adidas AG

Sebastian Steffen - VP of IR Kasper Rorsted - CEO Robin Stalker - CFO Harm Ohlmeyer - Executive Board Member

Fred Speirs - UBS Cedric Lecasble - Raymond James John Guy - MainFirst Jürgen Kolb - Kepler Cheuvreux Louise Singlehurst - Morgan Stanley Adrian Rott - Deutsche Bank. Antoine Belge - HSBC Eric Johnson - Piper Jaffray.

Piral Dadhania - Royal Bank of Canada John Kernan - Cowen & Co Jonathan Komp - Robert W. Baird

Thanks very much, and good afternoon, ladies and gentlemen, and welcome to our first quarter 2017 results conference call. Our presenters today are Kasper Rorsted, adidas CEO; and our CFO, Robin Stalker.

In addition joining us here in the room is our Executive Board Member, Harm Ohlmeyer. Before I will hand over to Kasper and Robin in a second, please allow me just one housekeeping item upfront.

We have quite a few participants in the call today, so that's why I would ask you to limit your questions to two in order to give as many people as possible the chance to ask questions. Thanks very much in advance for that.

And without any further ado, now over to you, Kasper.

Thank you very much, and also welcome from me. adidas recorded a strong start into the year.

We grew our top line in revenue neutral terms by 16%. The net income grew by 30% and our eCommerce business grew by 53%, as some of the highlights you'll hear through today's presentation.

But let me take you through the strength and weaknesses of the first quarter. We continue to see an accelerating momentum in the two regions, that for us are the most important regions globally, China and North America, where we saw a growth of respectively of 30% and 31%.

In North America, if you exclude the Reebok and just look upon the pure adidas growth, we recorded a growth of 36%. So we are continuing the very strong momentum that we have seen in North America in the last two years.

We saw excellent top line growth in running and originals by respectively 27% and 28%, so also very strong growth in those areas. eCom continued and I'll get back to that in a second, but of course it is vital that we maintain a very high growth rate to get to the full plan by 2020.

And we did see improvements in our profitability despite severe FX headwinds. On the challenges, our performance in Russia was not satisfactory with the growth of minus 10% against the target of plus 10%, and what we are seeing in Russia is a severe impact of the sanctions but we are also seeing that particularly in apparel lower price points are being shopped.

We did go in and closed 80 shops in the first quarter in Russia. But I do want to just remind everybody in the call that Russia today for adidas is a very different market than Russia five years ago.

Russia today is 3% of our total business, and despite the challenges we have in Russia, it will have no impact on the overall outlook for us as a company. But we did want to highlight it that it is only 3% of the business and of course we are taking it serious.

That will also mean that we will not reach the 10% that we initially had planned for the year, as I said, will have no impact for the company's results for the year. We did see slower comp sales growth in Western Europe and Russia, which I just spoke about.

We saw a decline in football and basketball, which is particularly related to the license business. In basketball, it's related to the exit of the NBA contract, which will be finalized by the second quarter, and in football, it's partially - but only partially due to the exit of Chelsea contract but overall apparel business in the license side has been negative.

We did see also a limited operating overhead leverage, which I'll get to in a second. So if you look upon the major developments, our revenue increased, currency-neutral 16%, nominal 19%, which got us to a €5.7 billion top line.

Our gross margin went down 20 basis points to 49.2%, very much aligned with the expectations that we have which are related to currency impacts. It will have no impact on our annual guidance, and Robin will take you through the details on this.

Our operating margin improved by 90 basis points to 11.1%, and what I do want to highlight here is there is a positive influence of the same 90 basis points because of pure sequencing of marketing spend. So I want to stress that this is not a saving.

It is simply a sequencing of marketing spend that you will see in the quarters to come, and so the improvement of the 90 basis points - and this coincidently is the same as the sequencing of the marketing spend. So there is no intention of having lower marketing spend that we've had previously.

It will be in the same ballpark, as I repeat, purely sequencing. This gets us through a net income growth of 30% to a total number of €455 million, and EPS growth of 29% to €2.26.

When we go through and look upon the top line momentum across the regions, I did speak to Russia and our position in Russia. We continued to see a solid market in Western Europe growing at double-digit, and North America which is extremely strong 31% growth despite a slight negative Reebok, which brings the adidas growth to 36%.

In Latin America, a 9% growth despite the reflection of slightly negative growth in two of our countries in Latin America, Brazil and Argentina, which are impacted by the overall politically and economic situation in those region. So despite that, we still are growing at 9% in the region.

Japan at 21%, which again is a change in the business model. The guidance of 10% for the year still stays, so it's simply we have changed the business model which we have mentioned on a number of calls lately.

And then we see a growth in the Greater China of 30%. So you can see overall very strong growth and particularly in the two largest market in the world, North America and China, which we are very happy about.

North America, coming back to the point that we have a target of €5 billion business for the adidas brand by 2020, so it's important that we maintain the growth rate that we have. This certainly still stands.

We are very happy with the progress and we are very unhappy with the state of where we are but we are making progress in trying to change the latter. When you look upon the overall adidas brand growing 18% and so we continue the double-digit improvements we saw, as I said, very strong growth in North America and China, and we did also see very strong growth in the women's business.

The women's grew by 28% and now account for core of our overall business versus 24% last year, so 1 percentage points improvement versus to the first quarter of 2016. Bringing it down to sports performance.

We saw a growth in sports performance of 4% and this is divided into two. We saw a very strong growth in running and training, and we saw mixed growth in football and basketball.

So we continue to have - accelerate our growth in our running and in footwear. We also accelerated our growth in training.

In our basketball, as I said at the very beginning, we're exiting the NBA contracts, which is you're seeing the impact up here. And in football, you have two phenomenon.

You have non-event year, which means that the license business as it relates to the country teams are in decline and we have seen a negative development in the license business for our football clubs, particularly driven by the exit of Chelsea, which will be exiting by the end of the English Season which is in the second quarter. Overall our football footwear business is going up.

If you go to the originals business, we see a growth of 30%, which is very strong growth compared to work where we are coming from, and I think the most important message here is that we are seeing a 50% growth in our modern footwear franchises. The NMD, the Tubular and the Shadow and the EQT, which means we are doing exactly as we communicated, building a broader franchising landscape to ensure that when different franchises are in different stages of their lifecycle, we have shown that over time will decline, we are certain that over time will pick up and that means also the split between the “old and new franchises” are now close to 50-50.

We saw a double-digit growth in all markets, except Russia and China. So overall a strong growth in our originals business, but mostly important is the balance of the growth is now getting more towards the newer franchises, which does give us a high level of stability within our originals business.

Moving onto Reebok. We saw a 13% growth in Reebok, which was the strongest growth we've seen for a long time, driven by classics and training and it was driven by a couple of different events.

One was expansion of regional business in China because we are bringing - we are putting, what you call, accelerated effort on our Reebok business in China and we are seeing a different launch schedule than we saw in the past year. So I would caution you, and that's why we're saying at this stage, that 13% is going to be the growth rate.

We said at our last meeting that we are quite happy with the 6% to 8% growth rate. But 13% is coming on the picture of a slightly negative growth in the U.S.

So we have, as we have indicated or communicated, put a turnaround plan in place. It is far too early to say that this is the early indications of this.

This was more due to retail opening and different launch schedules than anything else. What we need to do is we need to make sure that the quality of the top line is found on the bottom line rather than having a larger top line.

So overall not a bad situation, but this is far too early to do any celebration when it comes to Reebok. We still have a long way ahead of us.

When we look upon the areas that we are focused on to drive profitability, it's in the area of our business model what we looked upon the U.S. and global integrations, which we've done and defined or executed, we have defined a clear governance model.

We have implemented a new design structure with design-to-value that should improve our overall cost of goods. We have defined new consumer touch-points in the creation process and are in the process of executing on a number of initiatives.

We have mentioned the initiatives here but as long as initiative is not fully executed upon, of course we do not take it off. It does not mean that we are not fully engaged and joint develop [ph] planning with the wholesale.

Does not engage so we are not well under way with closing the 50 doors in the U.S. where we closed 30 but we are not finalized yet.

And in order to have a consistent reporting towards this part of our stakeholder community, we've chosen to operating the binary motives, of course we execute upon it, that's why it's transparent, but we will report a plan when it's done. But we are doing what we said we are going to do, but some of these items will take time.

Some of them will have a time lag particularly as it comes to product design and bringing good products to market. That's where you're going to see a 12 to 18-month design - time lag as in any other creation process.

We saw exceptional growth in our eCom driven by again our three most important markets in the world, the U.S., China and Europe, by 53%. So the momentum we've had from last year will continue and carrying into this year.

And as you remember, when we guided our CapEx, our CapEx was getting up to €1.1 billion. A big part of that CapEx is going to be directed towards building the appropriate and necessary infrastructure for eCommerce business to get to the target we set to ourselves for 2020.

But overall a very strong growth for eCommerce business which not only helps the top line but is also will be accretive to the bottom line of our business. We are making the appropriate progress on the strategic initiatives.

When it comes to portfolio, we are, as you know, in the market with our TaylorMade business we have not been happy with the progress that we made but we will report when an agreement has been made. On our CCM business that we announced would be taking to market, we are making good progress on and are engaged in relation in discussions with interested parties and we are going through a list of, what we call, loss-making legal entities to ensure that we reflect our infrastructure to the local market conditions.

Some example of that, you did see the severe change in Russia and of course you also saw a corresponding reaction from our side of closing 80 stores in Russia in the first quarter. We have established our top leadership team which is our top 20.

We have subsequent established the next level, which is our top 110. So we now have the top 130 defined.

We have a long-term intensive scheme defined, which is being measured upon one single transparent KPI, which is EPS, which is also our core KPI for our target for 2020. So the key KPI for 2020 is and will remain the EPS growth.

So overall we had a strong start to the year with a lot of focus in many areas but also a number of areas where there is room for improvement. I'll now ask Robin to take us through the greater level of details for the first quarter.

Thank you very much, Kasper. Good afternoon, ladies and gentlemen.

My job is to go into a little more detail. I'll start with the regional analysis and then talk a little bit more about the P&L and balance sheet.

Let's jump straight into Western Europe, where we had very strong performance continue with revenues increasing 10%, and that, ladies and gentlemen, don't forget is on top of a 25% increase last year in this region. If we look at it from a market perspective, the main contributors to the increase were the U.K., Spain, Italy and Poland, where revenues grew at double-digit rates each, but in addition high-single digit sales growth in Germany obviously also contributed to the regions development.

Brand adidas sales were up 8% and that's despite difficult prior year comparisons, resulting particularly from the sell-in of the UEFA EURO 2016 related product, which was also in Q1 2016. Growth was driven by double-digit sales increases at adidas originals and adidas NEO, as well as top-line improvements in the outdoor, training and the running categories.

Reebok had an excellent start into the year in Western Europe. Their revenues increased here 25% mainly due to double-digit sales growth in the training category, but as well as in classics following the successful launch of a new CrossFit Nano 7.0 product and the ongoing demand around Athletics-ZNE [ph] products.

Now as far as the gross margin is concerned, we still burdened in this region by the severe currency headwinds, so the gross margin declined by 1.6 percentage points to 44.5%. However due to lower operating expenses, as a percentage of sales, as a consequence of lower marketing investments following last year's event year, we limited the operating margin decline to 60 basis points ending the first quarter of 2017 at 21.6%.

North America market, as discussed already, yet another quarter of exceptional performance, with revenues up 31% due to strong double-digit growth particularly at brand adidas where the momentum accelerated further with revenues up 36% on top of a 31% increase in the prior year period. Double-digit growth in both the wholesale business, up 40%, and retail up 28%, shows the heat of the brand with U.S.

wholesales and of course consumers alike. The fact of this development is driven by our performance which is up 9% in lifestyle up 73% businesses makes us feel very positive that we are leaving a lasting impression with U.S.

consumers. From a category perspective, growth is driven by double-digit sales increases in our training and running categories, as well as at adidas originals.

Revenues at Reebok brand declined 2%, mainly reflecting the planned closure of Reebok factory outlets in the U.S., as Kasper has already mentioned. This resulted in sales declines in the training and running categories more than offsetting double-digit growth in classics.

The exceptional top line development in Q1 is also reflected in the region's profitability development, and while the gross margin increased 40 basis points to 38.1%, strong leverage from both our marketing investments and operating overhead pushed operating margin up 7.2 percentage points to 9.8%. Let's look at Greater China.

We are continuing - well, it's definitely continuing its winning streak with sales growth of 30%, also comping against tough previous year baseline where our growth last year was also 30%. So an excellent momentum of both the adidas and Reebok brands continued, with sales up 31% in adidas and 19% in Reebok driven by double-digit growth in key performance and obviously also a lifestyle categories.

This underpins the favorable trends we have been talking about for many quarters as the disposable income increases, the increase in sport and the growth in sports participation, and of course it reflects the high brand aspiration our brands enjoy within this growing market. The gross margin continued to grow in Q1 ending the quarter up 1.7 percentage points at 58.9%, reflecting an improved pricing, product and channel mix, as well as lower input costs.

Operating margin actually increased again, up 90 basis points now to 39.9%, driven obviously by the increase in the gross margin. And while we remain very optimistic about China and the underlying dynamics, we must bring out this exceptional growth rates in profitability levels as sustainable for the long run as we've been commenting on the last several quarters.

Finally in terms of the regions, the Latin America, and Kasper has already mentioned about business in Latin America. It has to cope with challenging macroeconomic environment.

This is particularly true for Argentina and Brazil, where we experienced a slight sales decline in the quarter, nevertheless driven by double-digit growth in Mexico. Peru and Chile, sales in Latin America as a whole grew 9%, reflecting strong top line improvements at both the adidas and Reebok brands; adidas up 7% and Reebok brand actually up 25%.

Despite difficult prior year comparisons resulting from these sell-in of the Copa America in 2016 related-product, adidas brand revenues increased 7% driven by double-digit sales growth at adidas originals and adidas neo. And the Reebok brand revenues, as I said, up 25% was as a result of double-digit growth in the running and training categories as well as in the classics category.

The segment's gross margin declined however 5.3 percentage points to 39.9% as the positive effects from an improved pricing and channel mix were more than offset by the severe negative currency effects. Operating margin therefore decreased 3.3 percentage points to 10.9%, reflecting this gross margin decrease which more than offset the positive effect of lower operating expenses as a percentage of sales.

The other part of our business we classify as other business and this actually grew 4% in Q1. Here the largest driver here is obviously the TaylorMade adidas Golf business, where revenues were also up 4% largely a result of the TaylorMade brand, which was partly offset by declines at Ashworth, Adams Golf and adidas Golf due to the timing of product launches.

CCM Hockey also had decline in revenues mainly of 11% and mainly reflecting declines in the licensed apparel business in light of the upcoming transition of the existing NHL partnership from the CCM Hockey to the adidas brand, and there were a few revenue increases because of the brands equipment business. Other things in managed business increased 8% mainly as a result of double-digit sales growth at White Free [ph].

Gross margin grew 3.8 percentage points to 40.8% mainly due to higher product margins at TMAG. Operating margin also increased 8.1% now actually the profit is 7.9% supported by strong improvements TaylorMade adidas Golf.

One of the key areas I'd like to make sure you understand properly, ladies and gentlemen, is obviously the development of our gross margin. And yes, in this quarter the gross margin did decline but it is right in line with our full-year guidance for 2017.

So while we were down 20 basis points to 49.2%, this decline is solely related to the anticipated negative currency effects experienced during the quarter as our hedge rates during Q1 '17 were less favorable compared to last year's hedging rates. And we are at around about 1.12 for '17 whereas we were at about 1.17 for 2016.

But once again, we were able to mitigate almost all of these negative effects through better pricing and through mix largely, product mix. Now as negative FX effects move slowed down during the second half of the year, in fact they even reversed because we've got a hedge rate for the second part of the year of '17 of about 1.14 and obviously talking about dollar/euro, to what we had of 1.12 in 2016.

And given our strong momentum in the marketplace, we expect gross margin improvements during the second half of the year. So as a result, we continue to forecast a gross margin increase for the full-year of up to 50 basis points.

Let's look at the P&L below the gross margin now. And other operating expenses, as a percentage of sales, decreased 1.3 percentage points at 39.1%.

Now that's mainly driven by the significant leveraging point of sale and marketing investments, down 90 basis points, but largely as Kasper said, reflecting a different phasing of our marketing spend in 2017 because of the events in 2016. In addition, we were also able to generate leverage around our operating overhead expenses of about 40 basis points as a percentage of sales.

For the full-year, we are expecting this picture to change, as our marketing investments will increase as the year progresses, we expect only slight leverage from the marketing in 2017. At the same time however, leverage from operating overhead expenditure will accelerate in the coming quarters.

And so the Q1 operating margin increased 90 basis points to 11.1% translating into a strong improvement of 29% in the operating profit to a figure of €632 million. Carrying on further down on the P&L, the strong increase in both financial income and financial expenses as a result of, on the one hand, positive exchange rates and an increase in interest expenses, netted out at about net financial income slightly increased about €8 million compared to net of €6 million that we had in the prior year.

We are able to apply an income tax rate of 28.9% this quarter, which meant we were able to end the quarter with a net income from continuing operations of €455 million, which is up 30% on the prior year. This translates into diluted EPS from continuing operations of €2.23, up 31%.

A quick mention about our status with the retail business and here our own retail, as you can see from that chart, with a number of shops we've had and we had a strong improvement of revenues in 2001 first quarter of 18% supported by a strong double-digit growth, also in eCommerce, as Kasper has already indicated, and improvement in the comp store sales, which you read here, were up 5%. Two of those effects weighted in on our retail performance however during the quarter, an overall weakness in the Russia CIS market, which negatively impacted the comp store sales, as well as the total of 125 net store closures, as Kasper said, charge of that in Russia.

The comp store sales increased 5% driven by brand adidas. Excluding Russia CIS, where comp store sales declined 7%, total comp store sales would have been up 7%.

Additionally the shift of the Easter business from Q1 last year to Q2 this year also negatively impacted comp store sales, especially in the Western Europe market. We closed in Q1 2017, in total, 185 stores.

The majority of these closes, about 84, happened in Russia CIS, reflecting a weak consumer sentiment and therefore also to streamline our portfolio there. Closures of Reebok factory outlets in the U.S.

in line with the Muscle Up program that we've spoken about in the past, as well as some closures in Latin America and Middle East and West Asia also contributed to this development. At the same time, we opened 60 stores in the quarter mainly in the emerging markets, around about 30 in those markets.

This leaves us with a 125 net store closures in Q1 and the total number of stores of 2,686 at the end of March 2017. A quick look, ladies and gentlemen, at the balance sheet.

The biggest development here, I believe, is being able to keep the operating working capitals to very low level but obviously the moving parts here where inventories are up 18% on a currency-neutral basis, reflecting higher stock levels to support the company's top line momentum. However not all of the inventory growth is driven by an increased purchasing involvement and that a third of inventory growth is non-volume related, which you can see from the development of currencies.

Reflecting the higher inventories compared to the prior year's accounts payable were also up and they are up 21%. Accounts receivables were up 11% and that's below the company's top line development during the first quarter and reflecting our strict discipline again on trade terms management and concerted collection efforts.

So this translates into, what I said, was a very good operating working capital, which were increased 17% to €4.5 billion, the average working capital, as a percent of sales, remained at a very stable 20.1%. Finally looking at our net debt position.

This increased €51 million compared to the prior year and total €859 million at the end of March, but this development is mainly a result of the utilization of cash for the purchase of fixed assets, as well as the continued repurchase of shares within the framework of our share buyback program. So we remained below our mid-term target ratio of net debt to EBITDA of below 2x, end of the quarter at 0.4x, and you should see the equity ratio remaining very solid at 42.8%.

And with that, ladies and gentlemen, I hand back to Kasper for the outlook.

Thank you very much, Robin. Looking upon the momentum we expected to continue in 2017, we currently have a very high level brand heat and we believe that we have a number of activities that will continue the brand heat.

We have a new launches of our successful franchises like ACE, X, UltraBOOST, PureBOOST, other brands, NMD, et cetera, but we're also very happy that we are reintroducing some of our iconic footwear brands like Predator that was announced yesterday and those of you will still remember Beckham as probably one of the greatest sport athletes in the football history was the original, I would say, user of this technology. On the training side we are further rolling out our [indiscernible] franchise on running.

We will be introducing a number of new UltraBOOST models but of course also what we are very excited about our new Parley Run for the Oceans collection. We have a set of marching campaigns planned around for summer for Climacool and Originals, and of course we have activations planned for the major sporting events coming up like the Champions League, the Country cup, et cetera.

It's important that we also will start seeing a leverage of the top line in our operating overhead. It's also clear that a number of these initiatives that we have defined and communicated to you in the One adidas framework takes time to execute upon because we are changing some of the infrastructure we are having, but at the same time we do expect leverage on our operating overheads through our strong top line growth.

And then we'll continue to drive our portfolio initiatives and it really comes in a number of different areas. On the brands which we've spoken about when it comes to Reebok TaylorMade and CCM, the channels that we just heard about and how we ensure that we have the right amount of retail channel available for us with the right quality and the right contribution.

And as you could see, we had a reduction of that in the first quarter ensure that we actually have the appropriate contribution, so this is not about quantity, it's about quality and the market that we get the appropriate contribution from each of the markets that we're presently in. So we are managing the business in the context of portfolio to ensure that we are driving not only top line but also getting the appropriate contribution on the bottom line, which brings me to the outlook and we reconfirming the guidance that we gave you less than two months ago, and that means we expect sales to increase between 11% and 13%.

The gross margin, as alluded to from Robin, to increase by 50 basis points. The operating margins to grow between 60 basis points and 80 basis points, and the net income to grow at a rate between 18% and 20%.

What I do want to just remind everybody about is that since we are in the second quarter, we will be comparing ourselves to a second quarter of 2016 where we had a number of one-time items. Chelsea matureness [ph] that contributed with more than €100 million to the profit in the second quarter of last year, that means that in order to us to get to a several percent [ph] growth, we need to cover for the €100 million of non-operational items that came in in the second quarter of last year, which is also part of the reason why we believe that the current guidance is appropriate and also realistic.

We've had a strong start to the year. The ongoing momentum that we carried - we had last year, we continue to see this year.

We expect also profitability to continue to improve despite the FX impact that we had in our gross margin. We are seeing the portfolio initiatives gain traction and will continue to have that focus on our portfolio in the short but also medium to long-term.

We had established, as I said, the appropriate leadership teams and also building the intensive model that is aligned with shareholders and investing vehicles to ensure that we are defining success in the same way and report transparently about it, and we are having a relentless execution on creating the new. It is not about new strategy, it's about executing intelligently about on the strategy that we have.

With this, I'd like to close for the formal presentation from Robin and I, and we'll be happy to take any questions you might have. So back to Steffen.

Thanks very much, Kasper. And Sager, if you could now open the lines for the questions please.

Hi, Kasper, Robin. Two questions for me please.

First was on your North America wholesale partners. We are seeing very strong sell-in at the moment but we've seen from past cycles that these can be the moments where, I guess, you have to most vigilant, if you like, about stocks you're holding in the channel.

Can you talk about your visibility on inventory that stand outs to your key partners and how also how timely that data is? Second one was on China.

If the proposed [indiscernible] deal goes through, do you think that's much of a risk that will look to change business terms with you? Thank you.

Thanks Fred. Good afternoon.

Just on the visibility we have with the retail partners in America, you will appreciate we've had very good momentum in our business there and the visibility we have is also quite good because they keep bringing us and asking us for more. So I don't think you should anticipate any issues with inventory overhang in these partners in the U.S.

They are very strong position with the brand and also for the retail inventory levels.

And as it relates to China and Baileys [ph], I would share two weeks ago made up with the management which also contrast to be some of the co-owners of the company. At this stage, we no reason to believe that they will change our business relationship with Baileys [ph].

The rest would be pure stipulation. We have a very strong and very good relationship with them, which has growing significantly over the last set of years, so at this stage, as I said, there is no indication that that relationship will change irrespectively of a change in the ownership structure.

I think the rest would be speculation from this side.

Okay. Thank you.

Thanks Fred.

Yes, good afternoon, Kasper, Robin and team. I have two questions.

So first one focused on China follow-up, but onto commercial side onto dynamics which are very strong for the adidas and the Reebok brand, could you go - take us among the initiatives and explain why in your opinion the adidas brand is so hard today in China and especially versus your main competitor, and on Reebok, what was the most recent initiatives you said you had to meet that expansion in China, if you elaborate a little bit. And the second one is a very short one.

It's about your adidas comps, 7% ex-Russia CIS. Could you maybe provide us with the numbers in North America and the Western Europe?

Thank you.

I will do the first one and Robin will do the second one. In China, there are set of initiatives.

One is we continue to have new store openings in China and also franchise openings with our key partners. Secondly, we are seeing a very strong growth in our online initiatives in our business in China.

And thirdly is that with some of the products that have both global but also local assigned particularly comes across very well with our Chinese consumers, so it's more stores, it's more franchise stores, it's eCommerce, and I think at this stage we have the right product for the right Chinese consumers, so we are not seeing any slowdown in that context. With Reebok, as I said, we are reengaged with Reebok in China.

We were with Reebok in China several years ago and right now we have an agreement with one of our partners to set a Reebok stores which we are seeing the early signs of. This has no significant impact on our overall Chinese growth in the first quarter but I do think it's a continuation of the growth rate that we've experienced over a longer period of China and we continue to, we believe, outgrow the market and also gain market share.

If you go to China and you see the quality of the stores in the largest cities, you will see that there are on-level or above-level what you see from a quality standpoint in the western world, so very high quality of product position in the market.

And Cedric, the point about the comp stores sales in the two markets, Western Europe and the U.S. Western Europe flat because largely impacted by the last year, and the U.S., a very good solid double-digit growth, plus 14%.

Thank you very much.

Yes, good afternoon, Kasper, Robin. Thanks for taking my two questions.

The first is with regards to gross margin. I'm looking at the estimated impact to FX and wage inflation.

Is it fair to say that that's run to 180 basis points? And is it also fair to say when you're looking at the product margin mix comparison year-on-year in the two tournament affected regions, Western Europe and Latin America, you clearly saw more high margin jerseys in the first quarter of 2016.

So stripping that product margin mix impact out, your gross margin could have been slightly positive on a group basis, potentially around 10 basis points to 20 basis points positive. Just wondering if you could comment on that.

And I guess by that rational by Q4, you'll be selling in ahead of the World Cup so we should see further acceleration given the margin accretion that the apparel business brings. Second question around marketing spend and timing.

You mentioned that it was a phasing impact around marketing. Should we expect to see marketing increase into the second half of '17, and I guess, as we move into a tournament year in 2018, what are your expectations around marketing spend?

Thank you.

Okay, John. Thanks very much.

I'll take both of them. Firstly on the gross margin.

Yes, that's absolutely true. We are obviously in the first quarter of last year because that some influence from the higher profit margin product sales.

And I'd be cautious however about reading too much into what that might have been for the fourth quarter of this year because I think if you go back and look at the fourth quarter of '16, we also had a very strong development in the margin in 2016. But yes, fundamentally you're correct.

Second point about - I just forgot what was the second point, I'm sorry?

Marketing savings.

Marketing savings, yes. As Kasper said, this is clearly because of the events.

We are definitely not reducing our investment in marketing but this will be - we'll maintain the percentage. Absolutely obviously going up.

We're not giving any guidance specifically for '18 at the moment but you should not expect that our marketing spend, as a percentage of sales, will go up. In fact we've even said through to the plan to execute to 2020.

There will be some slight leverage on those, so no increase in the percentage. We continue obviously to strongly invest in marketing.

That's great. Many thanks, Robin, and all the best going forward and good luck to Harm.

Thanks very much, John.

Thank you very much. Two questions.

First of all, on the license business. You mentioned that you were seeing some weakness in the license business.

I was just wondering if you could just give us an indication how big that is as percent of your total apparel business and how you see that development going forward and if that might even influence your decision with respect to new endorsement partners that you might want to sign or existing ones that are running out? And secondly, on the key KPI that you just mentioned as being the EPS number, maybe some thought as to why you focus so exclusively on the EPS number?

I assume in the KPIs also still the NPS as a core indicator, but maybe some thoughts as to why EPS is so crucial for you? Thanks.

So I will take both. No, we cannot disclose the license part of the overall apparel business.

But as I said, you have to take a couple of things into account. One was that we are in a non-event year, so that has an impact of course on the jerseys that are related to the national teams.

The second one, as we said, was the Chelsea. I think it's far too early to make any conclusion whether is this a sustainable development or this is a short-term development.

And at the same time also I think it's far too early to make any correlation between this and the pricing of the major assets because one thing that we are seeing very clearly is that the major sporting, since you're stating football, are migrating from local to regional to global and that is the vast majority of the growth, the major sporting as they are seeing is seen outside the region of their origin and that is a completely different setup that we saw five or six years ago. so the major assets, the [indiscernible] seeing huge - you're seeing the growth by far being expanded to a global position.

So I think it would be far too early to say that, and I don't think that any of those assets have exploited the global position at this stage. I think that's where particularly a relationship with adidas where we have a global footprint does come into account.

So that is on this. The reason why I was so specific on EPS, of course the NPS plays a key role but I was distinguishing between, what we call, the short-term development and the long-term development.

In our short-term, all of us, including us and the management team, are measured of a margin, revenue growth, NPS, because that is what we look upon every single day because that's the state, unless we get the short-term right, we can't get the long-term right. So these are the components of the short-term.

On the long-term, it is only EPS but the point is also you can't long-term drive EPS growth if you have a strongly deteriorated NPS because that is the indication to buy. So we are separating the two.

And EPS, we have chosen for the long-term because it is a transparent KPI that the investors can get aligned to so when we deliver guidance around a long-term with EPS and that is actually also what is - what trick us or doesn't trick up here on the LTI scheme. So it's very deliberate we're taking a transparent, what we call, KPI or LTI, but it does not discount any focus we have on the NPS, which is our short-term.

Very good. Understood.

And Robin, enjoy the last week. Thanks.

Thanks very much, Jürgen. Thank you.

Hi, good afternoon, gentlemen. Thank you for taking my question.

Robin, I think this is probably opportunity to say thank you mostly putting out with all of our questions over the years. A few more to go for you today no doubt.

Two questions just for me. North America, can you help us understand the margin progression?

Understand presumably this year or near-term we've got some marketing shift in the second half. And as we look through more annualized medium-term, I'm not after numbers but in terms of the thought process, presumably there is a fairly fixed cost structure for the potential for that business to see quite a good acceleration on the margin should hold.

And then secondly, just on really the pricing environment. As we look between sports performance and sports lifestyle, just be interested to think or to ask the question, if you think that there is any difference in price sensitivity between those two categories?

Thank you.

Okay, Louise, yes, straight line, I'm very happy I got another question probably which I think I can answer and that is in terms of the U.S. is I can confirm your assumption here that - and we've always said this that there is significant opportunity in America that's also why it's so significantly important in our strategy to grow our business but to grow it profitably in the States because there is a good athletic year.

So yes, the margin development should reflect the top line growth here. And I leave the second question to Kasper.

So please restate the second question again because I want to make sure I can answer it appropriately?

Sure, it was just comments regarding the pricing environment. Did you see any difference between the consumer and price sensitivity between performance and lifestyle?

Yes, thank you very much. I think you have to break it down to apparel and footwear.

And I do think if you get to the lifestyle, you will have a more price sensitive apparel, what we call, environment in lifestyle, particularly also the H&Ms and the [indiscernible] of this world. So I think in that area, you do see a high level of price sensitivity.

When it comes to footwear, of course in the technical footwear, you can price significantly higher when it comes to performance part but the mid-tier segment I would say is fairly similar. So overall on footwear in the mid-tier, I would say it's similar but higher price point when it comes to performance.

On apparel, you will see a high level of, what we call, price sensitivity but also lower price points than we see on the performance side.

Thank you.

Hi there. My first one is a follow-up on North America.

So as you've explained operating margin was up a couple of points but gross margin only up a few bps, and I would just like to confirm that this is the sort of leverage that you can get despite being in investment mode or have investments in North America temporarily being muted, for example, also a marketing shift or marketing being skewed towards upcoming quarters because the €100 million segmental operating profit this quarter is more than you've earned in North America in all of 2015. So just trying to get orders of magnitude right here?

And then secondly on retail doors. Sounds like there has been some 70 closures that aren't related to Russia or Reebok.

That's just you being opportunistic as in extending a bunch of leases that has been up for renewal or more of a proactive move that can be seen in context of more transactions happening online and you're upgrading eCom plan. It would be great to have an idea what the fleet is going to look like by the end of the year.

Thank you.

So let me just following up upon the America part which Robin answered before. It's clear that North America, with the size of the U.S.

market, represents long-term a huge opportunity for us, and it's also clear that we need to look for long-term sustainable development and not go for short-term profit optimization in U.S. So you are seeing a jump in profitability in the first quarter.

I would caution you when I say this because right now we are not optimizing the short-term profitability. We'll continue to see leverage in our infrastructure, which as Robin was correctly saying, but we are looking upon I'm saying, we need to get the size and the market share correct in the U.S.

because that is what long-term drives the highest value for our company. So if you were to look upon the two right now is of course we are trying to improve the margin but we've got to continue to high growth rate to generate market share and customer loyalty that will allow for the long-term to take place.

So yes, we are seeing it but we are in for the long-term and we said we would want €5 billion adidas business by 2020 and that's what we are looking and of course you will see a different contribution by then. But if we believe it's appropriate to invest more, we will invest more to make sure that we don't optimize in the short-term.

Okay, Adrian, the question about the closures. Yes, we you're right.

We have closed outside Russia around that 60 to - about 50 to 60. That's coming from several factory outlets to Reebok in line with the Muscle Up program in the States.

It's also coming from closures in some of those markets in Latin America, certain ones in the emerging markets and even a couple in Greater China. But don't forget where the closure of retail shops is a normal part of the retail businesses.

So do not interpret that we are just suddenly seeing a shift to eCommerce and therefore are doing more closures. It's not the case.

There is those structural changes as I mentioned in Muscle Up and as Kasper mentioned earlier for Russia, and that will probably have a little bit of impact also in some of the Latin American countries but we continue to open shops also and I think I've stated in the past with Greater China particularly, as we started off there was a lot of very small shops. As that market has matured or developed and matured, we've moved into bigger malls and what have you and we have shut the smaller old shop and opened a new shop in the mall.

So it's a normal process and I think you have to look at the net development and we still have 2,600 something shops at the end of March. It's still very much an important part of our business.

Great. Thanks for those answers, and all the best, Robin.

Thank you.

Yes, hi. Good afternoon.

It's Antoine at HSBC. Two questions.

So first of all, regarding the U.S. markets, obviously you have an excellent performance, which seems to be a bit contrasting with some kind of a slowdown that you're seeing, maybe also some sporting goods chain [ph] maybe struggling a little bit.

So what's your comment about the market overall and then your own performance? And secondly regarding China.

Can you maybe refresh, Harm Ohlmeyer, about the initiatives that you're undertaking with the schools and I think you've been trying to participate in the [indiscernible] in China. So maybe an update on how many schools etcetera you're present and what's your plan there?

Thank you.

So I'll take the first one and Robin will take the second one. Regarding the U.S., clearly we are, at this stage, satisfied with our current performance in the U.S., which we have had for a while now where we are growing ahead of the market that I think there is no doubt about.

We are also coming from a position which I think is important to understand where we had - we were not distributed in their area than we really needed to. The evolution of the omni-channel and digital is helping our growth rate, particularly eCommerce has been a growth driver for us in the U.S., and with the distribution structure we have, we have not experienced maybe same level of closure of stores that maybe some of our competitors have done.

Part of the competitors I can't really comment on but we are really seeing continued growth opportunities in the U.S. with our key partners in the U.S.

and also through our own stores and our eCommerce. So we expect to continue to outgrow the market also for 2017, which is also reflected in our current guidance.

The other competitors have different charges. I think that they are better particularly in that than we are but we don't really - we believe that we'll have for 2017 again a successful year in the U.S.

And as far as China goes, Antoine, yes, we're very excited by the continued opportunities here in particular because now is the authorities of central and local governments are encouraging investment in sport facilities, encouraging the kids to play sport and be more active in schools. And as you know, we have this arrangement with the Ministry of Education where we are supporting these activities in schools.

I think at the moment we are in about 8,000 schools in China and that number presumably grows over the next quarters as we roll this program up.

Thanks a lot. Maybe just a follow-up actually on what you said about the FX impact on gross margin in the first quarter.

If you had to quantify in terms of minus number in basis point, I don't know, would it be 200 basis points or more?

So we showed you the net FX figure which is exactly 180 basis points. There is two portions of it.

There is 230 basis points to 240 basis points of actual hedge effect and there is another 30 basis points to 40 basis points positive on unhedged currency effects. So net it's about 180 basis points.

And as I say, don't forget that that was all planned. There is no surprises of that and the hedge rate actually turns slightly positive in the second half of the year, therefore we reconfirmed the development of gross margin for the year being a positive versus 2016 up to 50 basis points improvement.

Thank you.

Welcome.

Hi, this is Eric Johnson on for Erinn today. Thanks for taking my questions.

My first one is on just wondering if you could touch on the Boost supply shortfall if there is any updates over the last couple of months in terms of that and then what your continuity plan is if that becomes a barrier to your long-term targets? What you guys are working on behind the scenes to offset that?

And then secondly, I was curious on your women's business, if you could help us better understand how that business looks without lifestyle being stripped out to better understand, how the performance side of that businesses is performing, and as well as what you guys are currently working on to drive that? Thank you.

I'll take the first one. On Boost, there is - with the current supply profile, that is including our 2020 guidance, so we will continue to have Boost constraint until approximately 2019, which despite the fact that we have an excellent relationship with BSF [ph] and despite the fact that they continue to put more capacity online, we continue to up the forecast based on the consumer demand.

So we believe that we are in a strong position. Of course we would like to have had more supply.

There is no doubt about that. But the current supply profile that we have is completely calculated into our 2020 targets and that assumes at this stage a supply on constrained market condition in 2019, which we, at this stage, still believe to be the case.

I will however say that we continue to grow our Boost business quite significantly and we are in the fortune situation. We have a franchise that is very highly thought after not only in the performance but particular performance some of our originals, but of course this is a performance technology that we are using to differentiate ourselves in the marketplace and it is which we can see from the marketing standpoint and you could also see from overall we started our running business which were very positive for this quarter.

On the second of your question, Eric, relating to the development of the business for the women customer or consumer, excluding lifestyle, although we don't break it down quietly well, I can say that this is a very positive development. We have very good development with partnerships.

We are enjoying not just still a partnership but also recently won the list and exciting product launches, specifically for women in running such as UltraBOOST X and PureBOOST X. In addition to that, a significant dedicated product in training, which is also driving good underlying growth in the women's business in the performance category.

Thank you.

Yes, good afternoon. Thanks for taking my questions.

Firstly just on eCommerce. Obviously the growth there is very impressive.

Could you firstly breakout the U.S. eCommerce growth in the period?

I think Kasper mentioned that this channel has been a key driver for you in that market. And then just thinking about the profitability dynamics for that channel, how quickly do you think additional operating leverage can be achieved assuming that the growth rates you saw in the first quarter can be continued, and as you work towards that €4 billion target?

That's the first one. And then secondly just on China.

I think you said that Originals growth was only single-digit in that market, but given the actual overall market growth of 30%, are we right in assuming it's running potentially NEO that were the main contributors, any help just understanding where that growth came from, would be very helpful. Thank you.

So first let me correct that China, no, it was - what we call, I gave the wrong number. It was 27% growth for our Originals business in China, which is still below 30% we recorded, so apologies for this.

On the eCommerce business, let me just give you a couple of points here is we mentioned the three large markets, Europe, U.S. and China, which are growing very fast.

We do not break it down by market for competitive reasons which sure that you can understand but it is part of our growth driver and a key part of our growth drivers in those markets. When it comes to the overall profit contribution, it does drive a different profile because we will have a higher level of operating overhead for the eCom but we'll have also a higher overall profitability.

So you will see us investing more because we need to build infrastructure to do that but it will generate of course a higher profitability. We have not broken it down, say, when this is occurring but you should assume that it's accretive to earnings as we speak.

So the quicker we can grow this, the better it is. But of course what we are doing is we are pushing this quite hard because we see it as a competitive weapon and it also drives the top line.

So we will invest as much as we can to ensure that we drive the top line. Currently it's accretive to earnings.

And you should assume also moving forward.

Yes brilliant. Can I just assume that - sorry, did you say 27% growth in Originals for China?

Yes, I did. Apologies.

27% and overall growth in China is 30%. So you can see where the growth is coming from.

All right, brilliant. Thank you very much, and all the best, Robin.

Thank you.

Sager, we have time for two more questions please.

Good morning, Kasper and Robin. Thanks for taking my questions.

I guess I wanted to go back to North America and particularly the wholesale environment in North America. Your growth is exponentially higher than any other brand in North America right now.

I'm just wondering what you're seeing as we go into the back half of the year for fall, how your order book trends within North America. There is obviously a lot of door closures going on.

There has been quite a few sporting goods bankruptcies but it doesn't seem to be affecting at all. You're growing, like I said, at an exponentially higher rate than really any of your competitors.

So can you just talk about what you're seeing in North America wholesale right now and what's enabling you category-wise to really outperform the market by such a ridiculous amount?

So thank you for using the word ridiculous. Right now you have to look upon also where we are coming from.

I think that's important but we are coming from a lower base. We are quite confident that we'll continue to have above market growth also in the second half.

We don't comment on order book but our guidance was that we would grow double-digit in the U.S., and of course we've been growing quite strong in the U.S. in the past and our assumption is that could continue in the future.

So we are not seeing any adverse trends in the performance of our wholesalers in the U.S. that should lead us to believe something different than what we are seeing today.

So we have not seen that but I do want also stress that we are coming from a position, a low position. We are also coming from, which you need to take into account, a supply constraint Boost delivery.

So there is a pent-up demand for Boost which we haven't been able to supply upon and of course that helps us also in the growth profile.

It's helpful. If I can just sneak one quick follow-up question.

Growth overall of the apparel category versus footwear, there was a big disconnect between growth of footwear and apparel last year. So I'm just wondering what you're seeing in apparel, which is obviously been a far more difficult category for everyone globally?

So we're still seeing footwear by far outgrowing the apparel side of the business. So that is still the trend that we are seeing.

Okay. Thank you.

Best of luck.

Yes, hi. Thank you.

My first question just really trying to frame up the first quarter results in relation to the full-year guidance. It was helpful to see the strength and the weaknesses listed, so maybe I'm asking about the magnitude of the strengths relative to the weaknesses and whether it's sitting today if you're more or less confident full-year outlook based on what you've seen so far?

So I am completely unchanged in the full-year outlook because we're two months into it, and I've been around too long to get excited about something when you have 44 years ahead of us. And I think that doing extrapolations can be very difficult based on a quarter when we have 16 quarters or 14 quarters ahead of us.

So for the full-year, we are confirming our guidance for the full-year and then we'll of course, in March next year, confirming our - do our guidance for 2018. But right now our long-term outlook remains unchanged and we know we have a lot of work ahead of us but there is also going to be a lot of challenges and only looking upon, I would say, the assets and liabilities can be a very dangerous situation, so '17 confirmed.

We are also confirming the long-term outlook but there is no change in any of the guidance that we gave two months ago.

Okay, that's helpful perspective. And then my second question.

I just wanted to follow-up on the adidas brand in North America. I think you mentioned lifestyle was up 73% in the quarter, so obviously a very dramatic merchandising shift that continues to go on.

And I'm wondering when you look at the distribution, how much of the growth do you think should be or is being driven by your core current partners? How much of the growth is being driven by expanding some of the distribution to maybe non-traditional partners for your brand?

And if you could just comment on the strategy for the distributing given the merchandising shift?

So if you look upon the first quarter, there has been very little change in the distribution structure. It doesn't mean that we don't believe that we have more opportunities of getting a broader distribution in the U.S.

but it will be premature to have any - there is no co-relation to the distribution structure in the first and in the fourth quarter. They are very, very similar.

So long-term or medium-term, we will of course look for a more balanced distribution structure than we have today in the U.S., but right now there is no change in the distribution structure that leads to any change in the numbers that you've seen.

Okay. Thank you very much.

Thanks very much, Jon. Thanks very much, Kasper.

And thanks very much, Robin. This actually does complete our Q&A session but it does not complete our call yet, so please don't hang up.

As all of you know, this is indeed a very special call today, as after 17 years, it easy Robin's last call as our CFO. And since all of you of course know that we have our AGM next week and our next reporting date is the August 3 and that you can always track Christian and myself down if you have further questions, I'm going to skip that part of my speech and instead going to hand over to Robin for some closing remarks.

Thank you very much, Sebastian, and ladies and gentlemen. I just wanted to take the opportunity to thank you all for the interest that you've shown in the adidas company over the years, and particular the respect that you've shown me and my team and all of the very professional dealings we've had through times that have more often not been very, very good, although had have also included some challenging times.

One way it's sad obviously to be leaving this tremendous position but I'm also very happy to be leaving it in such a solid state and with very good outlook for the future and in very good hands to manage us through the future. So thank you very much for your interest in the company, and thank you for all the support for me personally.

I wish you all the best and stay true to this wonderful company. Thank you.

Okay. So thanks very much, Robin.

This now does concludes our call today. We are all looking forward to seeing you around the world over the next couple of weeks, be it in London, Paris or somewhere in the U.S.

where we are going to be over the next couple of weeks. As I said, if you have additional questions, please don't hesitate to reach out to Christian, Jenny, myself or anyone else from the IR team.

Thanks very much for dialing in. We are looking forward staying in touch and have a good day.

Bye-bye.