adidas AG

Sebastian Steffen - VP, IR Kasper Rorsted - CEO Harm Ohlmeyer - CFO

Antoine Belge - HSBC John Speirs - UBS Investment Bank Erinn Murphy - Piper Jaffray Companies Jurgen Kolb - Kepler Cheuvreux John Guy - MainFirst Bank Jaina Mistry - Deutsche Bank Andreas Inderst - Macquarie Research Omar Saad - Evercore ISI Piral Dadhania - RBC Capital Markets Chiara Battistini - JPMorgan Chase & Co. John Kernan - Cowen and Company

Thanks very much, Jeff, and good afternoon, ladies and gentlemen. A warm welcome also from my side to our Q3 2018 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, I would like to add ask you to limit your questions during the Q&A session to 2.

In addition, please keep in mind that all figures that we will be talking about will be stated on a currency-neutral basis and will be discussed for our continued activities unless otherwise stated. And with that, over to you, Kasper.

Thank you Sebastian. As always, I will take you through the business highlights.

Harm will take you through the financial highlights and the appropriate details, we'll subsequently have the outlook for the remainder of the year, and then Harm and I will be happy to take your questions. It was a strong third quarter for adidas.

We continued to make progress across all our strategic growth areas, North America, Greater China and e-commerce, all growing going double-digit. We saw a significant growth in our Sport Performance with double-digit increases in Training and Running, and we had a bit of unexpected gross margin, which really is a consequence of the focus of quality top line and not chasing revenue for the sake of chasing revenue.

And eventually, we saw strong profitability improvement despite severe FX headwinds. However, there was also areas that we were not -- we continue to see challenges in Western Europe, which is weighing in on the company's top line.

As you can see the 8% instead of the guided 10%. And when it comes to operate leverage by a number investments.

We continue to invest in brands and the scalability of our business, which match some of the leverage that we're actually generating. In the meantime, consider the headcount development as a proxy for how much more efficient we're becoming.

Headcount is down 2% since the end of last year while we've, of course, continued to grow the business in the first 9 months more than 9%. Our Originals normalized after a period of extraordinary growth in the last couple of years and the Sport Inspired was supported by an exceptional Yeezy in the third quarter where we're doing what we said more than 3 years ago, approximately 3 years ago, democratizing Yeezy.

The retail comp trend was mixed. You will not be surprised to hear that the comps both overall and for concept stores have softened in Western Europe.

This weighs in our global comps. At the same time, Latin America, particularly with Argentina and Emerging Markets are suffering from difficult macro conditions under which tend to outperform concept stores as consumers are trading down.

That's it. We continue to record healthy comps in our focus markets in North America and China where comps accelerated sequentially.

A look upon the major developments around P&L standpoint in the third quarter. Our revenue increased 8% currency-neutral and 3% in Euro terms to €5.9 billion and a [indiscernible] of 5 points between nominal and currency-neutral is also what you expect for the remainder of the year.

The gross margin is up 140 basis points to 51.8% despite severe FX headwinds. The operating margin up 130 basis points to 15.3% despite higher marketing investment.

And net income from continued operations increased 19% to €656 million and the basic EPS from continued operations up 21% to €3.26. We saw double-digit increases in our strategic growth areas in the third quarter.

adidas North America continues its strong track, 18% up; Greater China, 26% up; and an e-commerce growth of 76% in the third quarter, a stellar performance of our digital business. The adidas brand continued its strong growth, double-digit increase in North America and Asia-Pacific led to an overall 10% growth of the adidas brand.

The Sport Performance grew 8% driven by double-digit growth in Training and Running. Sport Inspired grossed 11%, reflecting also an exceptional Yeezy growth in the quarter.

And we saw a balanced growth between Footwear and Apparel, both were on double-digit, so that means both growing 10%, not surprisingly when we overall grew 10% but a very strong balance between Footwear and Apparel. When it comes to Reebok, we saw robust profitability improvement at Reebok and making further progress on our [indiscernible] and Muscle Up initiatives.

So we saw our gross margin up 4.4 percentage points, up to 45.3%., so you can see we are continuing to make progress when it comes to profitability. We saw revenue decreases up 5% sales due to sales decreases in all markets.

U.S., a sustainable market was up, North America was down due to Canada. We saw double-digit growth in Classics, offset by declines in Training and Running.

So in essence, what we're seeing is we're making strong progress on the profitability side. We still have to bring Reebok back to growth, but one step at a time.

Coming back to our digital business. We saw exceptional growth in eCom of 76%, driven by double-digit growth across all regions.

We saw a set of strong Hype releases and the launch of our Creators Club. The Creators Club is a global membership program that will reward consumers' loyalty to their brand with access to a set of specials, including exclusive product offers and events.

Consumers in the U.S. are the first who can sign up for the program in our stores, through [indiscernible] and through the Adidas app.

Additional markets will follow throughout the coming month. Like our Hype releases, this will help us drive traffic and engagement rates with the consumer.

And also, with the adidas app, we continue to make progress. We're now live in 17 countries, and we have closed 5 million downloads by the end of the third quarter.

With this, I would like to Harm who will you through the financial highlights also in more detail. Harm, over to you.

Thank you, Kasper, and good afternoon, ladies and gentlemen. We go into the regions.

I would like to state, again, North America and Asia-Pacific has double-digit sales increase sales increases, reiterate, again adidas North America was 18% up in the third quarter, and then in Asia-Pacific, double-digit growth was also driven by China with 26% up. When I look at Russia, despite ongoing closures of stores in 2018 but also comping the closed stores in 2017, was a 7% growth in the third quarter, still, to some degree, impacted by July World Cup effect.

They did a fantastic job on the ground. That's what we're seeing in the numbers here.

I would talk about Western Europe in more detail later, but it's also, according to what we mentioned after Q1 and Q2, we are more in a flat environment in Western Europe with minus 1 on the chart. When it comes to Latin America and Emerging Markets reflecting the macroeconomic challenges that we have in these markets, but I would like to go a little more detail into Latin America, specifically Argentina where, for the first time, we applied hyperinflation accounting.

So on the IAS 29, the Argentinian account is now translated into Euro using period end rather than period average exchange rates. And given the continued devaluation of the Peso, reported revenues were hence negatively impacted by a high double-digit million euro amount.

That is what you see in the nominal net sales. That's why you also see, in Q3, a 5 percentage points GAAP of 8% currency-neutral for the overall company versus 3% nominal overall company that is slightly impacted by the Argentinian hyperinflation.

There was a slight positive element but to be neglected on the currency-neutral number as well. But rest assured, going forward, the impact of hyperinflation accounting in Argentina should be small on a quarterly basis, given that from here on, it's just the respective quarter that is subject to the accounting rather than the entire period from January 1, because we have now 9 months reflected in 1 quarter and, going forward, it will be a minor impact.

And against the background of the overall volatility and global ethics markets, the impact of hyperinflation accounting on our profitability is negligible. When it comes to North America.

Again, very strong 16% currency-neutral growth. The adidas brand revenues up 18%, driven by double-digit growth in Training, Running, Football and Sport Inspired.

Reebok brand revenues flat, but we actually grew with a high single-digit in the U.S, which was than offset by a decline in Canada and, again, especially the high single-digit increase in the U.S. is despite the closure of the retail stores in 2017 that we are still comping.

But as we said after Q2, we are largely done with the retail closures, and it's about growing in that marketplace now again. But you also see the quality growth that we have contributing by both brands that the gross margin is up by 220 basis points and now 42%; several positive drivers, including favorable channel and category mix; but also what we talked about almost every quarter, we had the hangover of inventories from last year warehouse challenges that had been cleared in the first half.

And we said after second quarter as well, you should see a positive development of the gross margin in the North American markets, specifically on the adidas side. And with that, the operating margin increases, 6.8 percentage points to now 18.1 on the back of the gross margin expansion as well as operating leverage.

When it comes to Asia-Pacific, we are up 15%. Again, this is driven by greater China with 26% up.

The adidas brand sales increased 16%, double-digit growth in Training, Running, Heartbeat Sports and Sport Inspired. Just for clarity, Heartbeat Sports also includes Outdoor.

The Reebok brand revenues decreased 1%, decline in Training, largely compensated by growth in Classics and Running. Northern Asia, the gross margins up 180 basis points to now 57.2%.

Again, better pricing channel and category mix compensating FX headwinds in Asia. And with that, the operating margin also up 90 basis points to now 35.5%.

Again, investments partially offset gross margin expansion and investment yields, so primarily [indiscernible]. When it comes to Western Europe, again, the top line development in line with expectations that we alluded to after Q1 and then after Q2 again.

With that, currency-neutral sales decrease by 1%. The adidas brand revenues decreases by 1% as well as the overall market.

There were moderate gains in Sport Performance, offset by moderate declines in Sport Inspired. The Reebok brand sales decreases 5% reflecting, on the one hand, tough prior year comps and also [indiscernible] distribution.

I'll come back to that when it's about future marketplace and when we come to the margin bridge. But overall, a positive development of the gross margin with 340 basis points to now 48.8% despite negative FX impact, which shows, again, the focus on the quality of growth is really paying off in the gross margin.

And with that, the operating margin in Western Europe goes up 110 basis points to now 24.4% in the third quarter. Gross margin improvement partly offset, again, with significant brand investments in Europe.

So let me move now on the balance between gross and margin, and why this great record profitability improvement in Europe of that magnitude. We are not quite happy with the balance between their recent top line and market trends in Europe.

It might have been a little too ambitious, in terms of pricing, in some areas, which is, of course, to the detriment of growth in a highly material and competitive market like Europa. But rest assured, we will reinvest into pricing and product, which means, going forward, we should not expect the gross margin to expand further.

We expect to keep expanding it at the rate of -- should not expect expanding at the rate that you've seen in Q3. So we are more cautious in this one as we keep investing into the gross engine and offset of the market.

But I also want to go a little deeper into Western Europe about the challenges and the countermeasures that we have identified and that we now put in place. On the one hand, we clearly had an overreliance on Originals.

Originals was leading the way during the extraordinary successful three years between 2015 and 2017 when we actually grew our business in Europe by 15% on an annual average. As a result, the dependence on Sport Inspired has increased while we haven't leveraged the Sport Performance enough.

However, in the upcoming seasons, we have implemented a much more holistic segmentation approach for Europe to give us a healthier gross in that marketplace. Also, Stan Smith and Superstar have been managed very diligently and continues to be healthy franchises, not just in Europe but also globally.

However, in Europe, the planned management of the Stan and Superstar declines have not been fully compensated by new franchises to the extent that we had expected due to some mixed lunches. Especially in the beginning of the year, in the first half, we had [indiscernible] and, to some degree, also Deerupt that didn't grow to our expectations.

On the other end, you could also see good successes with products like Continental 80 and also Falcon or Yung-1. So it's very balanced, but they are not in the level that we would have expected and we're still incubating these products towards the future.

We also clearly admit that it was a slow reaction in the run up to some recent launches and campaigns. We haven't been as close to the consumer as we used to be and need to be, and therefore, the new team in Europe is simplifying structures, just making sure that on-the-ground execution to its consumers and key accounts being stepped up again.

And that is one of the initiatives we've put in place. And as you all know, in we have a new management team on the ground that is executing what I'm updating you on today.

Finally, of course, there's aggressive competition. That shouldn't be a surprise.

But as mentioned earlier, we might have been a little too ambitious in terms of pricing in some areas, which we are addressing now. But I also want to be clear, besides reinvesting into price of the product, we have come up with a tailored investment plan for a key accounts so as to win back any shelf space that we might have lost in the past months.

But please also, to be very clear, we will do some selective pricing adjustments. We will not do an overall adjustment of pricing in Europe.

It will be selected by some products. We [indiscernible] the price of the marketplace if we keep launching every quarter and every season, and it will be selectively, again, go back to our crazy new strategies to gain market share.

The good thing is we are reflecting [indiscernible]. This is homemade and not market-made.

We are not using the weather as an excuse. These are internal things that we're acting on right now, and this is what we are preparing for 2019.

Moving onto to adidas Europe. I want give you some full picture on the P&L.

Again, as the CFO, as I said, in many quarters, I'm very happy with the development. We have a healthy top line growth of 8% currency-neutral and 3% nominal.

We have a tremendous success on the gross margin, now it's 140 basis points come, up to 51.8%. And despite the significant investment in the marketing, working budget with plus 7%.

And to leverage and operating overheads, we expanded our operating profit by 13% to now €901 million and an operating margin of 15.3%, 130 basis points up resulting to a net income from continuing operations of €656 million and then basic earnings per share from continuing operations of €3.26. Just to give you some more clarity on the gross margin expansion.

Again, it's up 140 basis points. And we calculated also, we want to be transparent, the headwind around 130 basis points, and it was compensated through the underlying improvements by 270 basis points to then result in 140 basis points up.

Where is it coming from? I talked a lot about the future marketplace that we put in place already end of 2016.

And again, we looked at every channel, whether it's retail, concept store, factory outlets, e-commerce, how we run our e-commerce, how we run our wholesale channels, with whom do we have a good relationship, with whom do we money. We look at it end-to-end, and we made some decisions to have quality growth.

And that's what you see in the underlying improvement. As I mentioned earlier, maybe we went a little bit too far in that market, and that's why we are course correcting.

But that's not something that we can do in one quarter, but we're very happy where we're going with the margin development. Overall, it's also a much cleaner inventory situation that we had.

We had some challenges in Emerging Markets and Latin America last year. I talked about the challenges in North America.

We have a much cleaner inventory today. That's something with fewer provisions, you're seeing in the gross margins being reflected.

And credit to our operations team. They did a really good job on the sourcing side as well to mitigate some of the labor increases in our sourcing markets.

And had a significant FOB mitigation in place as well that helped us to overcompensate the FX headwinds that we had in the third quarter but also clearly year-to-date. All of result is possible with the strict working capital management, as I mentioned on the cleaner inventory.

And just as I mentioned after Q2, maybe 2018 will be the year we have one quarter where we will be below 20% operating working capital as a percent of net sales. And Q3 2018 actually is a quarter where, for first time, you see 19.7% being disciplined on the inventories, having receivables largely aligned with our net sales rose and definitely putting some measures in place for payables as well, the biggest one I want to call out.

So our non-trade procurement as part of One adidas initiative, we have extended our payment terms also to non-trade procurement suppliers and vendors that is being reflected here. The strong P&L and the diligent management on working capital led to a pretty solid net cash position of €535 million in Q3 2018.

And again, our equity position increased by €456 million, and the overall equity ratio is around 41.8%, and it's pretty stable as well. That puts us into a position to execute our share buyback plan that we announced in March 22, 2018, and it's ending in May 11, 2021.

And we always said we want to be up to €3 billion share buyback, up to €1 billion in 2018. And we actually have purchased 3.8 million shares until the end of the third quarter, which amounts to €733 million.

And we actually have actively cancelled also 8.8 million shares already in the third quarter and also it will reduce our overall share base. With that, I would like to hand over to Kasper again before we come back for Q&A.

So Harm, thank you very much. I'll go into the outlook.

Let me just reiterate the way we [indiscernible] in 2018, which has been very consistent throughout the entire year. And I think it's [indiscernible], balancing market share growth and market improvement, that we need to do both at the same time and gain the balance right, which I believe we have done throughout the 9 months of 2018.

We're seeing a high-quality revenue growth, which means, in the first 9 months, a growth of more than 9%. We are outgrowing the market and gaining market share.

We have a pipeline to support the planned top line expansion across the board, which you're seeing in the numbers. We are already proportionate investing in brands and products and we'll continue to do so.

So we want to make sure that we remain as a business for the long term, and build strong equity into our brand and make sure that we invest -- to ensure the rights set of products also in the future. We continue to implement our scalable business model.

Harm gave you an example of where you'll find in when we look up non-trade procurement. These are investments -- many of those that we're doing that are diluted to earnings for this year and the next 2 years coming, but we know it's fundamental for our future success.

And we could allow that through the strong gross margin expansion to ensure that we do the right thing for the company in the long term. And we are seeing a margin expansion and overproportion growth of mid-income growth as a consequence of what we're doing that were they a net income -- a nominal growth of approximately 3% to 3.5% for the first 9 months.

We're growing the bottom line by 19%, so we are seeing the scaling coming in and, at the same time, overly investing in our brands for the long-term. As we explained to you in March, our powerful engine to drive brand desirability as well as growth is based on 6 pillars.

And we continue to play many great stories across those pillars, but let me just highlight a few. UltraBOOST franchise that was going towards a €1 billion franchise continues to be strong.

We are reactivating the UltraBOOST Collective and are having a series of special editions, leverage of UltraBOOST releases throughout the year and also in the third quarter. The UltraBOOST franchise continues to grow in the strong double-digit even before the launch of the next generation UltraBOOST in early 2019.

So we have 4 years into this franchise and we continue to see very strong growth also in 2018. From our archive standpoint, the first ever rerelease of the Conti 80, a classic trainer from our archives in the late 1980s continues to be a great success.

[indiscernible] metrics are great and we're having significant commercial transaction with this one. The Yung-1 and Falcon, our bulky silhouettes from the late '90s, also strong performance in the terms of sell-through as we keep releasing new colorways and play the bulky trend in commercial and meaningful ways like no other brand can do due to the heritage we have.

And Future 4D, which our carbon 4D-printed shoes are game changers. and we're now starting to bring this innovation to many more consumers as we're increasing volume in retail by [indiscernible].

We have lines outside stores for the recent sporty releases like the AlphaEDGE, the [indiscernible] and the Future, our pinnacle of product across several categories in the future. An exciting example of how we're driving the business is the flawless execution of our biggest digital release in the history of the company, the Yeezy Boost 350 V2 [indiscernible] that we have in the planned for the third quarter.

So it's a large scale activation, executing perfectly in sync across all functions across the globe. It was a digital-only launch across the globe, except in China where we also work with our partners.

Social media. We saw the media mentions and search interest surpassing any past Yeezy launch.

It was driving high levels of e-commerce traffic launching, generating millions of adidas.com site visits. And it was a major commercial success.

The sell-through rates and the margin matrix was above any [indiscernible] we had. And it's really sticking to the.

brand. We're taking a now more than three year-old products and, in Yeezy terms, democratizing the Yeezy while preserving the hype.

Let me just spend a second here. As we're moving new Yeezy products into the market, we will do what we've done also in the past, create strategy around the new products we're launching, make sure that we have the hype and, overall, [indiscernible] drive volume into that market when that product has been into the market for several years.

And the Yeezy 350 has been in the market now for 3 years, that's why we're "democratizing" the Yeezy with the 350 in the context of bringing new, cool products into the marketplace. But we're also moving fast in order to win the physical retail.

Because while digital is immensely important, we still need to make sure we have the coolest stores in the world. Our new brand center in the East Road is an example of that.

So we remain committed to creating to creating a lasting experience for our consumers and physical store place to play a major role in that. While we closed 327 stores year-to-date, we also opened 137 stores in the areas where opportunities have emerged it.

But it means, that this year, we closed 109 stores despite the revenue number, the revenue growth that we've had. So we continue to reduce the amount of stores and continue to increase the quality of the stores that we have.

Our new Shanghai branches on the East Nanjing Road is our latest addition to our retail network. And not only have we built one of the most impressive retail locations, we did it in just 6 months from concept to opening, which has been done in no other place in the road.

That's why China knows what speed means when you act with agility. In the first days of trading, we have more than 10,000 visitors per day.

We already have a number of line ups for limited releases and offer 8 different classes of workouts for consumers, which are fully booked for the weeks ahead. So as you can see, we could bring the brand to life also in our physical retail through focused investments.

Right now, the new store in Shanghai is the measurement of success, overtaking the one store that we opened in New York approximately a 2 years ago. Of course, the next new store that we'll open, we will continue to focus on making that experience even better.

This brings us to the outlook of 2018, which we increased with a stronger bottom line improvement than expected. The net sales will be coming in at the low end between 8% to 9% increase instead of the 10%.

And the [indiscernible] between the 8% to 10% growth and the now 8% to 9% full-year growth is [indiscernible] development in Western Europe. Bear in mind that Western Europe was up approximately 17% in Q4 2017, so the drag from this market is slightly felt in Q4 2018 in particular.

As a result, expect growth for the company in Q4 to be slower than in Q3 this year. Our gross margin, we initially guided an increase of up to 30 basis points to 50 7%, now we're taking and increasing the guidance up 200 basis points to 51.4%.

The operating profit was supposed to grow initially between 9% and 13%, now we're guiding between 12% and 16%. The operating margin, we expect an increase between 10.3% and 10.5%, now we expect that increase to around 10.8%.

The net income, we expect an increase between 13% and 17%, now we're expecting between 16% and 20%. So in nominal terms, between 16.15% and 16.75%, now we expect 16.60% to 17.20%.

And from an EPS standpoint, an increase between the original of 12% to 16%, and now 15% to 19%. All of these in the context of a much higher marketing working budget spend also.

When you look upon the overall numbers and taking the translation impact into consideration, as it looks right now, currency translation will eat away more than 5 percentage points of our growth for the full year as headwinds are persisting. Nevertheless, the bottom line improvement for the full year is going to be stronger than initially expected, which speaks to our ability to mitigate our external pressures.

So what you saw in the third quarter with a [indiscernible] of approximately 3 or 5 full points between currency-neutral and nominal is what expect also for the full year, and we will continue to deliver on our bottom line as communicated. So in summary, 2018 ahead of plan, full-year outlook increased, progress against our strategic growth areas, we're acting upon the situation in Western Europe as communicated, we continue to drive higher marketing investments to support brand and products, we see strong profitability improvement despite investment into the brand and into the business and we focus on executing the second half of creating news to ensure that we reach our already communicated long-term plans for 2020.

With this, I'd like to thank you for listening so far. And Harm and I will now be happy to take any questions you might have.

Thank you.

First of all, you mentioned that in your Q4, in terms of top line should be a bit weaker than Q3, and you high lithed Western Europe. What about China?

I think quarter-after-quarter, you indicate that, at some stage, just because of the rule of big numbers that China should moderate in Q3. Having said that, there seems to be some promotional activity going on in China, maybe a bit of another sticking situation for some of your products.

So how do you see China in Q4? And why the top line overall would be a bit weaker?

And second question. You mentioned that you had fantastic gross margin gain this year ahead of your own expectations, and that you're taking this opportunity to invest in marketing and also the scalability of the business.

Could you give a bit of an example of what exactly scalability of the business means? You mentioned the supply chain for instance.

And also, in terms of higher marketing ratios, any particular region or product category? Thank you.

So, Antoine, thank you very much for your question. First of all, the fourth quarter, which is a 17% growth year-over-year.

Going back to China, you could see that despite certain promotional activities, you can see a strong evolution in the margin in Asia. So it is not impacting the overall margin situation.

We are expecting a slight slowdown also in China, which we have indicated in previous occasions. Not a dramatic one, but we expect a slowdown also in China in the fourth quarter.

We are very committed to exit the year on a diligent way and not pushing revenue for the sake of revenue. But overall, the China business that you need to see in the third quarter in the context also of the margin evolution, which is a fairly clean business.

But expect this on Q4, which of course, leads to the guidance we've given you for Q4. On the gross margin and the margin, I'll hand you to Harm.

The gross margin, indeed it was better than we have expected to some degree, so we definitely guided that we will [indiscernible] the gross margin, it was much better. There are some elements of it that's market mix where Europe is not growing as quickly as we expected.

It definitely has an impact. But also what Kasper mentioned, when we democratized the Yeezy brand, there were some ideas on how we do that, but it was fully executed digital, and that definitely had a significant positive benefit on the margin as well.

And again, we continue to be disciplined on the inventory. So it's one of the situations where everything went perfectly well on the gross margin in Q3 and that we'll be seeing in the numbers.

When it comes to the scalability model, you indicated already the supply chain. We keep investing in it also, especially in the U.S.

to get faster to the consumer in the digital side, on the e-commerce, so we keep investing into build infrastructure. And we have the financial strengths to do so and accelerating these things.

But it's also investing into global business services that we are centralizing into 2 locations for almost all the markets and the growth where we are transitioning, existing organization [indiscernible] these locations. There are onetime costs that we are accelerating as well and moving in the right positions as we feel appropriate in these markets.

I also mentioned about non-trade procurement where we build a professional, centralized organization that is going after the addressable spend in non-trade procurement, which needs to be built and there are benefits, but we're also reinvesting these benefits right now into the brand. That's where you see the marketing investments.

And the last one is also, we mentioned many times, we used to run this company like 20 small companies. We want to run it as one company.

And we are accelerating our ERP rollout. And this ERP rollout, we're also standardizing some of the business process, primarily in Asia.

We are building 1 Asia, as you know. And we put to all the hands on deck for Asia to accelerate as much of as these things into 2018 to then get more scale in the years to come.

Maybe more specifically on marketing. Any region or maybe product line that you're supporting?

Maybe Western Europe or...

It's really across the board. There's no specific lesion.

We stay committed to what our new strategy is. [Indiscernible] investment into the North America, of course, that's a priority market, but it's also in China and we are committed to Europe.

So it's really across the board in every market where we are investing and in every category. You could call out Football, you can call out Running.

It's definitely going into the Sport Inspired areas, but [indiscernible] going into Reebok, we shouldn't be worried about this.

Two questions for me please. The first would be on e-commerce.

Very strong acceleration, big impact from the Yeezy drop. Had you seen the acceleration in e-commerce before that drop took place?

And also how should we be thinking about the cadence of e-commerce gross ahead? And the second question would be on the other businesses operating units.

The gross margin was up 22 percentage points. Just interested, what were the reasons behind that?

Fred, this is Kasper. I'll do the e-commerce one.

E-commerce, overall, is highly dependent on which hype drops you make and in which months, irrespective of Yeezy, that will continue to be so. And then, of course, it's how we're also looking up on when we do launches.

So if you were to go back in the second quarter, it was impacted by a positive impact by the fact that we've launched exclusively both in the first and second quarter some of the [indiscernible]. In the first 6 months, we had a growth rates of roughly 30% on eCom.

It's clear that Yeezy had a positive impact on eCom growth, 76% in the third quarter, but we also did a number of other launches like the Yung-1 and the Falcon, so it's just not only down to Yeezy. We don't guide on how you think about the growth rate for eCom on a quarterly basis.

But we [indiscernible] we expect the business [indiscernible] €4 billion by 2020 , and that's how we look upon the business. Some quarters will be more, some quarters will be less.

It depends on how many Hype launches do we make and also, in terms of Hype launch, how much volume do we have behind it? So we're doing the long term that saying 2020 is the target of the roughly €4 billion.

On the other business, Fred, we have several businesses being aggregated in the other business. There's, of course, Fantastic in there, there's Adidas Gold in there [indiscernible] of the TaylorMade.

There's also the Y-3 business in there including distribution, and we have the centralized fashion business. So everything that is not run in the market would be in other businesses.

And what you have there is all the fashion account around the world that's being aggregated there. And of course, it has been, to some degree, being impacted by some of the Yeezy launch as well but also other Hype products that are going to these fashion accounts.

That's where, I would say, the line share of the gross is coming from. It's coming out of the fashion accounts world, maybe if Hype drops, one of these drops [indiscernible] the Yeezy products.

Two questions for me. First question is on North America.

Still very teens growth there. Can you just speak to what you're seeing between the Family channel mid-tier versus the Sporting Goods channel and, obviously, your own DTC.

And then my second question is related to the new BOOST launch in 2019. Just as you think about the launch, will you be making any price adjustments or major price adjustments?

Just given your commentary on maybe being priced too aggressively in select market like Europe?

What we're seeing is we're seeing a balanced growth in the U.S. between the Family channel [indiscernible] in the market.

Of course [indiscernible] has been very positive to us because we're still in rollout mode. I was out in [indiscernible] from Cole's only 3 weeks ago and we still see rollout opportunity.

But at the same time, we see other channels, DICK'S Sporting Goods has been exceptionally strong, e-commerce has been exceptionally strong. So I wouldn't go in and say there's 1 category that has been much stronger than the other ones because DICKS'S is in rollout, Cole's is in rollout and e-commerce, as we said.

Also, the North America business had a very high contribution to e-commerce growth. When it comes to our new UV 19, actually, it's not been the BOOST that's ben overpriced.

I think that would be the wrong [indiscernible]. We need to continue to have a pinnacle product, which the BOOST the pinnacle running product that we have, has been and will continue to be so.

That's actually where pricing [indiscernible] and I think it's important. It's the high end product that really drives that brand value and the innovation that we bring into the marketplace at a high-end price, which is also an inspiring product for many of our other products.

So we don't expect any great changes to how we price, overall, the UltraBOOST 19. We, of course, thinking through how we price for a temporary period of time when we have a newer product in the market, and all the product in the market.

You should expect a differentiated pricing of those 2 products.

On this strategy to become maybe a little bit more democratic on that pricing, when will that start? And is there any ranking in terms of regions when you want to start first?

And within Europe, any core region that you will start and when will we actually see the impact here on also the growth rates?

This is Kasper. Maybe we were not clear enough.

We tried to articulate it, but apparently we didn't do well enough. Being more democratic was meant in the context of Yeezy.

Because when we put Yeezy in the market three years ago, the plan was, after a longer period of time, take a product and make it more in volume. That is what we did with [indiscernible] in third quarter of the 350.

We will also, in the future, look upon doing that with the 350. Then for Yeezy, we will continue to introduce new Yeezy products, but they will be in high [indiscernible] but that is for the Yeezy.

Then, we believe, in the overall European marketplace that in certain areas, not across-the-board, we might have overpriced certain products. We are now looking upon very selective [indiscernible] we probably should look upon the pricing in certain pricing categories.

This is particularly as it pertains to Western Europe, not the rest of the world. In Western Europe, you also a margin increase of 350 basis points.

That is how we look upon it. So we just want to be clear on the YEEZY position and then the overall pricing policy in Western Europe to make sure that we get the right balance between margin expansion, market rate expansion, which is how we manage the business, getting that balance right.

We got that balance right as a company, in Western Europe, we probably didn't in the last set of quarters, and that's what we're looking are looking upon now. I hope that answers your question.

Absolutely. And if I may follow up here.

When do you see the first impact of that selective repricing?

Of course, we will give you guidance on the new year. But it's clear that having Western Europe that doesn't grow is not an unacceptable position.

So you should expect that we are working diligently on that. We have also said, both Harm, and I and Sebastian, that we want to build a sustainable plan for Western Europe and not do something for the sake of doing something.

So of course, we expect a return to growth for Western Europe throughout and sometime during '19. We'll give more color in that when we meet in March.

But also, Jurgen, what Kasper said, based on our business model, we have a sold in the products for '18, [indiscernible] opportunities to adjust the pricing. You might see one or the other, but it's not meaningful for an overall P&L, neither in Europe or globally, but you will see those [indiscernible] going into 2019, you will probably see it on one of the product that we'll be executing.

First question, Kasper, on the Reebok. I appreciate the sales declined.

There was a pretty sharp negative impact around the store closures. I think there are year-on-year about 68 closures made.

And we clearly saw a significant improvement within the gross margin. So how far away are you from breaking even within the Reebok brand?

And one question for Harm, just on the gross margin. You were thinking about the guidance up to 100 basis points in fiscal '18.

I mean, if you were to take 150, push it out just a little bit more, that only applies 70 basis points in the fourth quarter. I'm trying to understand what that -- with a relatively similar comp base effectively, what the Delta is in terms of FOB, sourcing labor costs, FX, or price mix that we should expect to see in the fourth quarter to make that gross margin effectively come down a little bit?

So, John, thanks for your question. We're doing two things for Reebok as we've been saying.

One is fixing the profitability of Reebok and the other one is getting the brand attractiveness up to a level which is acceptable, and acceptable means we start growing the business again. The current plan is breakeven no later than 2020.

Should we breakeven earlier, we would inform you immediately. We want to do with the right way, but we expect to breakeven by the end of 2020.

On the gross margin, of course, it's a complicated figure, but definitely first and foremost, John, there's a higher comp from Q4 2017 where we have the highest margin in the full year last year so it's higher comps. We're not going to repeat the same level of impact level we had in Q3 with the digital Yeezy launch.

We have been very disciplined with the inventory as we're getting prepared for 2019. Most of the comparison to last year, from an inventory probation point of view, has been dealt with as well.

And this is what, I would say, explain 70%, 80% of what we expect in the fourth quarter and the rest is give-and-take, here and there, country mix and revenue growing and what we want to sell in and then sell through in the fourth quarter.

I've got two questions. Firstly, can you quantify the effect of hyperinflation accounting on constant currency gross in Q3?

My second question is around medium term sales targets. You target €25 billion to €27 billion by 2020, which implies a pick up in constant currency growth rate from this year's guidance.

Can you give us some more color on how you plan to accelerate growth rate in the 2 years?

On the first question on the hyperinflation, Jaina, that impact that we mentioned earlier, there's an impact on the nominal growth in Argentina. And the impact, as I mentioned, is a high double-digit impact on the nominal gross number in Latin America and the overall company.

So that number is based on the spot price or spot the exchange rate at the end of September applied for first 9 months. So again, high double-digit number on the nominal sales.

Then on the overall profitability for the company, its a minor effect that we don't need to quantify or disclose. It's not meaningful on the net income or operating margin number.

It's more on the net sales.

So regarding the growth assumptions, the growth assumptions are [indiscernible] overall targets currency-neutral growth during the period of 10 to 12 percentage points. That should get us into that range that we're speaking about.

The actual growth for '19 will give up -- when we have the guidance for '19, which is along with the [indiscernible] in the month of March of next year. But it's consistent with the overall guidance.

We've done consistently done in the long term sequential growth for the period of 10 to 12 percentage points [indiscernible] actual guidance for '19 we'll have in '19.

Just a follow up. In the release it says, hyperinflation accounting had slightly positive impact on currency-neutral revenue growth.

Are you able to quantify it in Q3?

We never disclosed the number in detail but it's minor.

Two questions. First of all, on the feedback what you hear and see for the spring/summer 2019 on your products, maybe particularly for your Originals, maybe you give us a general sneak preview without going too much into guidance for next year.

And then the second question on digital. Extremely strong growth.

I understand this was partly driven by YEEZY and so on. But what can you actually do better to get to your €4 billion sales target by 2020 or even beyond the €4 billion, maybe you can elaborate what can be done in the digital environments at adidas.

Andreas, thank you for your question. Of course, a sneak preview would be our product pipeline would be a sneak preview to our guidance.

So I would leave at that and be happy to give you the details when we meet in March. But I think it would be inappropriate to speak about it today.

But of course, our product pipeline, that one we have, assumes, of course, from our standpoint, that it's capable of supporting the long-term guidance. And if that was not the case, we would say something different, so I assume that we the product pipeline.

When it comes to digital, we still believe there are still many things we can do. We have been and will continue to invest very, very heavily into the overall set of our digital business model.

We have the Creator Club that we just launched in the U.S. We rolled that out.

We have app that we have launched this year and now in 17 countries with almost 5 million downloads. We are heavily investing in people and [indiscernible] can make use of the data much more diligently.

We are applying dynamic pricing. We are investing into physical infrastructure to ensure that we speed up the delivery.

We're doing the Hype launches online. So it's a combination of products, Hype launches surrounding digital tools like the app, like the Creators Club and just continuing to invest to making the app consistently.

Two years ago, we would do updates in monthly or quarterly, now we do updates to the site on a weekly, on a daily basis to continue to look upon increasing pleasing site speed, making checkout easier. So it's an ongoing process and that's, why if you look upon the operating overhead, you are seeing a reflection [indiscernible] we're doing digital.

We believe and we're convinced that digital is the most important [indiscernible] globally, that's why we're consistently investing into it. Whether we do a €3.7 billion or €4.3 billion, it makes no difference.

It makes a huge difference that we drive our business and our consumer engagement through the digital channels. And that's where, I would say -- a proof point of that was the YEEZY launch where we worked a months ago before we launched the product on driving engagement with our consumers, understanding where the gross demands was, which allowed us to do a fairly detailed forecast on the net demand [indiscernible].

So we'll continue to do so if we feel comfortable on the journey we are on. Some quarters will be great, some quarters will be slower because of what we said but overall, we're convinced that the digital journey is the right one for the company.

Just two questions. #1 on the marketing side I want to see if there are any change in strategy.

I noticed a couple of big team contracts signings Real, Arsenal. How are you thinking about those high-profile endorsement deals?

And I also wanted to ask, in the presentation, it seems like you've switched the nomenclature from Originals to Sport Inspired. Is that just to accommodate the YEEZY franchise or is there a different way you're thinking about the two pieces of the adidas brand?

On the Sports margin, there's no change. We have signed Arsenal.

We've not signed Real. Real is signed right now.

There's speculation in the market [indiscernible] on regarding Real. We've been happy with the Real relationship.

Arsenal we have signed. We will continue to sign sport franchises because that's how we influence the consumers.

There is no change in our strategy. It's very consistent to pursue their greatest sports in the world, football is one of them.

But I just want to clarify that there has been no extension to Real to our contract. Should an extension come, we will, of course, immediately notify you.

There's no change. We change at the beginning of the year.

We reported the Sport Performance. And Sport Inspired, Originals is part of it, YEEZY is part of it, but there will be other products in Sports Inspired and also Sport Performance that were covered.

So we talked about core in the past, but there's core lifestyle products and there are core sports performance products are part of the respective categories there. But there's no change in the beginning of the year and any comparison [indiscernible]

To clarify, Yeezy, goes in other or is in the other category line item?

No, YEEZY is part of Sport Inspired.

Firstly, just on product categories. Similar speed of growth for Footwear and Apparel in that third quarter, but given the strength in in retro sports-inspired designs in the clothing category, should we expect to see any acceleration in the coming quarters or months as you've seen with some of your competitors?

And then secondly, just on Reebok and you're thinking around that. Obviously, the brand has been repositioned as a fitness brand in the past few years.

However, most of the growth is coming from Classics where Training remains negative in most markets. Could you just perhaps give us your thoughts on the contribution and composition of growth within Reebok and how you're thinking about the relative to their repositioned branding?

On the first question, we are very happy with the balance of Apparel and Footwear. When we look back in the first 2 or 3 years, we've been overproportioned growing in Footwear, which was also our strategy.

We said we want to build the brand from the feet up. And we always got the question why is Apparel not following?

And now, given the strength of the brand that we have today there's also more Apparel coming in. And that's why it's pretty balanced in Q3.

Especially in Q3, I'm pretty happy with that one because the World Cup effect is now behind us. But don't expect a significant change in that going forward.

I'm pretty happy to see balance in the gross that we have across Apparel and Footwear.

Regarding the Reebok and Reebok position. Reebok was changing position many, many times in the past.

And we believe it's important that we have a more consistent position in Reebok and not just change in because of the weather. We need to make certain that we build an understanding with the consumer so they know what Reebok stands for today.

50% of the business is Classic and 50% is the running products. We're seeing progress on the Classic side.

We need to see the same progress on the Sport side, so to speak and that's why we haven't seen the gross yet. We believe it will be a mistake of trying to change the position.

We need to make sure we do the right thing, bringing back products to the market. We've done that in the classic side and we've done on the remaining side.

We need to make sure that happens to get the growth back into Reebok brand that we need to get back.

I have a product question on a different category and I was wondering if you could comment on what you're seeing in that category broadly and not notably in Europe. One of your peers mentioned that there is a slowdown in the sneakers market in Western Europe and a couple of apparel players recently have noted that leisure is also slowing, no fashion trends are emerging.

So I was wondering if you could add some colors on your side and what you're seeing in this category and possibly by region, please?

Regarding the slowdown in the markets, as one of our competitors said in Europe, unfortunately, we haven't seen that. That's why, we were quite distinct about our slowdown.

We don't think about there's any fundamental change in the market at this stage. That we see changing trends.

You see the bulky trend coming in, which is why we launched the Yng-1 and the Falcon from a Reebok standpoint, but we are not seeing any fundamental changes also [indiscernible] from a market growth standpoint and also revenue growth.

And if I may, ask another question on your inventories, again following a very healthy Q2 as well, can you talk on the bit more about the initiatives were implementing leading to such tight inventory management? Or was there any early shipments in Q3 that led to a very light inventory levels again in the quarter please?

Good question. It starts what you measure will happen, right?

So when I took the helm of the CFO last year, I want to make sure that we are focusing much more in cash such as P&L because [indiscernible] previous locations, cash [indiscernible] its effect on the P&L is an opinion. That's how I, as mentioned, implemented it into the company.

Cash is really important. And we have entity for every market.

We also look at the cash and not just the P&L. And that is being fed in the organization.

That's how you install discipline and that is what is paying off right now. And on top of that, probably as we announced in March 22 a share buyback to remain disciplined because it needs to be financed.

And additional help to get the discipline in the organization.

We have time for one more question please.

Two quick questions. As Kasper, you talked about some of your investments you're making in the digital space in a dynamic pricing and such.

We obviously, know there's a positive mixed shift in the gross margin from e-commerce. Can you talk about the overall profitability and how that's trended within the digital space?

And then my follow-up is just on at the growth of Apparel versus Footwear. Apparel has outgrown Footwear this year in each quarter.

How should we think about that it's growth may category going forward?

This is on the income margin. We said all along, we're not going to this is close channel profitability but also of course the gross margin of e-commerce it would be in wholesale or retail.

But also, and this will be disclosing, its accretive to our corporate profitability, overall company profitability. So the faster we grain e-commerce in simple terms, the more it will help our overall gross margin and operating margin as well.

So when it comes to Apparel and Footwear, we've had a slightly higher growth and Apparel than we've had in Footwear. I wouldn't put too much into that.

If you go back, there's no doubt that we had a contribution from the work up with Apparel. And in the beginning of the year, which we have said some of the early launches of the franchises did not work as well, but of course, had to impact on the overall profile.

In the past quarter, we had, as we said, it was completely balanced so it was completely balanced. So as you can see, we are striving towards having a fairly balanced gross of the.

Our footwear word from a footwear standpoint, approximately 2/3 of the businesses is footwear, but you should think about it probably in the context of the year where we had football championship and the initial launches in the beginning of the year where less successful than we had expected. Right now, as we said, the Yung-1, Continental and Falcon [indiscernible] seeing a different picture.

That's why you're seeing a more balanced growth in the latter. So maybe, before we close, we have to thank you for dialing in.

After 9 months we're well underway. We want to make sure that we push that message to you that we are managing towards a market share and a margin improvement by continuing to invest in the business.

We have done that so far. We believe in the appropriate way.

It was a high-quality third quarter. North America, digital in China [indiscernible] expectation.

Clearly Europe has not. We're very committed to turning Europe around, but I hope that you see that we are striving towards taking the right long-term decisions and not pushing anything for the short-term.

But that the same time, we're very committed to the level of financial results that we have committed the company to and we'll manage the company towards that also in the future. We have a 2020 target that we're extremely committed to, we're very focused on, but we're doing it through an investment mode and not through a savings mode.

With this, I'd like to hand over to Sebastian.

Thanks very much, Kasper and thanks, also to Harm. And ladies and gentlemen this completes our conference call for today.

Our next reporting date will be March 13, 2019 for our 2018 full year results. As you've heard several times today, this will also be the point in time over we will provide you with our 2019 guidance.

We all look forward to speaking to and seeing many of you over the next couple of weeks and months. If you have additional questions today in the next couple of days or weeks or months, please don't hesitate to reach out to Adrian myself.

And with that, thanks very much for your participation. Have a great day and bye-bye.