adidas AG

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

Fred Speirs - UBS Erinn Murphy - Piper Jaffray Andreas Inderst - Macquarie Geoff Lowery - Redburn Piral Dadhania - RBC Capital Markets Erwan Rambourg - HSBC Anna Andreeva - Oppenheimer Jurgen Kolb - Kepler Omar Saad - Evercore ISI John Kernan - Cowen

Thanks very much Tracy and good afternoon ladies and gentlemen. Also, warm welcome from my side to our full year 2017 results conference call.

Our presenters today are our CEO, Kasper Rorsted; and our CFO, Harm Ohlmeyer. Before I will hand over to Kasper and Harm in a second, I will as always, quickly run you through a couple of housekeeping items.

Firstly, we have once again a lot of topics to cover as you know and we have a very large of people dialing into our call today. So, I am again asking you to strictly limit your questions to two in order to give as many people as possible the chance to ask what’s on their mind.

Thanks very much for that in advance. And secondly as always unless otherwise stated all figures that we will be talking are currency neutral and will be discussed for our continuing operations.

And with that I would say we kick it off. Over to you Kasper.

Thank you very much Sebastian and welcome to everybody also from my side. Today we will have four topics on the agenda.

I'll give you a strategic update and subsequent business update. Harm will take you through the numbers more in detail and at the end I will give you the outlook and we will then move to a Q&A session, but let’s dive into it.

Of course, what we are doing is we are executing our Creating the New Strategy that was formulated in the 2015 where creation of brand Desire a sense of what we do is aimed at delivering top line and market share growth plus market expansion operating leverage. And we have defined three quarters of focus, Cities, Speed and Open Source.

Culture, meaning the organization that we have at hand and then four acceleration topics and I will speak you through most of this and subsequent take you through how it can be found again in Adidas. Our Culture, we are increasingly focused when it comes to diversity, not only when it comes to male-female but also having a more international base of key leaders across our organization, when it comes to female leadership we almost grew our potential female leaders with 3 percentage points in the last year, so we are also making progress in this area, but I would say from an international standpoint or cash flow standpoint we are becoming a much more global company.

We have also made progress in creating our performance culture and in this what does that mean, that means differentiated view on what performance look like. So, to be clear on what works well, what does not work well and also reward accordingly.

We have established the coalition groups within our organization, top 25 and top 100, that will allow us to have a very direct outlook with 140 leaders in our company that really ensure that things happen, engaged in the strategic conversation but most important make sure that we completely align when it comes to executing our strategy. And last but not least for our key leaders in our company our top 600 leaders in our company we have introduced last year an LTI program, which is focused solely on LTIP target for 2020.

So we have now a complete alignment of how we measure the key leaders and what we are telling you our targets are. Also, which you can find in our annual report and I really ask for you to read the compensation filing, a report, but I also asking for your support, we have changed the compensation system for the management board.

And what we have done is that 80% of the total variable compensation is completely aimed at the targets that we are presenting. Our long-term incentive is based on net earnings, our short-term incentives to 60% is based on currency neutral growth and operating margin and thereby making our compensation system as transparent as absolutely possible and as aligned as I would argue probably any other large company today.

I believe we’ll take leadership position in aligning our overall comp model to what we setting out as targets to the market. As I said I hope that you will read it and even more hope that you will also give us the support for the compensation model that will be presented at the AGM in May.

Last year, we also undertook a significant generation change with our management team. Harm, that you all know joined and became CFO, Karen came from within and is managing our HR group globally.

Gil who was running Europe is now running our global supply chain and Eric and Roland brand and sales respectively have just extended their contracts with another five years meaning we have created stability within our management structure for the team that’s here to develop our 2020 targets which I believe is extremely important. So, we’ve undergone a generation change in the management team and we have signed a quote-on-quote too longer first on the management team on the longer-term contracts.

When it comes to speed, and then you all aware of the initiatives we are making a progress that we aimed at making. In speed, where we’ve enabled our products that accounts for approximately 28% of sales meaning the capability to do replenishment within adjacencies.

Furthermore, we have not only brought our German base speed factory up to speed, so to speak it is now manufacturing close to full volume but we’ve also opened our second manufacturing speed factory in Georgia, Atlanta. When it comes to city, we are seeing our key cities Los Angeles and New York, Paris and London, Shanghai and Tokyo we are seeing above market growth, above market NPS and really delivering upon the expectation that we have that we’ll have a major impact across not only countries but regions, meaning that when we do a major launch in New York it does have an impact on our European business and our Asian business that is proving to be correct.

And on open source, last year I can probably say that we showed more than 1 million partner shoes, shoes that are made of ocean plastic that does not only position us as a company with a great focus of sustainability but also delivering true value to our consumers. We extended our relationship with Carbon that allows us to do 3D printed shoes and this year will sell approximately 100,000 3D printed shoes and we’ve established Adidas as one-off circle in more than 50 cities.

So, we’re delivering on what we set ourselves on in three strategic relations. When it comes to our acceleration plan our four acceleration topics that we started in the portfolio.

Earlier for mid-summer last year we parted ways with CCM, Hockey brand and TaylorMade. We’ve made substantial progress with our much-loved program when it comes to Reebok which we will speak about more in today and two countries that were giving us headaches and we’re highly dilutive to earnings in Brazil and Argentina, we’ve implemented the necessary steps to turn those companies or subsidiaries around and we’re making the progress there respected with significant upside and the business.

In North America, we continue to outperform the market both on a bottom line basis and subsequent from a market share standpoint where we’re seeing us moving into double digit territory when it comes to footwear. Getting closer to the first target we’ve set ourselves which is the 15% but also getting us closer to the 5 billion target we set ourselves as the company for 2020.

And we’re starting to see the profitability improvements that we need and we also expect what and what not. Our One adidas we have changed our organizational model substantially to make sure that we made use of becoming a global company we are starting to see the first very early fruits of some of the efficiency initiatives but I just want to highlight here.

These are multi-year initiatives when it comes to global business services, core procurement et cetera. So, we're only seeing the very early fruit of this, this is something that we expect will deliver significant advantage over the next years to come.

But as I said, this is a long-term initiative we have. Digital is making a true impact on our company not only when it comes to how we serve products, but how we engage to became consumers.

And also, the early signs of how we design our products. This will be a large investment area moving forward, but one that does and will give us sustainable competitive advantage.

So, in all of our acceleration focus. Portfolio America why Adidas and digital we are well on track to start this and achieve what we are trying to do.

And this brings me now to the business side of it. What came out of all this?

What came out it was a currency neutral growth of 16% bringing the net sales to €21.2 billion for the first time surpassing €21 billion line, which was the upgrading margin up and continue the business of 1.2% to 9.8% but as you will see further along in our presentation it was a significant bigger step from the starting point that we had January 1, a year ago. Then it comes from continued operations increased 32% to €1.43 billion and that will be the basis for the dividend payout.

And we also looking on our balance sheet to ensure that we create value for our shareholders. We proposed AGM a dividend to €1.60 which is an increase of 30% compared to last year's earnings and with a payout ratio very similar to last year at 37.1 versus 37.4.

Yesterday evening we announced our intention to launch a share buyback program this month for the next 3 years with the aim of spending €3 billion or investing €3 billion in our shares over the next 3 years, which reflects approximately 8% of our current market capitalization which is also of course ensure that our capabilities to deliver return to our shareholders will continue to increase. So, we're not only putting our P&L to work we also make a use of an attractive balance sheet that we have.

Which brings me to the guidance. For 2018, we see a currency neutral growth of approximately 10%.

And we expect net income from continuing operations between 13% and 17% equating to €1.615 billion to €1.675 billion. I'll come back to that in further detail at the end of the presentation.

Our long term financial ambition on the top-line that remains unchanged. The net income from continuing operations on a CAGR level of 2015 to 2020 is now 22 to 24 up from 20 to 22.

So again, for the second time within 3 years we have now upgraded the not only short term but also long-term guidance. When I move upon the strength and opportunities that the company has, let me start with some of the challenges.

We saw a sales decline in football and basketball, predominantly due to our license business. We saw football picking up in the fourth quarter as a result of the World Cup but overall, we did see increasing sale in the footwear side of it.

The basketball is due to the exit of the NBA, football predominantly due to the exit of the Chelsea business but also a more depressed market when it comes to overall license business in the football area. Our sales in apparel continued to lag behind our sales in footwear.

So, while we are very happy with some of the progress we made in the footwear side it's clear that right now with a 7% growth in apparel we're not quite well into the. Our topline growth has also challenged our '16 infrastructure we spoke about that in the third quarter, would still have an impact on overall delivery.

We are investing heavily across the board to ensure that we have the upsell infrastructure, and this is not only buildings or warehouses, it's also systems, infrastructure, use of shared services etc. And lastly, we did see a slow sales growth for the company, mainly due to Western Europe and of course a very depressed Russian market.

On the upside we continue to see a broad based topline momentum with double-digit growth across most of our regions. E-commerce continued to operate any region in the world and we saw strong margin increases.

And I believe it's all back to the point that we are relentlessly executing the strategy we have ahead of us instead of talking about new strategies to getting the job done which allows us to make progress financially to the tune that we're striving to. And let me now close with the ad experience, the Adidas brand saw a growth of 18% last year on top of 22% the prior year so very strong comparable.

We saw significant double-digit growth in footwear and we continue to do a good job of managing the different franchise. Women's piece is also up from 2017 with an increase of sales more than 20%.

When it comes to performance we saw a growth of 8% running right about 23 sales grew and our training grew seven and as I said football revenue did come back to growth in the fourth quarter, but you saw a very strong growth of our sports business in the fourth quarter of 18%. So, we're starting to see a river acquisition of our growth [indiscernible].

Original and very strong at 32 driven by North America, Greater China and Western Europe and we saw the model franchises grow by more than 50% and they're now representing more than half the original footwear business. So, we have seen the slowdown, in some of the more traditional franchises that you know like Stan Smith and Super Star this has been going on throughout the entire year and in most of the cases not all, we would be capable of driving a new franchise into growth which we're seeing also.

The Neo business grew in the past year 35% predominantly through our football business. Now let me just spend a couple of minutes on the Reebok business as we promised that we will do.

18 months ago, we put turnaround plan in place called Muscle Up with the aim of fully trying to rip that around by 2020. Also, indicating that it would take three to four years to get Reebok to the state that we felt comfortable with and of course the first part was to stabilize the business, get the profitability back under control to build a foundation from which we can grow upon.

And last year we achieved an increase 400 basis points when it comes to our net margin. We now have the highest margin in Reebok since the acquisition.

We saw sales of 4% reflecting improvements in most regions but with a strong negative growth in North America. This was done deliberately to get you know the foundation to a level which is healthy in North America.

So, we've been accelerating the cleanup on North American business throughout the entire year. We look upon the Reebok business on a quarterly basis and the management team Eric and Roland looks upon it monthly and the Reebok team has what they call their Wednesday meeting where they go through every single project every Wednesday for 15 months now.

And the projects you can really characterize or separate into six categories. Organization, design to value marking working budget, business model U.S.

market and efficiency improvement. In the organization we have finalized the movements on new building quicker than we have ever done before and the old building was sold this week.

On a design to value we are very keen to ensure that when we have products, the consumers are willing to pay for what we are putting into products, on the marketing working budget we have dramatically reduced the number of concepts but at the same time we have added new influencers and creators like Victoria Beckham into our brand to give the brand more heat and not only are absolute but also are relative margin working budget did increase in 2017, meaning that the 400 basis points you saw in the margin that's up, is most likely flowing to the bottom, because we are not doing any savings when it comes to investment in the brand and the country. We are pushing a new business model very similar to the adidas one by pushing e-com we have done a significant cleanup of the U.S.

market and expected the U.S. market to return to growth for the first time in many years and we are trying to see the efficiency improvements.

Overall a very important first year of four years of the turnaround plan, so we still have three years ahead of us, but we achieved or overachieved any single milestone that we had set out for in 2017. However, I do want to caution everybody this is a long-term turnaround and we are treating it also as a long-term turnaround.

Our e-com business grew 57%, so by far outgoing on entire market or any market and getting the absolute number to above 1.5 billion still with a target of approximately 4 billion in 2022. And we also launched our adidas app that you can have in a number of countries, we initiated also in the U.S.

and UK, then in Spain and France and now in Germany and this has now more than 1 million downloads so we are making the right progress of not only on store but also through our app capability that will increase consumer loyalty. Now going through the highlights, I will now like to hand over to Harm who will take us through the details from a financial standpoint and hopefully that will give you the right insight to the closure of the year and also the foundation for next year.

Thank you, Kasper. Good morning, good afternoon, ladies and gentlemen, it's a pleasure for me to guide you now through the financial details.

I want to start with some markets, as I go a bit deeper in North America, Western Europe and Greater China, I just want to sit on this chart a little bit for the other segments. Starting with Russia, and we clearly besides the growth of all markets in double digit, Russia is one market that declined in double digit and the main reason for that is what we all know the sanctions in the market that consumer we're also seeing is clearly not trading down, and we have closed net more than 180 stores in 2017.

And that of course results in a double digit decline overall. However, the focus in Russia, is only representing roughly 3% of our top line in 2017, we are focusing on the profitability and on the cash generation that it remains cash positive, and that is clearly our goal and what we've achieved in 2017 and you also see on the operating margin actually improved by 520 basis points in Russia.

When we move to Japan, or Middle East and other Asian markets, especially in Japan in a very mature market, we were able to grow double-digit with 10% in 2017 as well and also in Japan not just the gross margin but improve by 370 basis points but also the operating margin improved by 460 basis points, this is again testament of the quality of growth that we are driving in the markets we’re evolve. When I look at Middle East, another Asian market it’s a mix bag we definitely saw strong double-digit growth in most of the Asian markets, but definitely we’re some flattish markets when it comes to Dubai or UAE, where Dubai of course is the main area of consumer demand and that’s definitely impacted by many years of all price depression and even so it came back in 2017 a little bit from all parts point of view, we haven’t seen a significant turnaround from an pricing point of view in that market.

When it comes to Latin America, very happy with double-digit growth there as well 12% that is especially significant as we talked about in the portfolio approach such as Rebook, Muscle Up plan as not just not about selling a TaylorMade and CCM, but we also look at markets that are not contributing to the all company, and we called out Brazil and Argentina back then. So, Brazil only being flat in 2017 so the growth is really driven by Mexico, Argentina which were a turnaround our situation and also by smaller market like Chile and Peru.

When I go a little deeper in North America and I believe you all know about the retail environment that wasn’t the easiest in 2017, so in light of that growing 27% in the market and especially with the Adidas brand growing 35% in 2017 driven by running, training, Originals and neo it’s a significant achievement of our North American team, we’re definitely very part of that one and when we look at the Reebok brand a decline of 15%, this is what we talked about all along 2017 its right sizing the business, focusing on profitability are not chasing to next consecutive quarter of growth, it’s all about our much loved plan that we need to drive profitability and in that number just a 37 stores that we closed in the course of 2017. What you all should expect for Reebok just looking forward, we still have a few stores to be closed in Q1 and you will most likely see a single-digit decline in Q1, but for the full year as we mentioned also our Q3 call we’re expecting returning back to growth with Reebok in North America in 2018.

Overall, given the growth of the market 27% we were also able to expand our gross margin by 180 basis points contributed by both brands even over proportion percentage from the Reebok brand in the North American market and overall operating margin up by significant 470 basis points to now 10.9% in 2017. When we look at Greater China, one of our three key markets as well growing 29% in 2017 on a currency neutral basis, this is again almost equally in the growth 30% for the Adidas brand, double-digit growth in running, training, basketball, Originals and neos so it’s very broad base from a category point of view and also the Reebok brand of course on a different absolute level, but from a percentage point as well 25% after by training, running and classics.

I know even my predecessors have talked about the operating margin will not remain at a 35% forever, and I have to repeat that again today even so the gross margin was down by 50 basis points given the expansion and lower tier cities and also bringing the right products into the market that is resonating with these consumers in lower tier cities. We were still able to given the growth of the top-line to leverage the operating margin by 20 basis points.

I'm not hoping this is the last time that I'm presenting something like that. But just looking forward, I really expect the 35% is on a significant level that we should not count on towards 2020 and we will slightly go down overtime year-by-year.

But still it will be to remain our most profitable market for the foreseeable future. When it comes to Western Europe another of our mature markets similar to Japan.

Double digit growth again with 13% driven on the Adidas brand was 12% out of Running, Outdoor, Originals and neo. Again, very broad based in our home turf here as well.

And the Reebok brand on a significant level as well growing 24% driven by again Training, Running and Classics, so it's a broad based. What I most proud of and credit to the team in Europe is the expansion of the gross margin of 110 basis points despite the fact that we had an FX impact of more than 200 basis points.

And that is significant improvement again, Craig and his management team and again also testament of the quality of growth that we are managing in Europe and that's I believe we are doing the right things in that market also from a growth and from a profitability point of view. All of this prior to an expansion of 210 basis points to now 20% of the operating margin.

When it comes to the overall P&L now in the nominal rates on the top-line. The currency neutral of 16% top-line in 2017.

It was 15% and nominal, we already talked about the gross margin expansion of 120 basis points that is very healthy despite the FX effect. And what you will see here is the impact of other operating income.

This is again we talked about all '17, the onetime effect that we had in 2016 with the termination of the contract with Chelsea and also the divestiture of the Mitchell & Ness where we had onetime effect in 2016 that didn't repeat themselves in 2017. As we see a lot of numbers here, and the operating margin please allow me on the next page to guide you little bit through the bridge of where we actually coming from 2016 and what we have achieved in 2017 also on the comparable basis.

So, when we looked at 2016 as reported, we actually thought it was 7.7% operating margin, including TaylorMade and CCM, our hockey brand. That of course drove one of the decisions to clean up the portfolio to focus on Adidas and Reebok going forward just the success of divesting both brands led to 90 basis points improvements.

And yes, I have to say again we paid surprise in the profitability in the past, and now we get the gain in 2017 on that divestiture. So, the starting point on a comparable level would then be 8.6% but also on the 8.6% despite the currency headwinds that we had in 2017 where we're able to expand the gross margin by 120 basis points.

This of course is a quality of growth but also the e-commerce growth has contributing to that gross margin expansion of 120 basis points. And I also talked about limited leverage of our operating overheads.

And when you look at this chart, the leverage that we had of 80 basis points were completely eaten up by the not reoccurrence of the 2016 events of Chelsea and Mitchell & Ness, but still on the 80 basis points operating expense leverage. The majority of that leverage came out of operating expenses and not out of marketing investments, operating overhead and not out of marketing investments.

So, all of this given the significant gross to gross margin expansion we are now at an operating margin of 9.8% and it was at 9.8% and off course there was leading to the increase over 2020 guidance from 11% originally to now 11.5% because we are well on track with these achievements in 2017. When we look at the net income and the customer already mentioned all the operating profit of 2.70 billion and the operating margin of 9.8% led to a net income from continuing operations of 1,430,000 on a comparable basis excluding the divestitures there would be an increase of 32% in 2017 and again a lot of numbers on their sheet so please allow me to guide you towards a bridge on the next chart.

Also there need to start with what we reported back in 2016 and so the net income from continuing operations as reported was a 1.19 billion, if you then adjust that one for discontinued operations given the divestiture of TaylorMade and CCM the comparable base for our net income would be a 1.82 billion so the underlying improvement of our operational business of continuing operation and it was actually 32% so it's a 1,430,000 compared to the 1.82 billion and that is really what we need to focus on as it is also the 1.430 that we are going to pay the dividend or base the dividend on. What you also see as the reported numbers is 1.1 billion as net income and off course that is the bridge there is the losses from discontinued operations and given the divestitures of those brands and also the one time negative U.S.

tax effect that we articulated in early January and that again I want to repeat it's a onetime 2017 and the non-cash effect in 2017 and it will not repeat itself in 2018. Going to the operating working capital, we finished the year with very clean inventories so we are well prepared moving into 2018 with a truly comparable 8% the currency neutral inventory position at the end and receivables are in line we see 90% growth that we saw in the fourth quarter especially with the shipments that we did in December as well so this is at a very healthy level and also the ageing of those inventories or receivables have not are fundamentally changed compared to prior years.

All of this led to a very healthy position of 20.4% at average of about capital uber net sales and this is also bring us closer to us at our, I don’t want to call it a dream scenario, but at some stage during my tenure I want to see it below 20% and that's what we are relentlessly working towards starting of 2018 and beyond. When it comes to the net cash position I need to get used to that, we normally speak about net debt during on that chart so for first time in many years we are talking about the net cash position again of 484 million and again this is one of the questions that I always got from all of you during my road show in the last at least in second half of 2017, what if we generate some cash what are we going to do with that one and so far I talked about lets generate the problem for us before we do resist that's meant for cash but that's actually leading to the next chart which is explaining in more detail our cash strategy and off course we will first and foremost continue to invest into our operations with a CapEx that we guide around 900 million in 2018 coming from 752 million in 2017.

That’s the best investment or the return that we can get for the money that we are investing. We will be very predictable as our dividends going forward staying within the payout ratio of 30% to 50% on the continuing operations.

And as you saw yesterday evening we announced a share buyback program up to 3 billion that we want to start probably around March 22, and then it will run through May 2021 and I want to give you some more details around that one. Just when it comes to CapEx where is it going to, there are pretty much three buckets where we want to invest.

One is controlled space and within controlled space there are primarily three areas that we are investing into. One is selectively new stores primarily focused on key cities that doesn’t mean it's only the six key cities that we have talked about, that might be the top 10 to 15 cities around the world where we keep investing into and we will be remodeling of the retail fleet that we have around the world.

And certainly, love to be branded space within our hotel partners. This is a significant piece of the CapEx where we invested into.

And secondly as we talked about, some of the bottlenecks that we had but also part of the growth of our digital business we keep investing into our IT not just in digital IT but also in overall IT infrastructure to run this company as one company and not like many small companies. We keep investing into this one but we also have to invest into more warehouses we talked about given the Brexit.

It will be dedicated ecommerce warehouse in the UK. It will be one of the north east of U.S.

and there will be one warehouse in the west coast to service the consumers better primarily in the online space and on the ecommerce space. And whether we like it or not we keep hiring or have hired in the past and they are still investment here in our headquarter in Herzogenaurach that will be finished during the course of 2018 and early 2019.

And we will also keep investing primarily in China and also in our headquarter locations in the U.S. When it comes to the dividend, the increase from €2 per share from 2016 to now €2.60 as we proposed for the annual shareholders meeting.

It’s a 30% increase in dividend. We actually took the liberty to look at the doc 30 average of our peers, at least the ones that that reported their financials already.

And so far, we are leading the pack with 30% increase. So, we are pretty happy to announce that today that this is what we are proposing and also in absolute terms its 530 million absolute terms, and we are at a similar ratio that we had in 2016.

And this represents our guidance of 30% to 50% and we will continue to do so in the years to come. Even after the dividend is being paid out and the free cash flow that we are generating we also looked at what will be the right size of share buyback program and that’s where we settled given the underlying improvements not just of the business as part of our Creating the New strategy or the execution of Creating the New strategy.

Of course, that success will generate cash as well every year as far we are proposed up to 3 billion towards May 2021. It will start as early as March 22 and also it will not be a technical program where we will be in and out, we want to be continuous in the market and work with the respective banks to be in the market on a continuous basis and then continue to buy back shares starting significantly in 2018 with up to €1 billion.

So, we're clearly committed to their program as early as March 22 and expect a significant part of that happening at 2018. From the funding point of view, I talked about it.

We have a solid net cash position already at the end of 2017 or as we are today March 14, we will generate more free cash flow going forward not just in '18 but the years to come. But we also look at opportunities of debt funding in the market.

And this could be as early as 2018 as well. And stay tuned for that going forward.

With that, I would like to hand over to Kasper again, to give you the outlook and then we come back with Q&A later on.

So, before I go to the outlook, let me just stress again what we'll aiming at achieving and it comes really back to the core slide of Creating the New, winning first few slides growing market share and growing margin. That is what we're trying to do.

So, get to like that which mean our top and bottom line. We had likely so for many years been criticized our, compared to previous underperformance, under profitability.

And it's very important to us that we find the right balance moving forward of growing market share, but at the same time improving the profit margin for us as a company, that allow us to do the right things and become equally efficient as some of our peers and particularly one of our peers. But that is how we look upon our overall company also going into '18, but also towards 2020, finding the right balance, make sure that we focus on revenue when it delivers margin but of course not focus on margin which we don't get any revenue along with it.

So, you will see that being characterized also in our guidance. We look upon 2018, we are looking for high-quality top-line growth ensuring that we are getting the products into the market that it value for us.

We were over pushing this in brands and products so the increase in the guidance I'll speak to you in a second is not coming through savings top brands we are over proportionately investing both actual and relative in our brand. We are starting to see the first level of responsive our scale of business models is getting more scale out of the same population, lastly if you go through numbers we actually decreased our number of employees by 2000 and at the same time added €3 billion to the top-line.

So, you are seeing that we are getting the first signs of the scale of the business model. Everyone drives marketing expansion over the portion the net income growth.

We will do that through a number of initiatives. One is our system products assist us use them as a baseline to drive revenue forward, continue to launch new product and franchises.

We hope most will win, not all the win and because that is evolution in any given industry, but we're focused to ensure that those we launched are successful and should be launched some that are not successful have the courage to pull them from the market quickly. We use innovation not only to drive revenue but to drive brand differentiation our 3D relationship with Carbon is a good example where the 3D printed shoe in 2018.

So, this year we'll sell more than 100,000 of these shoes. Maybe the revenue itself is not too important.

But the bran we create from that revenue is substantially. And lastly but at least make sure that we use that make sure that we use the major sports event will brand our products.

And just looking back since we are in '18, we start up with the Grandslam German in Tennis, in Australia where Caroline Wozniacki won, true as its ambassador. We have for the brand a various Winter Olympics in Seoul and it should be in Korea in a month February.

And of course, we're looking forward to a very strong World Championships in Russia. And football, is and will remain the single biggest sport in the world, so while the commercial of football, how we find out you know might have a lesser importance now than it did five or ten years ago simply due to the exercise of our company the brand exposure side is immensely important for us to make sure that we transmit the brand we have with 12 teams globally to push revenue for us as an overall company, probably more in the market than in Russia itself.

We have made one reporting change which is reflection of a business model change in Europe for a very long time, we've been running Europe as one organization, we've done the same with emerging markets. We've done the same with Latin America, we've done the same with the US and Canada.

We've now made the decision to bundle all activity in Asia in one organizational structure. Pick one out of China, so Asia we run out of China in a very consistent setup to our other regions and it'll run by Colin Curry, somebody who is currently our Head of China and he will do both roles, China and Asia simply because of the big impact that China has in the overall Asian markets.

But we need some assurance that we run the region more consolidated and get more benefits from the scale and learnings that we have in Asia. So, it's a natural evolution taking the Asian model into a model that is very similar to the models we have in other regions.

The growth drivers also in 2018 will be North America where we continue to expect a very strong growth on top of the 27% growth we saw in 2017. The Adidas brand grew 37%.

And we expect also margins to continue to improve, it will continue to [dilutive] but the absolute income growth coming from North America is quite substantial. Asia-Pacific grew 22% overall with China growing almost 30 last year, we do not believe as Hans said that there is substantial market upside but we need to continue our strong growth in Asia, and e-com after 57% growth 2017, we need to ensure that we drive that business forward and also get some benefits of the investments we made in infrastructure, in Europe, in the US and in China.

From a marketing standpoint we will be investing mainly in three areas, reason to believe, reason to buy and [indiscernible] communities, our marketing investments are aimed to increase in absolute and in relative terms compared to 2018. So again, to repeat myself the market expansion that we're foreseeing is not coming from brand cuts, we are over investing in our brands compared to previous years.

And the leverage point is take the strategy that we have brand leadership terms and execute that very consistently on a global basis, have clarity on who does what and makes certain that we don't reinvent the wheel. Drive managing effectiveness and as you could hear before while we're increasing the amount of absolute spend and also relative we want to invest in fewer campaigns, we want to make use of data, data analytics to ensure that we get the best possible return on very large market invest we're doing.

And lastly but also very important improve operating efficiency that is a scalable business model that we can have revenue at a higher rate on the top line than the overall operating overhead to ensure that we get the margin expansion. Which brings me to the outlook.

The net sales are aimed to increase approximately 10% the gross margin up 30 basis points to approximately 50.7. The operating profit increased 9 to 13, the operating margin between 50 and 70 basis points to 10.3 to 10.5 which will be an all-time high.

Then net income from continuing operations to increase between 13% and 17% and the basis is the [14.30] so that is excluding the U.S. tax reform and that is the number.

And of course, the basic EPS from continuing operations to increase between 12% and 16%, but 12% and 16% includes a convertible bond does not include the share buyback program that we have. And of course, overall, everything has been equal EPS will of course grow and benefit from the buyback actions activities we are taking in place.

When it comes to the convertible bond we have a small portion 6% of the convertible that has not been converted into shares. And that conversion might increase the share count by 0.4 million so we need to take into the account but we will be happy in subsequent meetings to take you through really the details of this, but of course, the overall intention is to decrease the number of outstanding shares by acquiring up to potentially 8% of the outstanding shares depending on the share price.

Let me just spend a couple of seconds on the guidance and give you an insight into how we look upon the guidance from a more qualitative standpoint. We believe, starting from below, that we feel very comfortable with the net income increased to between 13% and 17%.

The same goes for the margin expansion, taking the margin up to -- between 10.3% and 10.5% up from the 9.8%. So, where we believe that we have most challenged from a guidance standpoint is on the top line the, 10% we think that is by far from be the most challenging element of our guidance for 2018.

As I said the overall margin and net income and subsequent the EPS we feel less is challenged than the top line. I want to make sure that you understood that up front and let me just give you another caveat.

For your models we are seeing significant currency headwinds which will mean that with the current view of how the year will evolve from the currency standpoint, we will lose up to half of the nominal conversion from the currency neutral, meaning should be below 10% currency neutral, we expect 5% or less percentage number growth. So, you are seeing that we are actually guiding right now with that assumption a proper expansion of a rate of three to four times higher than the nominal expansion on the top line.

And we are seeing in the first quarter higher levels of currency headwinds than we expect for the year. So, the conversion from currency neutral to nominal will have a higher currency lost transaction wise in the first quarter than we expect from the year.

Just to repeat current view is that we will lose at least half in conversion from currency neutral to nominal on a full-year basis and we expect an overall portion higher loss in the first quarter. I’m saying that just to make sure that you build your models appropriately.

The same goals from the way we look upon the depth of elements of our guidance where I said the highest challenge will be on the top line we feel more comparable with those in the middle and subsequent below. We have also updated our 2020 guidance, and this is the second time we are doing it.

You know the March 15 which we spoke about last year where we updated not only the top line, but also the net income and net sales and operating margin. And again, and now we are upgrading net income for the full period where a year ago it was 22 we are seeing 24 and the implied March and our usage deliberately is now up to 11.5% versus the 11.

I’d say its deliberately because we consistently said that the key guidance is then it come, because that is what drives shareholder value, of course there is implication in the margin that’s what we are showing you here the same logic as we’ve done before. So, up to 22 to 24 and in operating margin up to approximately 11.5 versus 11.0 last year.

So, in summary strong operational and financial performance in 2017, 2018 will be another year of high quality growth but with a different profile than we’ve seen in the last year, but with continued margin expansion towards the target of 11.5. the 2020 financial ambitions that we update greater and profitability of target have increased and we’ll continue to invest in people infrastructure on brands.

So, while we will continue to invest in people it is equally from a quality standpoint that we’re hiring different profiles particularly with the additional background and a little more of background infrastructure when it comes to buildings and supply chain and of course continued very strong spending into our brands Adidas and Reebok. And then lastly a relentless focus on executing create a new acceleration plan there is no discussion about new strategies in this days there is only discussion on how to ensure consistent execution over the strategy we have to what the target we have said in the last months.

With this I like to stop at this stage and back to Steffen, so we can start with the question-and-answer round. Thank you very much.

Thank you very much Kasper, Tracy, we’re now ready to take questions.

Hi, good afternoon. Two questions for me please.

First is around the 2020 EBIT margin, could you just please tell detail what the main drivers were behind raising the target to 11.5 from 11. And perhaps give us a bit more detail around how much the better gross margin expectation is, how much is from better OpEx leverage expectation.

And the second would be on North America and you’re guiding for a significant double-digit revenue growth here for the Adidas brand. And it would be helpful to hear more about the key drivers for that in 2018 in particular obviously shelf space gains are major driver, could you perhaps also share some color around recent like-for-like sell out trends as well.

Thank you.

So, on the US we believe that through further expansion of distribution point of US we have been under distributed in the past that would help drive topline growth along with a consistent new introduction of key franchises and the US and the expansion of our e-commerce business in the US. We do not comment on the remaining part of your question, when it comes to the US, but we do see continued market share opportunity gains in the US where we are under work proportion represented.

I believe Hans in previous meetings, said that this is one of the few countries where below 15% so the first step is towards the 15%. On the 11.5 versus 11, as I said, this is an implied margin and I want to be inherently on this because of course we are operating with model, we think that we can get more operating leverage out than we’ve seen before, we’re not guiding on the gross margin by 2020 at this stage, we will of course in 2020 guide, but it’s really making more use of becoming a global scale organization.

So, it will predominantly come out of operating overhead. And also using the right channels to optimize our margin, that was a project that was initiated this year, where we look very deeply into what is the profitable way of bringing products to market and optimize that also from a channel standpoint and not only from the country standpoint.

Just to add to that thread, I mean as I mentioned in many meetings in 2017 as well, we made tremendous progress in 2017, we saw 9.8%, but we really see the next three years ahead as the majority of the benefit of the leverage will come out of the operating overheads and less out of the margin, yes we will work on improving the gross margin as well but the majority would come out of the operating overhead leverage.

And just one follow-up, so the marketing as a percentage of sales going up this year, there been a longer-term view of it coming down from 13% to 12% by 2020? Can you reconfirm that?

Directionally yes, what the absolute number is, of course we are still looking, but what I want to say is and that's why I deliberately said that we -- our primary KPI is the net earnings, we want to make sure that we invest ourselves to success, well knowing that there's targets beyond 2020 and we are trying to set ourselves for long term success, and we don’t believe that we should settle ourselves to that, but directionally yes.

A couple of questions from me I guess first on the 2018 guidance, can you talk a little bit about what your underlying assumptions are for Reebok's versus Adidas to hit that 10% goal?

So, we don’t guide on Reebok, specifically you've seen Reebok has had significantly lower growth rate than Adidas, that would be our assumption also for 2018 and I just want to reiterate what we're trying to do in Reebok. on previous calls we have said that the chance we have around Reebok is not growth, it's profitability and in the past, we drove I think 15 or 14 quarters of growth that delivered negative contribution to our company.

So, if we have to settle on less growth with adidas we wouldn't want to do so, we need to get the foundation right and the first step was first 100 basis points, so you should expect a lower under proportional contribution from Reebok and then over proportional contribution from Adidas that's pretty much the way we would specify it.

And then just two more for me, just in 2018 could you just talk about your overall assumptions for the competitive -- for the promotional landscape broadly. I know last quarter you spoke more specifically to some of the promotional threats that you’re seeing from some of your competition, western Europe are you still seeing that or expecting that to be the case in 2018, just any major nuances, both in Europe and in the U.S.

and then my last question is just on the ecommerce business in North America, how are you feeling about the fulfillment rate versus where you've been in the prior quarter?

Yes first on the promotional environment of course it's different market by market and the fundamentals are very-very positive and in China of course yes it has improved slightly in the U.S. it has -- it's stable I would say in western Europe, so I would say 2018 should be from a promotional point of view have better environment than 2017, that's ingoing assumption for us also bit into the guidance of 10% currency neutral as Kasper mentioned earlier.

When it comes to the fulfillment, we are definitely not satisfactory as it is not a satisfactory situation that we have and we're not being particularly quickly I mean we made the decisions especially in the west coast warehouse and also in Northeast warehouse, we implemented omni-channel capabilities where we start to ship from store to the consumers but there is only so many consumers you can reach with this inventory that you have in the stores so it's very limited and until we have these warehouse up and running as a fulfillment will remain a challenge in North America. And I just want to repeat it and in Q3 and Q4 and as for today, an ecommerce consumer it takes probably four to five days on average to get the product after you ordered it, that will not fundamentally change in the first half of 2018.

And we just don’t know also yes we lost some demand in 2017 given the warehouse constraints but there is an underlying challenge that we have in GSS as well that if you are a consumer that ordered something in Q4 and you rate product days whole likely do you buy again and that's something we are looking as we can quantify the impact of not shipping but we can't really quantify the impact of un-satisfaction of consumers given there. But so, before we get to the second half of 2018 there will be constraint from a fast shipment point of view.

I have two questions. On your apparel business Kasper, you highlighted slower growth you are not fully happy here, as I understand maybe you can give us a bit more insight what the current strategy is here, what are the key initiatives to accelerate the business and to take your market shares to maybe particularly for the U.S.

market would be quite interesting. And the second question is related to speed to market, you highlighted that significant progress here 27% to 28% of sales on speed to market capability.

And you mentioned in the past the target of 50% is that still valid does it make a sense to keep it on 50% or maybe even more and maybe on that respect also what was the impact from speed to market on full price sets and gross margins?

So, thank you very much for the question regarding apparel. I'll do that, and then Harm will do the speed question.

If you look upon the foundation for our creating the new strategy was very much based taking starting point in footwear and that's where we use this foundation I believe that you create more customer or loyalty through footwear then you do through apparel. Today approximately 6% of our business is footwear and 40% of the business is apparel.

We grew our apparel business to 7% last year so compared to the 16 dilutive but still overall an okay number however we believe in the bigger context that we have more growth opportunities in here moving forward because of our previous focus in footwear and I think there is a couple of areas where we could become better. One is in the overall use of franchises for apparel like they have [indiscernible] expand franchise with different models, different pricing points and different materials.

So, one is franchise management. The second is use of different materials that we’ve not done before and I’ll give you another example we’ve been very successful with shoes where we sold more than 1 million last year, you would also see by mid of last year we started using the time material into swimwear.

So, using different kinds of materials that have not been used before of the franchise through the use of material in apparel business, I believe gives opportunity for more growth. So, starting with understanding our primary focus in 2014 and 2015 it was differentiation to footwear and now you’re seeing we were trying to move some of the ranks we have from our consistent footwear expansion to apparel to drive a higher growth rate in the past.

I just like to hand over to Harm for speed.

Yeah. First of all, it would be great Andreas for sticking to the two questions, so I will you a very good answer on the speed as it still one of our choices and you’re absolutely right 28% of our speed enabled articles were driving 28% of the sales.

It makes sense directionally to stick to the 50% and it’s really important in a more volatile market environment that really drives the speed initiatives to the full extend. And I can’t really tell you as I said in earlier calls, what is the impact on full price see-through, because we don’t get all the numbers on a wholesale basis, but you will see in 20 odd years in 2017 that the quality growth in our gross margin expansion definitely impacted by our speed initiatives and how we operate going forward and you also see it on the inventory discipline.

So, for me, I rather look at the -- having the right inventory through ordering later rather than sale through because it’s an easier measure that we can look at. But it’s remains one of our choices and Steffen, are getting more important, but the 50% is the direction, not a hard target.

Hi, team. Could you talk a bit more about conditions in Greater China?

And what is driving your topline in terms of price versus volume and performance versus lifestyle. And also, what you’re doing to accelerate your progress on team now?

So, if you look upon we don’t give specific numbers, but the overall growth in China is based on a number of parameters. One is expansion of stores, we have approximately 10,000 stores today and we’re aiming towards rough number of 12,000 franchise stores by 2020.

Second is, that we’re seeing a significant expansion opportunity when it comes to entire digital marketplace, not only our own site but through partnerships with [Indiscernible] which adds a much more dominant position than we see in Europe, the entire expansion digital is very much advanced in China compared to any market, particularly our franchise stores approximately 50% of all payment in our franchise stores are done by mobile pay, it’s the single highest payment methodology in the world. So, there is a physical expansion, there is a digital expansion and the growth is coming more from lifestyle and also sports.

As you broadly know the Chinese governments is pushing quite aggressively the use the use of sport within the schooling system and the [indiscernible] of football is one of the areas of sport. China usually not had sport as part of the school that has changed now, so it’s a mix of many rings, lifestyle and sports, physical and digital and also political expansion or political pressure for products.

We are seeing an increasingly demand also to mid-tier price point. We started from the very top, where we have pricing very similar to Europe but we are of course seeing a market that is bigger and the mid-sized market.

So, overtime, the more successful become in the mid-term market you will have an impact on the margin which was predicted by Harm previously. So, the bigger we become we are in different price points with lower margins.

But if you look upon the overall margin in China, I believe or we believe that its highly acceptable with the current market landscape we have.

And on your question on the volume where those prices it's a difficult answer. Because if you just look at one channel like a franchise channel it's definitely driven by volume as we, get to same doors and expand to new doors.

But there is significant effect are the overproportionate growth of ecommerce you get the retail value as a lower volume. So, it's a mixed bag.

So, it is definitely a combination of both volume and price.

Ask you on e-commerce. Could you perhaps explain where the acceleration in the fourth quarter came from, maybe break that down by region, if possible?

Are you seeing any normalization in -- or improvement in your returns rate within the e-commerce channel? And then secondly, just on China again, if possible.

Could you perhaps give us a bit of an update on how the competitive environment is evolving and how you view local brands in relation to western brands? Is there -- is it more competitive now?

And are you having to work harder to generate the growth rates that you're posting?

Now that we continue with China since we were in China before. China has been and will continue to be a very highly competitive landscape.

I think that it's important to understand that was never our walk in the park. It is a very competitive landscape which also has some local players.

Most of those players are occupying price points which are lower than our traditional price points have been. And that’s why we're looking upon expansion standpoint to take our price point and moving down also to complement our current products with lower price products.

We still see the Chinese market as being very attractive for us also moving forward both from a top-line standpoint and a bottom line standpoint. But I would argue we always say it's the high competitive environment than it is and that it will remain so.

We don't see any change there. There is however no indication that the Chinese consumer would prefer local brands versus global brands.

I would say the other way around. The global brand still have a very high-level effectiveness and aspiration for the typical Chinese consumer and particularly to further go down in the market the more attractive it is because you attract the consumers and as I said before, it's not been able to buying to those brands.

So, we still believe that we have a huge opportunity in China moving forward with the expansion plans that we have. On the e-com side.

Just on the e-commerce on the fourth quarter. I mean e-commerce will always remain the more significant quarter in our business overall.

We're just getting better prepared and we're taking the learnings from the past on things like Single's Day, we have been better prepared we have been better bode for it. We partially repeated Singles Day in China on 12/12 again, which is another significant day that we have in China as well.

And not just talking about Cyber Monday, and yes, but we are actually expanding Cyber Monday to several days starting from kind of the day before Black Friday and then Cyber Tuesday whatsoever to expanding these periods as well, so we are better prepared for these as well. But there's also significant World Cup drops, it's definitely residual, in the ball in Europe primarily but also in other markets when it comes to jersey's and then we had two significant easy drops as well, primarily in Western Europe and in North America as well, that fell into the fourth quarter and from a market point of view, as we said in previous calls 8% of the growth is largely coming from the three key markets which is China, Western Europe and North America and that is pretty much unchanged, as we started late in China, you can expect an over proportional growth in China in general not just in Q4.

Kasper just a quick follow-up. So, is that to suggest that in China, you're going to extend the product architecture from a price perspective downwards while maintaining premium price products?

So, you're going to expand the overall merchandise offer as you expand into lower-tier cities. Is that fair?

Yes but that is very consistent to what we've also done in other markets, so in China when we came in we deliberately -- because the market was in a different stage, it was less mature, we started at a very high end, so it’s a normal evolution but we are not going to be a low priced company, so let me just be clear on this, so don’t move any kind of anxiety that's in the room, but of course we do want to try to take certain of our price points down like we've done, in the Europe, and the U.S. also to address, broader base, so it's not we -- but at the time we clearly do not want to aspire to be a low price brand, we want to be a high priced brand that people can aspire too, by hitting sequentially lower pricing points.

Two questions, I'll stick to it promise, so first of all following up on that comment of more access price points. I had noted that one of the big untapped opportunities in the U.S.

was the development in family footwear in that channel, and I am just wondering if you could update us on how that's going and what do you think for '18 and beyond? And the second question is around -- sorry to belabor the point, but the guidance for 2020, 11.5% operating margin presumably FX has a role to play in this and I'm just wondering -- obviously when you gave guidance's before you were in an environment where FX was not as favorable as it could be now with the euro-dollar at 1.24, I am just wondering if you can comment on what the role adidas has to play and how does the FX tailwind look like for '19 and '20 if we were to keep the current spot rates still valid?

So, let's start with the first one and then Harm will take the second one, of course we are seeing plenty of opportunity in the U.S., in the places like Kohl's or Famous Footwear where you can also find a set of our products today which you couldn't find a year ago, we have been very selective in the U.S. in our expansion strategies, because once we make sure that we're building a foundation upon which will last a long time, to contrast to some of the learnings of the past, so we start out by almost exclusively going through Foot Locker.

Then we expanded to a number of other franchises or partners, now with DICK'S Sporting Goods, now from DICK'S Sporting Goods we move into Kohl's and Famous Footwear and of course we're moving broader at the high end, and then we are moving also in now to the family "[indiscernible] distribution channel", because that's where huge part of the market is. But we just want to make sure we do it sequentially right so we don’t overlook the mark, we don’t do inventory positions and we don’t harm the brands so we see the opportunity we are executing upon the opportunity it will help us achieve the tax we have from the U.S.

but we are trying to do it in the right way. For the 2020 guidance I will hand over to Harm.

Yes, just on the 11.5% I mean we are definitely not betting on any currency development in '18, '19 or '20 and off course it's a simple calculation as a dollar weakens further and it sounds like it's easier to get to the operating margin but on other hand don’t forget there are significant translation impact as well as customer mentioned you earlier if he would get to a 10% currency neutral growth and this is nominal only 5% or less we have a lot of cost denominated in Euro our pound or other currencies and dollar so that's definitely stress on the organization as relatively disciplined on cost so even if we get a probably nicer operating margin through the currencies it's also getting harder to get to the absolute net income so don’t forget about this one that's why we need to be disciplined. Also, on the quality growth and if the nominal growth rate isn’t what the currency neutral is we got to be very-very disciplined on the quality growth to get to the respective gross margin and leverage our infrastructures that we have.

so, the guidance that we gave for 2020 is given the progress that we have made in the first two years and our confidence to leverage regardless of the top line our infrastructure and that's what is based on it's not betting on currencies up or down, because a good movement any direction as we learned in 2017.

That was our answer, was it okay?

Yes, that's fine. I'm not taking a bit on currency either.

I'm just looking at the current spot rates and I'm thinking these spot rates will give you a pretty good tailwind not this year obviously but more in '19 and I'm just wondering if you could give us an idea of how much -- again not taking currency just the image that spot rates remain, how much of that in '19 and '20?

And the straight answer is we don’t worry about the spot rate.

Two questions for us. Follow-up on Europe can you maybe talk about performance versus your expectations?

Any differences you saw by country. What was the amount of the world cup sell-in and what's driving that deceleration two mid-single digits in '18?

And then secondly just bigger picture curious on your thoughts about the pipeline of innovation for '18. Should we think this year will be driven more by expansion of current franchises or more new franchises?

I think they are trying to give you a good explanation it's got to be a mix of why don’t you go to page fairly 7 and to make some existing franchises new franchises we simply have long run rate we will continue to implement new franchises and then using technologies to build brand heat so it's very too much what we are trying to do little bit but we are doing and we are managing our franchises towards life cycle, to ensure that we don’t over exposed. When it comes to year we don’t break it down to the level that you would like us to break it down so I can't give you much guidance on the detail that you would like to however we do see the European demand have been less attractive this year from an overall growth profile than we see in the previous years and that's goes into the numbers.

Football as I've said there is a tremendous brand impact as relative to the overall company and much lesser financial impact simply because we become so much better and bigger. 32 teams have qualified.

A big part of those teams is outside Europe. We have 12 of those teams.

We have three in Europe, Western Europe if I remember correctly. So, it has a contribution 13 in the fourth quarter but you are seeing a lesser contribution than you have seen some years ago.

So that’s the macro of the question a European market that is growing below rates a growth profile between existing and new, but also with a lot of energy put into driving select franchises, select models that will drive brand heat into ourselves and the organization.

Harm, you indicated that you're actually seeing the 2018 markets to be less promotional. At the same time, you're saying you're pushing new franchise into the marketplace, and the old ones are still doing fine.

So, help us better understand why the sales line is such a big challenge for you at this point in time, maybe some additional words on that one. And then secondly, on store growth.

I think in 2017, you had, on a net basis, store closures. I was wondering how you see that rate developing in '18, '19 and '20.

When we say the existing franchises are doing fine, I think it’s important to understand that each franchise has a lifecycle that means we manifest through the lifecycles. And for us, of course we know used two examples, that the growth rate of Stan Smith or a Superstar are now by far what it was 18 months ago that we have seen in the last six to 12 months.

In the context what I’m saying they are doing fine, they are doing according to the expectation that we have. And the plan is which you could see now on slides we have continuously spoken about how much of the growth is coming from new franchises to replace existing franchises.

And that is, in that context, they are saying they are doing fine they are doing fine in the context of what our expectation is. So, we need of course to implement new franchises to deliver growth, to replace existing franchises.

And some of it will take longer particularly because a Stan Smith or a Superstar is such a massive franchise globally. But we all know and I hope you do also that franchises don’t last forever.

It's managing through the cycle up, manage them down and then eventually managing up again. We are not clear on this I apologize.

Second point is the stock closure impact, so in 2017 we roughly closed net 220 stores a lot of these of course in Russia was led to the double-digit decline in Russia. And of course, these closures as they happen throughout the whole year will impact till 2018 because there still have been some sales in the first couple of quarters.

We [indiscernible] not continue on the sale level but we are planning on roughly 170 stores again to be close in 2018 and that is reflected in our guidance. Its predominantly coming out of Russia again that’s why we also not guiding a flat market in Russia there is some uptick hopefully through the event, there will be more closures in Russia as well.

But I also want to repeat, if we believe as the currencies aren’t moving as we expect them to move and there is more stress on the nominal rates we will look at the quality of the growth again, that might be more aggressive in some of the stores wherever they are because I think we want to make sure that we are here for the for the long run even beyond 2020 and if we need to act we will act.

Thanks for taking my question. Great finish for the year congratulations.

I was hoping that you could shed some light and if you look at some of the retailing change across Europe and North America, the results they’re posting are slowing, there is negative sales growth, negative comps and obviously it’s not what you guys are experiencing in your business with your brand. Could you help maybe talk it, is there an underlying channel shift going on there and what that means for the business versus the way you guys ran your businesses historically.

Could it feel there is a disconnect between one of the retailers again the especially in North America and Europe versus what you and other brand are seeing in our businesses. And then my second question was, I was hoping you can just maybe elaborate on the old, interesting to hear the new management incentive system, it’s great to hear.

Maybe contrasted with the old system and how that change and what the response has been internally to it. Thanks.

So, what we’re seeing is and I don’t believe I should comment on retail-by-retail maybe to comment on other business, but I think is the biggest shift you’re seeing is where the shift towards across all markets. But that is had a relatively impact in those retails that have strong online platforms continue to benefit but it is clear that we are seeing particularly the smaller retailers will continue to struggle and it is struggling moving forward.

So, there is a, there is particular in the US the entire challenge around the mall structure such that you probably where that are, but those retailers have the high out exposure to I’d say lower quality or lower attraction located more are suffering more than that. But I think that the biggest switch we’re seeing is brick and motor to digital and of course that’s where we see the opportunity in the US we have been less exposed in some of our retail partner simply because we were under this - and still under this US.

When it comes to our comfort, let me just try to be very throughput to explain what it, what it consists off, for the management board and I hope that if you’re a shareholder - it’s a very, very easy one to understand. We’re only compensated when it comes to LTI and the incremental net income for the next three years so we have a topic every single year of $210 million of incremental net income.

If we over perform one year, the starting point is higher, so let me be very easy, we ended this year with a net income of 14, 13, the net income target for long-term incentive next year or 2018 is 14, 13 plus 200%, 14, excuse me 16, 14. If we then to 16, 60 then of course we over achieve in the first year, but we still have to add 210 to the 16, 60.

If we under-perform then we have to add the 210 plus the under-performance level we then get allocated options in our shares every year that paid up with a 3.5 investing and that means if you were to the right thing, if we did 210 over year we got shares and you want two and three in the year four, shares that we have one wasted in year two. And the year five shares from year two invested et cetera.

And of course, the value of the share you only know when it invests, so if we do the right thing and year one and get the award of shares we only know the revalue in year four because that’s where the number of shares is most likely with the share price. So, it’s a very transparent one, it’s completely align to the target that we gave out of 22% to 24% and it’s hitting right in the middle, 23% gives you 200 million net income every year, in the old model, we have five criteria which were -- had very little to do with what I speak about right now and I'll get there in a second if you’re interested, short term incentives, 6% of our short term incentive is down to two criteria, it is operating margin, so the 11.5% so to speak, and for this year, it's 10.4% because we're guiding between 10.3% and 10.4% or 10.5% and currency neutral and we have measured a 100% as a 10%, so you become very transparent 80% as I said of the variable income that we have is 100% aligned, one to one to what we're speaking about right now.

If you look from the old one, it was net income from continued operations, it was increasing presence on the U.S., it was share price development improvement, it was retail profitability and improvement in sustainability. So it was quite difficult to be very transparent it was difficult to show what the target is, here you know exactly what the target is, and the time it gets coverts to shares, and the share price is a determining factor, how much we're getting out after three and half of investing, and that's what we believe is the most transparent compensation system that I believe is in the market right now and it's one that is completely linked to the guidance that we're set in giving you, LTI, here today and STI for the full fiscal year 2018, so you know how we compensated right now, it's -- there's a description and a report but I really hope you support us in this, total transparency, completely linked to the targets we're speaking about.

And no adjustments by the way.

And in addition to that we also aligned our top leaders in the organization to that incentive system as well, in the past we had an LTI for China or for ecommerce, or for North America, and our top leaders are aligned on earnings per share growth as well on the LTI, and that's something we implemented already in 2017.

Just congratulations on tremendous performance particularly in the digital space, 57% growth in Q4, how should we think about your investments in digital, and my follow-up to that is how do we expect the margin mix shift from the digital -- from growth in digital to play out?

You should think about our investment into digital in the entire end to end chain, and what we mean by that is from continued engagement to demand generation and transaction to the fulfillment, so when Harm speaks about we're building large warehouses in the Europe, in the U.S. or in China, that's actually related to the digital, we opened one of the largest e-com warehouses, probably the largest we have as we speak in on the German border to Belgium and Holland, so if you look upon in the entire context from consumer engagement to fulfillment of it, and what we are doing is we are investing in people, substantial increase in our capability that we ever had, we're investing in software and solutions, then we're investing in infrastructure, we're investing in traffic because we believe this is an extremely attractive business model for us.

It is accretive to our overall business, from a margin standpoint despite the high return rates, because of course that there is no call on middleman. And that's why it's not only attractive for us financially, but it's also very attractive for us.

Because we see the positive in the marketplace every single day. We know the demand for every franchise every single day whereas we do through wholesales or somewhere our own retails we're growing on the same sophistication that were on the systems.

We don't have the same market for us. So, it's achieved well and enforced it's financially well enforced.

But it does imply a very large investment and people systems and physical infrastructure.

Thank you very John. And thank you very to Kasper and Harm.

Ladies and gentlemen this completes our conference call for today. As you know, our next reporting date will in less than 2 months on May 3, 2018 file our Q1 results.

We all look forward to speaking to and seeing many of you over the next couple of weeks and months during our roadshows here in Europe and also over in the U.S. If in the meantime you have any questions, as always please don’t hesitate to reach out to Christian and any other member of the team or myself.

We will always be happy to assist you. And with that I would also like to thank you for participating in today's call.

Wish you a great day and bye bye. Thanks very much.