Adidas AG's CEO Discusses Q3 2012 Results - Earnings Call Transcript

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Adidas AG (OTCQX:ADDDF) Nine Months 2012 Earnings Call November 8, 2012 9:00 AM ET

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

Andreas Inderst - Exane BNP Paribas, Research Division

Jurgen Kolb - CA Cheuvreux, Research Division

Matthias Eifert - MainFirst Bank AG, Research Division

Julian Easthope - Barclays Capital, Research Division

Louise Singlehurst - Morgan Stanley, Research Division

Michael Kuhn - Deutsche Bank AG, Research Division

Chiara Battistini - JP Morgan Chase & Co, Research Division

Operator

Good day, and welcome to the Adidas Group Conference Call for the Nine Months 2012 Financial Results. Today's conference is being recorded. At this time, I would like to turn the conference over to John-Paul O'Meara. Please go ahead, sir.

John-Paul O'Meara

Thank you, operator, and good afternoon, ladies and gentlemen. I am JP O'Meara, and I'm head of the IR activities here at the Adidas Group. Today, our presenters will be Herbert Hainer, Group's CEO; and Robin Stalker, Group's CFO. And they'll be covering our strong financial performance so far this year, as well as giving you some insights into the various initiatives we have planned to keep momentum going for the remainder of 2012 and into a very exciting 2013. So with that, over to you, Herbert.

Herbert Hainer

Yes, thanks, JP, and good afternoon, ladies and gentlemen. I'm very pleased to report today another set of robust and record financial results for our group.

For the first 9 months, currency mutual sales increased 8%, or 14% in euros to over EUR 11.5 billion with growth across all geographical areas. To break this gross margin management and discipline control of our operating costs, we were able to achieve an operating margin improvement of 40 basis points to 10.1%. And as a result, Group net income and earnings per share have jumped 22% to EUR 798 million and EUR 3.82, respectively.

We, again, had many highlights in the third quarter but there are 3 real outstands. Firstly, there's a power in the global strength of the Adidas brand, where we enjoyed 10% currency-neutral growth. The second is our gross margin performance, which increased 30 basis points, despite continuing pressures from input costs. This allowed us, for the seventh consecutive quarter, to grow our bottom line book both faster than sales and the double-digit rates being 14% for the quarter. And thirdly, we continued our industry-leading inventory management, which resulted in another quarter of sequential decline, as inventories were down 1% currency-neutral compared to the prior year period.

These strong results continue to be a reflection of our relentless focus on driving quality and sustainable top line growth. Unlike many in our industry, we have not only preserved but created opportunities to improve and grow our margins. And we intend so, without the need to sacrifice important investments into our brand and infrastructure, critical to sustaining our future success. And this is clearly one of the key strengths of our Route 2015 strategy.

Our powerful global reach and brand appeal is reflected in the strong and broad-based sales growth seen in all of our geographic areas in the first 9 months.

In particular, our key tech markets of North America, which is up 5%; Greater China, which is up 16%; and Russia/CIS, which is up 17%, have once again delivered significant category and market share victories. And even in Western Europe, we were able to grow group sales by 4%, which is impressive given the recent economic challenges.

Our performance holds in the first 9 months also reflect our dedication to creating the industry's most desirable brand, which we are doing by consistently driving product innovation, brand authentication and investment.

But let's have a look at our brand achievements for the period. Starting with Adidas, the momentum we are currently enjoying with the Adidas brand is unprecedented in the last decades, with sales increasing 10% currency-neutral in the third quarter and 12% year-to-date. We have marked our 10th consecutive quarter of double-digit growth for the brand. Sales are up at double-digit rate in all regions with the exception of Western Europe, which increased 7%. All around the world, the brand was front and center in the summer sports. Speed, the success of our corporation is team tribute to Olympic Games where they won 65 medals. Andy Murray's first Grand Slam victory at the U.S. Open and Olympic gold in London, and our success of the World Marathon stage, which includes Geoffrey Mutai and Mary Keitany being crowned 2011-2012 World Marathon Majors Series Champions. And these are just some of the inspirational athlete achievements that continue to inspire and showcase to the consumer why Adidas received best performance sports brand in the world.

This is also fully underlined in the diversity of the brands growth by category. All of our key performance categories, be it football, running, basketball, outdoor, as well as Adidas sports style has grown its strong -- have grown its strong double-digit rates this year. And our innovation net growth is reflected in the brand's gross margin, which was up by healthy 70 basis points in the third quarter.

In Football, our year-to-date sales are up 17% currency-neutral and at the high single-digit rate in the quarter, as we built in our dominance at the UEFA EURO 2012. During the quarter, the president and the key football club apparel launches, such as Chelsea by Munich and Real Madrid, have all seen year-over-year increases of over 20%.

In Running, our growth rate accelerated in the third quarter, with sales rising 17%, driven by the continued success of our adizero and Clima franchises. In addition, several new introductions such us the adizero Adios 2 racing shoe, the Kanadia trail shoe and our SuperNova technical apparel all received industry awards during the period, highlighting the strengths of our offering across the full breadth of our -- of the running market.

In Basketball, sales also accelerated in the third quarter growing 30% within North America, even up almost 60%. And this was fueled by strong footwear sales driven by the Rose 3 and the Crazy Light 2 as well as strong growth in apparel as we anniversary last year's NBA lockout.

And finally, it goes without saying that our connection to the lifestyle consumers is only getting deeper. Sales increased 23% currency-neutral in the third quarter, driven by double-digit growth at Adidas Originals and in Adidas NEO Label. A particular highlight was the strong reception to our all-original 3% campaign, which resonated strongly in the back-to-school period all around the world.

Now moving over to Reebok. The reported sales declined 25% currency-neutral in the quarter and 20% year-to-date. If we exclude the impact from our, excuse me, if we exclude the impact from our cleanup of Reebok India and our decision to discontinue the NFL license and the reporting change of the NHL business from Reebok to Reebok-CCM Hockey, revenues declined 6% in the quarter. While this is still by no means satisfactory, it is an improvement in trends compared to the second quarter decline of 10%. This confirms what I told you back in August, that we do see encouraging signs for the brand, particularly in markets led by our own retail and controlled space initiatives. In fact, comparable store sales globally are up 11% in the third quarter. In addition, I also now believe we can call out that our classic business is moving into a sustainable upward trend. Reebok classic sales were up double-digit in the third quarter, supported by strong new product introductions such as shoes with new brand ambassador, Alicia Keys.

Finally, let me wrap-up my comments on the period with a review of TaylorMade-adidas Golf. Sales in the first 9 months increased 21% currency-neutral. In the third quarter, sales increased 4% currency-neutral with strong double-digit growth in North America and in Netherlands, offset by lower sales in European and in Ireland, due to the timing of this year's product launches.

Our strength in innovation is, once again, shown through, on this year's 6 major professional Golf tours, with TaylorMade drivers winning 49 events already. Also several of our tour staff pros played starring roles in the Ryder Cup matches, including Dustin Johnson, Justin Rose, Sergio Garcia, and the ultimate hero, Martin Kaymer.

So ladies and gentlemen, this completes my review of the period. I will be back in a few moments to talk about the rest of the year and some initial flavor on 2012. But before that, let me hand over to Robin, who will discuss the third quarter financials and business development in more detail with you.

Robin J. Stalker

Great. Thanks very much, Herbert, and good afternoon, ladies and gentlemen. As you've just heard, our group is having another excellent year, both operationally and financially. In my comments today, I want to focus on 3 topics: Firstly, I look at our third quarter top line performance trends by region and channel, also adjusting for this year's one-time items; secondly, the reasons for the strong development of our growth in operating margins; and finally, our continued progress and discipline in balance sheet and cash management.

In the third quarter, currency-neutral sales increased 4%, or 11% in euro terms to EUR 4.2 billion, with every region, except North America, posting sales gains. If we exclude the impacts from the NFL license and Reebok India, sales for the Group in the quarter increased 7% currency-neutral. In Western Europe, despite the widely commented macroeconomic challenges in many parts of the region, Group sales grew 1%. This was primarily a result of strong sales growth in the U.K., France and Poland, which offset declines in the southern European markets. Both the U.K. and Poland saw very strong results as we benefited from tremendous brand visibility during the major sports events, with currency-neutral revenues gaining 19% in the U.K. and 27% in Poland.

In European emerging markets, Group sales increased 19% currency-neutral. This strong performance was mainly driven by Russia/CIS, where revenues were up 21% currency-neutral, again, driven by strong comparable store sales growth of 14%.

In North America, Q3 Group sales decreased 5% on a currency-neutral basis, mainly as a result of sales declines at Reebok, which more than offset sales growth of 11% at Adidas and 13% growth at TaylorMade-adidas Golf.

In Greater China, currency-neutral sales increased 11%, with double-digit growth at both Adidas and Reebok. Comparable store sales at all of our sub-labels are very strong. And in particular, the highlight for this quarter was the Adidas NEO label, which saw a double-digit comps driven by our first ever, fully integrated campaign featuring 2 of Asia's biggest youth icons, Eddie Peng and Angelababy.

In other Asian markets, Group revenues were up 1% driven by a strong growth in Japan and South Korea, which was partly offset by the negative consequences related to Reebok India. Excluding these effects, sales growth for the region would've been up 6% for the quarter and 13% year-to-date.

Finally, in Latin America, our Adidas group sales accelerated significantly in the third quarter, increasing 16% on a currency-neutral basis. Double-digit sales growth both at Adidas and in Other Businesses more than offset revenue declines at Reebok.

Now moving on to profitability. We continued to be rewarded for our hard work and strategic focus on driving quality sales growth. Similar to previous quarters, the Group faced challenges from higher input costs. In fact, the total negative impact was 2.5 percentage points in the third quarter, which we were able to fully mitigate, delivering a margin increase of 30 basis points for the period. The key drivers to achieving this expansion were similar to those outlined in our recent earnings calls. Firstly, and most importantly, price increases, Product Engineering efficiencies and a more favorable product and regional sales mix. Definitely, the over-proportion of sales growth in our Retail segment, which carries higher margins and lastly, our hedging strategy yields at a slight positive tailwind. However, I would like to add here that we expect this reverse -- this to reverse and become a headwind in 2013.

Now for the first 9 months, that means we are now closing in on our target of a gross margin of around the prior year level of 47.5%, with year-to-date gross margin now down only 40 basis points. And by the way, for the 9 months period, input cost pressures were a 4.1 percentage point negative.

Moving now below the gross profit line. We continue to make very good progress towards one of our key Route 2015 goals. And that's leveraging our growth and operational scale to drive operating expense leverage. For the quarter and year-to-date, other operating expenses increased 14% and 13%, respectively. As a percentage of sales, other operating expenses were up 0.7 percentage points in the third quarter. However, year-to-date, they decreased 0.5 percentage points. There, all sales and marketing working budget expenditures increased 9% for the third quarter and 8% for the first 9 months. As a percentage of sales, sales and marketing working budget was 10.8% for the third quarter and 11.7% for the first 9 months.

Group operating profit increased 19% in the first 9 months to a new record 9 months level of EUR 1.2 billion. This translates into an operating margin of 10.1%, up 40 basis points. In the third quarter, operating margin expanded 10 basis points to 11.8%.

Heading now to the nonoperating items of the P&L. Net financial expenses decreased to 25% in the first 9 months compared to a year ago. This mainly reflects a 22% increase in interest income and a 60% decline in negative exchange rate effects. Lower interest expenses also contributed to this development.

The tax rate for the first 9 months increased a slight 40 basis points to 27.8%, which is due to a less favorable regional earnings mix and fully in line with our guidance of the tax rate increase to 28.5% for the full year. As a result, net income attributable to shareholders for the first 9 months increased 22% to EUR 798 million. A new first 9 months record mark for the Adidas group, which translates into basic and diluted EPS of EUR 3.82. Third quarter net income attributed to shareholders, as well as basic and diluted earnings per share increased 14% to EUR 344 million and EUR 1.64, respectively.

Now by segment, currency-neutral Wholesale revenues reflect, in the third quarter, an increase to 4% in the first 9 months, as sales growth at Adidas more than offset revenue declines at Reebok. Gross margin for the segment was up 0.9 percentage points for the quarter to 41.3%, and is now down nearly 50 basis points year-to-date. Price increases as well as a more favorable product and regional mix helped to more than offset the headwinds from input costs in the third quarter.

In the Retail segment, comparable store sales growth continued to be a key driver for segment revenues, contributing 9% of the 15% currency-neutral growth for the quarter. For the first 9 months, comp store sales also extended 9% currency-neutral, while total segment sales grew 16% currency-neutral.

By brand, currency-neutral Adidas comp store sales increased 8% in Q3 and 9% in the first 9 months, while Reebok comp store sales grew a very healthy 11% and 9% for the quarter of year-to-date period, respectively. Sales from e-commerce were also very strong, growing 63% in the third quarter and 65% year-to-date. Retail gross margin decreased 3.3 percentage points to 59.0% for the third quarter and decreased 2.2 percentage points to 61.0% in the first 9 months. Increased promotional activities, as well as the devaluation of the Russian ruble versus the U.S. dollar were the main factors contributing to margin declines.

Coming out of the segmental operating margin for retail, we continued to make strides towards becoming a world-class retailer. Despite the decrease in the retail gross margin, segmental operating margin for the third quarter declined only 1.4 percentage points to 21.8% and by 0.1 percentage points to 21.6% for the first 9 months.

Now in terms of per store development, at the end of the third quarter, we operated 2,466 stores, a net increase of 65 stores, or 3% versus the prior year end level of 2,401. During the first 9 months, we opened 262 new stores and closed 197 stores, while 52 stores were remodeled.

Now our remodeling and store upgrade efforts continue to yield significant benefits. For example, during the quarter, we reopened the Adidas brand concept store on Hankow Road in Hong Kong, where after the store renovation, we are seeing impressive results. In the first trading days after its reopening, sales increased 47% versus the previous year, and traffic was up 9%.

Now finally, coming to the Other Business segment, this is certainly one of the highlights of our first 9 months performance. Currency-neutral revenues grew 7% in Q3 and 20% year-to-date, driven by strong sales increases at TaylorMade-adidas Golf and Reebok-CCM Hockey.

In euro terms, sales for Other Businesses grew 18% during the quarter to EUR 486 million, and 30% in the first 9 months to EUR 1.6 billion. Then this June, the consolidation of Adams Golf added EUR 23 million of sales. The segmental quarterly gross margin decreased to 0.2 percentage points to 42. 7%. For the first 9 months gross margin was down 0.5 percentage points to 44.0%, mainly as a result of lower product margins at Rockport and Reebok CCM Hockey. Improvements at TaylorMade-adidas Golf partially helped to offset these negatives.

Now ladies and gentlemen, I'd like to discuss our balance sheet and cash flow development. And I am, again, particularly proud of the further progress we achieved in the quarter. Our conservative approach towards managing risks and our disciplined control of our inventories is certainly justified and we continue to be rewarded for pursuing this focus. Our inventory growth rate has once again declined compared to the prior quarter, decreasing 1% on a currency-neutral basis. This is in stark contrast to most of our major competitors where inventory growth rates continued to be at much higher levels. As a result, we were also able to further decrease operating working capital as a percentage of sales by 0.4 percentage points to a record low of 20.5%.

The combination of our tight control of working capital with our strong operational performance led to significant cash flow generation for the period. This is reflected in the 55% year-over-year decline in net debt from EUR 750 million to a level of only EUR 337 million. Taking all of our results together, we once again have seen a strong increase in our equity ratio, which is up 2.7 percentage points to 49.6%.

Now looking out to the remainder of the year, we have made some small adjustments to our full-year guidance, which slightly reduced our sales outlook to high single-digit currency-neutral growth from approaching 10%, which mainly relates to lower sales expectations at Reebok after the first 9 months performance, as well as negative impacts due to the ongoing NHL lockout. Our gross and operating margin guidance for the year, as well as our earnings per share guidance obviously, remains unchanged.

Finally, given our strong inventory management, we expect operating working capital as a percentage of sales to be around the prior year level, compared to our early expectations of a moderate increase. This means we will deliver not only record P&L results but also record cash flows from operations this year, which will be ahead of our original expectation.

So ladies and gentlemen, on that very positive note, this concludes my comments for today. Now back to Herbert to take you through our key initiatives and to give you an update on our initiatives for the remainder of the year and some indications of what to expect from us in 2013.

Herbert Hainer

Thanks, Robin. Let me tell you, ladies and gentlemen, that never in my time as CEO of the Adidas Group have I seen momentum like we have today. And we can definitely look forward to the remainder of the year and 2013 with confidence and with ambition. But there is still a lot of macroeconomic uncertainty, both positive and negative. We have done all the right things, and we will continue to do so, also in the first quarter to give our groups a perfect platform for a strong competitive attack in 2013.

In terms of our expectations for Q4, where our priority will continue to be on ensuring markets and channels stay clean and fresh, there are also a few things to bear in mind. Firstly, we will anniversary the sell-in of high-margin event-related products for the Olympic and Paralympic Games and the UEFA EURO 2012, particularly here in Europe. Secondly, we will continue to see negative impact on Reebok from the NFL license termination, with Q4 being one of the peak quarters, also a negative.

Certainly, as Robin mentioned already, the player lockout in the NHL will negatively affect our first quarter results, often, one of its most important quarters. And finally, we will see the last of the Reebok into negatives as we finalize our cleanup efforts. If you add all of that up, that is a material headwind for our smallest quarter. Each of these accounts were a low double-digit million impact on profit, totaling as much as EUR 50 million.

But nevertheless, given the strong momentum in our key Route 2015 growth categories, we expect to be able to offset many of these headwinds, as you can see by the reiteration of our guidance.

So what are the positive things going on that will fuel our underlying success over the holiday period? Firstly, on the product type. We have some significant new introductions. Here are few examples. In basketball, we launched the Rose 3 basketball shoe on October 1 at the USD 160 price point, 45% higher than its predecessor, the Rose 2. And since its launch, it has enjoyed double-digit sell-through each week. Driven by one of our most successful campaigns in history, the Rose returned, which has had 18.5 million digital views already. This clearly highlights the broad appeal of this very special NBA icon. Another example of great product to check out is in football. Yesterday evening, we introduced the new Adidas Adizero f50 football boot, which was worn for the first time by the world's best player, Lionel Messi, last night in the Champions League Game between Barcelona and Celtic. And last but not least, TaylorMade-adidas Golf has unveiled its latest and most remarkable golf irons to date, RocketBladez, inspired by the distance-enhancing benefits of the RocketBallz Fairway Woods and the Rescue clubs. This is certain to be another consumer hit when it started retail at the end of November.

In terms of our channels in wholesales, we are piloting some of our latest shop in shop initiatives before ramp up next year. For example, in the U.S., we began our new Adidas Home Court Program with peaks at the end of last week. In this sport chalet, we have already have 20 new Reebok Fit Hub shop in shops in place, and the early results of both programs are very encouraging.

In own retail for Q4, it is all about driving holiday traffic and conversion in our stores. Here, not only do we have our most comprehensive winter wear offering to-date, but also for the first time ever, we will have a fully integrated global in-store and online Christmas campaign, which launches at the end of November.

So as you can see across the group, there is plenty going on to ensure a highly successful end to the year. But after such a great year 2012, what can we look forward to in 2013?

Well, let me put it simply, an even better year. We will continue in the same direction and with the same determination as we have done all through the first years through 2015. Staying focused, implementing with excellence, and above all, placing the consumer front and center in every decision we make. We will create the unexpected by bringing more game-changing innovation and freshness in more categories than any of our competitors. In particular, we will bring one game-changing revolution to market in spring, which I'm certain will shake up the entire running market. In addition, you will see us continue to deepen the emotional connection between our brands and our consumers, becoming an even greater part of their lives through best in class brand activation on the field of play, on the street and in social media.

You will see this again on every major stage, be that the NBA All-Star weekend in Houston, Texas; the UEFA Champions League Finals in London; the IAAF World Championship in Moscow; or as we kickoff for the FIFA World Cup 2014 at next summer's FIFA Confederations Cup in Brazil. And you will see fantastic new brands and product collaborations with key promotional partners such as the Derrick Rose logo and collection basketball, our new exciting partnership with Justin Bieber for the Adidas NEO label, Hugo Rebelo [ph] Aero styles with Reebok and Alicia Keys for Reebok Classics. These are the types of opportunities and initiatives that make our group unique. They are part of a formula that is rich in content, comprehensive to the global relevance and focused to maximize and grow earnings and cash flow.

I can already confirm that we expect to deliver another year of record financial performance in 2013. This will come predominantly from operating margin expansion, where we expect to achieve a level of around 9% in 2013 as well as from sales growth. This will yield another year of significant double-digit earnings growth, which I'm sure you will agree is the tell-tale sign of a high-performing company. But we said, ladies and gentlemen, thank you for your attention. And Robin and I are happy now to take all your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Andreas Inderst of Exane BNP Paribas.

Andreas Inderst - Exane BNP Paribas, Research Division

I have a couple of questions. The first one on inventory management, excellent development here. Robin, maybe you can elaborate a bit more, how come is it that you are so much better than competition right now? You mentioned the focus on inventory management, but what exactly are you doing? And what are the prospects for 2013 on inventory management? The second question is on cash flow. Extremely good development here as well. What -- in terms of utilization of cash, what can we expect in terms of dividends, share buybacks or acquisitions? Maybe you can give us a hint here? My third question is on the one-offs related to India. Can you quantify the one-offs for Q3, please? And then my final question on 2013 on the sales growth, would you expect -- are you happy with the consensus developed -- a concensus forecast of a 5%, 6% growth rate?

Robin J. Stalker

Okay, and thank you very much. I'll take first couple of questions. I'm not trying to specifically identify what the competitors are doing with inventory, but I can say what we are doing. And we are, over the last years, really concerned that we have a good visibility on our inventory. That we have a focus on clearing the inventory as quickly as possible. And you may also see that we proactively have to take trade-off decisions in this respect, and sometimes clear and achieve lower margins just to make sure that we do have very clean inventories. And perhaps one of the best examples compared to competitors, you look at our performance in China. And one of the reasons where we're very well positioned in China is that we took decision in 2009 to go deeper in the clean up and to maintain a very current inventory in that region. So we will continue to keep everybody focused on that. And I think that will also help us, over time, to increase our stock turns, and therefore obviously, further our use of cash and our cash flow generally. Apropos the use of cash, note there's no change in the guidance that we've given over the last year. Our first priority is to continue to generate good cash to pay down the debt. Secondly, we have said that we will continue to invest in our operations. And we have got a, what we believe, a very good dividend policy. And you have seen us slightly increase our dividend over the last couple of years, and you may anticipate us increasing that in the future. We have still some room to grow within our guidance. And we have no plans for any sort of major acquisition or any sort of buyback at this stage. Your third question is about India, Reebok India and the one-off hits this year. We gave guidance earlier in the year that we're expecting the one-off charge this year to be around EUR 70 million. Year-to-date at the end of the third quarter, we've probably got about EUR 60 million. And there, we've probably got another EUR 10 million to EUR 15 million to go in the fourth quarter.

Herbert Hainer

Andreas, your fourth question was about the sales increase in 2013. You can be sure that our deep desire is to, first to grow our business in 2013 as I have already said in my little speech. But bear with us when have the annual results presentation in the beginning of March, we'll give you all the details to that.

Operator

We will now take the next question from Jurgen Kolb of Cheuvreux.

Jurgen Kolb - CA Cheuvreux, Research Division

Again on the inventory side, a very strong performance indeed. Any concerns that there might be, in the next quarters, the need to ramp up your inventory side? Or is that a level you think you can continue on a sustainable basis? And then again, the raw material impact in the third quarter, another 250 basis points, the trend is obviously, improving but how could you -- or how do you see the next quarters trending from that perspective? Maybe also looking into the first half of 2013, and sorry if I may have missed it, but the gross margin for the group in Q3, excluding India, how did that develop there?

Robin J. Stalker

Okay, Jurgen, look, with the inventory, no, we're quite confident. We can sustain this. We, as I said to Andreas' question, we're trying to improve our stock turns here. And so we're getting more efficient in our inventory. But we definitely also want to make the sale, but we're not anticipating that we have to see that we will increase inventory. We want to maintain it at this -- at this good level. In terms of FLVs, yes, you've seen that this quarter's -- the trade's been better. And although for the full 9 months, we're still suffering something like over 400 basis points negative impact because of the FLVs. It is getting better. We would anticipate that this will be a smaller impact in the future quarters, particularly because we are starting to enter anniversary or do the comp with the significant increases at the beginning of 2012. So look at this to be something that is not the headwind in the future that has been in the last few months. And in terms of the gross margin impact from Reebok India, it's minimal, if at all, anything on the Group basis. But in terms of the Reebok segment, it's about 1.2, 1.3 percentage points from the gross margin.

Jurgen Kolb - CA Cheuvreux, Research Division

Okay. Allow me please one add-on question regarding Southern Europe. How do you see the situation there, specifically the 3 core markets, Italy, Spain and France, the current trends that you're noticing there?

Herbert Hainer

Yes, Jurgen, the Southern Europe countries you mentioned, they're definitely still challenging. But on the other hand, as you have seen also during the summer months, we are able to excite the consumers' bid on the European championship with the Spanish national team bid to the Real Madrid and a lot of others. So therefore, on the one hand, it's as I said, it's challenging. But on the other hand, I think we have been quite successful to motivate the consumer to go into the stores and buy our products. And this is what we will continue to do.

Operator

We will take the next question from Matthias Eifert of MainFirst.

Matthias Eifert - MainFirst Bank AG, Research Division

First question for myself would be, could you help us to understand Page 20 in your presentation? How to reconcile the 5% increase you are mentioning there? I don't know if that is referring to North America. Because, I think Q3 sales were actually declining there. That would be my first question. Second question is extremely exciting about basketball of Adidas in North America, up nearly 60%. Other than any other categories that didn't perform as good as you expected it? And if so, what would that be? And do you have any measures to kind of improve that going forward? And my third question would be also about the gross margin, a bit more on a longer-term perspective. Do you think we ever will get back to this kind of levels we have seen at the Adidas brand in the Wholesale business of 46% in 2008? Or is it just not possible anymore due to, I don't know, continuously increasing labor costs and -- or maybe a mix change or something like that? Can you put that into perspective, please?

Robin J. Stalker

So Matthias, just to add to this clarification point. We're up 5% year-to-date in the U.S., down in the quarter.

Herbert Hainer

So your second question Matthias was on the basketball, or if there are or are there categories which are not performing as well. I mean, as I have said in my speech, I'm very pleased with speeds running, be it football, be it basketball, be it outdoor or the Adidas style business was original. If I would have to pick one within the Adidas, well then it would be tennis, which was not as successful as all the others. But you know, tennis is not the biggest category. But overall, I must say I'm very pleased with the development of the Adidas brand.

Matthias Eifert - MainFirst Bank AG, Research Division

And then for North America in particular?

Herbert Hainer

Yes, in North America in particular, it's basketball, it's football, it's originals, it's apparel. These are the main categories.

Robin J. Stalker

And Matthias, we like challenges. And we, therefore, believe there's still opportunity to improve gross margin, although I think we've given you over the previous years a good guidance in terms of where that's coming from. I mean, there is this development in the mix, in the regional mix and obviously, also in our channel mix. I mean, the retail margin, obviously being higher than the wholesale margin. And the faster growth in retail, that certainly helps us. And don't forget also, that one of the major opportunities we have in further improving our margin is improving the gross margin of the Reebok brand. And if that improves, okay, that helps also the total Group margin. So we're optimistic, but no specific guidance on that at this stage.

Operator

We will now take the next question from Julian Easthope of Barclays.

Julian Easthope - Barclays Capital, Research Division

Just 3 questions, if I may. The first one from marketing spend. I see for the first 9 months, you're down about 70 basis points in terms of percentage of sales. Is that going to be a step change in marketing spend from this point forward? Are we looking now at sort of 12% and a bit, rather than 13%? And I always say, I like it to be a sort of margin headwind on marketing spend for next year? The second question I have is on the interest charge. You've now got EUR 1 billion in the CV and the bond. And you still have some private placements. So I just wondered if the bond is going to be used to pay down those private placements early, or what is the actual average interest charge of the gross debt, if possible? And just lastly, a clarification on Reebok. Are we expecting, therefore, with the NFL contract being big in the fourth quarter this year, another quarter that's going to be down further 25% caused by the NFL and NHL contracts as well?

Herbert Hainer

Julian, let me start with the first question in marketing. Looking back, there's no -- this is definitely not the step change. As we, I think, I have said it already several times. I don't see there's a cost in some investment. This is just pure timing effect. And as we told you, we are spending around 12% to 13% to activate our consumer sentiment, and I think we do it in a fairly professional way. When you look what our campaign is, as I said, just before the original tolling campaign, how much consumer excitement they create. So but the answer is, no, there is no step change. And the last question on Reebok ad, this is definitely correct, as the NFL, in the last quarter is the biggest quarter. This will ultimately influence our performance for Reebok in the fourth quarter, and the decrease will be around that number.

Robin J. Stalker

And in terms of the interest charge, you are right. We have, obviously, lot of growth that we have no plans in order to change that structure. And in the convertible bond, we have to, from accounting point of view, also reflect this as a cost at a normal bond rate. We bifurcate obviously. You may remember the coupon of that is 0.25%. So we have a very good practical financing rate. But obviously, through the accounting of that goes if they go through the P&L more expensively. And if I look at the gross borrowing average, we'd probably be close to 5% at the moment.

Operator

We will now take the next question from Louise Singlehurst of Morgan Stanley.

Louise Singlehurst - Morgan Stanley, Research Division

A couple of questions for me, please, if I may. Firstly on Europe, obviously, there's been a slowdown in Q3. Not at all a surprise, but can you talk about the end consumer? If there's any difference there in terms of pricing demand? Or if it's just football? Secondly on China, given the problems all the domestic brands are having, you are clearly outperforming significantly in that market at the moment. Can you just talk about plans to push out to lower tier cities? Does the current difficulties at the domestic environment prevent you from going as fast as you'd like to in those lower tier cities? I suppose I'm really trying to find out whether we should expect an acceleration in the growth for 2013. And then thirdly, back on the balance sheet, again, I'm thinking about what Nike's been up to in terms of exiting some non-core or smaller brands. But are there any plans like for Rockport or the hockey business for any changes that you can expect to see with the portfolio at Adidas Group?

Herbert Hainer

Okay, Louise, let me start with the first question, Europe and the consumer. Yes, we definitely see in some countries, as we have spoken before, especially in the Southern Europe, that the consumer is a little bit more price sensitive. But on the other hand, as we have said over the last years, by bringing in new innovative product, this helps us to raise our prices. I have just given the example before in America, with the Rose shoes that we have similar examples here. In Europe was our football boots, F50, which I have mentioned, the Newman with Lionel Messi, with the new jerseys at Fit Hub. And as Robin said before, having a clear inventory really helps us to put our prices into the market and not downgrade and reduce the prices for faster sales. Therefore, this keeps our margin. But this also keeps the reputation and the image for our brand. And I think, as was planned, we're doing a better job than many of our competitors here in that respect. Second question to China. Yes, we will first continue to lower tier cities. But with all the respect to build a sustainable and healthy business as I have told you already in the last 3 years, if you remember of the 2008 and 2009, where I said yes, we will clean up the market first. We will install information systems with our key franchisees that we know exactly what the consumer is doing in the stores that we can put in fresh products, and we don't have over inventories. And I think it's also fair to say that we have been quite successful with setting this underlying success, which we have in China. Honestly, I don't see any difference to that bracket in the future, and this will mean that we will further continue to grow in China. And we will expand also with all the respect that we monitor the market quite carefully in 2013 to lower tier cities. And the third question, I think, was to smaller businesses. I mean, as you can imagine, we always get or have been approached by companies to want to buy the one of the other thing from our product portfolio. Yes, and I can confirm that we have been approached in the near future for our hockey business, and we are in discussions. But we haven't taken the final decision yet.

Louise Singlehurst - Morgan Stanley, Research Division

Just a quick follow up on NEO, as well, obviously that's doing very well for you in China, guessing for all the Justin Bieber fans out there I'm sure. But in terms of the global rollout, is there anything else beyond Germany you've got plans for that label?

Herbert Hainer

Yes, we have NEO in more countries that doesn't come in China. We have it in Russia. We have it in some of our emerging markets. But we said for the core of European, which always mean the 5 countries, be it U.K., Germany, France, Spain and Italy, but first one to test it in Germany. We took Germany as the test market because we think this is a highly competitive market. We have 10 stores opened, as we told you. We will take 12 months as we said, so this means mid of next year, we're definitely in the better position. And then we decide how we will we do the first rollout. But I also can tell you that the first indications that we have from our stores in Germany are quite positive. Doesn't mean that all the 10 stores are booming, but 7 out of the 10 are doing very well. 1 or 2, we have to look how we improve, and one is not performing to the level which we thought. But this is exactly, honestly, what we wanted. Because we want to learn what is working and what doesn't work before we then do the rollout. But we definitely will give to that much more details next year when we speak about the first expansion of NEO.

Operator

We will now take our next question from Michael Kuhn of Deutsche Bank.

Michael Kuhn - Deutsche Bank AG, Research Division

Also essentially 3 questions from my side. Firstly, on Other Businesses, here the operating margin was down 2.3 percentage points in the third quarter. Would be interested what's the reason behind that, and whether it has to do with the Adams inclusion. And in that context, one clarification context. I think the figure of EUR 23 million was mentioned. Was that the first-time sales consolidation of Adams in the third quarter?

Robin J. Stalker

Okay. The figure that I announced for Adams is for the total -- for the year. We said from June, so there was a bit in the second quarter also. But it was minimal, obviously. And the margin deterioration in the -- it goes pretty small, but it is, and largely because of the Rockport margin.

Michael Kuhn - Deutsche Bank AG, Research Division

Okay. Then second question on hedging. So where do you stand currently in terms of the -- your total hedge rate? And could you explain a little more what you were referring to when you said that the hedging might turn into a headwind? And then finally, on current trading, I mean, would be interested if you see any, let's say, substantial changes in trends among the regions or whether you would say that the environment is, let's say, fairly stable?

Robin J. Stalker

Okay, Michael, certainly. Firstly, what I said with the margin, with the gross margin, is that it gave us a little bit of a tailwind in the third quarter. But it's only about 30 basis points, so it's not very much. And I think we'll see that flip the other side as we go into 2013. But overall, the hedging will be a slightly more negative figure for us in 2013 because our hedge rate at the moment, 2013 is around about the 132. And we were over 136 to 137, basically for 2012. So we see a deterioration there.

Herbert Hainer

And in terms of your third question, current trading, I mean, the latest news obviously, I get from our own stores. And what I can see is that we are doing very well in China, in the U.S. Russia is doing okay. Also the biggest part of Europe is okay. But as we have said already, Southern Europe has more challenges than the rest.

Operator

We will now take the next question. It comes from Chiara Battistini of JPMorgan.

Chiara Battistini - JP Morgan Chase & Co, Research Division

A couple of questions for me, please. As top line is slowing down in the second half of this year and comes for the first half of next year will be particularly tough, shall we expect the 2013 top line development more weighted towards the second half? And that would be my first question. And then on the other operating income, I see that, that was up 131% in Q3, compared to 44% in Q1, and 32% in Q2. So I was wondering if that's including any one-off? And this significantly boosted the Group EBIT margin in Q3, and what the Group EBIT margin would have been excluding those one-offs?

Robin J. Stalker

Chiara, I'll take the second question just on the operating income. Don't just look at the percentages. I mean, I know the percentage high, but look at the absolute. Again, we're talking about EUR 20 million or EUR 30 million or something here. This was always other income. There's always a collection of various things. And this particular period, we've got insurance claim payments, we've also got a release of various accruals. But you'll see that going up and down quarter-over-quarter. So I don't think it has any significant -- I definitely can't quantify for the percentage for you, but I don't think it's significant.

Herbert Hainer

Carol, we have some noise on the telephone. Can you shortly repeat the first question because we didn't understand it quite clear.

Chiara Battistini - JP Morgan Chase & Co, Research Division

Sure, I was wondering given that in the second half of this year, we are seeing a top line growing slower than in the first half. And in the first half of next year, you will have very tough comps given the events in 2012. I was wondering if the development of the 2013 top line will be more weighted towards the second half of the year, so we should expect a slower growth in the first half and then a pickup in the second half? Or it will be more equally balanced?

Herbert Hainer

So Chiara, now I understood the question. Yes, obviously, the comps in the first half next year will be tougher because of the events. But on the other hand, please have in mind that we have proven over the last, I think, 5, 6 years, that we are quite capable in the so-called in between years to boost our product initiatives, and therefore, drive sales. And as we have indicated already, we do believe we have a game changing innovation, which we'll bring out in spring next year on the running market and a lot of other initiatives. So you definitely will see us growing our business also in the first half next year.

John-Paul O'Meara

So ladies and gentlemen, that completes our call for today. Our next reporting day will be March 7, 2013, when we give out our full year results. I'd like to also remind you, for those who haven't already downloaded our apps, we have our new Investor Relations mini app available. I would love that extra information to help you continue to follow all of the great things going on at the brand. And other than that, I wish you all a Happy Holiday period and look forward to talking to you in the New Year.

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