adidas AG ADR (OTCQX:ADDYY) Q2 2018 Earnings Conference Call August 9, 2018 9:00 AM ET
Sebastian Steffen - VP of IR
Kasper Rorsted - CEO
Harm Ohlmeyer - CFO and Executive Board Member
Antoine Belge - HSBC
Fred Speirs - UBS
John Guy - MainFirst
Piral Dadhania - RBC Capital Markets
Jürgen Kolb - Kepler Cheuvreux
Omar Saad - Evercore
Zuzanna Pusz - Berenberg
Andreas Inderst - Macquarie
Erinn Murphy - Piper Jaffray
Stan Holman - Citi
Simon Irvin - Credit Suisse
John Kernan - Cowen
Good day, and welcome to the adidas Conference Call for the First Half Year 2018 Results. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Sebastian Steffen. Please go ahead.
Thank you very much, Bettina, and good afternoon, ladies and gentlemen. Also, a warm welcome from my side to our second quarter results conference call. Thank you very much for joining us at a little bit different time and from a different location this time. Our presenters today here in London our CEO, Kasper Rorsted; and our CFO, Harm Ohlmeyer.
Before I will hand over to Kasper in a second, I will as always quickly run through a couple of housekeeping items. As always, I would like to ask you to limit your questions to two, and also as always please keep in mind that all figures that we will be talking about will be stated on a currency neutral basis and will be discussed for our continued business activities.
And with that, I would like to hand over to you, Kasper.
Thank you very much, and again also from my side, welcome to our second quarter call of 2018. The agenda is I will take you through the business highlights. Harm will take you through the financial items. I will deliver the outlook, and then Harm and I will be more than happy to take the questions that you may have.
So let's go into the second quarter, and as always, go through the strength and weaknesses. On the strength side, we saw double-digit growth in North America, in Asia-Pacific, in Latin America and in Russia. We saw a strong growth in our sports performance and double-digit increase in training, running and football, football, of course, due to the world championships in Russia.
We saw a very powerful brand activation on a global stage not only the World Cup, but also Run For The Ocean activity where we activated more than 1 million runners to push running activity and of course Run For The Ocean, which is a great campaign on the overall use for Parley. And we saw excellent profitability improvement despite a significant increase in a margin investment.
On the weaknesses side, we saw a flat top line in Western Europe, and as we communicated to you in May, we are facing challenges in Western Europe. Going into the year, we did expect some normalization to take place, and bear in mind, that over the past three years, we have grown at a 15% CAGR and more than $2 billion to our top line in this mature market. At the same time, we have improved our operation margin by no less than 250 basis points.
However, our normalization year-to-date has been somewhat more pronounced as we expected into the year. This is also related to the fact that we have not executed as well as in the past on our product storytelling and consumer activation. As a result, we have acted and made changes in Western European management team in order to ensure that execution is being stepped up. We expect the current business trend from the second quarter to be largely unchanged for the second half as we are sticking to our disciplined approach.
Secondly, we did see less of an operation leveraged matched by investments into our scale of business, but of course, also into our brand. We saw the momentum in Sports normalizing and we saw retail comp train being mixed, and we’ll get into further detail.
Major P&L items in the second quarter. Revenue increased 10% on a currency-neutral basis and 4% in euro terms to 5.3%. The number was similar in the first quarter with the nominal growth being 3%. Gross margin up 220 basis points to 52.3, despite ongoing FX headwinds in our gross margin. We saw the operating margin up 120 basis points to 11.3 due to higher gross margin and despite higher margin investment.
We saw net income from continued operations increased 20% to €480 million, and basic EPS from continued operations up 20% to 206. And let me [indiscernible] for a second. As we said on the top line, we increased our top line with 4% in nominal terms and we increased our net income by 20%, and that means we are having a five times stronger growth on the bottom line compared to the top, despite strong investment in our marketing activities.
When we look upon our strategic growth areas, adidas North America, 17% on a very strong, two previous years. Greater China 27% and e-commerce 26%, so all elements are growing in the market and gaining market share in these areas.
The FIFA World Cup was a showcase in the power log brand. There is no doubt that the World Cup is the big biggest brand event, the single biggest sporting event over a three-week period. And we were from a brand and social media standpoint the most visible media when you measure that. We are at very active when it came to stadium advertising which help us drive the adidas downloads in our adidas apps.
We use the Creativity Is the Answer campaign to push the entire value proposition around our brand. And the global jersey sales outsold the number of jerseys we did – we sold in 2014, despite what we call a somewhat peculiar development of the tournament. Direct financial impact was limited on the bottom line simply because of the way the mix was in jerseys. But overall, we sold more than 8 million jerseys during the World Cup.
Moving to the adidas brand, we saw double-digit growth in North America, Asia-Pacific, Latin America and Russia. We saw growth of 12%. Sport performance growth, 16% due to double-digit growth in training and running and in football. Sporting grows 7%, driven by significant growth in footwear and apparel. And we saw footwear growth accelerating, resulting in double-digit growth increase, up from a single digit in the first quarter.
On the Reebok side, we continue to see robust improvement in the profitability. We improved the profitability by 390 basis points and right now, we offer the 44.9% net margin, the highest net margin that I can recall.
Reebok overall top line declined 3%. Decline came from Western Europe where we’re seeing a similar situation for Reebok as we’re doing with adidas Latin America and the emerging markets. We saw sales in North America increase 6%, despite significant number of store closures in the past 12 to 18 months. So operationally, we are making progress in Reebok towards our targets of returning Reebok to profitability by 2020.
On the income side, we continue to see excellent growth in e-com with 26% growth, driven by double-digit growth in all regions. The adidas app has now been launched in 13 countries and more than 2.5 million downloads was done by the end of second quarter.
We are now in all the western countries of significance. What yet has to come from very large sizes, of course, Latin America and China, we expect China to be ready by the end of the year. So we are seeing the apps download being accelerated, especially during the World Cup with the aggressive and very impressive advertising in stadium.
With this, I would like to stop the overview part and I’ll over to Harm who will take you through the financial highlights.
Thank you, Kasper, and warm welcome out of London this time. Good morning, good afternoon, good evening, whatever you call it from – just real quick on the key regions. At this time, every region is contributing to the growth Kasper already talked about the flatness in Europe. I want to go a little bit deeper on this chart now about Russia and Latin America.
Russia, of course, we’ve got a nice uplift given the World Cup has happened in that market and we did a lot of on-site tails around the stadiums and we definitely had more traffic than we originally have estimated there. But we also see the net sales in line of 180 stores that we have closed in 2017 and another 50 stores that we closed in 2018.
And at this stage, I think we’re getting closer that we have found the bottom from a top-line point of view in Russia. We can build on that one going forward. And, of course, Latin America has also been positively impacted through the two federations that we had on contract, Colombia, Mexico and Argentina. Hence, very good double-digit increase in the second quarter for Latin America.
When I go to the details, starting with North America, strong top and bottom-line improvements with overall 16%. For the adidas brand, revenues were up 17% driven by double-digit growth in training, running and football and especially there on the sport performance side, very good sales growth we saw in one of our key partners with Dick’s Sporting Goods.
Reebok brand revenues grew 6%. That’s something that we always highlight as strategic. KPI for us and we expect to grow in North America with Reebok despite also their significant number of store closures in 2017 and only a small number of closures in 2018. But, again, expected growth was 6% in North America.
Gross margin decreased 60 basis points to 40.8 basis points. There was better pricing mix offset by channel and category mix and still there I mentioned in the first quarter, we are still impacted slightly by some clearance activities given the hangover of our warehouse constraints in 2017 and that gross margin you should see improving in Q3 and Q4 as well going forward.
But, overall, given the cost leverage, operating margin increases 3.8 points to 16.7 now. And so, the leverage of the operating expenses more than compensated for the decrease in the margin.
We go to Asia Pacific, again, strong double-digit growth driven by Greater China. We mentioned the 27% growth in Greater China already. Overall, adidas brand sales increasing by 19% double-digit growth in training, running, football and sport-inspired and the Reebok brand revenue is up 7% double-digit growth in training in that region.
Gross margin up 30 basis points to 57.5. Again, better pricing at channel and category mix compensates for some FX headwind in that region. Operating margin up 1 percentage points to 34.2. Again, due to a higher gross margin and some operating leverage despite the fact that we are investing into that market to build one region in Asia.
When it comes to Western Europe, Kasper mentioned already the flat development in Q2. So that is given our expectations that we also announced after Q1. adidas brand revenues are still up 1%, driven by significant growth in football on the back-of-the-worker activities, but I also want to mention the comps to last year where the adidas brand grew 18% and the Reebok brand sales decreased 10%. Again, reflecting a tougher prior-year comp at 33% Q2 growth in 2017.
And, of course, we talked about the future marketplace initiatives that we now just did in Europe, but we started in Europe where we prepared for quality growth and are more selective in our distribution. And this, of course, to some degree impacting the top line but also shows the gross-margin improvement of 330 basis points, because this is really where we started with the quality growth initiatives and that is paramount to the top-line growth. But no question, we are not happy where we are, just what Kasper mentioned. We are affected on Western Europe and pretty much [indiscernible].
Now, coming to the financial results overview, and I want to chew on this a little longer and have an additional chart on the operating expense on the next slide, but I want to go back again what Kasper said. We delivered another quarter after Q1 according to our guidance. It is under 10% top-line currency neutral and we have a factor of five when it comes to the net income of 20%. So, for the first half, 19% up in net income, which is slightly above our full-year guidance of 13% to 17%.
Again, when you talk about the gross margin, definitely up with 220 basis points. And I have to admit, it’s a bit better than we originally had planned for. We had good jersey and ball sales in the second quarter overall driven by the World Cup. It had some impact. I talked about the future marketplace initiatives that is definitely contributing to the quality of the margins. So we are really pretty happy with the progress that we’ve made on the margin.
But also we will definitely get some questions later on, on the margin development, but I wanted to make it very clear, you’re already hear, they’re different comps in the second half versus the second half 2017 where we had more than 100 basis points higher margin compared to the first half in 2017.
And there will be some unhedged portions of our currencies, especially Latin America, Chinese RMB and there will be some other impacts to the margin in the second half that I want to explain later on. But this is really where we are guiding our margins. But I also I want to remain margins of positive on the margins that there’s opportunity as look at the full year.
I also want to highlight when we come to the cost, the other operating income is up the $70 million compared to the $24 million of the previous period. Other operating expenses up by 9%. And again I wanted to give you some more details on the next page when we talk about the bridge of the operating expenses to give you some more transparency.
Overall, despite the mismanagement of the brand, the operating profit is up by 17% to €592 million with an operating margin of 11.3% for the second quarter, up again 120 basis points, all of this resulting to net income on continuing operations to €418 million and 20% up over prior year.
Now we go to the operating margin expansion, somewhat more decomposed. On the first end the really significant increase of the gross margin is to some degree been used to invest or continue to invest into the brand with 120 basis points. So if you look at the marketing working budget, the major driver of that cost increase in Q2 was our accelerated marketing spend. We leveraged the World Cup by continuing to invest over proportionately and our brands and the sell-through of our products.
As a result, our marketing investment increased by close to 100 million in the second quarter, or 120 basis points as you see in the chart. So you always should see the investment into the brand and the gross margin and quality growth, both in consideration to drive quality growth of our brand and ensure a sustainable top-line development not just in 2018.
On the operating overhead, I put a little box around the operating overhead expenses and other operating income. So in the operating overhead first and foremost we continued our investment efforts into our scalable business model, and hence recorded a somewhat more pronounced increase in operating overhead expenses.
Some examples, there have been some start-up costs for our Global Business Services that is definitely scaling significantly in 2018. We prepared for that in 2017. Now we are in full action in 2018. We keep investing into IT-related expenses to drive our additional transformation, but also building one Asia, where we continue to roll out our ERP systems to drive one standard around the world, which we are going to finish in early 2019 to be on really one standard as a company.
We also further transformed our operating model in Latin America by further reducing our fixed costs primarily related to local production capacities. And we remain proactive to look at our retail freeze from a closure point of view and from an impairment point of view already in Q2. So these are some of the one-offs that you’re seeing the operating overheads.
Points of intra-year fluctuations can occur. We really live on our commitment to generate operating overhead leverage for the full year. We are just not going to focus every quarter exactly on what we said, but we are sticking to our guidance for the full year to generate leverage.
On the other operating income, it’s up to some release of prior-year operational provisions and litigation gains. To be clear, we have not declared any of these provisions when building them in 2017, so this is mainly profits organically generated in the past that are now showing up based on our conservative accounting approach in 2017.
As a summary, as you can see from the chart, the net of operating overhead expenses and other operating income actually only added 20 basis points to our operating margin, and hence what you can see in absolute terms the additional investment reflecting in our operating overhead increased, exceeds the gains that led to the other operating income.
When it comes to the average operating working capital, I’m pretty happy where we developed here. It was at 20.1%. We always said ideally we want to see in 2018, later in 2019 that we get to the below-20% line. We are getting very close to it. It was 20.1% and one or the main reason for that is our disciplined action on the inventory.
So we are acting on the sell through that we are seeing. We are adjusting our accordingly and stay very disciplined in our pull across most of the markets and that is leading to efficiency in the operating working capital.
Given the strength in the operating working capital and discipline inventories, you also see the net cash position developing positively from last year Q2 201 from a minus €735 million to now a positive €89 million, including the share buyback. And that is also what I said, we wanted to generate the cash to then act on what we do as a return for the shareholders and that’s what you see on the next page.
We are executing on what we said in March that we are going up to €3 billion to share buyback towards 2021. The time frame is May 2021 and we also set up to €1 billion already in 2018. And you can see, there’s 2.8 million shares being brought back since March 22 until the end of June in the amount of €544 million, so we are well underway and we are always in the market to continue that program in 2018 and beyond.
That leads me to the retrospective accounting treatment of the Reebok trademark in 2016. You saw it in the press release this morning and you will see a clear announcement in the afternoon in the [indiscernible] as well. It is an accounting restatement. We had the routine ordered from the FREP in 2017 for the year 2016 and even so they confirmed the methodology that was line with our orders. We had some discussion around the input factors for our future plus we got the Reebok brand. Hence, the accounting restatement in 2016. It has no cash impact or any P&L impact in 2017 or 2018.
We are restating 2016 and it will be an impact on the equity in the amount of after-tax of €475 million that changes the equity in the opening balance of 2017 and 2018. You don’t see it as a comparison 2017 as we are changing the opening balance in 2017 already. I want to be very clear, this is 2016-related only.
It’s backward-looking, forward-looking. We started the Muscle-Up initiative in 2017 and 2018 with significant progress and what you’re seeing in the Q2 results with 390 basis points up in the margin to historical strong margin with Reebok. We are making good progress when it comes to Muscle-Up and there’s no impact to our future prospects of the Reebok brand.
With that, I want to hand over to Kasper to expand a little bit the outlook of 2018.
Thank you very much, Harm. I will now go through the outlook and also speak about some of the new exciting product launches we have. For 2018, we have and plan to have the right balancing between margin growth and margin improvement. And that is really the essence of what we’re doing with our company.
Drive market share and drive margin in the short, medium and long term to ensure we expand our position, but also expand our position in a financially-meaningful way. We have and will continue to strive for high-quality growth, which I hope you’ve seen we’ve done in the first six months with 3% nominal growth and top line and 19% income growth. So we have been able to get both.
We are seeing a product pipeline to support the planned top-line expansions. I will take you through some of the new products we’re bringing the market. We have and will continue to invest in brands and products. So the scaling, I want to be very clear on this. The scaling we’re getting in our margin right now is having – is getting a negative impact from our March investment budget.
So we are heavily investing our brand and will continue to do so to make sure that we push in the brand for the long-term. We continue to implement a scaled business model, which also has a onetime cost associated with it and we expect the margin expansion net income growth.
Now let me take you through just a couple of the products to give you a highlight of where we are, starting with the existing product franchises. Our UltraBOOST, in the past three years, we’ve built one of the most converted franchise the industry, the UltraBOOST. Success continues with this franchise, growing close to 50% in the past quarter. So we have a long way from being saturated.
We have reactivated the UltraBOOST collections this season in July, and the first drop collaboration with the streetwear label, A Kind of Guise has sold out instantly. You’re going to see more of the special edition collaborative UltraBOOST releases in the remainder of the year. This leads up to the launch of the next generation of the UltraBOOST in early 2019, and this will be the next leg of growth for the UltraBOOST franchise and drive it towards the €1 billion mark.
When it comes to football, we’re going to build on the excitement we created around the World Cup. Just days around the final in Moscow, we have collectively launched the latest iterations of our four big football franchises; X PREDATOR, NEMEZIZ and Copa. This comes to right in time when the kids are shopping for back to school and cannot wait to get back on the pitch a new pair of football boots.
Those iterations will be worn by some the games’ biggest players. Gabrielle Jesus, Paul Pogba, Messi, Dele Alli for the kickoff of the 2018 and 2019 season. All of them of course available in the stadium, cage and street versions in order to maximize our commercial impact as well as range of synergies.
When it comes to Superstar and Stan Smith, speaking of successful franchises, let me give you an update on the two because I know you care and there seems to be some misconception. Let me be clear; we have proactively managed those two franchises down after the [indiscernible] in this current cycle.
In fact, Stan Smith and Superstar have been managed down for the past 18 months now, which did not get in the way of our continued top line growth. As you know from the numbers we have reported to you, year-to-date and also for 2017. Today Stan and Superstar each only account for low single-digit percentage of our total sales.
Volumes out in the market are very healthy. If anything, there is more demand than what we want to supply right now. As such, Stan and Superstar continue to be leading examples of disciplined life cycle management. You can expect us to handle other maturing franchises similar prudent.
When it comes to launching new products, the POD within sport inspired we are consistently delivering newness in the past few months through Deerupt, Arkyn, Etric, Commander, Supercross and momodos [ph]. But POD is without doubt going to be the most visible sport inspired franchise in the second half of 2018.
What is unique about the POD is its inclusion of two different types of foam and sole, boost of the heel and EVA cushion on the forefoot. Store selling and activation is also much bolder and more focused than was the case in the past. We involve consumers around the growth both physically and digitally. Together with them, we bring POD to life be it through inductive creative workshops in our Keysaid London and creative space in Brooklyn.
Solar. Meanwhile, in sports performance, we have completely relaunched our technical running offering and created a holistic franchise for our running consumer. Solar Boost, which is successfully launched in May, is leading the direction for Solar and is going to be complemented by several modular additions, namely Solar Glide and Solar Drive.
This way we’re covering all relevant price points between €120 and €160. The franchise is gaining weight quickly and will contribute a material triple-digit €1 million amount to our revenue already in one year. Solar features a ton of innovations leading to a superior comfort fit and support in lightweight form.
But I want to highlight one benefit that we offer to the consumer, the transparent franchise setup. It will ensure a consumer-friendly segmentation. Consumers will be able to identify the best fit product within the Solar across the different price points rather than being overwhelmed by an over ambience of different models. At the same time, the holistic franchise setup of Solar enable us to realize range efficiencies.
Scaling and innovation. Our FUTURE 4D CRAFT we are incredibly proud of. Our collaboration with Carbon has enabled us to be the first brand to create 4D printed shoes for consumers and to commercialize it. We will bring this innovation to many more consumers in the second half as we increase volume in retail by tenfold. Volume will scale and in the future will be featured in our pinnacle products across several categories.
And Parley, and we are just as proud of our cooperation in this area. Parley is our way of proving that you can do good and do business. As we communicated to you before, we are on track to deliver 5 million pairs of Parley shoes this year, up 1 million over a year ago. Each pair of Parley shoes prevents approximately 11 plastic bottles from entering the world oceans.
And we haven’t even started talking about apparel. We are also going to have a million pieces featuring Parley this year. Taking sustainability to the product level and scaling it makes a real difference also for our P&L. We are also leveraging the industry’s largest and deepest archive to seize commercial opportunities.
The first ever rerelease of the Continental 80, a classic trainer from [indiscernible] in the late 1980s, is a runaway success. Harm and I are sitting here in London and was walking down to the nearby store and we couldn’t get it. It’s a great thing to see that we continue to launch successful products, and I can only encourage you to look upon the Continental 80.
Yung-1 and Falcon, as well as Reebok X-ray, all serving looks of the 90s, also strong performance in terms of sales growth. Those sales have significant commercial relevance already, and definitely have the potential to soon become as big as some of our well-established franchises. So we have been all but surprised by the emergence of these themes, and we are all but done with playing with them in a commercial meaningful way.
I have already explained how we score at global sporting events, at the example of the World Cup. But of course, there is light after World Cup. Football small clubs return to the stage, and we have some the biggest global symbols where you went to us with Ballon with Madrid and United. We’ll continue to leverage those assets globally and seize commercial opportunities as they arise.
We’ve got too many great sport, both in teams and rituals to mention this place, but I want to out Angela Cabo. Her victory in the women’s was huge and it raised even more awareness for rule-breaking collaboration with streetwear brand talents on the biggest stage in tennis.
On World Ocean Day on June 8, we entered our second Run for the Ocean, month-long campaign to raise worldwide awareness for the oceans and fight re-plastic pollution. Driven by our Adidas runner’s community we saw close to 1 million runners getting involved, supported by more than 200 events in 60 countries across the world.
In total, participants, including more than 12,000 Adidas employees, collected over 12 million km through the run testing. This increased not only the awareness for one of the most pressing challenges of our time, but at the same time acts as an incredible platform for us as a brand and allowed us to connect with consumers around the world. Another example of doing good and doing business.
Last, but certainly not least, I want to talk about our partnership with Kanye West. It’s been three years now since we started the most significant collaboration ever created between a non-athlete and athlete brand. Together we have created global brand power in an unprecedented way with many of the products having developed the most sought-after and fast-selling footwear models in the history of our industry.
We are excited to build on this partnership and continue to explore new territories. Kanye has repeatedly stated his aspiration to democratize the Asia brand. We share his aspiration and we are working hard to bring this vision to life. Watch out for more.
And this brings me to the outlook for our 2018, and this remains reconfirmed. Our net sales will continue to increase by around 10%, gross margin up 30 basis points, operating profit up between 9% and 13%. The operating margin should land between 10.3 and 10.5, and the net income of continued operations to grow between 13% and 17%.
Also want to repeat what we have said on several meetings with many of you through the second quarter. In our outlook we believe there are more challenges on the top line than on the bottom line, but we expect to deliver upon the promise we set here, and ensure that we build the foundation also to deliver upon our promise for 2020.
So in summary, the first half of 2018 is running according to plan. Secondly, we are seeing progress across strategic growth areas. We are acting upon the situation in Europe, but we want to make certain that we build a sustainable solution and not have a onetime blip, and that’s why we’re taking the time it takes to make certain that we will get Europe back into the state where it needs to get to. We are accelerating our margin activities core brand and product. We are seeing strong profitability improvement despite investment and brand and business, and we’ve focused on executing the second half of [Indiscernible].
With this, I would like to thank you for your attention so far, and Harm and I will of course take your questions over the next 50 minutes.
Thank you. [Operator Instructions] Our first question today comes from Antoine Belge of HSBC. Please go ahead.
Hi. Good afternoon. Antoine Belge of HSBC. Two questions, first of all, you just mentioned that the top line remained a bit challenging compared to last time we spoke, i.e. in May, where you said it’s a bit less challenging, that now that you’ve got the Q2 quarter behind you and maybe some kind of visibility on the back-to-school season.
And if so, that the gross margin outlook looks really conservative. I understand the unhedged currencies, but you’re doing 30 basis points what you’ve done already 118 in the first half. It seems quite conservative.
And the second question is about Western Europe. I think you mentioned some management changes. I wanted to make sure I understood that correctly. And so what’s the plan for the second half of 2019? Wouldn’t you agree that maybe you are under invested in Western Europe? And maybe because you were focusing not really, but concentrating on the U.S. and on China? It seems that Nike has been growing faster. So what’s the plan for Western Europe? Thank you.
So the outlook for Western Europe, as I said, remains flat, just as we’ve seen. I completely disagree that we are under investing in Western Europe. If you look upon our brand spend in Western Europe compared to others, I do not see that being the case. We believe that the challenges we have lies in three areas; the product launches, distribution, and property focus.
We have changed our maintenance structure in Western Europe to ensure that we are building a plan to sufficiently address the challenges that we have. But I can say very clearly that we are not under investing. And if you look upon our actual marketing spend, I believe that compared to the competitor that that you just mentioned, we are close to mid-double digit and they are high-single digits. So I just want to be clear that we are speaking on the same facts.
When it comes to guidance, which I assume is what you’re speaking about, we believe that the current guidance is the appropriate one. We’re also with a backup situation, we think the guidance we have is appropriate, and we will have some challenges in the second quarter, that’s why we said that we see more challenges on the top line then the bottom line. The second quarter was positively impacted globally, of course, by the World Cup.
Okay. Thank you. Maybe just to follow up regarding the management changes in Europe. Are they more the original level? Or in certain countries more specifically?
This is at the top of the house. So as the head of the guy that reigned Western Europe and of course we put a plan in place to look upon all on levels to sure that we will execute in our Western Europe organizations so much across the board.
Just real quick on China and the gross margin question, I don’t want to forget about this one, yes, we have tougher comps on the gross margin. This alone will not explain it, but we have some unhedged currencies that are moving, especially in Latin America but also the Chinese RMB given the growth that we have in China. And there are some other small effects that we have that I don’t want to go into the details.
But we remain bullish on this one. We are definitely had a fantastic start, little bit better than expected in the first half. But we want to stick to the guidance, because we also want to be optimistic on supporting sales, and want to balance the gross margin improvements obviously top line delivery in 2018 and make sure that the sell-through remains healthy.
Our next question comes from Fred Speirs of UBS. Please go ahead.
Hey. Good afternoon. Two questions from me please. The first is on the footwear momentum you’re seeing at the adidas brand. It looks like performance footwear has stepped up by quite a few points quarter-on-quarter and just be very interested to get a little more detail around why that’s accelerating in terms of by which sports, which franchises, which price points.
And the second would be a broader question on the gross margin. Obviously, you’ve been seeing some very strong improvements on price mix. You talked earlier about working harder on the Pro model. If we come back to the angle of boosting full-price sell through, if you like, could you just sort of talk to us about where you are on this journey? Are you seeing some of these full-price benefits come through earlier than you’d expected? Just more color on how that’s going would be great. Thank you.
I will take the first question, Harm will take the second. We’re seeing the growth in footwear coming from the sports side from training and running. Of course, one of the key franchise we have is UltraBOOST, which has probably grown almost 50% in the last quarter.
So you’re seeing a significant impact on our very-strong UltraBOOST franchise. But we’re also starting to see the first early signs of Sola coming in and start to make its contribution. So it’s really UltraBOOST and Sola coming in. It’s in the area of training and running. And we’ll continue to reiterate our UltraBOOST model, as I’ve said, and we’ll launch the next-generation UltraBOOST coming into 2019. On the second question, Harm will take that.
Yeah, Fred. Hi, Fred. I just don’t want to comment again on the full-price sell through. I mean, I said in over many quarters that it’s difficult to get a solid number throughout our wholesale account. So we have it for you to see, but I really don’t want to comment on the full-price sell through percentage anymore. But rest assured, whatever the full-price sell through is, key for us is that on the one hand we remain disciplined on our Pro model that we don’t sell in more than the sell through is. This delivers better pricing if we contribute to the full-price sell through.
And, secondly, what I mentioned earlier we’re contributing to our gross margin improvement as well to our future marketplace initiatives where we are very clear with whom we want to grow and with whom we want to grow in a healthy way and that we actually stepped away with one of the other calendar distribution center that we didn’t consider to be healthy.
Great. Thank you.
John Guy of MainFirst can take the next question.
Yes. Good afternoon, Kasper and Harm. A couple of questions from me please. The first, nearly following on gross margin. I appreciate the unhedged positions you have in LatAm regions, ruble, et cetera and the tougher comp. But if we’re starting to see a more positive contribution coming through from Reebok, we’re seeing double-digit performance in direct-to-consumer, the fact that you locked in your procurement 12 months in advance and you talked about positive effects given where the euro has moved on the way that you basically deal with that.
So, it seems that up to 30 basis points guidance is still reasonably conservative. And I appreciate that labor and raw materials remained headwinds, but could you maybe just sort of flesh out why you’re sticking to 30 basis points, because it does seem overly conservative?
My second question is around Reebok and clearly we’ve seen very strong gross margin performance here. I think a lot of investors in the past have basically viewed Reebok as a free option. Kasper, you’ve now highlighted more of a time frame around Reebok’s turnaround to 2020. If we effectively get Reebok closer to group gross margin averages, would that lead up to at least a 60 basis points, if not closer to 100 basis points EBIT margin uplift at the group level? And that’s my second question.
My final question around cash flow. Very, very strong performance in your working capital going to a net cash position even after looking at the balance of having continued with the share buyback, et cetera. Is the John Guy €3 billion that we have running through until 2021 still reasonably conservative given the kind of cash generation that we’re seeing? And would that leave further room for future buybacks after the €3 billion charge that we have over the course of the next few years? Thanks very much.
Let me just start with the gross margin and then take it in a bigger context. If you look at our Annual Report, we guided 15 parameters. There’s no doubt that sometimes there’s a slight upside on one and sometimes there’s a slight downside on one. What we’re trying to prevent is sitting and giving re-guidance in 15 parameters every quarter because it’s actually a misleading indicator. I think the most important part and we’ve hopefully been very clear on it, we’re trying to drive market share expansion and margin expansion.
API net income, which is between 13% and 17%, we’re right now at 19%. And that’s why we try to guide you and say we look upon there’s probably more risk to the top line than there is the bottom line, that means that there’s somewhere else in the model that we will have some relief, but I think as Harm said very wisely is, when we see relief we also take the opportunity and make investments. That is good for the brand in the long-term.
So I’m just saying we are of course looking upon this strategically and where we are going to take the company, but we are also looking upon it tactically and if there’s opportunities that are good for the company, we will take this opportunities and we’ll address them.
The best part was explained today in the operating overhead where you saw an increase in this, Harm mentioned, but I just want to regard you back to one single number. Look upon the headcount development. There is no headcount increase in our development, so you can rest assured that we building a company for the future. That’s why we don’t want to go in and have 15 iterations of guidance revisions quarter-by-quarter. So that was number one.
On the Reebok side, of course, there is marketing upside when we get there. What I do want to say is I think it’s increases that shouldn’t sell the bear before you shot the bear. We have got to make sure that we continue to do the progress Reebok on both the profitability side and the growth side, and there’s no doubt that today it’s highly dilutive to the margin.
In 2020 we’re also dilutive to the margin but to a lesser extent, but over time, of course, Reebok even now is helping on some of the margin expansion. I believe that the right time will be when we get closer to 2020 we can give an outlook on what are the given opportunities in value creation for Reebok.
Yeah, just want to add to that, John, on the one hand the gross margin I can now go to the details of the model that we have been telling of course, when we talk about oil prices going up or the share of the North American growth that we have relative to other markets, but it does say we remain optimistic on this one, and if you exceed the guidance that we have, we definitely will invest back in the company in the right way. So just rest assured we are optimistic with our guidance when it comes to gross margin, this is where we will leave it for now.
When it comes to the working capital, you’re absolutely right, we put more discipline in there. I’m very happy where we are, this inventory discipline that we are staying disciplined with our full model, and quite honestly the share buyback probably has helped also to install the discipline in the company to focus on cash, and that’s something that I’ve said from the very beginning that profits are an opinion, but cash effects, and this is what we are driving throughout the company.
And it’s definitely too early to say what’s coming up in the share buyback plan because this is the biggest ever we have done and executed diligently the $3 billion until 2021, and then there’s life after 2021.
Great. Thank you very much.
We will now take a question from Piral Dadhania of RBC Capital Markets. Please go ahead.
Thanks. If I could just start with investments that you’ve referred to in terms of scalability of the business model and reinvesting gross margin gains, are you able to quantify in euro million terms how much those invests are in the second quarter?
And then looking forward, how long you expect those investments to last and when they might sort of complete? And then secondly, just a quick question on receivables, which I note is up 15% relative to sales growth up around 10%. Is there any sales booked in the second quarter for wholesale deliveries for back-to-school in the third quarter? Thank you.
So on the first question, Piral, of course we have some details on what we invested is a scale of a business model whether it’s around GBS rolling or the FP systems in Asia. I’m not going to disclose the details of this every quarter, but as a guidance, I mean, look at the additional income on the other operating income and assume the increase that we had there is probably in the ballpark of what we invested in the second quarter as well.
It doesn’t stop in the second quarter, no, we keep investing, but that is a significant investment at the end of the second quarter, but we continue to do that wherever it’s required, and that’s why I look at it as one bucket, but you doesn’t prevent us from keep investing. But I stick to the guidance that there will be leverage for the full year, but I’m not that worried about quarter-by-quarter.
On the second question about the receivables, yes, the receivables are higher than the conceivable gross for the quarter, that of course indicates as the aging is very healthy it was a good June, but there was no extra effort compared to last year what we had on shipments.
There were probably some small initiatives, but I won’t qualify these because they are not meaningful as we shift a little bit more in the U.S. getting ready for the back-to-school season, because back-to-school is still a big season for us and we want to make sure as not all our warehouse constraints have been overcome yet.
We have been, to some degree, opportunistic to move in June. But, again, there’s nothing to be significant or meaningful to be called out. But rest assured, we are prepared operations to have a good back-to-school in North America.
We now move to a question from Jürgen Kolb of Kepler Cheuvreux.
Yes. Thank you. Two questions in the area of products mainly. First, you mentioned that Gigi’s and that you’re thinking about rolling them out maybe more volume-wise. I was wondering if you could just give us maybe an early teaser here as to when we could expect that to happen. Is that going to be U.S. first in a certain category, or whatever? Maybe an additional comment here.
And a similar question with respect to Parley, you mentioned how big the size and the contribution from Stan Smith and Superstar is. Maybe any indication how big Parley has grown since you initiated it and it now has become obviously a big franchise for you. Thank you.
So I’m very happy you asked the question around Kanye West, because we think it’s very exciting. I can only say no comment and wait to see, but we think we have a good plan. Sorry for not giving you any more insight to that. On the Parley side, you can see the scale that we’re getting now. It was – not long ago, it was 100,000. Last year, it was 1 million.
Last year, it was 1 million, this year it would be 5 million. So we can increase this very quickly, surpass some of the franchises of the shoe franchise. You know it will. Right now, some of the constraint is going to be in the supply chain. It’s not only collecting enough plastic, but also making the plastic from a raw material.
The next thing that’s happening also it is happening we’ll be shipping 2 million pieces of apparel. Apparel started out in swimwear. It’s going to come into jackets. If you follow football, Manchester United and Real Madrid launched their jerseys also in Parley.
So Parley is becoming a meaningful platform for us and it’s one that has a very unique – I would say, cycle into the marketplace. But we will continue to have a very, very strong focus on Parley. And so far, I believe that we have had constraints, or not. I believe we have constraints and really driving up the scale, but 5 million pairs of shoes is a significant franchise at this stage.
Thank you very much.
Our next question today comes from Omar Saad of Evercore. Please go ahead.
Thanks for taking my question. Very nice quarter. Actually, I wanted to ask a little bit of a follow up, the conversation on Stan Smith and the Superstar. As you manage these franchises down, did a very nice job. But maybe you could talk about what you learned from that process, trying to transition the consumer [indiscernible] original-style conscious consumer to a new franchise, new platforms.
You mentioned the Parley, NMDs. Maybe you could kind of go back and give us your thoughts on what you learn from the entire kind of process as you guys stepped in with it, it’d already become a very big franchise, Stan Smith and Superstar. Thanks.
Yeah, what we are doing is we’re building franchise models and look upon the lifecycle of model and what we expect should be the volumes and ensuring that we become more, I would say, cautious in selling in. We don’t want to sit on inventories. It’s very difficult to say that we move a consumer from franchise A to franchise B, because some of the, I would say, Stan Smith and Superstar consumers are probably those that are moving right now to the continental. So that is “A like for like”.
Then, you have some of those moving from the stand into an NMD, which is like for unlike and then some of them must be going somewhere else. I think the most important part is that we realize and manage those franchise with the very launch of you know that we have a higher upside over time and very big downside. So the more we get up, the more we get it down and manage it in that context.
Maybe one last point on it, the franchise in itself is a different status at different places in the world. So we might have a declining franchise for a Superstar in America, as an example, and a growing franchise for Superstar in Asia. So we got to look upon [indiscernible] also. But it’s really the financial model we’re looking upon and making certain that we don’t get ourselves into dangerous territory. that if Stan Smith and a Superstar will start growing again in the next two to three or four years. And then, we’re going to have another hike. So, we want to be certain we maintain the integrity of the brand.
Thank you. These insights are very helpful. Thank you.
We will now take a question from Zuzanna Pusz of Berenberg. Please go ahead.
Good afternoon. Thank you for taking my questions. I have two questions. One is on the like-for-like development, which in Q2 was exactly in line with Q1. And I could be wrong, but on my estimates, if we basically exclude Russia, which improved significantly versus Q1 due to the World Cup, it looks like-the-likes underline actually decelerated from plus-8 in Q1 to plus-4 in Q2.
So would you be able to comment on that if this is more or less the trend you’ve seen? And also whether you have seen any underlying improvement with the end of the quarter just to get an idea where we will be heading in Q3 and Q4?
And secondly, also on other operating income, so it looks like in Q2 you saw again some small benefits from the one-offs designed was the provision. I was wondering is there anything else we should also expect in the coming quarters. Any releases of the past provisions? Anything you can anticipate at this stage just to have an idea of what we can expect? Thank you so much.
Yes, Zuzanna, first question on the comps. You definitely have a point when you take the CIS out of it, and we have not been happy with the comp development, especially in Europe and in emerging markets. And we mentioned it in the first slide from Kasper where we talked about the strength and weaknesses.
We said the comps in concept stores is a mixed bag, so that is a good observation on your side, but that’s again why we’re acting also in Europe to develop good to better execution, especially also on the retail side, not just too with our key comps as well.
On the other operating income, again, I have by no means given any guidance now by quarter given what we generated in Q2. But just by normal course of timing, you primarily have effects from the prior year period, namely 2017 in Q1 and Q2, and is definitely less so in Q3 and Q4 because these are mainly accruals of restructuring items that you built in the prior year. And then you get to the actual of that in Q1 and Q2, no real rally in Q3 and Q4, so it’s definitely easing compared to the first half.
Perfect. Thank you very much.
We now move to a question from Andreas Inderst from Macquarie. Please go ahead.
Yeah, hello, everyone. I have two questions. The first one, Kasper, you mentioned some brand activation issues was a bit optimal. What do you exactly mean here? And what is to change from here? Maybe you can elaborate on your comment.
Then a second question, China was extremely strong, much stronger than we and consensus anticipated. Maybe you can provide us with an update about the current market situation there. If I’m correct, you are now number one in greater China. What do you see in the second half? How is the inventory position? How is the number of franchisees in terms of stores? Maybe you can give us a quick strategic update here. Thank you.
So let me start with Europe. I think it’s important that we are self-critical about what we are doing and try to understand the mistakes we are making. But the starting point is that we are running a company at a 10% growth rate, which is very high.
And I think when you look back, sometimes successful companies become complacent, and I think part of it was complacency in Europe. I don’t think that we launched the products in the right channels with the right, I would say, flow through. But we believe that some of some of the selling was less than optimal, and sometimes we got the timing wrong.
So you can argue these are fundamental problems, which is why we also believe we also can fix them. But it came from a point where we needed to get overall a combination, a better storytelling with the product, and recognize that sometimes the products are not always unique. They can be very good, but you got to have very good stores around it. As you can see that Parley has been a unique example of fantastic innovation, but it has taking a while to get the stores done right.
So it’s really, I think it’s I would call it very fundamental elements that we didn’t get right. Getting the right products into the right channel at the right time, getting the right follow-through, getting the right storytelling and just being more diligent, being in the details and correcting, correcting, correcting when we make mistakes. And I don’t think we did that, and that’s only I, we don’t think we did that. That’s why we make the management change.
When it comes to China, first China will continue to be a tremendous market, simply the size of the market expansion opportunity. The growth we enjoyed the first half is been very strong. We continue to see store expansion, but at a lesser extent right now than we’ve seen before, simply because the physical store is also not reaching its limit in China because you still have a lot of opportunity in three, four and six cities. Now we are starting see stronger growth on the digital and the e-commerce side.
Most of our franchises are selling well but some of them that we spoke about here, in Western Europe and the U.S., we’ve seen similar challenges in China. We believe we have an acceptable inventory position in China, we expect continued strong growth in China.
We have not seen any really change in the market momentum. The biggest concerns one can have is actually the one that Harm spoke to you about, the change in the Chinese currency and whether that can have an impact in the expense of the product. But we expect, for the foreseeable future, very strong growth in China.
The only point I would like to comment on of course, the bigger we become in China, the harder it’s going to be to keep the same relative growth rates, because we almost within two years we are almost doubling, in three years we are doubling the size of China, so running at the same relative growth rate mean doubling the absolute.
And I think that’s what you have to take into account, that the growth will still be very effective but a bit like the overall Chinese economy, the 7% growth there today probably reflects the 13% they enjoyed 10 years ago and that eventually will come to us and other partners in the Chinese market. But in essence we continue to remain very positive about the Chinese market.
Maybe one last point. We are in very close dialog with our two largest partners, I was able to see them on a monthly basis. It’s probably globally those that we have from worldwide standpoint the closest relationship to global reach is in China, I would say, every other week, every other month. Eric has been there, Harm has been there I would say three times in the third quarter, I’ll be going there again in this quarter and next quarter. So we have an extremely close contact to ensure that of course we are on trend and when we are not on trend that we do course correction as soon as we see that some the franchises are not doing as they should.
Excellent. Thank you.
We will now take a question from Erinn Murphy of Piper Jaffray.
Great. Thanks. Good afternoon. I guess my first question is on digital, it was up 26% in the quarter. Could you just unpack how that looked by region? And then, it’s been pretty stable year-to-date. Is this the run rate we should expect into the second half just in the absence of the new USDC?
We are not disclosing the actual number we rank double digit by each region. Over time we are investing heavily, as you know it, in the U.S. to build an infrastructure that is appropriate to deliver upon the consumer expectation. But, of course, with launches that we are coming, depending on how we drive those launches, are they going to wholesale, or retail, or online, it will have a significant impact on our growth rates.
And we saw just as a reference in a very recent month in America, we launched a product and the growth on our online channel was 100% that month. So it’s very much important to us, through which channels do we put which products? But we have seen double digit growth in each of the major regions that’s the only disclosure we’ve made.
Okay. That’s helpful. And then on the Apparel business, it was up mid-teens in the quarter. Can you just break out how that growth looked by pricing versus unit, and then any update on how your women’s apparel business is trending?
Well, we don’t want to disclose that, Erinn, by pricing or what the units are by pricing. Just on the woman’s question, it’s pretty much going in mid-teens as we announce apparel, is pretty much in the same trajectory.
Okay. Thank you, guys.
Thank you, Erinn.
We will now take a question from Stan Holman of Citi. Please go ahead.
Good afternoon, guys. Thanks for taking my questions. First of all, just going back to your comments on Western Europe, you commented that the second half would look similar to 2Q. Does that include the gross margin and the strength that we saw in the second quarter in Western Europe? If not, was there any particular one offs in Western Europe and 2Q that we should be aware of on gross margin?
And then the second one, on the provisions, despite the release that you’ve done in the quarter, I notice there are still over a billion of provisions on your balance sheet and they’re grown year-over-year. Can you just give us an slight idea what this may consist of, and when you might be looking to utilize them? Thank you.
So on Europe we are only guiding on top line, so we are not speaking about gross margin guide on a retail level. But I can say the only one off that was in Europe, and I’m not speaking gross margin right now, I’m just speaking one off, was of course, the World Cup.
On the provisions, I will hand over to Harm on this, but of course, we are not driving our revenue, no our income growth through provisions, but we are of course in provisions are legally required to be released, we released the provisions. But as you can see, we try to make sure that we invest appropriately in the plan, and that’s what we are doing. I will hand over to Harm for more detail on the personal side.
Yeah, I don’t want to go through the details on this, but they are always in the operational business some provisions that we provide for on the balance sheet, but it’s the biggest change probably we have seen interpretation of Af15 it has some intake on the provision line as well. But that’s all the detail I will disclose here.
Okay. Dan, thank you very much. Bettina, we have time for two more questions, please.
Thank you. Our next questions today comes from Simon Irvin of Credit Suisse.
Afternoon, everyone. Two questions. Just on the U.S., can you talk a little bit about the commercial channel launch and how material that is, what impact you think that will have on gross margins over time? And secondly, can you just give us your thoughts around tariffs? And obviously there are no particularly impacts at the moment, but how much flexibility do you have in your model at the moment if the tariff situation worsens?
So let me start with the latter. We had a similar supply chain pretty much across all the competitors in the industry. And as you can follow as well as I can, the current OJ trade war trade, but the trade differences between America is predominately between America and China at this stage.
While we have a substantial manufacturing set up in China, it predominantly serves the Chinese market. It serves to a minor extent the U.S. market whereas the majority of the U.S. market we serve is through Vietnam and Indonesia. So I would say a trade war that would be relating to the sporting goods industry on China would probably might have some irritation in the short term in the medium-term it will have very little, because of the footprint that we have. So that’s more the way we look upon it.
We are actually just more concerned about whether it will have an impact in the overall U.S. economy, and the U.S. consumer will have less money to spend. I think that’s the bigger microest call consuming those countries. I think in our area, this is not one of, and we mean this disrespectfully, this is not one area that we are overly concerned about. Because first of all, it’s outside of our agreement.
Secondly, as we have constructed a supply team where the vast majority of our supplies in the U.S. is coming from, when it comes to the distribution structure, in the U.S., of course, we are expanding that but we are trying to do it cautiously, because we do not want to end up in bad malls, or different price points.
We have initiated a very strong relationship with Dick Sporting which you can see if you go in the store. You’re seeing delay timewise, not delay but from time limitation, you’re seeing clothes coming up, getting different price points than DSG. We don’t comment on gross margin, but I think what you should think about in the following way, we came to a point where we are building an infrastructure where the infrastructure should not grow parallel to the top line, because you work at this scale and with the new warehousing investments that we are making, with assistance we are putting in place, we come to a point where you supply the various large partners.
There is very little personnel expense associated with it, of course, there’s the pricing element associated with that, but America is still dilutive from a contribution marketing standpoint, and that is something that we have to address, and that will be addressed also proactively or positively also with the distribution of a lower channel. It’s not going to work against us in the medium-term.
Fine. And then can I just ask one quick detail question? They sale of the Reebok campus, has that actually gone through? And is that in Q2 and in the balance sheet? Or is that not completed yet?
It has been completed, yes.
So the funds are on the balance sheet for this quarter?
Our last question today comes from John Kernan of Cowen. Please go ahead.
Hi. Thanks for taking my question, and congrats on another strong quarter. Can you talk to the North American margin for – I’m sorry. Can you hear me?
Yes. We can hear you.
Okay. Can you just talk to the strength in the North American margin performance? I know there’s been some capacity constraint there that’s affected the margins the past quarters. But where do you feel like you are in terms of capacity in North America?
And then how should we think about inventory levels as we go into the back half of the year? The top line growth has been well above inventory the past couple of quarters. If this continues, there’s obviously going to be pretty significant cash benefits. How should we think about globally inventory finishing year-end? Thank you.
I will take the last question. I’m not projecting any inventory for year-end, but just going back to the North American margin. You’re absolutely right. I mean the gross margin impacted some of our warehouse constraints, but we are not significantly impacted by the capacity that we have. I mean given the growth that we are seeing and that are planning for 2018, we’ll be able to ship the products. But what I’ve said on previous calls, the service level agreement that we have towards our key accounts and with the end consumer is still the one piece that worries me.
So we can ship it, but it takes you five to seven days to get to an end consumer on e-commerce on the West Coast from our warehouse on the East Coast. Or if you’re not fulfilling with your key account that on the one hand doesn’t make them happier, and on the other hand it cost us money as well. And the overall operating margin expenses that we have is just the sheer level of growth that we are seeing, is outgrowing our growth and the infrastructure for [indiscernible] we just can’t build it fast enough.
As always, the progress that we have made on the operating margin’s almost too fast, given the overall investments that we’re doing. So – but again, for 2020, we’ll look forward, the path forward. We’re definitely on track to deliver our target towards 2020 and we start in 2020 seeing North America contributing to the company then.
All right. Thank you. Best of luck in the back half of the year.
Good. Let me just summarize before we close the call. We’ve had a first strong half of 2018. We grow 10% currency neutral. We grew the bottom line 19%. We made substantial improvement in our operating margin and we have done a substantial expansion on our investment into a scalable business model and to create better shared services but also most important into investing into the brand.
We are completely committed to our 2020 targets. And I want to make certain we reiterate that every time. We’re trying to make certain that we build it year by year and also take as much work in front of us that we can to make sure that we build it away for the future. We want to be very transparent with you as our shareholders, and that’s why we’re staying the way we are around Europe.
We’re trying to disclose the problems that we have. A large company will always have problems. I think the most important part is that we hit our targets while addressing the problems that we have.
And you can see that despite the problem that we have in Europe where our initial expectation was a 5% growth in a market that is highly profitable that despite that, we are hitting or doing whatever we can to hit our targets. But hitting our target in a sustainable way, recognizing that in 2019 will come over. And you can see the cost consciousness upon which we are operating the company. You’re seeing zero increase in people, and that speaks to the scalability of the business model.
So I want to thank you for the questions today. Thank you for being with us so far in the journey. We believe there’s a lot to come. We also believe we will continuously charges, but I can assure you that the management team, the entire company, Harm and I are very confident that we’re going to make this happen.
And we are very determined to make this happen. So – and I hope you could see that in the second quarter, was the second quarter which in all ways, the way it was reported was solid one. There were no onetimes or no items that was done to try to make certain, it did happen because we know the third quarter’s coming up now and we’re sitting in it.
So we’re very focused on making 2018 good but even more focused on hitting the targets for 2020 to ensure that we’re building full confidence with the U.S. as investors.
Okay. Thank you very much, Kasper. Thank you very much, Harm. Ladies and gentlemen, this completes our conference call for today. Our next reporting day for our Q3 results will be November 7. We all look forward to speak and see many of you over the next couple of weeks and months. If you have any questions in the meantime, don’t hesitate to reach out to Adrian, myself or any other member of the IR team.
With that, I would like to thank you for participating, and also thanks, at least to most of you, for keeping an eye on the two-question act that I had at the beginning. For some, there’s still some improvement potential. With that, have a great day, have a great summer and bye-bye.
That will conclude today’s conference call. Thank you for your participation. You may now disconnect.