early and very healthy inventory. I think, that our guys definitely doing a very good job in managing that.
Unidentified Analyst
Okay. Thank you.
Operator
We will now take our next question from Cedric Lecasble from Raymond James. Please go ahead.
Cedric Lecasble – Raymond James
Yes. Good afternoon gentlemen, this is Cedric Lecasble from Raymond James. I have two follow-ups if I may, the first one on marketing budget spending. You choose to say that’s an average level for the Group was between 13% and 13.5%, is this year is an important year with big events and you’re guiding on less 13%, at 12.7%. Does it mean that you are leveraging in better turns your marketing expenditure and is it something structural. Do you believe this ratio will continue to be a lower than 13% and probably lower than it was in the past, despite big events. That’s the question number one. And question number two. On Reebok, when the trends are facing between Toning (inaudible). Is your comps going forward, a declining total phase and so what part and just with products, when do you think the balance of the two will lead to more positive growth strength while we walk along? Thank you.
Herbert Hainer
So question number one, marketing better. I think we always just said that we were expected in 2013. And you should not assume that in an event year, marketing working budget is going across this boundary, because as we have said already several times, we try now to face our product introductions.
Our new brand campaigns and also the big sporting events throughout the years, that we have on the one hand the more stable spending on our (inaudible) and therefore permanently talking to our consumers and in the in between years, much more about product concept and new innovations whereas in the event years, we talk about much more about the event.
And you can imagine that with the phase grows, which we are experiencing that we want to bring the marketing working just step by step slightly down. But nevertheless, let me also make it clear that Daisy marketing working much as an investment in our consumers and definitely we will always spend a certain amount which we think we need to excite our consumers and drive our sales. The big importance of Reebok, I think you can expect a more like-for-like on second half where the toning influence in 2011 was not a strong anymore as it possible first half of 2011.
Cedric Lecasble – Raymond James
Just could I have a sense, maybe if I may, on the share that are toning phase in the total sales, just to know an idea of when this toning thing is over?
Herbert Hainer
No, we don’t comment on any shares of a product concept within the total sales.
Cedric Lecasble – Raymond James
Okay. So you are expecting better growth or partial growth for Reebok in Q2?
Herbert Hainer
No. I mean, let me also be clear, we don’t see toning completely over. We do believe that we can rebuild the business obviously, as you know one of our competitors has put out the lot of inventory with those sales. And this is where the market in 2011, this is continuing into 2012. But we definitely do believe in the toning business, or the market research which we’re doing is clearly telling as a, that there is a consumer out with a slightly pricing product and b, that Reebok has definitely been the one who has been the most innovative on the toning side.
And this is what we want to use and we still have a lot of countries where toning is doing very well especially in Asia, but also in Russia, in some of the emerging markets. And technically, we will comeback with first new collection in the second half of 2012 but then in spring 2013, you will see a complete new era of toning product.
Cedric Lecasble – Raymond James
Thank you very much.
Robin Stalker
You’re welcome.
Herbert Hainer
Ladies and gentlemen, that completes our call for today. And we will report our first half year results on the 2th of August. And celebrities and his comments today. And we’ve also host an investor trip is here to the United States in September and more details on as we come out in the next few days. So thank you very much and enjoy the rest of the day.
Operator
That will conclude today’s conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.
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