Adidas Ag Ord

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the Adidas AGQ1 2023 conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may do so by pressing star and 1. Press the star key followed by 0 for operator assistance. It's my pleasure, and I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead.

Thanks very much, Francie, and good evening, good afternoon, good morning, everyone, wherever you're joining us today, and welcome to our Q1 2023 conference call. With me here today in beautiful Herzogenaurach are our CEO Björn Golden and our CFO Harm Ohlmeier. Bjorn will kick it off in a second with his prepared remarks, and then both Harm and Bjorn will be available for your questions. During the Q&A session, as always, I would like to ask you to limit your initial questions to two. And that's, of course, not because the fewer questions you ask, the sooner we will be able to head into our well-deserved weekend. That's, of course, because we want to allow as many people as possible to ask their questions. So please stick to the two-question rule. And with that being said, and without any further ado, over to you, Björn.

Thanks, Sebastian. And hello, everybody. I will take you through the numbers, but also take you through some visuals to explain a little bit where we are and what we're doing. And I think it starts with actually the front page. Here you see the jerseys that we have made for the teams that will play in the World Cup for women in New Zealand and Australia this summer. And these are jerseys developed only for the female teams. And I'm actually very proud of it. You have eight teams here. We actually have 10 when we go to the tournament. And as you remember from the European Cup in UK, women's football is incoming. And as you see here, having 10 teams in that tournament shows you that we are heavily investing in women's soccer. If you look at the numbers, I'm sure you had a look at it, so I'll go quickly through them. 5.3 billion in sales, which is basically flat, currency neutral. And if you then, as we have to do these days, look at the missing GC, then we are actually up 7% without that. If you look at gross profit, losing 510 basis points is, of course, not good. mainly because of discounts and also write-offs of inventory. Of course, there are other moving parts, which I'm sure you will ask about later, but that's the major reason. I think that down the road, our gross margin should again go towards 50, but of course, the gross margin will be the biggest problem for the rest of the year. If you look at OPEX, again, an increase, as you see here, around 110 million. And this is, of course, that part of our OPEX was planned and based on a higher sales. And of course, there's no leverage now when we are so far behind the plan that was originally set. But again, Harm and the team has been very disciplined in OPEX. And that's also then the reason why we actually are then having a small profit of 60 million despite, I would say, all the troubles. And it's actually better than what I had expected because I told you to have a small loss in Q1. And again, if you remember the 724 loss we had in Q4, then it's, of course, a big, big swing. If you then look at the top line, minus 20 North America seems dramatic, and it is, but it's also what we actually planned. If you take the GC business into account, then the rest of the business is down 5%. And of course, these are not strong numbers. And of course, there is a big challenge to turn this around in the US. But also here, I do think we have a lot of, what should I say, initiatives in place. And I will take you through a few of them. Important for us being the home of football or soccer, we extended the MLS contract during Q1. And that is strategic for us, very, very, very important, because I do think we have to own soccer around the world. And again, as you will see later, we are trying also to create much more soccer culture for the street. And to do that, of course, we need to play both on where we are today, but also play on our heritage. And that's why it's important to protect our number one position in soccer in the big markets. You see here up in the left corner where we tried some of the things that has to do with street. The designer, Daniel Patrick, worked together with the Red Bull team of New York and also took part in the fashion shows. Again, one of these initiatives to bring fashion, music, and soccer together in a similar way that we're actually doing in basketball. Then we had Patrick Mahomes, you know, the best football player currently. And of course, him being the MVP, we have also started to use him more in our marketing. Very, very important in America is the festivals. And as you probably know, during the last three years, because of COVID, there was little activity. Now the Coachella was, you know, on the road again, and we decided to overinvest. We had a lot of presence there. And I think for the first time there was also an Asian, our pop group from Korea, Blackpink, on one major stage and did a great job for us. We also had a great lineup of other artists and a lot of our athletes was there. And I think it's fair to say that our, what should I say, investment there was the most visible on the Coachella. I think Coachella then also was topped by our collab with Bad Bunny. You see here him on stage, but you also see our, what should I say, pavilion or lounge or whatever you call it. And then the collab shoot, the campus that he has developed with us that you later will see is now also a bestseller in the higher end of the distribution. So this recipe works. The basketball investment goes on. I have said many times that I think to connect to the street in the U.S., we need to be credible in basketball on the court and then take that credibility on the street through our classics or through new developed silhouettes. For the first time in the history, Adi, I think, had two teams in the semifinal or the final four of the college tournament. Both Miami and Florida were playing in Adidas. We also extended the Grambling State University that plays a big role in the street culture. And of course, we are continuing with signature shoes because it's part of this culture. And here you see the examples of the Hardin Volume 7. Maybe even more important that we finally were able to launch Pharaoh God. We did that in LA a couple of weeks ago. A great job with Jerry Lorenzo. We had invited all our hype customers there. And it's fair to say that the reaction was great. You see some of the items on that slide. And here you see the lifestyle direction on the footwear side. And the second picture is actually the first performance shoe, which is called Basketball 1. There will be a Basketball 2, and there will be a Basketball 3. So you will actually see quite some performance shoes coming out of the Jerry Lorenzo, that is also going to be played in the NBA. And I think personally that this is a game changer. You will start to see this product visible during the second half. We will have some commercial launches also at the back end of the second half. And then, of course, this, should be a major part of our basketball initiatives for 2024 and beyond. If you then look at EMEA, also here slightly better than what I thought with a small plus. If you take Russia out, which you kind of have to at least do for a while in the way you compare it, then we were actually up 9%. And the changes we've done there, remember, we announced or promoted Arthur, who was running the region, to now be the board member for global sales. And he has then decided to divide the European set up in this way that he will have two reporting lines. One is Mathieu, who has now been running, for example, the French business. He will be in charge of Europe. And then Dave Thomas, who's doing emerging markets, will not report into Europe anymore, but actually straight into Arthur. So that will be a change going forward. Two very good leaders that I think will help us get more growth in both regions. If you then go into China, still negative number of minus nine. If you take GC out, it's flattish. But what is actually very positive is that the sellout in China is up in all our channels, meaning that our own retail is up double digit. And also our retail partners are having positive numbers on the sellout. That means that we're currently selling in less than we're selling out, which is, of course, is the healthy way of doing it. And I think it's the first time in a long, long time that that's happening. In general, a lot of energy in China when it gets to doing new things and the fact that they're not in any restrictions and that people are working freely and not sitting at home. Here you see an example of that. They took one of our technical shoes from the 90s, the climate and did a VSTEC launch only for China. Very successful, created a lot of buzz and this technical look that Adi used to do in the 90s is very popular and the Chinese team did a great launch with it back in February. Also positive is that we have started using celebrities again coming out of, I would say, dance, skateboard and a little bit of music. It's not the way it used to be, but it's starting in the direction and we see that that has an impact both on the traffic online and also on the conversion. I think more importantly down the road is that we see that the Chinese are back again in sports. All the marathons, 5Ks, 10Ks, half marathons are sold out, which means that people are moving again after three years of little sports activity. And therefore, we have, of course, as Adidas started signing a lot more athletes and also doing more events, And here you, for example, see the Shanghai Half Marathon, which was sold out, and we are sponsoring. So more sports interest, which, of course, plays in our direction. The two last regions, both Latin America and the Pacific, doing very well. Latin America growing, again, almost 50%. I think it's fair to say that we have a very energetic team that has the tools to grow. Flavia, our female leader there, is doing a great job, and And I think we've given them more freedom in both doing local programs and also doing the assortments the way they want to do it. So a lot of momentum. And also in Asia-Pacific, you see the positive numbers. So that's a positive thing. And that gives you then the flattish year-on-year sales. And again, the 9% compared to non-GC. If you look at the channels, wholesale, where we sell into the retailers and they sell to the consumer, plus 3%. Own retail, brick and mortar, plus 11%. I think we have 47 less stores now than we had a year ago. That means that the like-for-like number is a little bit higher, and it's about 13%, both in our concept stores and in our outlets. and that shows you a positive, what should I say, development for, of course, selling out is more important than selling in. Ecom, of course, different, reported minus 23%, and if you take GC out, it's actually plus 12, and here you see, of course, that the GC business for our Ecom business was very, very important, and we have not been able currently to replace that, and, of course, that is then What should I say? A challenge for the future. You should also know that we're trying to take the promotions down in e-com, trying to protect our franchises. So top-line maximization is not the goal of e-com, but it's to make it profitable, protect the brand, and then, of course, clear product where that's needed, but not to be promotional on in-line important franchises. That gives you the split in our challenge of 66% wholesale, 34% D2C, which I think is now a healthy balance. And over the D2C, then you see the split between own retail and e-commerce in 1915, which again, I think under the current conditions where we are, is a pretty healthy mix. Look at the divisions. Footwear at $3 billion being up 1%. And again, you have to remember, despite not having GC, Apparel at minus 3 at almost 2 billion. I think it's fair to say that there is more apparel inventory around in the market than footwear, and I think we expected this, so not a big surprise. A positive surprise is that the accessory business is growing and currently at 8%, and that gives you then this split, footwear being 57%, apparel 37% and accessory 6%. And again, I have always said in other companies that 50% footwear is a good ratio and here even close to 60. And I think we all know that this industry is led by footwear. And that's why I said also here for the future, we have a good starting point. What I'm very proud of, although I cannot take the honor for it, is that I've said all the time that I think the performance pipeline at Addi is good. you see also here same thing as we talked about nw4 all performance categories up all of them double digits except for training which is flattish and i think that again is a healthy starting point because it would have been worse if we now were up in lifestyle but down in performance because we all know that that is more difficult to turn football You know, the X, the Predator and the Copa, three fantastic franchises here in one of our packs. And again, since I'm new, I can promise you that all the franchises going into 24 is even better. And all the interaction we had with the distribution tell us that we look very, very good for 24 in football. Women's football being important. I already showed you on the left side the jerseys for the World Cup. And also in line with taking this business series, we launched the women's ball. And it's ironic, but now many of the men's tournaments are actually playing with the women's ball because that's the way it is now in the pipeline. A great ball, which is also selling decently around the world. I talked about trying to bring soccer more to the streets. One of the things we're doing there is to take all iconic jerseys from the 80s and the 90s and then launch them as streetwear. Here you see some of the examples. And you will, going forward, also see original products combined with football. And we did, for example, for some of the teams, do some bus branded together with the teams, and they sold out within hours. So a new way, I think, of using the heritage of the brand in a way that only we can do. Sustainability, as is important as always, that's why we continued doing projects. And here is the Predator with Parley, and we will continue to do projects like this. What is new? We did extend the contract with Union Berlin. Probably the biggest surprise in the Bundesliga. Great personality, great people, fits our brand. So we extended that. We started our cooperation with the Kings League, something that maybe many of you don't know. It's a seven against seven league in Spain, especially in the Barcelona area. very, very popular on Twitch and on, I say, YouTube and YouTube channels, something you should have a look upon because it's a different way of actually being in the soccer game. And we are the major sponsor. And then I already said that we extended the MLS contract. We have two running campaigns. One, the running needs nothing but you, where we use runners and other athletes. You see Sala showcasing, you know, the mood of running and also, of course, the products. And then very important, we did the Ridiculous Run campaign, where we talk about women being afraid of running alone outside. A very important message, and again, very important in our communication. Very proud again of our products, the Adizero franchise. In my opinion, probably the best running shoes out there, from a design point of view, but also from a construction, from a weight, and from a last. And the reason I'm saying that is that these shoes are winning almost half of the races around the world. And of course, Boston was the most impressive one. The number one, two, three, and four in the men's class was running out of zero. And the number two woman also. And you know, when you have the four best ones, then it's definitely a credible thing for the product. Same thing here. Proud. RD for the third time had Road to Records where they invite 140 of the best athletes in the world to run 5, 10 and half marathon around our campus. We also had a run for our own employees. More than 1,000 people showed up. And it was a tremendous event for us. And I think it's something that only Adi can do. We had also other celebrities from other sports. You see Kaká here, if you remember him from Milan and Brazil. And this, you know, the live of our campus with athletes, our own employees and other stars is a tremendous thing. And I get goosebumps when I think about it because this is the way I remember Adi from the earlier days. Sustainability, of course, communication-wise and product-wise, very important. We used to do the run for the oceans. We have now widened this into move for the planet. The concept is that when you log on to our running app and you do sports for more than 10 minutes, we will donate one euro. And the hope is, of course, that as many of our members does that so we can actually collect as much money as possible to put into the different programs in sustainability, and the campaign starts on June 1st. We also signed with Les Milles as a partnership in training, training being a huge category, especially on the women's side, and our partnership there is very important, a lot of activities going on. And one of the activities also, our partnership with Rayon, where we have taken materials that have been developed actually in the space program with NASA, and put that into our leggings and our bras. And again, a highly technical product to build image in the training side and especially on the women's side. More women, we had a celebration of Michaela Schifrin winning 88 World Cups, two more than Ingemar Stenmark. And of course, she being part of our family, we're very proud. She also spent last week here on campus and was an integral part of many things that we did, and a fantastic athlete and a fantastic person. Outdoor in general, you know there is an outdoor boom. We have a Terex connected to it, also here focused on women. You see here the women hiker. We did a collab with the National Geographic, both in footwear apparel, And here also inspired by the Japanese market, we did a call-out with Add & Wonder, which is a Japanese outdoor label. And again, a lot of activities going on, both in the true performance, but also in the lifestyle area. And again, outdoor being now under the Terex label doing well. For those who are interested in golf, we finally launched Ultra Boost also in golf. I think it's fair to say that Boost is the most comfortable foam in the industry, and there's no other sport where you spend so many hours in the shoes as in golf. So it was very logic then to put Ultra Boost into golf, and needless to say, the most comfortable shoe in the market. And I can only suggest that you try it because it's the best golf shoe that you can have. We continued also with more aggressive design on the apparel side. Here, the floral design that we did to get with Rose Chang. She's the best amateur in the world on golf, been that for three years. And here you can see she looks great. And I'm sure she will be pro in a very short period of time. You know, I'm a sports romantic. Many people here are. Adi has always been very visible in many sports. And that's what we're trying again to nurture. We have, since we talked last time, re-signed All Blacks. You know, All Blacks being maybe one of the most symbolic teams in the world. They will also be here on campus preparing, I think, 10 days in the preparation for the World Cup in France. And we will launch a spectacular jersey for them during that time. And we will extend the offer into lifestyle because their logo is carrying a lot of lifestyle appeal. So you can see or expect to see a lot of interesting things on that. In special sport, proud that we have two female boxers from India who both won the world title. So again, focus on smaller sports on the female side. And then a special thing in Germany, you will have the Special Olympics in Berlin in June. And we outfitted more than 400 athletes of the German delegation the other day. Again, you know, our commitment to sports and very, very important for our DNA. That was performance. We have talked about having issues in lifestyle. You see both sportswear and original still being negative. But we also see some highlights. The Taras, the Tito range, still doing fantastically well. I think the energy in certain markets around these models are great. And you have to remember, we haven't scaled it yet in a way that you see it in the numbers. There are periods coming in, as we speak, in much bigger numbers. And this will start to have an impact on our business going forward. New is that we have another winner. That's the Campus that you see on the foot of this model. Not a Terra style, not a Tito style, but again, one of our classics. And I think that the way we have done Collabs, you see it here together with Bad Bunny, and you also see the Samba that we did with Ronnie Feig, is causing a lot of energy. And as you can see outside the Kids Store in Tokyo, people are lining up in hundreds, to actually buy this product. And of course, that's creating a later high-low effect for our brand. In general, a lot of activities and lifestyle going on, a lot of positive feedback, of course, with many things that still not are scaled. But you know, you need to do small things first to get heat back again and then scale them. And I think it's fair to say that when we work through our archive, we are in a very good situation if we can manage this properly. And I would not be surprised if you also see shoes like Superstar coming back heavily, as you see in white, black, and black-white, because we already start to smell it in the trend magazines and in the, what should I say, fashion areas. And then we will have another winner. Great job of Adidas with Gucci. I think the samba boom that we see is coming out of this corporation, and here you see some examples of it. And again, I think both the Gucci team and the Adidas team have done a great job on these lines. And I guess that at least I have very, very many so-called friends who want to get their hands on this collection. And of course, I will try to help them. Pharrell talked about it last time, you know, now being the LVHM head lead on the men's side. Here is his take on the Samba thing, where he will launch many, many fashionable colors together with us in the second half of the year. Very cool, I would say, development. Sportswear also starting to turn around. We now have a positive order book. Here you see the Jenny Ortega and the Average shoe. And again, the things are starting to go in a direction where we also get the right volumes on this. That was the physical product. We also dealing with the metaverse. There was a fashion week end of March where all the brands were showcasing in that space. I'm very proud that we also here were very active and that actually our launch was the most visited also in this space. Probably not my world, but the world for the younger generation. And we are actually investing quite some time and energy with talent also in this space. That was sales and products. Very quick on the balance sheet. Inventories, as you can see up here, 25% are reported. That's 27% in neutral currencies. I'll get back to that in a second. Accounts receivable flat, of course, because our wholesale business is flattish. Accounts payable down 600 million, same thing again. This is also proof that we're sourcing less, buying less, which is in the strategy of getting our inventories down. And inventories up, accounts receivable flat and payable being down causes then working capital to go up. And of course, this will start to normalize as we get the better balance on these short-term activities. That means cash and equivalents at around 800 million. I think Harm's goal is to be around a billion, so we are in the ballpark of the number that he wants to have. Inventory, just a quick one on that. As you can see, 5.7 billion. The GC part of that is 500 million. If you remember back in Q4, it was 400. So that tells you that there's another 100 million that came in. And this is what we told you, that when the contract was broken, we had things in production that we continued with to not, what should I say, have people in the factory lose their jobs. And as you can see, then 100 million has been delivered into our inventories, also on the books during Q1. I have the feeling that if you take the GC out, we are at 5.2 billion, which is less than we had in Q2 last year. And I think with the plans that we have, that we should have our inventory in control, both from an amount and also from a mix at the back end of this year. When it gets to the relationship to the trade, we are leaving the own the game and feel that we now have to earn the game. We have invested over the last three months time, energy, and of course resources in really showing our retailers what kind of partner we can be. A couple of weeks ago, we had the owners and the CEOs and the most important people of all our most important retailers here on campus for two and a half days. where we showcased everything we have. We showed them the pipeline and innovation. We showed them the campus. We showed them the resources. Of course, we showed them the product. And we also showed them the new creative direction of the brand. And if they were nice, which they all were, they could also play, for example, paddle with Zidane and take part in other activities. For me, a great, great event with a lot of good feedback. We did the same specifically for football. We invited, again, all the football specialists to be here for two days. Went through all the product and concepts for 24 and also the innovation pipeline beyond. Had players like Del Piero, Alonso, and also our long-term partner Beckham here. And again, in a great atmosphere. And again, as being new to the brand again, The feedback on the 24 line is fantastic because I think it's the best line, including lifestyle for original that I have seen. Running, I told you already that we have the products, we have the technologies. Of course, we don't have the market share yet for A, winning the races and B, having the products. So again, we did the same thing. We invited the specialists to be here for three days. They were also here during the road for records. And I'm very, very sure that Alberto and his team will get better distribution because now we have the product and look forward to only not get credibility, but also get commercial business in the running area going into 24. At the other spectrum of our business, not in sales, but in sourcing, we did the same. We invited all our suppliers for a three-day summit in Shakarta. where we, again, presented where we are, both positive and negative, and had a very honest discussion about what we need to improve, topics like speed to market, topics like local sourcing, and, of course, trying to share resources was the major topics. And I have the feeling that was very, very welcome. And, again, I love these suppliers because they have experience making products for many, many, many years, and I think we need to use their knowledge even more than what we have done. So that was what we have done. Quick look at the outlook. Shouldn't be surprised for you. A big, big focus on the core of the business. Design, development, sourcing, which is the creation of the product. Then marketing and sales. And then, of course, delivering it as good as we can. And neither, or if it's wholesale or DTC, it doesn't really matter. We need to do both better than we're doing. And, of course, in the middle of all that is the consumer and customers. everything we do need to reach the consumer, because if not, it's a waste. That also means that in 2023, we will continue to focus on things that are important to build a base for 2024, which would be a better year, and that should again then lay the groundwork for 2025 and beyond, which would be, I would say, good, good years. Most importantly, that is our people. It's obvious that the people have had a tough time, you know, during COVID, not being on campus. And of course, when the results are not good, the atmosphere is not great. So important that we create that Adidas spirit again, which Adidas was known for. Product is king. Without the right product, we will never win. So product is hero. Everything we do should hit the consumer. Retailers is our partners, and I really mean partner. We need to share all ups and downs with them, and they need to feel that we are the best servicing partner in the industry. And then, of course, we are there for the athletes and not the other way around, and that's an attitude that Audi has always been known for, and that's what we're trying to wake up against. You know better than me that there are still some challenges in the environment. The geopolitical tensions and the situation is still not good. There are macroeconomic challenges, although at least what I can see, there are some positives. Inflation is coming down. Raw material prices have come down. Freight has started to normalize. So at least there are some external factors that help us. And then the high inventory levels that you have seen or we have seen, are still there, but my feeling is that when we get to the back end of the year, I think the whole trade and the brand should be in a better shape, which will, of course, help all of us. You put that all together and we confirm our guidance for 2023, which we have said from the beginning is a transition year, net sales with a high single-digit decline and an operating model that is now basically breakeven. The assumption for that is that we don't sell any of the GC inventory which then translates into 1.2 billion lower sales and a loss of operating profit hypothetically of 500 million. In addition to that, we said that we could see an operating loss of 700 million if we have to write off the existing inventory, which would then be the 500 million you saw on the balance sheet. And then, of course, based on all the strategic changes we need to do, over around 200 million. This is in line with everything we told you last time we spoke. So again, we have all the ingredients for success. I am so very positively, I wouldn't say surprised, but confirmed what I've seen. But in the short term, we're not performing the way we should. And I hope you have some patience with us because for us to short term try to show numbers would not make any sense. We need to manage through the year in the best way. And then, of course, using all the energy to do the right thing also for the future. So with that, I hand over again to you, Sebastian.

Yeah, thanks very much, Björn. And Francie, we would be ready to take the questions now.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press star followed by one at this time. And we have the first question from Erwan Ramburg from HSBC. Your question, please.

Yeah, good afternoon, gentlemen, and congratulations. And good to hear you're live and kicking, Bjorn, after your recent accident. So I'll keep it to two as planned. Just on China, I'm wondering if you can comment on your vision of Western bands relative to local Chinese brands in terms of market share. Do you think we could see a situation later this year of stabilization of market share? And maybe just related to your business, you said that you were down 9% and at the same time, sell-through is up double digits. So should we expect a snapback, a rebound in Q2 for sale, or is that still a bit premature? Sure. And then maybe secondly, I think you made a few comments around the fact that you were hopefully a bit closer to determining exit options for Yeezy. I'm just wondering if you could take us through what the latest thinking is on the possibilities there. Thank you.

Yeah, I'm doing fine after my accident. I never look pretty, and I don't look pretty now, so my face was damaged. But I'm okay. um in china we need to be careful because the positive thing is the following we have sold in less to the trade that they have sold out so that means for the first time inventories in the trade of adidas product is going down and there is a demand that the retailers haven't seen for a long long time it's the first time i see this in in many many quarters And that makes all of us, of course, positive. We also had our two big retail partners from China here in headquarters. And it's the first time again that they see, I would say, not only light of the tunnel, but see some normal developments coming. That gives our team, which you remember has been almost in two and a half years kind of quarantine or under heavy restriction, of course, have a lot of energy. And there's a lot of activities now going on in China that is consumer-fronted. We talked about athletes. We talked about culturally relevant events. We talked about in-store activities. And also in the social media side, starting to build campaigns again to generate traffic and conversion. So that's very positive. The reason why I'm hesitating to say, OK, that would mean that Q2 and Q3 will be up in sales, of course, is again, if I say that and it doesn't happen, you get mad at me. So I'm careful. But the indication is, of course, that if this continues, that will happen. It's obvious. And I do think you will see an increased top line coming in China. But don't arrest me on quarter to quarter because, you know, it's impossible to kind of be certain about that. My personal feeling when it gets to market share is that, of course, all the Chinese brands have exploited the last two and a half years and in a very smart way. But I do also, and again, from everything I can see, feel that that is being saturated so that the growth that they got almost for free is starting to slow down and that you will see Western brands again starting to take back some market share. And I, of course, hope that we will take most of it back again. I do not think that China will be one to one the way it was because competition is, of course, now harder. But I am counting on China being one of our fastest growing markets and also one of our most profitable markets, if not the most profitable. So I am or we are, I think, realistic, optimistic mid-turn about China. When it gets to the GC, there is nothing else to say than What we said last time, we are working on different options. The new thing is now that all inventory is now on our books. Most of the inventory are in the right warehouses and that we could theoretically sell product if and when and how is still in the evaluation. But of course, the decisions are getting closer and closer because that's the way it is. And we have spoken to all interesting parties many times. And there are three, four scenarios that are now building. And as soon as we have, what should I say, all the evaluation done in a way that we, and then to be honest, even our supervisory board feel comfortable, we will then go out with a decision. And that could happen in the midterm future.

Thank you. Best of luck. Thanks.

The next question comes from Simon Iron from Credit Suisse. Please go ahead.

Hello. Thanks for taking my questions. Can I firstly just come back to you on China, particularly since you've had the partners in town? How many... points of distribution have you now got in China? And has that bottomed out or do you think there's kind of a further decline to come? And secondly, when you talk about the route to margin, you talked about gross margins of up to 50. So to get to the 10% EBIT you mentioned on the last call implies at least 500 basis points of operating leverage I mean, is it leverage or do you see an opportunity to cut costs? I mean, how do you think you cross that gap and how long do you think it'll take?

The number of sales points in China, if you combine our partners, is around 8,000. Now you have to remember that only points of sales is not relevant because it's also the size of them. And what you have seen During COVID, actually before COVID, they were starting to open bigger stores. So instead of the numbers, it's also the total amount of square foot. But we have reduced, I would say, the number of sales about 2,000 stores, and it's now around 8,000. But it doesn't mean that we have reduced 20% of the square footage because some of the stores are bigger stores. I think that right now that is good. But then I do expect, again, as the business stabilizes in the growth mode, that we can open stores again in the third and fourth and fifth tier cities again, that you will actually see store bases going up again. But again, that's too early to do right now. When it gets to the gross margin, then 45% is, of course, not acceptable. Even with a 65-35 split between wholesale and retail, the margin should be close to 50, if not 50. And again, it's not only leverage. You have to remember that we are running at a very high discount. We have, because of the high inventory, written off high values. And then again, you know, a lot of the inventory that we now are selling have a very high freight because it's been bought at, you know, container rates about 10,000 and has also from the sourcing cost has the highest price. So I would be surprised. I'm looking at harm, but I hope that this is the lowest gross margin that we will have. This and the next quarter are kind of the type of product that has the lowest margin. And then it should... start to improve in the second half. To get to the 10% EBIT, the math is pretty easy. I mean, you need 50%, 51% gross margin. You're running marketing at 11%, and you can have an operating expense of 30%, and you are at the 10%. And this is where we should be, to be honest with you. And that is not impossible with what we have as businesses. We just need to get into a normal stage where we're not all inventories and we're focusing on our wholesale and retail business in a more, what should I say, realistic way. I clearly see the 10%, but I'm not saying to you it's 25%, 26% or 27% because then you will be disappointed if we do something wrong. I hope you give us 23% to show that we know what we're doing, that you see some improvement in 24%. And then the acceleration of our EBIT then depends on all these factors. But I think we all, and I'm looking at Harm, we should have 10% as a target, and that should be realistic.

Yeah, definitely, Simon, no doubt on the 10% in the midterm. But I want to echo what Bjorn said on the gross margin. We have reached the lowest point. Q2 already will see some progress, given the progress we make in China with the inventory situation, the better sell-out with our customers. a largely normalized situation in the next quarter in Europe. And again, North America takes a little longer, but it should sequentially improve. And then to your question on the leverage on the operating overhead, of course, we're not happy with 33%, 34% that we have reported recently. But the key thing is to get growth into the company. But secondly, that's what the $200 million one-time cost in this year is also for that we if we look strategically at the right elements to put in this 200 million to have a better base for next year. But that is something where we want to be carefully review the right actions. And clearly, the operating overhead needs to get closer to 30%, if not below 30% over time. But this is not something that we can see in the next quarter. So we'll take time.

Brilliant. Thank you very much, gentlemen. Thanks, Simon.

The next question comes from Adam from Deutsche Bank. Your question, please.

Hi, good afternoon. A couple of questions, firstly, on the wholesale order book. Can you give us any or shed any light on what the order book position looks like for the 2Q and 3Q and maybe even early signs for the fourth quarter? And then secondly, you talked about sourcing more inventory for some of your your best sellers. Can you talk through how important that could be, how much of the demand you can fill on a reasonably short time scale for those products which are selling well?

Thanks. When I said we're scaling the things that are trending, then you have to remember that many of these shoes, especially the Terrace, were things that were meant to be in what we call incubation. So they started in collapse on high end of the distribution in the second half of 22, like, you know, the Gazelle did with Gucci. And then the plan was still to incubate it and build heat during 23. But when I came in, the demand was so big that we said, hey, we need to scale it now. And that's why we went from, you know, some hundred thousand pairs to now actually looking at millions pairs. And we have done that pretty quickly, to be honest. We put brand, sourcing, finance, and the suppliers together with the commercial team and changed all that plan already the third week of January. And it's easier now because the capacities in Asia and the factories are easy to get because you have to remember with all the inventory issues, there is less orders in the factories than there has been. So we could scale that pretty quickly. And the first time that you actually see some substantial volume hitting the big markets is as we speak. It's now in May, and it will stay as a pretty high volume during the whole second half. The trick now is, of course, it's not only one shoe. If you look at it, it's actually four different styles. There might even be a fifth one coming and we need to manage them now so that we still, even if we scale it, keep supply lower than demand so that there is still a heat and that we continue to do both collabs and other marketing activities to keep these franchises hot. And I think that's a test for us. Can we do that discipline? Then very, very important that commercial and brand and the sourcing side works together. And I think that's, you know, how you should judge us if you do it in a good way, but I have a very, very good feeling. When it gets to the order book, you know, we are not publishing the order book, and there's good reasons for that, because if we had, you would see that the order book last year would not be relevant because of all the cancellations. You have to remember that last year, everybody ordered too much, and the order book at the second half of last year was inflated, and it was never realized. That's why it's hard to judge now what is the order book. It is negative against the order book you had in the beginning, but that was inflated and it never happened. We are trying now to manage the balance between clearing old inventory and then having enough new inventory that is selling through, not necessarily to take all the business. We're not chasing business in the second half because we think that that would be too risky. Don't expect us to show growth in the second half, but expect us to see that we're following the plan of taking down the inventory and then having the basis to have decent margins going into 24. So we are not in a change mood to, what should I say, surprise you positively on the top line because the risk of that would be too big. And again, we need to clear the old inventory. So that's the strategy.

So if we were to think about the inventory number that you published, is there a big difference between what's at hand and in transit within that number?

I mean, the transit number here would normally be around, I would say, a quarter maybe, ballpark. And that transfer number is not necessarily a lot different than, it's actually smaller than last year. It is actually, if I'm really honest with you, it's probably 400 million lower than last year. And you can see that in the payables, right? So the reduction in payable is mostly the difference in transfer because you see we're buying less. That's great. Thank you.

The next question comes from Peral Dadhania from Royal Bank of Canada. Please go ahead.

Thank you. Afternoon, everybody. Could I maybe start with the gross margin? Are you able to share in a bit more detail the moving parts in Q1? I think Bjorn mentioned that the two biggest factors were markdown and inventory write-downs, but just curious if you could share with us the quantification of the other factors, which are obviously FX, channel mix, regional mix, and so forth. And then my second question is just on the US. Obviously, the well-flagged pressures in the US market for various reasons. Could you maybe just share a little bit more in terms of detail around how your inventory clearance process is going there? how you see inventories at some of your key distribution partners, whether those are full price or off price, and how you expect the business to evolve for the remainder of the year, and whether you believe you can get to a clean inventory position in the U.S. by the middle of the year as you're expecting for the other regions. Thank you.

I'll do the U.S. and then Han can take you deeper into gross margin. The answer to U.S. inventory mid-year, no. The inventory issues in U.S. is bigger than that we can have that normalized at the mid-year. And the reason being that the inventory level, we are now channeling most of the excess inventory through our D2C. That means that our factory outlets, for example, which normally should have fresh merchandise also coming directly out of factories is now being only serviced by clearance, which again takes your margin down. There isn't any way right now to clear excess merchandise through channels that you normally do. The value channel with the TJ Maxx and the Rosses and stuff are also full. That's why our approach is to do this over three, four quarters and not try to flush it in one quarter because it won't help because it will come back again. So I would say that all other areas, the inventory should be, what should I say, normalized during Q3. I think the US inventory will still be there for a while. And again, it will be there for a while in the sense that instead of buying new merchandise for outlets, we will actually fill them with excess inventory. So it will have an impact on the US business for a longer period of time. both on the top line and the gross margin line. I think that's the honest answer.

Yeah, and Pierre, on the gross margin, more details without giving you the decimal number because there's a lot of mixed effect within the mixed effect, right? So we can talk about channel mix, but then there's a yeezy impact on the channel mix as well. So I just want to keep it simple. Assume there's not a big channel mix impact. Surprisingly, there's not a huge currency impact as well in the first quarter. The biggest impacts are actually FOBs and supply chain costs. Especially on the supply chain costs, it's the freight, because the freight was peaking in September, October times last year. And, of course, we are realizing the freight costs in the margin when we are selling the product. So Q1 is definitely the biggest impact from a freight point of view. Then, of course, significant was inventory allowance. Given our calculation that we had the first impact of fall-winter 2022 inventory allowance, you know, being partly allowed for in Q1. And again, clearing the inventory is discount. So the significant headwind is supply chain cost, especially freight, inventory allowance, and discounts. And of course, to some degree, Yeezy. And then you have a positive, and that's the only positive, is pricing that has been carried forward from last year as well. So the prices are still holding up for the fresh products that we have. That's the first quarter and largely the first half as well what's going to change for the second half first freight is definitely almost normalized to what it used to be you know two years ago that will be you know less negative in the second half inventory allowance will be neutral in the second half because that's the timing right now as we're moving through the fall winter 22 inventory that will be normalized in the second half and of course as we move through the inventory first in china second in europe and then you know late in the year north america as well as bjorn just mentioned discounts are easing and should be more positive as well. And everything else is pretty much neutral, but that's how we should look at the second half. That's why I also repeat what I said. Q1 was the worst margin for the year, and we always see improvements in the second quarter and then more to come in the second half.

That's very clear. Thank you.

The next question comes from Jürgen Kolb from Kepler. Your question, please.

Thanks very much. Hi guys. Two indeed. First one is really on your 200 million restructuring or business improvement plan. Have you any additional information for us on this front? Have you identified additional projects or something that you could share with us? And second one, thankfully, you detailed breakdown into wholesale, DTC, own retail. At the same time, you talked about products running football, basketball, what have you. Could you also maybe give us an indication about the breakdown in the footwear category into the different categories running football, what have you? Or if not currently, then maybe... what an ideal breakdown would be given that these individual categories are obviously different in size from a global perspective. Thank you.

The second question, the breakdown in each channel by category, what we have and what will be optimal, I think you and I should sit down and discuss that when we have product in front of us because it's impossible to explain that on the phone. You know that As a brand, we need to have a certain performance business that carries the image of the brand. In sports specialty, if you look at a running specialist, that should be 90% performance product. In a football retailer, it should be 100% performance. Then when you move into the family channel, zero is performance. You have to, what should I say, be very detailed to look at that and it's hard to find numbers on it. In our own distribution, it's obvious that if we have a concept store on Fifth Avenue, then you will try to showcase all the categories. Normally, the mix will mirror the mix that you have as a brand. If you have a small store, then depending if it is in a pedestrian area or it's in a strip center, it will be fashion and lifestyle in a pedestrian area and it will be more multi-category on a strip center, so it's a very difficult thing to explain because there's so many moving parts. A new trend that you might be interested in is that we see actually that the differences between performance and lifestyle is disappearing. If you look at brands like Hoka and OM, which you talk about as running specialty, are now starting to sell even more products on the comfort and obviously on the lifestyle area, and it's the same product. Again, the consumer in the end decides what the product is for, and I think you will start to see that distribution between fashion and performance is starting to be more loose, and that's why the old segmentation and the old way of distributing product is going to be a little bit more, I would say, loose, and that will change some of the classifications even of the product. I think that's all I can say because it's very, very difficult to give you any numbers on that, which would make sense.

Yeah, and during on the $200 million, there's no more detailed outlook that I can give you right now. As I said previously, it will be a combination of potentially the one or the other retail store closure. We will also look at what we have built in the digital space. And as we know, without the Yeezy component and with a different trajectory in In an e-commerce, we will look at some of the infrastructure that we have built there. Maybe the one or the other application or system need to be impaired. And we look at that overall structure. And of course, we will go through some selective right-sizing in the organization, potentially here and there. But that's something we haven't decided yet. But all the rest assured, we have not reported any one-time items in Q1 because it hasn't been meaningful yet. But probably going into Q2 and then more pronounced in the second half when we are clear on how we want to move forward, also going into 24, we will be more transparent what's in that 200 million bucket. That's how I would look at it.

Fantastic. Thanks so much, guys. All the best. Thanks, Jürgen.

The next question comes from Thomas Chauvet from City Research. Please go ahead.

Good afternoon. Thanks for taking my questions. The first one on lifestyle, on Samba Gasoline Campus, Tara Schuster, you said beyond how quickly demand went from, you know, 100K to millions of pair. Are there other lifestyle products that could experience the same kind of upside to your maybe internal forecast, initial forecast? You mentioned Fear of God. Anything else? And for Tara, will you be willing to test some price increases? once you lap the huge initial success, especially if you keep supply low. And secondly, on Russia, there was a detailed article in a Russian newspaper earlier this week about a potential agreement to sell the stores to a partner, a bit, I guess, like what Inditex did recently. It was in Russian, so I had to translate that. It wasn't so clear. Could you comment on that or more broadly your options in Russia? Would you want to follow that route or to contemplate a return to Russia. And if you could remind us what the size of the business was in 2019, sorry, 2020, 20, sorry, 21, just before the, well, yeah, probably in 2019, before COVID and before Ukraine and the one down of the business. Thank you.

Yeah, hi. I mean, on the, what should I say, scaling of the product, If you think about our archive, we have many issues that we can scale. And again, I think the good thing is that there is an energy being created right now, which wasn't there a year ago. And it's now up to us to manage it properly. And it started with what we call Taras, you know, with Samba Gazelle and Special. Now there's another Quartru campus coming and we start to see some movement also in the Superstar. all these being court-based. And, of course, the danger is that we need to manage these properly so we don't destroy any of them. So they need some discipline, but I think they're all scalable. What we desperately need in the next 18 months is also to find silhouettes on the running lifestyle. We had a huge success with some of the GC shoes that were running-based. We had the NMDs that were running-based, and we had other models. And right now, on the shelf of the lifestyle account, There is very little running that is coming from us. And that's one of the special projects that we're working on with our new creative people is to develop new silhouettes together, but also old classics from the 70s and 80s, which we have in the archive. So we need both. And again, I think all the shoes in that 90 to 120 euro price points coming out of the archive are scalable. And that's why, you know, I feel I'm sitting in a very good situation midterm because we have all these issues and, you know, they come and go. It's just a matter of managing them and also have enough resources on telling the story and heat them up so that we don't go up and then go down again, which has been the history of Adi and where we have to admit that Nike has done a much better job. When it gets to the price increases, we need to be a little bit careful because you know that when costs and freight and everything go up, there was a lot of price increases in the market also from Audi and not all of those worked. That's why in the inline normal styles, I'm not looking at price increases, but then when we do a collab like Bad Bunny or we do, what should I say, limited editions with different materials, there is much more air to then do higher prices, which is then creating the heat on the style. So this is a little bit the puzzle of making sure that you have stories, that you take prices up on special editions, that you do collapse, but that you keep the commercial price points, I would say between 90 and 120. Above that, On the court side, it starts to get difficult. And I think that is not what we should do. At the same time, you can do takedowns. And also what you do at 100, 110 as an original, you can also do at 60 as a takedown in the family channel. And this is, of course, where, for example, other companies have done a better job than Audi has done. And this is something we're working on. to capitalize on the heat on two different price points in different distribution channels. So again, still a lot of work to do, but again, we have all, as I said, the ingredients and if we get a little bit of time where we can manage this and do it in a proper way, I'm actually very optimistic that we can have more franchises at the same time playing in more distribution channels and that we can then have more consistency and when we are facing things up and facing down, and do a better job on it, which is the task. When it gets to Russia, I'm looking at my friend.

Yeah, when it comes to Russia, first and foremost, nothing has changed. We're in the process of winding down the business. But as you all remember, we had a pretty significant operations in Russia. We have an owned warehouse. We have a long-term lease with our office. We had many retail stores. And, of course, we are in the process. We have already sublet most of our office space. We have, you know, transferred or notified some of our retail stores. We are in the process also to transfer some of these stores or supply some of the stores. And of course, we are looking at opportunities and multiple options for our warehouse as well. But really clearly, nothing has changed in winding down the operations. So no plan to return to Russia anytime soon? No, and very clearly, there's not one store is open, no e-commerce business. And the warehouse is still operating because we still have, which is not a lot after one year, still some leftover inventory or DC that's still being transferred and sold in Russia. But that is part of winding down the business and clearing the warehouse and then finding somebody who is subleasing it or who would take it over, which is not an easy process in Russia nowadays. But that's what we're working through. But nothing else has changed and no operations in Russia. Okay. Thank you.

The next question comes from David Rocks from Bank of America. Please go ahead.

Good afternoon, Bjorn and Harm. Just two questions from my side. Just to go back to the points around marketing, could you perhaps give a bit more detail as to how you plan on getting down to 11% of revenue? And just remind me, has Adidas achieved that before? And then the second point is just on the OPEX. In terms of the cost savings from the existing 700 million BIP program that was flagged for this year, I think it was the back end of last year, how much of the 700 million was realized in Q1? Thank you.

The marketing, if you look at most successful companies in this industry, A marketing expense around 11%, it might be 10 and a half, it might be 11 and a half, it might even be 12, has been at least what I have seen and what I managed my previous businesses at. It's the same place where Adi is. Of course, the percentage depends on what your top line is and that means that it can vary a little bit. If I look at the activities that we have and the fact that we're spending 2.6 billion ballpark in marketing, That does include also performance marketing, which is what you're doing in your e-com to drive traffic. Of course, that should be enough for us to kind of develop the business where we are. At the same time, there's always changes. So if you look at the big teams, if you look at the big players, there is some inflation. Contracts have to be renewed. So I have... least in the brainstorming with harm and the rest of the management not even put in a target to save on marketing we have said that let's see what we used in the last three four years let's go through all the assets we have of course the sub assets we don't need and then there's some wishes we have of course we would have liked to have holan we lost him but there are other prospects and and i think that will mean that we will not save on marketing but but again being at 11 or 11.2 or 10.9, I think right now that is not really relevant, to be honest. It is to make sure that we have in absolute terms enough money to do what we need to create the heat that we need. And again, 50 million up or down doesn't make the difference. And the percentage is a little bit the result of what the end of the top line is. So I feel that we have a good base of assets. I feel that we have a decent marketing plan. I do think we need more media money to actually tell the stories. And that is one of the challenges. How can we make sure that all the good stuff that we are going to bring in the next 12 months, how do we make that visible to the consumer, both globally and locally? And I think that's one of the challenges. But I would you, if you're trying to model us, look at the marketing expenditure of 11, 11 and a half as a benchmark and then if there are variants to it, let's talk about it. But it's not a goal to find a leverage on the marketing right now. I think that would be the wrong signal.

Yeah, when it comes to the 700 million business improvement program, we do not want to track this now on a quarterly basis and be transparent about it. What we clearly said is it's a combination of cost mitigation We wanted to keep the ratios like on marketing. We wanted to keep the ratio on a potentially lower sales. That is also mitigation. We, of course, renegotiated some of the freight contracts that we have. But if I now try to compare Q123 with Q122, it probably doesn't look that good. If I compare Q123 with Q422, of course, it looks better. And that's why we don't want to get into this one. But we clearly had also in a selective salary round, we are very careful on hiring and leverage the attrition that we have in the company. We look at all ends, but again, it's a combination of mitigating cost increases that we saw coming already last year and real savings. But rest assured that everything that we have communicated last year is built into our, not just internal budget, but also into our guidance that we gave to all of you. And we want to focus on the guidance that we have given that we deliver on this one.

Thank you, very clear, and I'm very happy to see Ultraboost is now on a golf shoe, so thanks for that.

So are we.

Now we just need to find the time for it. It doesn't help against your slides, though.

Anything could help against that.

Thanks, David.

The next question comes from Cedric LeCastle from Stifel. Please go ahead.

Yeah, thank you very much for taking my questions. I'll stay at two with follow-ups on the previous ones. Bjorn, maybe after a few months within the company, what's your view down the road for the kind of achievable targets for a company like Adidas with the assets that you know very well, and especially versus initial targets before the problems jump in? of like 8-10% organic growth, 12-14% margin, like long-term sustainable profitability. What's your view on the previous goals of your predecessor at some point in time? That would be the question number one. And the question number two, in your ambition to recover the 10% profitability with China at 15% of sales versus 25% and easy out, Would you need to, what would be the main levels, create successful platforms such as Nike that you elaborated a little on, being more efficient than before? Or do you need to grow China to more than 15% of sales and to grow market share in China to reach its ambition? Thank you very much.

Well, Cedric, that's kind of an hour speech, if I should answer all those questions. And I hope that when we get to our new midterm strategy, that's what we're going to tell you. But to simplify it, I do think that we need to have a different business model than Nike. You have to remember, again, that Nike has a centralistic business model coming out of the US where they generate what I call the American street culture. they export it you know it's an efficient model as long as that works and then we will see down the road if it still works i think we sitting in germany doesn't have a german sweet culture to export so we need to do it in a different way and that's why the strategy for us in the future is to have creation centers that works on lifestyle products out of herzo out of la out of tokyo and out of shanghai and the sum of that is our offer that is less efficient on the cost side, but might be more efficient on the consumer side. So, what should I say? Our strategy will be to be the best sports brand globally from a credibility point of view, but then execute more local, which again then, of course, could be limiting your max profitability. That's why I talk about 10 and not 14. And again, Everything I have seen in the four months, both from people, from structures, from innovations, tells me that we have all the chances to do this in our way. I don't think I should comment on previous targets and strategies because I don't think that's my job. I look at the market and I look at this fantastic brand and I put the pieces together. I look around the table and we all say, yes, 10% is achievable. And yes, we agree we should be Audi and not Nike. And if there is an upside to that, then there is an upside to it. I don't think we should now force ourselves into artificial numbers on e-comm and say that China should be 18% or 14% or whatever. Let us fix the basics. Let us set up the structure Let us clean up the inventory and then we can have a midterm discussion when we come with our strategy. But the 10% is achievable. And again, I really think that Adi has a special DNA that should have a business model different than anybody else. And we should be visible in more than the five big sports. We should be more, what should I say, retail friendly. And we should be what Adi Dassler once made it, the best company for the athlete and the consumer. I think if we do that, instead of trying to impress you with artificial numbers, we will be successful. The irony of that is if we do that right, then the profitability can even be higher than we talk about. Expect us to work the way we said and then let us come back at the end of the year, beginning of the next year with a new I think that's the fairest way of doing it.

That's very helpful, Bjorn. Maybe just to put it differently on China, do you think conditions are met for China to become again the profitable market that it used to be for international players like you?

Well, if you think about that, they have 1.4, 1.5 billion consumers. If you think about that, the retail structure is is very homogeneous. There's basically, you know, two big partners, maybe three annual D2C, that there's a big e-com business and that the differences geographically in China is much smaller than what they are in other markets, then the answer is yes. All the ingredients for making that the most profitable market is there. And again, with 1.4 billion consumer, you would also think that the growth rate there should be one of the highest. My favorite to be the growth winner the next years after LATAM is going to be India because you start to see a development in India also from a consumer point of view that they're buying more Western brands, they're doing more sports. And of course, I would hold them as a favorite percentage-wise in growth. But again, India has a more complex structure. it might be less profitable. But for me, China is still the favorite to be the most profitable market in our portfolio. Thank you very much for that. Now it's ready.

The next question comes from Anisha Sherman from Bernstein. Please go ahead.

Thank you. I want to ask a follow-up about your earlier comment about order books, but I want to ask about FY24. So on the last earnings call, Bjorn, you talked about starting to meet with vendors to place spring-summer orders. So assuming that wholesale remains the majority of your business, is it fair to say that now you have a pretty good idea of your H-124 sales makeup and sales growth? And can you remind us, you know, you made the point about cancellations for 2023. Can you remind us of the timing here? I mean, to what extent is there flexibility for your partners to then ramp up or pull down those order books? And like at what point of time are those order books pretty much set in stone? Is it more like the second half or even Q4? And then I have one other follow-up on your previous comment about target inventory normalization by Q3. I assume that means on your own balance sheet. Can you talk about any expectations you have about inventory in the channel with your partners and when you expect that to normalize? Thank you so much.

A couple of clarifications. The cancellations on the order book was not 23, it was 22. So if you compare the order book in 23 against 22, It's not a fair comparison because the 22 order book never happened. It was huge cancellations. And in many, I think all the brands had order books that were very, very high. And then, you know, most of the retailers canceled with everybody because they didn't believe in the beginning they will get all the products. And then when they suddenly got deliveries, they started canceling. So that was in 22, not in 23. The visibility for H1-24 is not there at all. We haven't started placing those orders. Normally, an order book is being built six to eight months before delivery, so we are currently in the process with our retailers to fill the Q4 order book. When it gets to building relationship and giving visibility, we have showed them Q1, Q2 in 24 and even further because for us, of course, it's important that they see There are plans for franchises, there's innovations going forward, even into 25, but there is no order book yet for 24 in the system. So even if I would, I couldn't tell you the order book for 24. What I can tell you is that I think the fact that we are now saying that we are much more wholesaler oriented and you see it's now 64% of our business, And the fact that we have opened up our campus again for all these retailers, that we have partnership meetings in general, we had them on soccer, we had them on running, it's of course something new. And I think that giving them the feeling that Adi is again what Adi used to be, and I think they really appreciate that. And then of course it's up to us then to fill their pipeline with product that they sell, because without the sell-through relationship doesn't matter. But I think we all feel better now than we did three months ago when it gets to the relationship with our vendors. And then we all know that you can't be friends with everybody from the beginning. So, of course, we still have a lot of work to do. But I feel that most vendors in the world, if not everybody, would like to have a strong Adidas and are appreciating the direction we've taken.

And then could you address the question about inventory normalization in the channel, and do you have any expectations for that versus on your own balance sheet?

Ironically, they are kind of connected because I do believe that if you look at many retailers, they were over-inventoried at the beginning of the year. They were really, really scared about the development in sales. I think most of them have seen a better sale than they expected, but, of course, also at a higher discount. And ironically, I would believe that there are actually categories that might be under-inventoried in the second half because the order book of certain categories is too low and that people will start to chase certain products again at the back end of the year. If you look at apparel, I think people will be over-inventoried until the end of the year and that you first will see a relief. in 24. But it's pretty much the same picture, especially in the US, I think also for the trade, as we are seeing. So they need the second half to get out of it. And then maybe some other markets will recover quickly. But it kind of goes hand in hand.

Thank you very much.

Thanks very much, Anisha. Frenzy, we have time for two more questions.

Okay, then the next one will come from Susanna Push from UBS. Please go ahead.

Thank you for taking my questions. I'll stick to the rule, so just to... The first question will be on some of the franchises you've been mentioning, Samba, Gazelle, Campus. Would you be able to tell us maybe... I understand that most of these franchises, even when we look at Stan Smith Superstar, they've been historically quite cyclical. But I mean, how big can some of these or have some of these franchises become in terms of sales in the past, in terms of at the peak? So let's say Stan Smith Superstar in the last cycle, I think between 2015 to 18 when they were very hot, how big were they actually getting? Just so that we can get an idea of Samba Gazelle, what is their potential? And then secondly, sorry, just to follow up on marketing as a percentage of sales, because it's quite an intriguing topic, but would you be able, now, I understand you don't want to comment on anything that may have been done by management in the past, but if I look at my model, basically over the past 20 years, I think the lowest level of marketing spend as a percentage of sales was 12. So clearly, you know, I guess if a more reasonable level is 11, which to be fair is the industry average and Adelas was always above, are there any specific buckets of marketing spend where you would say maybe the money wasn't ideally spent? I know you mentioned a couple of things, but maybe if you could say, what are the top ones that you feel like maybe wasn't the best type of investment? So that's my second question. Thank you.

You know, Susanne, that marketing is very subjective and there's no formula that tells you where to invest because if there was one, we would all invest like it, but then the formula will be destroyed again, right? So marketing is 50% rational and 50% emotional. And you also have to remember that the components that goes into marketing over the last 20 years have changed dramatically. You know, performance marketing, Google search and all those things didn't exist only, you know, 10 years ago. And it's now hundreds of millions to actually generate traffic on your e-com. And of course, that didn't exist before. So it is a different, what should I say, bucket. And it's very hard now to sit and say that, OK, with 11 or 12 percent, these are the changes we should have been done. If you look at marketing in general, you need as a company, as Adi, to have certain global, I would say, assets that makes you a global brand. So Real Madrid, Manchester United, Bayern Munich, the German Federation, the Italian Federation, it's the basis to even be a soccer brand. And then you have the Messi's and the Salah's and whoever you do as individual stars. And you can always survive by reducing them short term. But the question is what happens in long term if you do it and I wouldn't be in a situation to criticize what Adi has done because I think Adi has always kept the visibility in sports to a degree maybe that if I should criticize something, they have gone out of too many smaller sports lately to be efficient and are losing a little bit of this difference to Nike by being in the smaller sports, which we will go back into again. And again, I really have the feeling that We need to be visible across almost all sports, also those who are not commercially very important because they don't cost a lot. The creativity that we then have in design of making a wrestling shoe or a ski boot or whatever will have a positive impact on the creativity in the brand in general. And that's why you don't need to measure it only on the business, but actually measure it more on a on a creative spirit in the company. And that's what Adi always used to be good. So if there's one thing to criticize, I do think that during COVID and the last years, it's streamlined too much. So we lost a little bit of that edge, which we're trying to find back again. The good thing is that we have the people, we have the competence and that we can start to invest again. The bad thing is that we can't get back again quickly enough in some of these sports because it takes time to sign federations and it takes time to get, you know, product on the people's feet and on uniforms again. So we will take a little bit longer time than I would like. But I hope when we get to the next Olympics after Paris, we will be wider again. Because in Paris, in my opinion, we will be too narrow. On the other hand, you asked about how big were these franchises. And this is a tricky question because certain franchises could be up to 20 million pairs. And then the amount and that they bring compared to, is it D2C or is it wholesale, right? 100 euro shoe and 20 million pairs, you do the math, that's 200 million business. If you do it, no, that's a two, hang on. 20 million times 100 is 2 billion. If you do half of it or all of it in wholesale, it's then only a billion, right? So it's again, the split in the channels is as much worth as the pairage. We have, compared to Nike, a lot more franchises. If you really look at Nike, you will see they have five, six franchises, which I'm sure is doing more pairs, but they kept them alive over a longer time. We have gone in and out of them. So if you just look now, Samba, Gazelle, Campus, if we then add, for example, Superstar and Stan Smith to it, we would have five courts. big franchises. And of course, the question is, can you have five big ones at one time or do you then have to play one down and one up and manage them properly? And I think this is where we have not been as good as what our friends at Nike have been. At the same time, we had huge running franchises through the history and started with maybe the Flux. We had the NMD, which was fantastic. We had the beginning of the Ultra Boost. And right now that's where the shoe is not doing that well. And in general, there's very few running franchises out there that goes lifestyle. Ironically, it is, you know, brands like On and Hoka coming in from the performance side and certainly goes lifestyle. And I'm not sure that it lasts long, but of course we need to make sure that we very quickly are having an answer to that. And that's what we're working on. So again, We have all the ingredients to have franchises that we can scale up to 20 million pairs, but we need to make sure we do it in a proper way and then not oversupply so we start to discount again. This is the test that we are now going through because now we have this energy in certain of them and now we need to scale, but scale it in a way that we can actually keep them for a long time. At the same time, exploit the look also in the down channel We take down the version that we can then sell in the family channel, and that's how you make a franchise profitable, and that's what we're trying to do.

Excellent. Thank you, Bjorn.

You're welcome.

Our last question for today comes from Warwick Okines from BNP. Please go ahead.

Good afternoon, Bjorn and Harm. Bjorn, on the last call, you talked about the changes you'd made to the executive board and today you talked about EMEA management. Could you give us an insight about how much change is taking place further down the organisation? And secondly, could you give us some feeling of what you think the shape of revenue will be this year? Obviously, you're flat in Q1 and you're still guiding for high single digit declines. Is Q2 the low point, do you think? Thank you.

Um, we did the two changes in the board that, you know, um, you know, we changed Roland after 33 years with Arthur. Um, and that was of course necessary to do the changes we need to do on the commercial side. Uh, and then I took the brand side away from Brian again, necessary to get the speed of all the creative environments so they can go straight to me, which is important in a change. And then when you go down in the organization, of course, there's many changes in people that you don't see. And there's quite some changes in the way we are trying to go to market. We're trying to open up the campus, have more samples in the showrooms, have much more accounts coming to our headquarter. We are changing calendars to be quicker in the way we develop product. And we are trying to be more local, so we give more autonomy to the markets to also utilize the engines in the markets they sit. So there's quite some changes going on between beginning of January and now when it gets to the product cycle. Difficult to quantify when it gets to people, but there are roles being changed, and there will always be changes because that's the way our business is going. When it gets to revenue development, we're still seeing high single digit decline. And the reason for that is, of course, that we do not know if we will have enough good inventory in the second half to actually do higher sales. And remember, I said we will not chase any business because we think that that would be the wrong strategy. So the priority is not to have growth on the top line, but it's to get out of the air with a cleaner inventory. And if we now were chasing sales, we could end up in the ironic situation that we could have a better top line. We will not get rid of the inventory that we're sitting. So that's why we kind of have a hybrid, what should I say, strategy for the second half. Of course, try to sell as much as we can of what we have, but maybe not chase everything we could by buying into it, but have a better start to 24. That's why we keep currently... the sales guidance the way we do. And then don't also forget that should we be able to start to sell off the GC product in one way, shape, or form, that has a lot of work for us because that's a complicated thing right now. So that's why we have consciously not tried to impress you guys with any numbers in 2013. but are trying to do everything right for midterm and are putting focus on that. That's why the guidance is the way it is. And that's also how we are trying to act every day.

Understood. Thanks very much.

Thanks very much, Warwick. Thanks very much, Francie. And thanks very much also to Björn and Harm. And of course, also thanks very much to all of you. Ladies and gentlemen, this concludes our Q1 call for today. If you have any further questions, please feel free to reach out to any member of the IR team and, of course, also myself. And with that, thanks very much again. Have a good remainder of the day and a great weekend ahead. All the best. Bye-bye.

Thank you all.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a great weekend. Goodbye.