adidas AG

Thanks very much, Healy, and good afternoon, ladies and gentlemen. Also from my end a warm welcome to our second quarter results conference call.

Our presenters today are our CEO, Kasper Rorsted; then our CFO, Harm Ohlmeyer. Before, I will handover to Kasper in a second for his prepared remarks, I would like to once again ask you to limit your questions to two during our Q&A session.

In addition, please keep in mind that all figures that we would be talking about would be stated on a currency neutral basis and will be discussed for our continued operations. And with that any further ado, over to you Kasper.

Thank you very much Sebastian. Before we go into the details of today's call, let me just inform you about the extension of our management board contracts with Karen Parker and Harm Ohlmeyer, which was decided yesterday at our Supervisory Board meeting which is good corporate governance in Germany, which means that we have also strong management team moving forward.

So, of course, we are happy with this development. Now, let me move into the business update.

The quarter was in many ways characterized by a set of new products being brought into the marketplace. We saw a further rollout of our UB19, Ultraboost 19, which has been shaping up exceptionally well by the consumer.

The Nite Jogger started its global launch and activation in April and is now starting to rollout in more volume. Among others, we upgraded our first flagship store, we had our Run for the Oceans event that a couple of years ago had 50,000 runners and today has 2.2 million.

So, we see the effort that we're putting into Parley is paying well. And the last one is, our partnership with Missoni, where we look upon and say, when we use external creators, we continue to drive brand heat into a product that in many different ways of course in small volumes about 2.4, [indiscernible] that all our consumers see newness in our product not only coming from adidas, but also from our creator base.

So, overall, a quarter with a lot of new products on the street. So, what was the strength and weakness of our quarter?

We continued progress -- progress in our specific growth areas particularly the double-digit growth, we saw in China in our e-commerce business, China 14% and e-com up 37%. On the new products, we started to gain commercial traction in our DTC business driving our DTC business up to double-digit growth rate.

Now, what we see is where we control the space, we continue to see a very positive up tick for our products. We saw Reebok coming back to growth as you know last year we returned to profitability, our target is to have a ongoing profitable growth business with Reebok by 2020, so we continue to make progress and you are starting to see the next steps here, but of course, we need to make sure that we do it in a more sustainable way and that is our target by 2020.

However, there are also matters that didn't go quite to our satisfaction. Not surprisingly, came the shortage from our supply chain as we saw in the first quarter also had its impact in the second quarter particularly weighing on the growth and the profitability of the U.S.

Harm will speak more about in detail, but the later arrivals in the way, we ship products into the U.S. had a negative impact on our overall market situation in the U.S.

We are now seeing growth in our wholesale business, many of our new products that we introduced in the second quarter are not going to scale, which of course, is also having an impact to our growth. We saw decline in our Sport Performance business mainly due to football last year, we had a very successful football event, which had a big up tick in our second quarter and that is also, single out the reason why you are seeing negative growth in Russia in the second quarter last year very, very strong first quarter underlying with the World Cup, this could have been positive.

And lastly, we are seeing OpEx levers being missed by increased marketing spend, we are also experiencing in the overall DTC space not only in new stores but our continued focus on our online business. Coming to the numbers, our revenue increased 4% currency neutral and 5% in nominal terms to 5.5 billion.

Our gross margin went up 120 basis points to 53.5, predominantly driven by FX. Our operating margin went up 40 basis points to 11.7, despite the increase in brand investment and of course, DTC costs we are seeing a big part of all our growth is coming from.

The net income from continuing operations increased 10% to 462 million and our basic EPS up 13% to €2.33. The Delta as you know is due to the share buyback program we launched and which we will -- [actually we will] [ph] and Harm will also give you an update on this later on the call.

So, when we look upon our strategic growth areas America came in at 5% impacted by the supply chain shortages and let me just stay here for a second. We expect supply chain or constraints in the first, second and also in the third quarter and there will be more or less sorted out by the fourth and we'll have no impact next year.

So, there is no change to the guidance we've given you around, the decisions we've taken around our supply chain. But, of course, you are seeing the impact of North America.

To Greater China 14% growth, very, very strong in our e-commerce 37% growth. So, the focus on our three strategic growth areas North America, Greater China and e-commerce continues to pay-off.

And we would have seen as I said a higher growth, have we not had the supply constraints in North America. The adidas brand growth in most markets, our footwear growth accelerated, overall, the brand grew by 4%.

Sports Performance declined by 2, as I said predominantly driven by football, also negative is running, but we're seeing double-digit growth in training and basketball. Sport Inspired 9% reflecting growth in Originals and Yeezy and of course the absolute size difference between the two is quite substantial.

So, it's very important that we have a solid growth in our originals business, which is the biggest foundation that we have. And we saw footwear revenue increase 5%, and as I said before around North America, the supply chain shortage is weighing in on the growth in apparel because we've had either no delivery or late delivery for certain products that came in which is why we gave the guidance we did in the month of March.

Moving on to Reebok. Reebok revenue increased 3% driven by double-digit growth in North America and Latin America, but also seeing growth coming out of Europe.

We're seeing growth in classics trend by robust increase in footwear. The gross margin is slightly down by 160 basis points of 43.2, after several years of expansion of our gross margin.

So we're now getting closer to the [indiscernible] Reebok, but I still want to say the end target is 2020 and before then, it'll be too early to declare victory. Coming to our e-commerce business up 37%, and also underlying traffic where we don't report that in actual terms we're seeing a strong increase in underlying traffic.

We're also seeing the overall growth is coming from double-digit growth across all regions. We launched our Creators Club in U.K.

and Germany, which is a loyalty program which has been taken to fill up in the countries where it's been launched with more than 15 million members. And our adidas app is now live close to 30 countries.

So we continue to make progress in our strategic area, digital and that will continue to be a cornerstone also moving forward. And let me just, again, repeat what we've said many times the single most important store in the world is and will remain our dot com business.

With this, overview, I would like to handover to Harm, who will now take you through the financials more in detail. And then, at the end, I will wrap up and we'll have the Q&A.

So, Harm please?

All right. Thank you, Kasper.

I would like to go and start with the growth by the market segments. And before I discuss our three main markets in more detail, let's briefly look into our three other markets which all proved the resilience in the face of various challenges.

So starting with emerging markets, increasing 12% despite headwinds from geopolitics in some countries and the segment's operating margin actually expanded by 490 basis points to now 28.5% mainly driven by the strong gross margin expansion of 180 basis points. Revenues in Latin America increased 5% despite a challenging macro backdrop and the segment operating margin decreased by 190 basis points to now 14.6 as continued investment into our brand more than offset the stable gross margin.

And of course, Latin America, it's also slightly impacted sell in Q2 by the e-com sales of World Cup 2018. The same for Russia CIS down 4% due to the tough comparisons related to the 2018 World Cup and the segment's operating margins slightly decreased by 110 basis points as the gross margin normalized.

It was only partly offset by lower OpEx ratio. Just as a side your information you might have noticed that other businesses declined by 24% in the quarter.

This is mainly because we shifted our clearance unit that has been centrally driven into our market segments. It's a small portion.

It's a big portion in other businesses, but it's a small portion in the market, so just as an additional transparency, we are not going to get that question later on. When it comes to North America, as Kasper mentioned, the top-line margin impact of our supply chain shortages.

Overall, the market growing 6% currency neutral, the adidas brand revenue is up 5%, those on the Sport Performance and on the Sport Inspired side those are growing. The Reebok brand revenue increased 10% driven by double-digit growth in Classics and the gross margin actually decreased by 150 basis points to 39.3%.

Better product, channel mix and lower sourcing cost more than offset by higher airfreight cost and less favorable pricing mix. And just on the gross margin or dimension, again, airfreight is a significant piece of that.

You get an idea in the gross margin what's the significance of the airfreight was in growth in North America, but as Kasper said it's not just lateness, but even if you get the airfreight in, you might be late, it's impacting sell-throughs being late in the market, you get charged picked from accounts. So, that's what you see in the gross margin, you get a feel for the profitability impact of the supply chain changes that we had.

At the same time, we remain committed to the market and keep investing on the brand marketing side, but also our DTC network and our infrastructure overall, as we continue to invest in North America. When it comes to Asia Pacific, significant growth driven by Greater China, overall 8%, Greater China was 14% in the second quarter after 16% in the first quarter.

Adidas brand sales up 9% driven by double-digit growth in Sport Inspired, Reebok brand down by 11% due to declines in both Sport and Classics, but also their gross margin up by 230 basis points to now 59.7%. This primarily driven by positive FX impact, but definitely also better products to channel mix and lower sourcing cost.

But, again, there again, the majority is on FX impact driven by the currencies. Operating margin up 60 basis points to 34.9%, and again, the gross margin expansion partially offset by OpEx investments.

So, as you see, China being up 14%, region being up 8%, so definitely there's a healthy Southeast Asia, but in the more mature market Japan and Korea, especially the latter is being challenged, one of the FX is [less towards] [ph] in Korea. So, these are the markets that are being challenged in Asia.

When it comes to Europe, after four quarters of decline and as we indicated to you for many quarters already, we are now at a stable top-line, the currency neutral sales being flat, the adidas brand, which is a majority part of it is being flat as well as growth in Sport Inspired offset by a slight decline in Sport Performance, but also the Sport Performance side primarily impacted by the 2018 World Cup football business on the jerseys definitely happening in the second quarter last year as well as. The Reebok brand up 4% driven by growth in Classics and the gross margin improved by 390 basis points to now 52.2% and also there its combination of FX, a better channel mix and lower sourcing cost.

But clearly the majority of that is FX-related, as we already indicated in Q1. And as an outlook and then in Europe as well, we continue to expect the region to return to growth in the second half.

And we said, we also are expecting growth for the full year in Europe as we communicated earlier. When it comes to the overall P&L, net sales and nominal returns up 5% and currency neutral as you said 4% gross margin again expended by 120 basis points to now 53.5% over prior year and the operating expenses, I want to focus right away on the marketing and the operating over expenses on our new segments as we reported, so you can see we keep investing into marketing was 5% up in line with the top-line still at a very high level of 13.5%.

So, we keep investing into the brand across the road and the operating overheads up by a 100 million or plus 7%. And this is primarily driven by the expansion of the DTC business and as a reminder also it was decline or was down by 2% and DTC growing by 16% and that's what you see in the mix effect even more pronounced on the operating expenses and the majority of that is contributing to the plus 7% and you see the benefit of that part in the gross margins as well.

When it comes to the operating profit, we expanded it by 40 basis points to now 11.7% and the net income as Kasper mentioned earlier already up by 10%, if you would do that before IFRS 16 actually would have been 12% on the net income and also talked about the earnings per share being up given the share buyback plan. But, also going to mention when it comes to the operating profit because we had quite a debate last year in Q2 2018 about the other operating income with the new segments that we're reporting, if I take but we still report another operating income that you see on the third line.

We still would have had 42 million benefit last year in Q2 that we compensated in this quarter as well. So, there was net of 42 million other operating income due to litigation gains and some release of operational accruals in Q2 2018 that did not repeat in 2019.

So, definitely want to get some credit for that a year later. When it comes to the gross margin decline in the second half, I talked about it on several road shows already.

And I want to be consistent on this. First and foremost, it will be less favorable sourcing cost and increased use of airfreight as Kasper said we are not out of the weeds in the third quarter.

It will end in the fourth quarter because the supply chain have been fixed, but you also know that a lot of companies are moving out of China and is not getting easier to get capacity up and it's not for free. So, that's something you'll always see in the second half.

As we plan to return back to growth and win with a key account in the second half, you will see a more balanced growth across the channels. So, wholesale is expected to grow in the second half that will have an impact on the gross margin.

We always said that we have selective price investments in Europe. It's not across the board, but you see it already from Q1 to Q2 that the benefit on the same hedging is less in Q2 compared to Q1.

And that will continue in the second half through the selective price set ups that we have. And to tailwind of course from FX such as will fade not just in Europe, but also in China.

We've had very favorable hedges in the first half compared to last year. And lastly, definitely we'll get into a tougher comparison not from a net sales point of view, but from a margin point of view in the second half.

And I specifically want to mention again to the successful democratization of Yeezy last year in September. If we were not going to repeat in Q3 and that would also be on the margin because it's a highly attractive business for us.

So, overall this is a direction and that's why we're seeing taking all these factors into account, we confirm our full year guidance for gross margin expansion to a level of around 52%. And these are the main factors leading to that.

When it comes to the average operating, working capital, we see we are still very disciplined with inventories only up 5%, receivables according to our wholesale business only up 1% and payables due to our efforts also on non-trade procurement and being more disciplined to what our external vendors up 14%. And again, I'm very, very happy with the 18.3%, but also there as we accelerate in the second half and moving into 2020.

And don't expect that this can be repeated necessarily, I always said that lever around 90% something that I'm very satisfied with. So, 18.3 given where we are in the business is good and we should be proud of that in the organization.

But going forward, 90% is probably an acceptable level for us going forward. When it comes to the net cash and equity position, despite the share buyback, we still have a very positive development also in net cash and net debt well over 362 million, 273 million up and equity ratio is down by [790] [ph] basis points, but that is solely due to the IFRS 16 change and just an accounting matter.

When it comes to shareholder return, I just want to give you a quick update on the share buyback. We actually completed in the amount of 301 million in the first half.

That is not exactly what would bring us to the 800 million, because the share price developed very favorably in the first half as you all know and that's why the bank finish at the lower end of our range. But, we already committed a second tranche for the second half that will lead us to around 800 million; we are fully committed to that after 1 billion in 2018.

We will get to around 800 million 2019 and then we will complete by May 2021, the 3 billion share buyback program consistently and always being in the market. With that, I would like to hand over to Kasper again.

Thank you very much, Harm. Let me just speak a bit about the outlook before we get to the question and answer session.

As we always spoken about, we believe we have right elements in place to ensure that we hit our 2020 numbers and that means we'll continue to drive innovation into the marketplace through different vehicles. We'll continue to invest with impact as we call into brand desire and into our business model to ensure that we drive better scalability into our business, and again, if you want to look upon the headcount numbers, you will see more stable headcount.

Also this quarter where as you can see, we're starting to see some of the elements showing its early signs. Our target is to deliver over-proportionate net income growth on the back of a sustainable operating margin expansion, which is very much in line with the guidance we normally given for this year, but as you know also the long-term guidance.

And we'll continue to address issues when and if they come up. Europe is expected to return to growth by the end of this year and have a sustainable growth pattern into next year.

And our supply shortages will be completely passed out, when we're done with the fourth quarter. And we'll have a normalized year next year.

But, I just want to remind everybody that, Q1 to Q3, we will continue to see impact with it and we'll continue to see so. We also continue to bring new products into the marketplace.

And I spoke about the Nite Jogger that we've been very happy with and we're starting to launch as we speak. And we also starting to bring the first new additions in our UB19, which was launched in February is coming into volume and right now has been very successful across the board for result varying on the Ultraboost technology.

And then, Ultraboost OG also remains in very high demand particularly when we do bespoke versions whether it's a country version or regional version or city version. One of the biggest launches we have is our home of Classics where we're bringing 10 different white leather sneakers into the collection.

For the [indiscernible] Lexicon, we're continuing to focus on driving Original business forward and Home of Classic is an important launch this year but also be a milestone for how we drive business next year. We're also using innovation to drive new launches.

Our Futurecraft 4D that many of you know, we have dramatically expanded the volume this year. And one of the cool shoe we actually launched this year was the Futurecraft 4D in combination with a Parley, which was immediately sold out, but this driving innovation in brand.

And we also continued to develop Boost. Many of you have asked what after a Boost?

We believe there will be many different iterations of Boost moving forward. And that's why it's important that we continue to drive new products into the marketplace.

With Boost HD, we found a way to put 20% more boost into a mid sole without increasing its size as the identity of the palate is higher. The result is an increase in stability without any sacrifice of the great energy return that boost is known for.

The first Boost HD is a shoe that we co-created with runners from key cities and it's the first product to feature Boost HD and was launched in June. So, it's still very early days, but this is, of course, we'll continue to expand our boost franchise.

And then, we also of course using our collaborations, with the toy store where we bought a limited edition of UB19 into the market model which is where we brought a new creation into the market, Manchester United notables or the latest adidas Pharrell, the SolarHu release updates, still it was new color ways. And by the way as many of you know we're celebrating our 70 years anniversary tomorrow and both Pharrell but also Stan Smith would be here.

So, these are to mention a few, I could also mention [Arizona Ice] [ph] or the Victoria Beckham products that we have through Reebok all new releases and new products that are coming into the market through our creative partners. As you know that we don't only create ourselves, but we also very much into cool relationships with creators across the globe that bring products into the market that are unique.

Looking upon why we believe that the top-line will accelerate in the second half. We believe, we have the building blocks in place.

We believe that we have the right products and I spoke about them throughout the presentation that will scale more in the second half due to launch days. We will see Europe return to growth in the second half and we've put the foundation for recovery and we're seeing the upcoming Euro 2020.

We're going to see the first positive impulses in the fourth quarter early Chinese New Year in Q4. The impact of our supply chain will fade particularly in the fourth quarter.

And then, we also have a lower base, last year we had 10% growth, 10%, 8% and 4%. So, we feel quite confident when we look upon our guidance based on reaching the guidance we gave for the first half, 3 to 4 coming out in 4.

We have a guidance of 5 to 8 for the remaining of the year, which indicates or assumes an acceleration for the second half and we are fully confident the acceleration will come. However, let me also give you some guidance how the quarters are going to come because I think it's interesting or it's important for you to understand.

So, we expect this sequential top-line acceleration towards the end of the year. We're going to see a modest improvement in Q3 follow-up by a step in Q4, which we're going to see as Harm spoke about a gross margin decline in the second quarter -- in the second half airfreight fading tailwinds and also investing into tough comps.

We're going to see [indiscernible] spending more evenly distributed across the quarters, which will impact the operating margin and profile development and we're going to see a bottom-line growth skewed towards the fourth quarter. What I'm saying here is very important we believe that the third quarter net income to be down year-over-year due to the top-line facing and margin profile.

Last year, we had an operating margin of 15.3 in the third quarter. This was due to the largest ever Yeezy launch we had.

This will not repeat itself. So, for us there is no news what we're saying.

We just want make sure that you don't get surprised when you see an accelerating top-line, which we're going to but with a kick in the fourth quarter and a declining year-over-year third quarter profit improvement simply because we're not going to have 15.3% profit margin that were due to the fact that we're not having a large period. Yeezy launch, this is not new, this was calculated all the time.

So I'm just saying totally surprised, we have confirmed our guidance and we are very certain that we are going to hit our guidance. Which brings me to our guidance, we expect mix sales of 5% to 8% gross margin around 52 as Harm spoke to you about an operating margin increase of 50 to 70 basis points, and you can see the impact before and after IFRS.

So, right now, there is absolutely no change to the guidance. We went out and gave in Q1 confirmed now here in Q2.

This is what you should expect for adidas in the second half. So, summing up, first half according to plan that was 3 to 4, we came out of 4.

We'll continue to see a double-digit bottom-line growth 13% in the first half 10% for Q2. We have the building blocks in place to accelerate our top-line in the second half and '19 will be in another year of top and bottom-line growth.

We are still very much focused on the execution and creating the new to ensure that we not only hit the guidance we're giving for this year, but of course, also the long-term guidance, we've given for our complete 2020 period. With this, I'd like to thank you for listening and then Harm and I'll be happy to take your questions.

Thank you very much.

Yes. Good afternoon.

Antoine Belge with HSBC. Two questions, first of all, listed a quite long list of reasons why the gross margin should be down in H2.

Is it possible to be a bit more precise especially on the two -- maybe the most important one, FX and channel mix, out of the 180 basis points of gross margin improvement, which was precisely the impact of FX on channel mix. And we expect those two to be negative in H2 or just to be less than in H1.

So, if gross margin are down in H2, is it possible for you to escape a gross margin decline in 2020, when the U.S. dollar strengths will be a bit more challenging.

And my second question is regarding Asia, 8% and was slightly below -- just on one quarter below the target for the year of 10%. China didn't really slow much, so can you highlight maybe one or two other Asian markets which explain this slowdown?

Thank you.

I'll take the second and Harm will take the first. We saw a slight slowdown in China as you saw 2 points and the remaining was really -- Korea we're seeing fairly solid business across the board and that's the two.

So, that is I'm not trying to short my answer, I'm saying that is the fact of where it is. And 14% growth in China still is very, very strong.

And as Harm said the Korea business is predominantly due to consistent slowdown in traffic -- store traffic. So, that's why that is.

Harm?

On the first one, the gross margin. Yes, I listed the five examples why the second half is rather declining compared to the first half.

Again, it's not negative on the FX in the second half, but its fading and is not giving us a lot of tailwind. So, there are two things happening on the one hand, the tailwind is receding.

On the other hand, all the work that we did over the previous years on FOB mitigation is slightly coming to an end as it's getting more convoluted in the supply chain or manufacturing capacities in Asia. There's a lot of brands moving out of China into other markets.

That's what we're seeing in the second half of 2019. I don't want to disclose more details of that, but rest assured that majority of the benefits are coming out of FX and that will be mitigation and some would be used strategically for repricing in Europe that's where we are.

Good question towards 2020. Of course, it's not getting easier in 2020 and that's why -- but we're not giving a guidance today, but we know what we have done from a hedging point of view, we know where the currencies are today, but currencies are still moving.

I would say on a daily basis, but we also have some benefit next year as we have addressed the supply chain shortages, we will have less airfreight, there will be some positives as well that we have negatives this year. And that's what we need to manage and become with the guidance in March 2020.

This is a follow-up. So, regarding the channel mix, so I was quite positive, you don't want to disclose it H1, for H2 I understand that wholesale should pick up, but is it your assumption that wholesale will outgrow DTC in the second half?

No. You shouldn't assume this, but the key thing is that wholesale gets back to growth.

And again, the primary growth factor that you saw was 37% in e-commerce and the overall mix, we are still at a 10% of the total, right. So that's why I think, the mix effect on the margin isn't as significant from a channel point of view yet.

Thank you.

Thanks Antoine.

Yes. Thank you very much.

Two questions. You mentioned that basketball was actually picking up in the performance category and maybe a few words, what really drove that positive development.

I think we've heard that -- haven't heard that for a long time that basketball was mentioned in the -- as a positive in the performance category. And then, secondly on the cost lines, you mentioned you were investing in the scalability of the business model and you were seeing higher costs associated with the DTC business, maybe some of the core elements of these where the money is going, where your investments are going in these two areas, so that we may better understand what the core elements of investments are in this -- in these two elements probably also being an factor for 2020.

Thank you.

Hi, Jürgen. This is Kasper.

I'll take the first one on the basketball side. As you know, we've had a decline in basketball business for a while also because we got out of the NBA contract and the legacy that it brought along with us to make sure that we sold-off the last jerseys.

What we are seeing, we're actually seeing quite solid growth or good growth in both our footwear in trial business. While the business is still small, I would say a good sign the right direction that we're seeing continued pick up of our products.

In a market that where -- you've not seen a lot of growth for many years. So, it was -- there's no doubt that we gained market share this quarter, but of course, we need to continue to expand our business.

The business is predominately in the U.S. and China.

That's about 90% of business. So that's summary in basketball, footwear and apparel both growing in North America and China.

Yes. On the cost side Jürgen, primarily the growth that you're seeing is impacted by our direct to consumer growth.

In addition to direct-to-consumer growth, of course, we invested into our DTC network not just in China, but also in the U.K. and also in the U.S.

as we indicated earlier. Of course given the growth was e-commerce has joined the shipping cost to its end consumer, which is part of it and we keep investing into our digital environment whether it's in apps, our Creator Club this where the money is going.

On the other hand, you do not see the benefits of One Adidas initiative yet around non-trade procurement and global business services, but they are coming to the end of these investment and the benefits will be more visible in 2020.

Thank you.

Thanks Jürgen.

Hi. Good afternoon, everyone.

Just two questions for me please. Firstly on the revenue guidance, the reiterated guidance employs a wide range for the second half of 6% to 12%.

Given you have greater visibility now in order books across the second half? So wondered why the range was still this wide?

What have you assumed for coming at the top-end of the range versus the bottom end? There are clearly are a lot of tailwinds you highlighted that should support a solid acceleration across the second half.

I just wondered where you still see the biggest risk or uncertainty. And secondly, that's on the Beyonce partnership, when it was announced.

I think you're still at that stage trying to work out what the partnership with Beyonce would look like commercially three months on. Can you offer any detail on what commercial terms would be now with Beyonce, have you started to design products?

Do you have a clear view on the product launch timeline? Will you be using Beyonce marketing campaigns ahead of the initial launch?

Appreciate the product launches are unlikely to be material themselves in the near-term, but just trying to get a sense on when this could start drive a lot brand heat for you particularly in the women's category? Thank you.

So, starting with the second half guidance, we don't narrow the guidance because we try to stick to the guidance that we have and we don't comment whether it's the upper end or the lower end? We do think that we need to see an acceleration and we are seeing that's why we explained the building blocks.

And as you saw it's going to be more fourth quarter and the third quarter simply because of the supply constraints. May be also on the guidance of the income growth last year, since all we made it, operating margin of 15.3%.

We had some criticism from some of you that why we're doing such -- normally a big launch because we're not doing it this year than we have subsequent to low income. And that is as simple as that is, I would be very careful putting ever any kind of overrating of that into it.

We're trying to spread the Yeezy business as equally across the year. And what you're seeing in the first and the second quarter has been an expansion of the market and margin you're not going to see that in the third quarter, you'll see that in the fourth quarter and that's why we're also confirming the margin guidance for the full year.

That is how basic that is. So, this is it, don't make it.

We'll just ask everybody not to make more complex than that. On the Beyonce, we'll start seeing the first part this year and for obvious reason, we're not going to give you any insight and part of the way, you actually drive brand heat and excitement around Beyonce [indiscernible] is also the element of surprise.

We are building a product line out. And as I say, we will see the first product launch this year.

You should assume which you also stated correctly, it will have limited revenue impact this year.

Okay. Thank you.

Hi, good afternoon. A couple of questions from me please.

Just going back on your FX hedging policy. Is it something more that you could share with us because FX seems to have a much more volatile impact for you versus peers?

And then, you've guided very, very, very much precisely on the second half of the year what we should expect. But you did not in the first half of the year, when the surprise was positive.

So, what are you doing differently versus your peers? How should we expect this to impact fiscal year 2020 on the basis of what you've hedged already today, this would be very helpful given that it seems to be one of the most important factors in your quarterly swings.

And then, a second question on the supply chain constraints, could you help us understand a little bit more which precise measures you've taken to solve the issues, some of your OEMs have mentioned that you might have raised some of the manufacturing prices up to 30% just to make sure you could secure [Technical Difficulty] we should expect to come from these measures both in the second half of the year and also in 2020? Thank you.

First, on the FX hedging, Elena. First and foremost, our hedging policy is always 12 to 18 months old and we want to cover our product cost to be more reliable and our guidance and our quarters.

And you can go back in the spring summer '19, if you go to 12 to 18 months back, we had a different U.S. dollar.

That's why it was more positive in the first half. And of course, as the dollar despite the fact a lot of banks told us, it's weakening, it hasn't.

And that's why the second half wasn't as good or as well hedged as the first half was. And again, the benefit was not much better in the first half.

And secondly, compared to the competition, our business has a lower percentage of overall net assets in the U.S., where we would have a natural hedge through the net sales and it was a main competitor has a benefit there because our share in Europe and also in China is higher than theirs. And that's why they have more of a natural hedge that we are missing.

That's why North America is so strategic for us also in the mid and the long-run even from a hedging point of view.

Let me speak about the supply constraint. As we already explained following the first quarter, we were in a supply constraint situation.

When you go out and ask for more capacity, most of the capacity is already used, so the way you could exit two capacity in the short-term is through overtime or through very "expensive idle capacity" where there's very little. The second part is, which is a cost associated with it and Harm has been quite clear on that has been then the subsequent, consequences of airfreight.

We have mitigated as much as we could in the first, second and also the third quarter. That is why you're seeing pretty much a more and more unconstrained situation in the fourth quarter and also going into the New Year.

You should assume for the capacity we have next year is very close to normalized rates. It does not preclude that the overall pricing is going up, but that's a market situation.

But, the marginal increase that we have this year for -- where we had supply constraint of course we are not continuing next year because we're not in overtime we are into a normalized manufacturing scenario. So, next year you should assume there is -- you don't have neither the same amount of airfreight nor the same amount of your marginal cost on the last product.

Understood. Thank you very much.

Thanks Elena.

Yes. Thank you and good afternoon everyone.

And my first question is on North America. There's lots of talk about the consumer slowdown, weakness promotional environment not necessarily in the sporting goods space, but maybe you can elaborate on that your take would be highly appreciated on that.

And second question is on Europe, you seem to be quite confident that you will see improvements in the second half of the year. You've clearly outlined several drivers, but given the development in H1 group wise and also in Europe and did you feel you are broadly in line with your expectations slightly ahead or do you have to step up materially versus your budget?

Thank you.

Starting with the last question, we had negative growth in the first quarter of 2019. We have no -- zero growth, so neutral position in the second is that what you are seeing, you are seeing what we of course are betting on a sustainable improvement in that you're going to see maybe not linear, but throughout -- remainder of the year, so you have to come back to growth as we said in the fourth quarter and we'll be in a growth scenario next year.

We have no reason to believe that the improvement that we're seeing is not going to be sustainable character. It has taken us four quarters to turnaround and I think that was more or less what was it last year that we looked upon a sustainable improvement and not a short-term whether be a disappointment.

So, with all the indicators we guys spoke about, and of course, also the football that you look for comparison you don't have a football element in the second half or you do have one which is the Euro. So, we don't really -- we believe that the assumptions we put in place are the appropriate ones.

U.S. continues to be a very positive market and we're not seeing a substantial slowdown in the U.S.

of course we've seen a slowdown in our business due to some of the factors that I mentioned. The competitive pressure, I would say remains high in all the key markets and I can't say that has been any higher or any lower from a substantial standpoint in the second quarter.

So, there is still good trading environment in the U.S. continues to be competitive.

But, when you bring new products in like some of the ones we discussed either through our own or through our creators, we continue to see a great demand for our products in the market.

Thank you.

Yes. Hi.

Thanks for taking my two questions as well on. On e-commerce, if I may.

Obviously, another strong -- very strong quarter of growth. Could you just help us understand the contribution of growth across the key platforms?

Is it coming mainly from your Web site? Is Instagram contributing?

Is your app now outsized in terms of contribution? How is Creators Club impacting that revenue growth?

What do you think is the mid-term growth rate for that -- for the e-commerce channel going forward to get to that 4 billion target, I think that you've said it requires a sustained level of high growth. Is that still sort of the base case assumption?

And then, secondly, just on Reebok. First positive growth in a number of quarters now.

Is this the beginning of the turnaround? Should we expect a sustained positive growth trajectory for Reebok as we go into 2020 and beyond?

Thank you.

Yes, Piral. Harm speaking.

Just on the e-com side, so it is indeed primarily still the Web site, but in the Web site it's primarily the mobile traffic that they're converting. So, that's the biggest piece that we're seeing.

Of course, the app is successful as well. But again, it's a minor piece of the overall business, but it is important for the loyal consumers that we have to convert them higher to get more frequently order them and of course linked to that is also to Creator Club or Instagram Checkout.

But the majority of the business is a traditional Web site. But, the traffic is more and more coming from mobile especially when it is in, China, it is almost completely mobile.

And that's really what we're seeing on the Web site. In the mid-term, we're not going to give a guidance beyond what we have in 2020.

And that's where we want to get to as part of our targets. But you can expect that it's an over proportional growth of online sales.

That's why we keep investing into all aspects of our digital endeavors.

On the Reebok side, you saw I would say the first very large step last year when we brought the Reebok brand back to profitability. Right now you're seeing the first quarter of growth.

We deliberately did not say whether this is sustainable. What we are saying is that by the end of 2020, we have a sustainable model where we are growing profitably.

And we're not going to give sequential guidance, we'll give of course guidance -- next year, but we're not going to give sequential guidance. But you should assume that we're working diligently.

I cannot rule out that we're going to have one or the other quarter without growth. But, of course, the target our commitment is to deliver what we promise you by 2020 sustainable profitable growth.

Okay. Thank you.

Maybe just on that Kasper, do you feel that the business is in the right place, obviously, profitability has been stabilized and improved. But do you feel like all the building blocks and the ingredients are in place to now drive forward.

I'm not asking you to commit to sequential quarters of growth, but do you feel that the business is now in the right place and you're happy with it from that perspective?

If you grow the way we're going right now, I can't be happy. I don't think we should be satisfied either, so we're getting more and more building blocks in place, but I still think we have a way to go.

We have shown that we can make a lot of progress, but I don't think by any means we're finished with getting Reebok to the state where it needs to be. So, without going to further details, what we need to achieve, I think there's work to do and the entire management team have a special review meeting with Reebok next Monday.

The following one, two weeks time, I was there last week and most of our people also spend time on it. So, on the right way, but we don't yet have all the building blocks in place better this year than last year which is why the numbers are better.

Brilliant. Thank you.

Great. Thanks.

Good afternoon. So, two questions for me.

First is on China, could you talk a little bit more about what you saw in terms of the digital trends in China versus the offline business. And then, where are you seeing or what did you see in terms of store growth there?

And then, my second question, in North America, Harm, could you quantify how much airfreight impacted the EBIT margin decline this quarter? And then, just given the supply constraints through the third quarter, are you expecting EBIT for the North American region to remain pressure for the year?

Thank you.

Thank you. So, we still see -- I will take the China.

We still see a good mix between brick and mortar and online growth. And when we open very large boxes, we just open a very large box or the biggest we have in Sanlitun, which is the largest city in China.

So, what we're going to expect very, very large high number visitors in our current biggest store in China, in Shanghai we have 20 and 30,000 visitors a day. We expect that to continue.

So, we see when the brand experience is good, we're seeing a very high interest. At the same time, digital is at the forefront in China.

I would say also from all that perspective and that's why we've built the digital team in China, so you should assume that the digital growth will by far outpace the physical growth. But, the same time, we still see opportunities for opening up stores particularly in lower tier cities across the Chinese continent.

It is such a vast country. We don't give guidance on the number of stores, but of course, we are seeing a slowdown in the opening of new doors, which is also the guidance, we've given in the past.

So, we're seeing a different size of the box and a slowdown in the opening, but of course, we'll continue to open new doors where appropriate.

On the EBIT impact of airfreight in North America, we're not going to give the details of that. But, what I can tell you as a direction when you look at the gross margin decline of 150 basis points, a significant part of that is impacted by airfreight.

That's where we leave it. But, when it comes to the EBIT, they have other things in there as well as I mentioned earlier from a brand investment, from an infrastructure investment, but when it comes to the gross margin significant part of that is impacted by airfreight.

Okay. Fair enough.

Thank you.

Thanks Erinn. Healy, we have time for two more questions.

Hi. Thanks for taking my question.

Sure. Hi, John.

Could you talk about -- you've reached the high-end of your margin guidance for 2020 in -- with your high-end of your guidance for this year implies that you've reached the 2020 target? Can you just talk about some of the operating leverage that's embedded in the second half guidance?

And what specific line items you're seeing the ability to lower within that OpEx ratio?

I'm not sure when you say we have achieved the guidance for 2020. Yes, we are definitely when I look at the first half, we made good progress.

And as we always said in the fourth quarter is always a quarter where we have a lower operating margin historically. It will be more balanced this year.

And of course, we talked lengthy already earlier about the impact on Q3 where we target to be below prior year on the net income line and of course correspondingly in the operating margin as well. So again, we continue to spend on the marketing side.

We continue to invest into our business. We are committed to our e-commerce growth and we will drive some of the operating overheads.

But, as I said earlier, you will see the first visible benefits of what it does in 2020 as some of these investments come to an end in 2019 and it has been built and that's the direction that we're going to go. But, please -- keep you reminded that in Q3 it will be a different operating profit than we had on prior year in Q4 will get.

Again, not similar to the previous year, but we want to get a more balanced quarter-by-quarter going forward.

Got it. And then, maybe just a quick follow-up.

We've seen some more Yeezy launches here in the U.S. in the first half of 2019, even more so than the second out of last year.

And the sell-throughs have been extremely strong in both the primary and resale market. So, just wondering what you expect out of Yeezy going forward, is this type of launch cadence that we should expect in the back half of the year as well?

Thank you.

So, thank you for asking this question because it's actually really paramount to the way our business is running right now. Last year, we had fewer launches with larger volumes.

What we have now is, we have more launches with this less volume. So, the business is being spread much more out and the launch you just spoke about, the last one was, well, we had a different launch we are.

So, you could buy one a different shoe every hour of course with a limited volume. But, what we are doing is, we're spreading it out to get to avoid having these very large elements in one quarter, which basically makes the comparison very different.

So you should assume that we will be more Yeezy products in. Also as we speak, the volume will not fundamentally change.

We're not fundamentally growing our Yeezy base. We think it's a very good level.

So, you might see a slight growth, but not seeing a substantial growth at all. But it's going to be spread much more evenly out, which of course also will mean that you're not going to have the very large variances in one quarter or certain that from a margin standpoint because it's simply not how we're going to launch the product.

So, what you saw in the U.S. with the launch with different models every hour you will see, I will not disclose it, but you'll see that one of the reasons also this quarter in Europe -- this quarter in the rest of the world, but of course not with the volume that we saw last quarter -- last Q3.

Excellent thank you thanks.

Thanks.

Morning. Oh, sorry, afternoon, two questions on product.

Can you just talk a little bit more about UB19, in terms of how you expect to scale it through the rest of this year and into next, I don't think I've seen anything on Instagram about it for the last quarter or so. And prices are still kind of well above mass market.

And secondly, I know you've already been asked about the onsite, but just kind of conceptually where are you looking to position it? Is this going to be kind of Yeezy style pricing, or will you be looking to bring in product at around kind of the upper end of existing product?

So, on the UB19, as we said, it has been a successful launch and it's a stage as we've seen with other products also that was just typical that you don't have unlimited supply. That's why we also are not seeing any price take down, so sell-through is good.

We've had substantial social media activity across the board, but we continue to see a growth for Ultraboost business with more than 30% this year. So, Ultraboost not only the UB19, but also the OG continues to be very well and we're very happy with the development.

I'm sorry [indiscernible] I'm not going to give you any details on Beyonce. We think that we don't want to -- what you call the cat out of the bag before we're there.

We think we'll be saying what we have to say, but we're not going to give any details on it beyond what we've given today, which means that you're going to see the first product hitting by the end of the year in the portfolio. And with this, I would like to hand the call to Sebastian.

Okay. Thank you very much Kasper.

Thank you very much Harm. This completes our conference call for today.

As you know our next reporting day will be the 6th of November for our third quarter results. We look forward to speaking and seeing many of you over the next couple of weeks and months.

As always if you have any questions in the meantime, please don't hesitate to reach out to Adrian, myself or any other member of the IR team. With that, I would like to thank you for participating in today's call.

Bye-bye. And have a great day.