Executives
John-Paul O'Meara - Head of Investor Relations
Herbert Hainer - Chairman of Executive Board and Chief Executive Officer
Robin J. Stalker - Chief Financial Officer and Member of Executive Board
Analysts
Matthieu Driol - Day By Day
Andreas Inderst - Exane BNP Paribas, Research Division
Jurgen Kolb - CA Cheuvreux, Research Division
William Hutchings - Goldman Sachs Group Inc., Research Division
Mark Josefson - Silvia Quandt Research GmbH
Julian Easthope - Barclays Capital, Research Division
Louise Singlehurst - Morgan Stanley, Research Division
Christopher Walker - Nomura Securities Co. Ltd., Research Division
Adidas AG (ADDDF.PK) H1 2012 Earnings Call August 2, 2012 5:30 AM ET
Operator
Good day, and welcome to the adidas Group Conference Call for the half year 2012 Financial Results.
John-Paul O'Meara
So good morning, ladies and gentlemen, and welcome to our First Half Year 2012 Financial Results Presentation and Conference Call live here from the adidas Olympic Media Lounge in London.
I'm JP O’Meara, and I'm Head of the Group's IR activity. Our presenters today are Herbert Hainer, adidas Group CEO; and Robin Stalker, Group CFO. They will be covering our excellent first half performance and will give you some insights into the various initiatives we've planned for the second half of the year.
So let's get started. But before Herbert takes the stage, let's have a look at some others who are taking the stage right as we speak.
[Presentation]
Herbert Hainer
Yes, great pictures. Good morning, ladies and gentlemen, and thank you for joining us here in this marvelous setting, overlooking the Olympic Park. We invited you here today, not only to share our first half year results, but also to give you a taste of the important role the adidas Group plays in global sports. Our association with major sporting events sets us apart from all the competition, and I will explain exactly how we are leveraging these Olympics and how it is benefiting our Group a little later in my presentation today. But first, let's dive into the results. I think this is the most important thing to you.
Despite all that -- what is going on, on a macroeconomic and competitive perspective, our strong business model and excellence in execution have once again delivered a winning performance. Revenue increased 11% on a currency-neutral basis as we added over EUR 1 billion, taking us to a best EUR 7.3 billion for the first 6 months. Even more pleasing is our operating margin improvement of 0.7 percentage points. Given negative pressures of almost 5 percentage points from the input costs, this is a significant result, especially in view of the fact that most of our major competitors have seen declines in this important metric in the same period. These improvements drove a 30% increase in net income attributable to shareholders to a new record level of EUR 455 million. And through our highest ever cash flow generation in the second quarter, we have seen a reduction in net borrowings by 63% to EUR 318 million compared to EUR 863 million a year ago. These are great results and a great inspiration as we continue to deliver on our promises.
During the period, the global reach and relevance of our brands through our diverse consumer audience was again very evident. We grew in every region of the world, led by strong growth across our entire spectrum of Performance categories, which is fitting in this high-profile sporting event year, and in particular, our 3 key attack markets, which you know, China, Russia, America, continued to meet our high expectations, each delivering double-digit growth in the first half and the second quarter.
Looking at Greater China, sales grew 19% currency-neutral in the first half, driven by 22% growth in Sports Performance, as new products like the ClimaCool Seduction running shoes, sold in [indiscernible]. And this is a confirmation that adidas is clearly the brand in the market with the greatest momentum, and you may rest assured that this will continue in the second half, given double-digit growth in order books and our healthy inventory situation relative to our competitors.
In North America, sales grew 11% on a currency-neutral basis, with the adidas brand up 12% and TaylorMade-adidas Golf increasing 32%. adidas Originals once again was a major highlight for the region, as revenues increased over 60% in the first half. But also in Basketball, we are enjoying fantastic momentum, with footwear sales growing 36% and our market share now in double-digit territory again, about 11%. Therefore, halfway through the year, I'm fully confident that we will achieve the targeted metric of years of double-digit growth for the adidas brand in North America.
In Russia/CIS, both adidas and Reebok grew at a double-digit rate in the first half and in the second quarter. In the first half, currency-neutral group sales were up by an impressive 15%. And this is not just a confirmation, but even a strengthening of our dominance in the market.
And finally, it goes without saying that I am again very pleased with our strong performance in Western Europe, with sales up 6% for the half year and 5% in the quarter. First half growth was driven by an exceptionally strong performance in the U.K., where sales were up 21% currency-neutral. We also enjoyed mid to high single-digit growth in Germany and in Spain.
From a brand perspective, the adidas brand continues to be the powerhouse of the industry. Revenues increased 14% currency-neutral in the first 6 months, with a strong 11% increase in the second quarter.
Football, the heart of the adidas brand, took center stage so far this year, and there is no doubt that we have hit the mark again in 2012, be it through brand visibility, product sales or simply confirmation of our status as the most innovative brand in the sport. Sales for the first half increased 25% currency-neutral, which prompted us to lift our forecast for the category to a new record of over EUR 1.6 billion for the year in June. And even before the first whistle was blown at the UEFA EURO 2012, we were already champions of Europe, ground by the all-adidas UEFA Champions League Finals between Bayern Munich and Chelsea FC. At UEFA EURO 2012, we won all battles on and off the field, typified by Spain's mark of [ph] class victory in the finals, as they achieved the impossible triple.
Even at a time of economic recession in Europe, we sold more jerseys and more footballs at the European Championship than ever before. We sold over 1 million German jerseys and almost 1 million Spanish jerseys. And in addition, the Tango 12 is our most successful ever European champion tournament football, selling more than 7 million units.
We also sponsored more players than any other brand, which gave us unprecedented visibility for our industry-leading adizero f50 and the recently launched Predator Lethal Zones. And in several consumer and social media tracking service, adidas was the most recognized and talked about sponsor of the event.
Well, our strong first half growth in adidas was not just all about football. The strength of our product pipeline led to robust sales growth rate in all of our other key Performance categories, be it running, be it basketball and outdoor, lifting; total adidas Sport Performance sales up 12%. For example, in running, sales were up 13%, driven by the key franchises, such as the adizero and the Clima. In the basketball, we had growth of 18%, with footwear even growing at double the pace. And here, the adizero Crazy Light 2 has been a major success, preselling at a premium price of USD $140, which is $10 higher than its predecessor. And it generated outstanding sell-through rates of over 30% in its first 6 weeks.
But for many, this may be seen as a performance year. It would be wrong to overlook our continued success with adidas Sport Style. Sales in the first half were up a strong 14%, driven by double-digit growth in adidas Originals and the adidas NEO label. And I am pleased to report, we are making good progress in our NEO test stores in Germany, where traffic has continued to strengthen, and we are hitting important milestones in terms of conversion, product and channel mix. And today, we will complete our rollout of 10 stores for this year by opening our new NEO store in Cologne.
Turning to Reebok. Sales declined 26% in the quarter and 16% year-to-date. Of course, I am disappointed by these results. Unfortunately, this year, we couldn't build on the great momentum we created by bringing unexpected innovative products to the market like EasyTone, Zig and Flex. Nevertheless, our fitness positioning for Reebok is exactly the right one because it resonates with consumers and customers alike. In fact, retailers have already seen our extended fitness proposition for Reebok, which will be visible in the marketplace beginning in 2013, and we will capitalize on many major fitness trends, in addition to our already successful growth rate initiative. Stay tuned to hear more about this at our Investor Day in September in California. However, what I can already tell you today, I am very optimistic that we will create a new dynamic for Reebok in 2013.
Looking at the Reebok results in the first half of this year, I think it's fair to say that there are also a few one-time factors that you should have in mind. Firstly, the impact from rectifying the situation regarding our operations in India accounted for a significant portion of the sales decline. A further product sales decline relates to our decision not to renew the NFL license and the shift of the NHL U.S. related sales to the Reebok-CCM Hockey segment. In addition to that, we continued to face challenges in Latin America due to difficulties at our joint venture partner and import restrictions in certain countries, and also investing in Europe as we clean up our toning inventory.
On the positive side, we continued to enjoy considerable success for the brand in controlled space driven in markets such as Russia and Korea. In North America, the underlying trend is also quite good. Also based [ph] was our growth down there as well, this was mainly due to a strategic decision which we took in May and June to reduce the Wholesale shipments of Zig and Flex products, which are still seeing strong demand in the market to ensure we protect and do not overheat these franchises. Otherwise, our strength in the U.S. for Reebok in the market remains promising, which is underpinned by continued strength of our own Retail sales. And this introduction in the second half of the ZigLite, the CrossFit Nano 2.0 and new our smooth Flex running shoes are expected improving sales trend in this market as we move into the second half.
Let me now also take the opportunity to update you on our situation in India. As you will [indiscernible] since our announcement at the end of April, our local management team has filed criminal charges against former officers of our Reebok subsidiary in India and is currently closely cooperating with various authorities on that matter. As a precaution, the team also moved the Reebok business to a cash and carry model for the interim to protect the Group from further losses until they have carried out the due diligence on their customer base. To ensure a thorough and independent review, we have also engaged the services of Ernst & Young to support our efforts. The Reebok customer review will be completed in the next few weeks, and as announced in May, there will be a reduction in the Reebok store base in India as we move towards a more profitable business model for the brand in this market.
In general, while the issue is unpleasant, we will achieve our goal and set Reebok up for a fresh start in India in 2013. And I can also confirm that we are not expecting a major deviation from the EUR 70 million negative impact in 2012 Group operating profit, which we projected already in May and told you. This relates to our loss of business, actions Reebok India is taking to move to the performance based rate and policy and other reorganization activities. And about EUR 17 million out of this EUR 70 million are already booked in the results so far.
Finally, for my review of the period, I can't go without commenting on the outstanding performance of TaylorMade-adidas Golf. From an industry perspective, it is shaping up to be one of the most promising years in more than a decade. In the U.S., rounds played up 12% for the first 6 months, and while we are definitely benefiting as golfers return to the course, even more than that, we are capitalizing from a full onslaught of product innovation from RocketBallz clubs to TOUR 360 and POWERBAND footwear to which competitions simply doesn't have an answer. This is reflected in our record first half top line growth of 29% currency-neutral. We grew in all categories with metalwoods, irons, putters and footwear all recording growth rates above 20%.
We also completed the acquisition of Adams Golf, which has been consolidated effective June 1. And looking at its performance, we have clearly acquired the second solid of the industry as sales for Adams products were up 16% in the first 6 months. Therefore, ladies and gentlemen, I can only reiterate that we are the ones to watch in golf.
So, ladies and gentlemen, that completes my comments on the first half. I will be back in a few moments to share some more details on what's to come in the second half. But first, let me hand over to Robin, who will take you through all our financials in more detail.
Robin J. Stalker
Great. Well, thanks a lot, Herbert, and a very good morning, ladies and gentlemen. While Herbert has explained all about the excellent growth we generated in the first half, I will now spend some time on showing you how we have converted this growth into meaningful bottom line and cash flow generation. However, first, let me spend a moment to round off the review of our Group's top line performance by giving you some more specific details on our second quarter.
Currency-neutral sales increased 7%, or that's 15% in euro terms, to over EUR 3.5 billion, with every region, except Latin America, posting sales gains. In Greater China, currency-neutral sales increased 13%, driven by 16% growth at adidas Sports Performance. In North America, second quarter Group sales grew 10% on a currency-neutral basis, as a result of sales growth at adidas and TaylorMade-adidas Golf of 15% and 31%, respectively. They clearly offset the declines of Reebok. In European Emerging Markets, Group sales increased 18% currency-neutral as we further strengthened our dominant market position in Russia/CIS, where revenues were up 20% currency-neutral. In Western Europe, despite the widely commented macroeconomic challenges in many parts of the region, Group sales grew 5% as Herbert has already discussed. In Other Asian Markets, Group revenue growth was 2%, as double-digit growth in Japan and Southeast Asia was partly offset by the negative consequences related to Reebok India. Excluding these effects, sales growth for the region would've been up double-digit. Finally, in Latin America, adidas Group sales decreased 2% on a currency-neutral basis in the second quarter. High single-digit sales growth at adidas, as well as double-digit growth in other businesses, was more than offset by declines at Reebok.
Now moving on to the profitability. We're, again, now focused on driving quality sales growth paydown [ph] . Similar to previous quarters, the Group was faced with enormous challenges from higher input costs. In fact, the total negative impact was around 5 percentage points on Group gross margin for both the half year and the second quarter. Nevertheless, through our various efforts across channels, brands and operations, we were able to mitigate the majority of the negative pressure and recorded a gross margin decline of only 90 basis points in Q2 and 80 basis points for the first half. The key drivers to offset the negative factors for both the second quarter and the first half are similar to those as discussed during our last earnings call: Firstly, and most importantly, price increases and a more favorable product and regional sales; secondly, the overproportionate sales growth in our Retail segment, which carries, obviously, higher margin. Our hedging provided some tailwind for the 6-month period, however, as indicated during our Q1 earnings release, this tailwind was reversed into a headwind recently, with hedging being a slight negative for the second quarter gross margin development.
And turn the page, ladies and gentlemen, for the outlook for margin. The impact from input cost pressures will start to ease in the second half of this year, which is mainly due to some relief on the global commodity markets, particularly on the apparel side. Therefore, we maintain our gross margin guidance for 2012 of around 47.5%.
Moving below the gross profit line, we continue to make good progress towards one of our key Route 2015 goals, that is, leveraging our growth and operational scale to drive operating margin improvement. For the quarter and year-to-date, other operating expenses increased 12%. As a percentage of sales, however, other operating expenses were down 1 percentage point and 1.3 percentage points, respectively. Thereof, sales and marketing/working budget expenditures increased 13% and 7% for the second quarter and the first half, respectively. The latter mainly reflects our marketing investments at the adidas Brand to support it's exclusive presence at the UEFA EURO in Poland and the Ukraine.
Group operating profit increased 25% in the first 6 months to a new record level of EUR 665 million. This translates into an operating margin of 9.1%, that's up 70 basis points. In the second quarter, operating margin expanded to 7.3% from 7.1% in the prior quarter -- in the prior year.
Now let's turn to the nonoperating items of the P&L. The end net financial expenses decreased 20% in the first half compared to a year ago. This mainly reflects a 32% increase in the interest income and a 47% decline in negative exchange rate effect. Lower interest expenses also contributed, obviously, to this development. Now, the first half year tax rate decreased a slight 10 basis points to 27.4%, which is due to a more favorable regional earnings mix. Therefore, net income attributable to shareholders for the first 6 months increased 30% to EUR 455 million, a new first half year record mark for the adidas Group, which translates into basic and diluted EPS of EUR 2.17. Now, second quarter net income attributable to shareholders, as well as basic and diluted earnings per share, increased 18% to EUR 165 million and EUR 0.79, respectively. Now let's -- ladies and gentlemen, let me remind you again that there is no diluted impact from our EUR 500 million convertible bond that we issued in March until the conversion price of EUR 83.46 is met.
So let's look at it now by segment. By segment, our currency-neutral Wholesale revenues increased 1% in the second quarter and 6% for the first half year. Gross margin for the segment was down 1.2 percentage points both for the quarter and the first half year. Price increases, a more favorable product and regional mix, as well as less clearance sales, helped us here to mitigate the headwind from rising input costs.
In the Retail segment, comparable store sales growth continued to be a key driver for segmental revenue, contributing 8% of the 16% currency-neutral growth for the quarter. For the first half year, comp store sales expanded 9% currency-neutral, while total segment sales grew 16% currency-neutral. By brand, currency-neutral adidas comp store sales increased 8% in Q2 and 9% in the first half, while Reebok comp store sales grew 9% and 8% for the quarter and the year-to-date period, respectively.
Retail gross margin decreased 300 basis points to 62.8% for the second quarter and 150 basis points to 62.2% in the first 6 months. The devaluation of the Russian ruble versus the U.S. dollar, as well as increased promotional activities at Reebok, were the main factors contributing to margin decline.
At the end of the second quarter, we operated 2,436 stores, that's a net increase of 35 stores versus December last year. During the first half year period, we opened 185 new stores and closed 150 stores, while 40 stores were remodeled. In addition, 57 concept stores were reclassified as stores in other retail formats and one concept store was reclassified as a factory outlet.
Turning now to the segmental operating margin for Retail. I can again report further evidence of our continued progress towards becoming a world-class retailer. Despite the significant decrease in the Retail gross margin, segmental operating margins for the second quarter actually increased 10 basis points to 25.4% and 70 basis points to 21.4% in the first half.
Last but certainly not least, let me spend a minute on our Other Businesses, a key highlight of our first half performance. Currency-neutral revenue grew an impressive 22% in Q2 and 27% year-to-date, as all segments recorded higher sales. In euro terms, sales to Other Businesses grew 34% during the quarter to EUR 550 million and 36% in the first half to almost EUR 1.1 billion. The first time consolidation of adidas stores in June added EUR 8 million to these sales. Now while the quarterly gross margin improved 40 basis points to 45.3%, it decreased of 70 basis points to 44.5% for the 6 months period as a result of lower product margins at Rockport and Reebock-CCM Hockey. For the quarter, however, improvements at TaylorMade-adidas Golf helped to more than offset these negatives.
Now ladies and gentlemen, let me come to my final and, probably, favorite topic of the day, our balance sheet and cash flow development. Given that the global economic outlook has certainly not improved over the course of the year, our conservative approach towards managing risks and rigorous control of our inventories is certainly vindicated. To that end, I'm very pleased to report that our inventory growth rate has once again declined compared to the prior quarter, increasing just 8% on a currency-neutral basis. This is a stark contrast to most of our major competitors, where inventory growth rates have been higher, in most cases, upwards of 20%. As a result, we were also able to maintain and even further decrease operating working capital as a percentage of sales by 10 basis points to what I believe is a very strong 20.6%. Now combining this tight control of working capital with our strong operational performance, that led to a significant cash flow generation for the period. This is reflected in the significant 63% year-over-year decline in net debt of EUR 545 million to a level of only EUR 318 million.
So, ladies and gentlemen, on that very positive note, this concludes my comments for today. But now, it's back to Herbert to take you through our initiatives and give an update on the outlook for the remainder of the year.
Herbert Hainer
So thanks, Robin, very well done. Our clear victory in the summer of football, our increased operating margin and our excellent inventory management, as Robin has just described, show we have exactly the right formula to preserve and sustain our positive earnings and our cash flow trajectory. So let me tell you how we are going to do that, and it starts right here and right now.
At this very moment, we are capitalizing on our involvement in the London 2012 Olympic Games, an event that echoes the values of our Group: performance, passion, integrity and diversity. And there is definitely no other sports brand that has such an authentic and long heritage with the modern Olympics. After spending already several days in the U.K., I can only admire the enthusiasm Great Britain is bringing to these Olympics, and I am proud that adidas, through our support of Team GB and iconic sports athletes, has been able to contribute to the spirit of this game.
From a commercial end perspective, this will be the most successful games we have ever had, with Olympic licensed products sales up 250% compared to that one in Beijing. However, the commercial success is the one thing. I believe it is the long-lasting impact on the consumer here in the U.K. and around the world that will bring us the greatest return on investment. With sales up 24% here in the U.K. for brand adidas so far this year, we have already closed the gap to the market leader, from 3 percentage points difference to just 1 percentage point. And this is no wonder, this emotional impact we are having through our "Take the Stage" campaign, our on the ground activities in London and the events with ambassadors such as David Beckham. So, let's just have a look.
[Presentation]
Herbert Hainer
So on a broader scale, I also have no doubt that this event will inspire generations worldwide to get into sports and providing further impetus to the global megatrend towards healthy living. And the message of the London Olympics to drive for greater efforts in sustainability is one that we will harness and use to maintain our success as the most trusted [indiscernible] sports brand.
Over the past week, you will have seen some exciting news on new processes we are currently developing within our innovations team and global operations to take manufacturing techniques to the next level, such as Dry Dye and [indiscernible]. And let me assure you that this will not be the end of great innovation stories you will be hearing from the adidas Group in the coming months.
In particular, we are planning a new wave of launches and our adidas key performance attribute, SMARTER [ph]. You might have seen already that we launched in association with our long-term partner, the MLS, the Major League Soccer, in the U.S. the adidas miCoach Elite System in New York 2 weeks ago. And the technology was publicly demonstrated for the first time during the MLS All-Star Game between Chelsea FC and the MLS All-Star team. This technology is a revolution in team sports as it enables an unrivaled understanding of the physical activity of the team on the pitch. A small data cell fit into a player's base layer, the cell transmits more than 200 data records per second from each player to a central computer, which is sent wirelessly, available in realtime on a coach's iPad. At the touch of his fingertips, the coach can monitor the workload of an individual player, compare one athlete with another or view the whole team to gain a complete picture of the squad. Beginning in the 2013 season, all 19 MLS clubs will use the miCoach Elite System, making the MLS the first smart soccer league globally. And I believe that this will become a must-have tool for coaches and trainers in many team sports as we evolve the platform in the future.
While there will also be a whole host of new product launches to drive adidas sales momentum in the second half, we also have planned some significant marketing initiatives in time for the important back-to-school and holiday seasons. The largest will be the next installment of our "all adidas" campaign, this time focusing on Originals. So let's take a look at the spots that we introduced yesterday.
[Presentation]
Herbert Hainer
So while there will be much more to talk about as we move into 2013 for the back-to-school season, we still have several initiatives in place to continue building the brand's credibility with the fitness consumer, including several store takeovers just like those we did at the beginning of the year in the U.S. with Finish Line. CrossFit will again play a central role as we build on the solid momentum of the CrossFit Games held in California in July this year. In just 2 years, participation in the Games has jumped from 4,000 to 70,000, and there were more than 30,000 spectators to see, packed into the Home Depot Center in Los Angeles.
Also, to ensure we are in a position to leverage the move by the brand to cover more holistic fitness offering, I'm excited to announce that we are planning a new store experience with the launch of a pilot Reebok Sport of Fitness Hub, including a store and Reebok CrossFit box on New York's Fifth Avenue. It will have its grand opening on August 16. With this, we are creating the ultimate fitness destination by providing the best coaching Yankee [ph] in New York. And we will cover more on this and as the evolutions of previous Reebok fitness strategy at our Investor Day in Carlsbad on September 20 and 21.
So let me underline, once again, at this point our strategy is quite clear. We will make Reebok the fitness empire, and the implementation of this strategy will lead to new momentum with Reebok in 2013.
So to wrap it all up and bring it all together, we have every confidence that our Group will continue to lead the pack from the front with great innovation, great product stories and great marketing. And this is why we can reconfirm our full year guidance today. We are even in a position now to announce that we will finish the year at the upper end of our range on the bottom line, which we gave you in May.
We continue to project full year sales to grow at a rate approaching around 10% on a currency-neutral basis, with minor adjustments to the segments to reflect the [indiscernible] and the Reebok India impact and, on the other hand, the strong growth at TaylorMade-adidas Golf. Operating margin is forecasted to increase to a level of approaching 8%. Net income attributable to shareholders is expected to increase at a rate between 15% and 17% to a new record level of between EUR 770 million and EUR 785 million. And this further balance sheet improvement, this will put us in a prime position to continue our strong business momentum.
So ladies and gentlemen, let me conclude by stating that I am very happy with our excellent first half performance. Now I'm looking forward to enjoying a fantastic present year at the London 2012 Olympic Games, and I'm also looking forward to updating all of you on our further growth plan at our Investor Day in September.
And with that, I thank you for your attention, and now, Robin and I will be happy to answer all your questions.
John-Paul O'Meara
So just before we start the questions, the dates for the Investor Day are the 20 to 21st of September, where we will have an update on Route 2015, TaylorMade presentation, presentations from adidas America and our basketball category, as well as on the Reebok strategic update. And if you could register with us by September 3, we'd greatly appreciate it so we can get all of the logistics and everything else sorted out.
So now we will start with the questions. We start over here, Matthieu?
Question-and-Answer Session
Matthieu Driol - Day By Day
First question that I have is can you give us a bit of flavor going forward what's going to happen with Reebok, 26% decline in Q2 looks quite big. And given that volumes in [indiscernible] might [indiscernible] the next few quarters and India is also -- probably not going to improve, should we look over the next 2 to 3 quarters for similar impact and then hopefully in 2013 to grow again? And the second question would be about the current trends you have seen in China, a very impressive growth, 13%, but everyone talks about the high level of inventories, it was difficult in the market. What is Europe's extent of the current market growth, and what do you expect for the second half on China? That would be my question.
Herbert Hainer
Okay. So let me start with the first one. Yes, I said already on Reebok, I'm also disappointed about their results. But when you take the one-time effect which we said, away, then the underlying business is down as well, but by single digits. And this is what I do believe continue going forward. We indicated to you already at the beginning of the year that 2012 will be a difficult year with the dropout of the NFL, then now we have the Indian case. And as I said, unfortunately, we were not able to bring new product concepts to market as we did with EasyTone, Zig and Flex, and these both helped us enormously in 2010 and 2011 to grow our business. But you will see in 2013, we are affected that -- we have already shown our new concepts to the retailers, especially in the U.S. and now starting in Europe, and we have got very positive comments. So there is no doubt that we will grow in 2013 again with Reebok. We have to go now through 2012. We will clean up India, there is no doubt, because we want to have a clean sheet. And we will bring new innovative products into the markets, spring/summer 2013. We'll also bring new products in the second half of 2012, but they will not be enough to really stimulate the sales that we get back into positive territories. But from 2013 onwards, we will grow again. This is what we will see. And we will give you all the details and also the product concepts in costs starting September so you can see as well. Second one, China. I cannot comment on the difficulties the other sport brands have in China. I can only tell you that our growth is very healthy and sustainable. And you might remember after the fallout in 2009, after the Beijing Olympics and then we had the economic crisis, we were discussing with you about the -- cleaning off the market, and I also told you it will take a little bit longer because we want to do it the right way and we will be back in the second half of 2010 to growth mode. And then, since, we are growing and growing and growing. What do we different? I do believe we have a great focus on the sell-through numbers with our franchisee partners because this is the most important thing. It doesn't help if we push products in and they don't sell out. Therefore, we have spent a lot of IT connections with our key franchisees that we get permanent, instant information what is selling and what isn't selling. And these leads -- that we have the highest growth rate in the moment in China and we have the lowest inventory. We had a few Chinese customers here last week in London. They're all very happy with the way which we are dealing with them because they earn the most money of us. They don't have less markdowns because inventories are clean, sell-through numbers are good and they are positive for 2013 as well. In general, the market might get tougher in China in 2013, but all what I have heard, we are the frontrunner in China also in 2013. In the second half in 2012, our backlog, we have already in the books as they are very good as well.
John-Paul O'Meara
Okay, so Andreas, yes?
Andreas Inderst - Exane BNP Paribas, Research Division
Andreas Inderst, Exane BNP Paribas. I have a couple of questions. The first one, on your development in Latin America, very poor development in the second quarter. You have elaborated already...
Herbert Hainer
This is not correct. This is not correct. We grew adidas by 8%. This is only Reebok.
Andreas Inderst - Exane BNP Paribas, Research Division
Yes. Maybe you can elaborate what is your action you take on Reebok in this market in respect to your joint venture partner, and when do you expect renewed growth and maybe you can give us a sneak preview on your 2014 spreadsheet for sales? That's my first question. Second question, like-for-like growth in owned Retail plus 8%, quite nice development compared to your competitors. Maybe you can give us more details how the growth rates will by region for China like-for-like U.S. and Western Europe, maybe? And my third question is related to the current economic situation. In 2008 and 2009, you experienced a significant profit decline. What's the difference today? How are you positioned differently today compared to 2009 to reassure us that you won't see a similar development in 2009? I understand inventories are already nicely compared to the past and brand adidas is better positioned, but maybe you can give us more information on that side.
Herbert Hainer
Okay. I guess I'd take the first and the third one, and Robin, you take the second one. Good. So let me start with Latin America. As I said already, Latin America, we have been growing by 8% with the adidas brand. We still do have the same issues on import restrictions for adidas as we have for Reebok. In addition, for Reebok, we also have seen that our joint venture partner and our joint venture is going until 2015. This will cover us in Latin America. They have difficulties in the market as you might have seen, they have to close factories, they have to release workers and obviously, this doesn't help our business either. But we have to go through them until 2015, as I said. We are bringing also their new products, but it is more complicated to import products into Brazil and Argentina as the governments have built more and more boundaries around. The question #3 was in 2009 because of the economical crisis you asked, if I understood the question correct. Profit dropped as everybody else, so now macroeconomics are getting tough again. What do we do to prevent it? I do believe that we are in a much better situation, although I must say, if the world collapses, then it might hit us as well. But when you look to our balance sheet numbers, which Robin showed you, I think we have a much better position, especially on the inventory side. All of our competitors which announced their results the last 2 weeks have high inventories, and our inventory growth is less than our sales growth. And we still drove growth over 10%. So this shows you that I do believe as a company in general, our growth is which we introduced in the last several years from planning, purchasing, sourcing, delivering, logistics and sell-through numbers controlling in the stores is really flawless. And I do believe, without sounding too self-confident, that we are much better than most of our competitors there. And this is how we channel our stream of products into the market. And obviously, this situation will have an effect on the next 6 months because they will have to drop their products. I mean, what do you do if you have 30% over inventory? You have to drop your products with markdowns, with less margin, et cetera. Whereas, we can still continue our clear channel segmentation approach that we give only products to these channels where the consumers are who can buy these products. This means we take Originals away from certain customers and give it to customers where we do believe these are the right ones. Giving you an example, we don't sell Originals here in the U.K. to sports direct but JV, obviously, is our Originals customer, number 1, because he is the consumer base. And this is what I think gives us a much better position than 3 years ago and as our main competitor.
Robin J. Stalker
Andreas, there's a lot of good news about Retail, and one of that is that the comps store growth, the development is throughout all the regions, we have in Russia, a 12% comp growth; U.S., 10%; China, 8%; and Europe, 4%.
Jurgen Kolb - CA Cheuvreux, Research Division
Jurgen from Cheuvreux. Maybe focusing again on India and the Reebok situation. Excuse me if I missed it or overheard it. Do you have the Reebok underlying growth excluding NHL, NFL and India, how did Reebok do there? And then maybe a little bit of an outlook, what the impact of the situation in India will be for Q3, Q4, how is that going to develop there? On the gross margin of the Group, was there an impact from India as well? And lastly, the $70 million restructuring expenses that you mentioned for India, did that also include the expected sales decline in the Indish [ph] market or is that just a pure restructuring cost for closing down the stores?
Herbert Hainer
Okay. So I'll just take the first one and you take all the gross margin and restructuring costs. So the Reebok numbers without NFL, NHL, et cetera, would've been minus 8% for the first 6 months.
Robin J. Stalker
And yes, you're absolutely right, Jurgen. Obviously, the issues at Reebok India had an impact on our margin, and anticipating that, I've got some calculated figures for you. So in terms of the Reebok India business, if that wasn't in our numbers, we would have had a 30 basis point improvement in the Group gross margin. If you look at it, however, just -- that's on the quarter, that's [ph] for the half year. If you look at it on the Wholesale base, I think you know that we're looking at Wholesale development as well, Wholesale for the 6 months, 70 basis points negative impact; 10 basis points for the half year. And in the Reebok numbers themselves, obviously, a significant impact for the quarter, it's 5.1 percentage points, and for the half year, 1.2 percentage points. Your question about what did we include in our so-called restructuring costs. As we gave you guidance at the end of our first quarter, we anticipate that not just the restructuring costs, but also the impacts of changing our business model in 2012 will result on less sales and less profit, obviously, in this period. And that altogether will be a negative, approximately EUR 70 million more than we had anticipated. And that number is still our best estimate for the full year. And of that EUR 70 million, EUR 17 million, 1-7, is in the first half, and that does include the negative sales development.
William Hutchings - Goldman Sachs Group Inc., Research Division
Will Hutchings at Goldman Sachs. 2 questions. One, on share gains. You gave us an update on your share gain performance in the U.K. I wonder if you could give us an update on a more global basis and where you think you've got good opportunities to continue to take share. And just one on the weighting of costs, which presumably there's quite a significant marketing budget going on for the Olympics. How much of that has been incurred in the numbers that we've seen and how much is to be incurred?
Herbert Hainer
So I don't have, unfortunately, any share numbers for the global world. I have it for individual markets, be it the U.S. or the U.K., as I said. In general, that were the 2 beliefs that we have gained share because when you just look to this year's sales growth numbers of all the people in the sporting goods industry, then we must have gained share. The U.K. ones, I have spoken about in my speech because we are here and this is at the very early stage that we definitely want to be become market leaders, this is why I pointed it out. But we definitely can deliver it later to you. The second one, the marketing/working budget. I think you have to have in mind what I said already several times that we are, first and foremost, spending trended around 12.5% to 13% on marketing/working budget, and this is very consistent over the last years and this is what we do plan going forward. [indiscernible] we have big event years or not, because in non-big event years, we're bringing much more product innovation to the market. The same will happen to -- in 2012, even despite the European Championship, which all the marketing/working budget costs were in the first half because the thing was over. You see that our marketing/working budget costs are not going out of this border what I have just described, and the same will happen in the second half.
Robin J. Stalker
Just maybe -- just to clarify the last point. I think you asked, Will, about Olympic spending. There'll be some, obviously, in the first half, but the majority of that will be in the third quarter.
John-Paul O'Meara
Mark?
Mark Josefson - Silvia Quandt Research GmbH
Mark, Silvia Quandt in Frankfurt [indiscernible]. Just following up from Will's question that the -- one area, which surprisingly on the positive was the SG&A net expense that you've found I think down 100 basis points or so. You've highlighted 13% increase in margins, in direct or your own sales of your own stores, these are the most spending. So where have you made savings on the SG&A, and what's the outlook of that? Unrelated to that question, in terms of some of the new brands, NEO, how is the trade densities of NEO in the Chinese stores compared to non-NEO stores, given the lower pricing points and much higher densities or some high densities are you generating there? And can you give us an update on the [indiscernible] early days in Germany, again with the NEO brand? And then very finally, Adams, if I understood you correctly, about EUR 18 million of those or EUR 16 million of those in June, booked 16% growth for the brand in H1. So what was defined the brand strength in H1 before you achieved it?
Robin J. Stalker
Okay, Mark, thank you for that. Yes, thanks for identifying that we are making progress, but in the first half of 2012, that progress is also being helped by as a percentage of lower marketing spend '12 better than [indiscernible] even though the absolute is up. But yes, we're definitely making progress on the SG&A as well. And to achieve our 2015 goals, which some see as ambitious in terms of increasing our operating margin to the 11%, we have to be also making improvements in the leverage in our SG&A, and what we're doing here is a variety of efforts of where we are taking costs out of the organization, not as a cost cutting measure, but as measures to fundamentally and sustainably improve our profitability, and that is, including efforts to standardize our processes, a common system, the common structures of our operating units around the world, taking costs out in how we run our businesses, consolidating warehouses. You might have heard of our major investment in Germany at the moment for a consolidated warehouse for Europe, which allows us also to close other warehouses. And various efforts like that are underway. Some benefits you can start to see, but the vast majority of these benefits really going to be coming through in the '13, '14, '15 period as you see our operating margin really significantly improve.
Herbert Hainer
I think it's fair to say that we have also some leverage on the SG&A in our Retail business.
Robin J. Stalker
That is true. We're getting better. That's exactly right, Herbert. As Retail's getting better, their profitability is also improving.
Herbert Hainer
Okay. Coming to NEO. Overall, we are very pleased with the development in NEO, which we have seen since up by 16% in the first half, and this is mainly coming from China and Russia, as this is by far the biggest NEO market. So this shows that product range, especially in China, which we are offering to the younger consumer is definitely hitting them, and when you go into the stores and you see exactly the consumer base that you want to have today, 15-, 16-year old boys and girls who are hanging around, making their photos on the artificial mirror and then posting it to their friends. In Germany, we had just opened today the 10th store, as I said, in Cologne. The overall performance is very good, but as we already said, we want also to learn. And we learned a lot already in the first 5 months, be it on locations, be it on logistics because we permanently have to refill the stores obviously, be it on what the consumers buy and what they don't buy. You have special articles who are selling like hotcakes and others that are not selling as well. As always, but the overall trend is very positive. We permanently increasing traffic, we permanently increasing conversion into stores and all that we see so far is quite encouraging. But nevertheless, as we said from the very beginning, we will take our time, 12 to 18 months, to really experience everything in a mature market like Germany because if we do it there, then we can do it everywhere, before we go out and in Europe to the rollout. Last question on Adams. First and foremost, I do believe that Adams is very complimentary to TaylorMade because when you are in the golf team you know TaylorMade is always fiercer, longer, stronger and this especially is not relating that much to the senior golfers and to the women's golfer. And this is exactly where Adams is strong. Adams was the first one who brought out the hybrid or rescue clubs 10 or 12 years ago. They are more forgiving. So it's easier to play. You don't have to hit the ball exactly on the right point. And this is why Adams has had such a success on senior players, for example, Tom Watson, [indiscernible] they all play Adams. Or on the women's side, the #1, the Korean girl, Kim-something. She is also playing in Adams. They have a full portfolio of patents, which we were surprised positively, and I think TaylorMade and Adams are the only 2 golf companies in the moment which are growing in the market because when you look to Calloway [ph] and the others, and it's quite clear. And it's a funny story, just aside. You might know that Gary Adams, he was the founder of TaylorMade 40 years ago and then when Salomon boarded, he walked away and founded Adams, and now he's back in the family. Does it answer your question?
John-Paul O'Meara
So we come here to Julian first. And just to correct you, it was EUR 8 million. EUR 8 million that Adams added in June.
Julian Easthope - Barclays Capital, Research Division
It's Julian Easthope from Barclays. I've got 2 questions. The first one concerns China. Your Chief was in the China Daily News a couple of weeks ago, English version, I should say. And saying that you're going to open 500 to 600 new stores at 3 franchise partners. Stocking at those new stores, how important is that within the growth rate for China, and how many more stores can you open through the franchise partnership? And the second question relates to the wholesale. As you cut your expectations or guidance down to mid single-digits now from the last quarter. Where have the disappointments been within that guidance geographically and is that obvious from the future's orders coming through?
Herbert Hainer
So in China, yes, this is true. I don't know exactly will it be 520 or 530. But what it clearly indicates is that we have a strong confidence in the Chinese market as half our franchisee partners, otherwise they wouldn't open the stores. And we still do believe there is a potential for much more stores in China as we penetrate ourselves through into the lower tier cities, but also store improvements and location improvements in the big cities, be it Shanghai, Beijing or Guangzhou. But this is clearly at confidence level of what we do believe we can do and the franchise partners do believe. And you know that we have high expectations for China until 2015, which we have outlined, and we are on the best way to achieve them. You have seen our growth rate and I'm absolutely convinced that just was over 2 months ago in China and have seen the consumer, have seen the traffic in our stores, have spoken to the 2 biggest franchisee, [indiscernible] and [indiscernible], and I don't have anything to say than being optimistic for the future for us.
Robin J. Stalker
And Julian, the only reason we have amended our guidance for sales for them at the Wholesale is to reflect the situation of Reebok India. I mean, the second quarter, increase of Wholesale was only 1%, but had we been able to take out all of Reebok, not just the Reebok India, that would have been up 9%. And we were very confident on our growth and Wholesale throughout the rest of this year, but the actual figure will be under what we have initially anticipated largely because of Reebok India.
John-Paul O'Meara
Louise, you may take the stage.
Louise Singlehurst - Morgan Stanley, Research Division
It's Louise Singlehurst from Morgan Stanley. Just a couple of questions for me, please. Can you talk a little bit more about Western Europe and the trends that you're seeing there, obviously, benefiting from the events in the first half of this year, no doubt Q3. How should we think about growth going into 2013 for Western Europe? And then secondly, again another follow-up on China, I'm afraid. At this stage, obviously, you've been talking a lot, Herbert, about the double-digit growth you're expecting trend on average to 2015. Are you quite confident at this stage for 2013 and double-digit growth? And then as a follow-up, can you tell us what the contribution of NEO is within the 13% growth of China in Q2? And then one last -- my final. Apologies, one last one, a clarification point. I think you said that you were stopping or withdrawing some of the big shipments to Wholesale in the U.S. Is that just clearing the inventory ahead of some big launches that we should expect towards the end of the year?
Herbert Hainer
So let me start with the last one. No, this has nothing to do with the clearance. What we see is that we have still very strong demand in the U.S. for Flex and for Zig. But what we don't want to have is that the same thing happens like with toning that the market is full with products and we ship and ship and ship and then the market is exploding. We definitely do believe that we have these 2 -- these 2 franchises, really franchises, which we can build over the long-term, and therefore, we don't want to sacrifice the good buildup and the segmented distribution strategy, and this was the reason. We could have sold more, definitely, which wouldn't have changed the picture in Reebok and the results completely, otherwise we might have done it. But we really have taken the strategic decision that we want to build with long-term learning out of the toning thing. The other one, NEO, I can't give you the percentage what the contribution of NEO is, but we have around 1,000 NEO stores out of the 6,000 stores which we have for the adidas brand in China. So it is quite a significant part. In China, general, you were asking why I'm so optimistic going forward and what will 2013 look like. I think it's a little bit too early to talk about details already in -- about 2013. This we will do in September in Carlsbad. But all that I have seen so far, as you know, we are selling already in for spring/summer 2013, all that I have seen is we will continue our growth momentum in China. Not everybody will do. This is quite clear, and this you have already heard or seen from some of our competitors, but I have all reasons to be optimistic going forward what I have seen so far. And then I think your first question was on Western Europe, how we have benefited from the events. I mean, when you see that we are growing in Germany, we are growing in Spain, obviously, the European Championship has helped us because we have sold a lot of replica jerseys. But I do believe that in general, our business is very solid in Western Europe. When you look that -- especially in Western Europe, the market is much more performance-driven than fashion-driven, and this is what we're all about. Be it football, be it running, our basketball business is good, our training business is good. We are very deep rooted, be it here in the U.K., be it in Germany, be it in Spain, be it in France. And therefore, I definitely expect tougher times in Western Europe according to all these discussions which we have now in 2 years about the euro and whether it's collapsing or not or breaking apart. But overall, I think our fundamental position in Western Europe is very good, and there is no other way than to grow in Western Europe as well because this is what we need to get to our targets.
John-Paul O'Meara
Right here, in the middle.
Christopher Walker - Nomura Securities Co. Ltd., Research Division
Chris Walker from Nomura. 3 quick questions. Firstly, you mentioned clearance of the toning products in Western Europe. Can you talk us through that and how much further there is to go? And then secondly, what have you learned over the first half in terms of stretching the pricing architecture higher, obviously, products such the Crazy Light 2, new price points coming through in the U.S. Does that give you confidence to stretch the pricing up, architecture higher, even further and maybe more quickly over time giving you some gross margins for both?
Herbert Hainer
The first one on the toning thing, we do believe that at the end of the year, we will have by far the biggest portion of toning cleared. Maybe we get through everything, maybe there will be a few thousand pairs left, I don't exactly because we also don't want to overfloat the market. We're still getting decent price of EUR 40, EUR 50, EUR 60, depends a little bit on the market. We still have a market like Spain where we sell-through with EUR 70, EUR 75. But the biggest part is done at the end of the year. The second question was on pricing. I mean, as we've told you already 12 months ago when all the FOB price increases came in, we have to raise prices, obviously, we did some other things to mitigate the prices as well, but we tried to stretch it as much as we can by bringing innovative new products to the market, and Crazy Light 2 is definitely an improvement, and we see the consumer is paying for that, 30% sell-through in the first few weeks. But we also learned, I have to be fair here, that some prices we overstretched a little bit, and we saw that there are critical price points which we took one notch above and those were going back a little bit. So this, we are correcting as well. We are looking quite carefully into the markets, but I do believe that we still have further possibilities to raise prices because our products are better than the ones, those of our competitors.
John-Paul O'Meara
Gentleman here at the front, and you'll be the second last today.
Unknown Analyst
Rob Walters [ph] from Deutsche Bank. You mentioned on input costs that there should be less pressure in there in the second half, and you talked about 500 basis points in the first half, but can you give us some kind of idea of what that would be? And perhaps more important, how do you see the outlook for 2013 where you must have some visibility by now? And secondly, on -- can you talk a bit about Russia and obviously, with the ruble moving have you put prices up, started putting prices up to make up for that? How do you feel the outlook is for demand in Russia?
Herbert Hainer
Robert [ph] the first one on input prices. Robin have already talked about Russia. I can't give you a specific figure for the second half of the year, but we, obviously, already know that the cost of our products are significantly -- the increase is significantly lower than has been in the first half year. I've guided, however, over the last several quarters to say that 2012 is still going to mean that the FOBs are higher than they have been in 2011, even though that growth rate will be significantly lower. We said that for the first quarter, we thought we'd got to the peak. Second quarter has been actually a little bit worse, but the visibility we have gives us confidence there's still that -- our gross margin guidance is still very good for the full year, and most of that's obviously coming through our expectations from the FOB development. 2013, you're right that we're expecting that it should -- these increases should be a little bit less in terms of the input prices from raw materials. We're still under pressure, however, with wages. Don't forget that in most of the places that we are producing, there's still considerable wage pressure, but we understand that some governments, they're trying to also, is not necessarily pursuing all of the increase that might have been anticipated, so maybe a better development in 2013 than 2012. But it's always still -- it's still up, it's just a little less rate.
Robin J. Stalker
The second question was concerning Russia. I mean, in Russia we have really a very prominent position, and when I look at through our sales, we have been up for the first half by 15%, for the second quarter, by 20%. So the second quarter was better than the first quarter. Overall, yes, also in Russia, the consumer is more critical, but once again, we do believe this plays in our hands because we are really bringing innovative new product concepts to the market, and this is what the consumer is enjoying in Russia. And as I said in my speech, we are growing with those brands. Also Reebok is still on a growing mode in Russia, and we will open more stores. And we have -- as I said, we have a dominant position, especially with those brands. I think we are close to 70% market share. And I definitely do believe that we will see further growth in Russia.
Andreas Inderst - Exane BNP Paribas, Research Division
Just a follow up on retail. You mentioned the like-for-like growth of 8%, which I find quite good. What's the sales productivity gains, the sales per square meter gain you had in the second quarter?
Robin J. Stalker
That's a lovely question, Andreas. I'm sure you're not going to be surprised that I'm not answering those sort of questions today. I told you before that as we get more and more sophisticated with Retail and really striving towards being a top Retailer, we will obviously be making those sort of KPIs also public. At the moment, we're still developing these KPIs internally. You can be assured, however, we have a close eye on all of those sort of retail KPIs. And the underlying point that we've made also in our prepared comments today was that retail profitability is getting better, and it's getting better through all sorts of things and, obviously, our productivity on a square meter basis has also to be improving.
John-Paul O'Meara
So ladies and gentlemen, that concludes our event and call for today. Thank you all very much and so many of you for really coming out here to Stratford to see us today, and we look forward to welcoming you to Carlsbad at the end of September. So enjoy your summer, enjoy your breaks, if you're going on a break. And hopefully, the markets will stay rosy for us as we go through the rest of the year.
Robin J. Stalker
Thank you.
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