Adidas Ag Ord

Hello everyone, good evening, good afternoon, good morning, wherever you're joining us today and welcome to our Q3 2023 results conference call. We know it's a pretty busy reporting today, so we definitely appreciate you joining our call today. Our presenters on the call will be our CEO Björn Golden and our CFO Harm Ohlmeier. As always, I would like to ask you that during the Q&A session, you limit your initial questions to two. to allow as many people as possible to ask their questions. And with that, and without any further ado, over to you, Bjorn.

Yeah, thanks, and hello also to everybody from me. As always, we will take you through a lot of pictures and some numbers, both Harm and myself, to tell you what we are working on and what is going on. I'll start with some good news. You know, there's been a lot of critique and negativity around Audi that we're not a good company and a lot of critique on different things. Therefore, I'm actually very proud to see the Forbes research that says that we are, you know, one of the 12 best companies to work for and actually the best one in the sports industry. And I think that I've always said that Audi is a great company and being on the inside of it, I can confirm it. And it's also cool to see that external people say the same thing. We have talked a lot about, you know, the soft values. And also a couple of weeks ago, we had what we call a global week of inclusion. You know, where all minority groups and all groups in general were able to, you know, present their views and we discussed on how we should behave with each other. And in a global company, this is extremely important and actually very interesting to be part of it and proud of the outcome. Also extremely proud to look what our team in Ukraine is doing under very difficult circumstances. The stores are open, they run the business, and they're also now starting again the running club. And as you know, sports is always important, and the spirit of our people in Ukraine is just fantastic. Unfortunately, over the last months, we have another conflict in our world, which will impact us, I think, for a while. We have about 620 people in Israel in the offices and the stores. Good is that no one of them are hurt, but many of them are now being called into the army. What we have done is, of course, to assure all the safety of all our people. And then we have started donating for other people and also in the Gaza area. through SOS Kinderdorfer. And we will continue to do that, of course, to help the civilians in the area in this terrible conflict. When you then look at the business, I think it's fair to say that we are trending in the right direction and a little bit better than what we have told you the last nine months. And by that, the financial performance, I think both top and bottom line is a little bit better than expected. I think the energy in the team and especially in the decision making has improved. So we are becoming faster and therefore, in my opinion, better. We are getting extremely good feedback from the retailers for fall winter 24. And you have to remember that fall winter 24 is the first go to market process. That is the way we would like it to be. And the first time we have gotten together as a team, treating the retail partners the way we want with full set of samples, showrooms, and also I will say with a service degree when it gets to SMUs and everything. And I'm pretty certain that we will have a very good order book building for the second half of 24. The sell-through of our new product is improving. I'm sure you see that also in the stores that you are. And of course, for us, it's about getting enough of the new good inventory through the slow moving inventory. And as you probably have seen already, the great thing is that our inventory is heavily down 23%. And we feel that our inventory at the year end will be under control with the exception of the US. I also think I said in my quote that retail inventory is improving and therefore You know, it should be during the first half an improvement in the total sellout. And, of course, then also building then the order book for the second half. Inventory level in the U.S. in general is still an issue. I think it lacks about six months for the rest of the world. But very proud of what Harm and the team in finance and also what the operational team has done. And you will see the details of that later. If we then get to the top line, North America was down nine, 15 for the year. So you see that at least a quarter has improved. We still have issues in our American business that we have to work through. We had a management change. Rupert, who's been the president for about two years and 11 years with the company, resigned and ended his great career with Audi end of October. As an interim solution, our board member, Arthur, has taken over. And then the idea is that during Q1, we will announce a new permanent president. And it should not be a surprise that we are looking for an American citizen. The issues in the market hasn't really changed. There are still elevated inventory, both in the trade and also in our own books. And especially in all the successful outlet businesses, is then almost only clearance business, which has a drag on both sales and on margin. The good thing is that our full-price concept stores are all comping like for like up and with a higher margin. So you clearly see that the D2C business is improving where we have the right merchandise. We do continue to see high discounts, and we will, of course, continue to be very conservative in the way we sell product in for the next six months. Told you about this before, but we need to be more American. That's why the office that we open in LA in Q1 is so important. It will focus on the American street culture, also connected to basketball, and all of American partnerships when it gets to CoLab and street culture-relevant CoLabs will then be managed out of LA. And I think this is a game-changing thing for us. There is no results of this yet because this was open in Q1, so you will not see the impact of this in product until I would say Q2, Q3 next year. Stores, I mean, I've been in New York every month and very happy to see the development of all our stores in New York. Here you see some of them. And as the good inventory has floated in, the like for like has continued to improve. And in the stores you see here, they're all up double digit like for like. And it clearly shows that the consumer is reacting very positively, even in the U.S., to our new merchandise. Messi's entrance to the U.S. we talked about many times. What he has done in Miami is unbelievable. They didn't qualify for the playoffs, but they won the League Cup. And when you see his pink jersey, it's the most sold jersey in the U.S., I think, ever. And, of course, it has had an impact on what we call also soccer street course in the U.S. I'm extremely happy that he went there instead of going somewhere else. Also cool in the U.S., we were part of the biggest women event ever, 93,000 people or 92,000 people watching our Nebraska Lincoln women's team in volleyball playing. And again, one of the small pieces in the focus on women's sports that I think is going to be very important also going forward. American football, extremely important for the U.S. market. Patrick Mahomes probably being, you know, should I say not only the best, but the coolest player in the NFL. He was also in Frankfurt last week. We just launched his collection, his training shoe, and we will do more products with him, branded with him, And I'm very, very, very sure that we can market him as a superstar and also get much more commercial success of him, especially in the U.S. We have also started to sign college athletes, you know, legally with the NIL agreement that's now allowed. And also here in American football, we started to invest in that. And it's clear to say that both college and high school sports for us, you know, connecting to the sports youth culture in the U.S. is going to be important. And here you see a couple of examples of players that we have just signed. Changing into EMEA, Europe, Middle East, and Africa, plus two, same in the quarter as for the year. So basically the same business. Also here, you know, investing in things that are a little bit different. We extended the Kings League. If you follow it, you know, a very cool league for the GNC coming out of Spain. They will expand this concept into other markets. And it's soccer done in a different way. And the same thing with the battle of the socials. We do try to connect with our traditional sports also into the new generation and into the social media. And they're doing quite some stuff outside, you know, sponsoring the big teams and the big players. And these are two examples of it. We talked about India and cricket. You know, we signed at the beginning of the year. We have sold more than half a million jerseys of the national team. Very, very unique, I think, for the sport and also very cool for us. The team won the Asia Cup and is currently playing the World Cup. I think the final is on the 19th, and that will give another boost to a business that I've said many times. I think India will be the fastest growing market for us, and that's why it's cool to see that that investment has worked very well. Another market that people talk a lot about, Saudi Arabia. We just opened the office. Haram was there to open it. And it's clearly that Saudi Arabia will play a bigger role in sports. We know that they are trying to get events. We know that the league is attracting players. And I'll be very surprised if you don't see Saudi Arabia investing even more into sports. And that is for us natural also to open our office there, which we now have. If you then move into a big, big, big important market, Greater China, we were up 6% for the quarter. 3% for the year. You remember we started the year being down double digit, then the business has improved. All of us, all board members have been to China, not only one time, but more times. We have talked to the trade, we have talked to the political, to the government, we have talked to the different sports federations, and been very active to understand what we can do and not do, and happy to report that the local focus The energy of the team is starting to improve the business. You see the growth numbers are not that great, but if you take the GC business out, it's already double-digit. And all the D2C business where we really have the best of the best are up double-digit. And as I've said many, many times, I'm a big believer of the market, and I'm really, really, what should I say, proud of the energy of the team and feel that we are in a very, very good way. We also took our basketball stars to China. We started our grassroots program again, and we know that basketball still is the sport that has the most street-relevant culture, so we will continue to do that. And we will also start to build basketball products for a price level that will compete with the local brands because we clearly see that there is two different markets. It's the market at the top where we compete now, but there is also commercial market, especially the local brands have established price points that we also need to enter, for example, in basketball, but also in running. Talking to running and other sports for the first time, I think in a long time, we have invested then in many, many sports from track and field to volleyball, to tennis, And the team is signing more and more athletes so that even if the market is small now, we will be a real sports brand in China because we think that's very important for the future. And we will over invest in this in the next couple of months and also in years to come. A cool thing, you know, the break dance thing, which is also going to be an Olympic sports. That's where we already have a big, what should I say, impact. And needless to say, when you see three stripes, when you see here, I think it's superstar, you clearly see that we fit into that and have already, I would say, good connection to that generation in that market. To service the growth that we foresee in China, we just opened also the most modern and the biggest distribution center, Harmos, there. And again, it's a commitment to the market with the best technology and the most automated wearers that we have. And yeah, I'm sure Harm will say something about that later. Going into LATAM, 13% for the quarter, 29 for the year. So the growth was slower in this quarter. As you probably know, LATAM, many of the markets are in a political situation with elections. There's a lot of inflation and uncertainty. So maybe a little bit more careful growth, but as you can see, still double-digit. And we have the feeling that the team with investments in sport, but also the energy they have on the activations are doing a great job. Here you see we're sponsoring running events in all the markets. And we are opening new and modern stores in all the major cities. And the D2C business there has developed very, very good. And again, I'm sure that Latam will still be a growing market for us. Very excited about Asia-Pacific, up seven for the quarter, ten for the year. You know that both Korea and Japan are very trend-setting markets, of course, very lifestyle-driven. And here we also clearly see that the success of our lifestyle business is having a big impact. And when you see the reaction to both the original campaign that we started in September, but also to the terrorist trend and all the trends that we have generated, our store is doing extremely well. especially actually in Korea and Japan. So when you look at all that, you see that the Q3 growth was then 1% and we are flattish for the year. If we then take a quick look how it looks compared to the non-GC business, you see that North America was 9% up in total. If you take EC out, 9% down for the quarter. If you take Yeezy out, then with minus 10, so a small impact. EMEA, actually no impact, plus 2, plus 2. Greater China, you know, plus 6 with Yeezy, plus 10 without. So you clearly see that the impact of Yeezy was less, and the underlying business is stronger. LATAM, almost sladdish. And then Asia Pacific, a little bit the other way, where actually the business was then helped by the Yeezy business with plus 7 to plus 5. All in all, as I said, our growth at 1%. If you exclude Yeezy, the underlying business was then up 2%. If you look at the channels, wholesale business down 2%. You have to remember that we started the quarter with an order book that was down more than 20%. I've always said that the second half order book was very, very weak because of all the inventory and because the way the retailer was reacting to RDNO a year ago. So you can see we've been able to chase the business and then deliver into the trade much more product that was not on order from the pre-orders, but actually then product that we accelerated and scaled, especially on the lifestyle area, where they were able then to sell through and, of course, then also make money with us. On retail, brick and mortar of 10. Number of stores, if you take China and Russia out, flattish. That means that most of this is like-for-like growth. Very happy to see that our concept stores, meaning the full-price stores, are actually up between 10% and 15% everywhere. And then the factory outlets are, of course, weaker because, as we know, they are currently selling almost only clearance. But the most important thing is that our own retail full-price concept stores are up double-digit. Ecom up one, same thing here. We have said that it's not to optimize or maximize top line. It is now to balance the brand side of it together with commercial success. So the share of full price here has increased substantially. We're protecting our franchises and the new management of digital clearly has the view of being more branded and value creation than maximizing top line. That's why we're actually very happy with that number under the current circumstances. That gives you the current split, 63% wholesale, 37% D2C. And as you can see, brick and mortar and e-comm is basically 50-50. Talking about the digital, we had a change in the management. So Scott left us as the chief digital officer, and we welcome Tobias again. He has a big history with us, but also with other digital companies, and was a natural replacement when Scott decided to go. I think Tobias has been here for a month and he's already had a big impact on, you know, looking at the strategy, making sure that we build plans based on the new Audi and the new environment in digital. And then, of course, make sure that we really are pushing the brand side and not only the commercial side. If you look at divisions, very important for us that footwear is still growing here at 6%. Apparel we said was going to be down with all the inventory in the market, down 6%. And then accessories for the quarter, a little bit worse than flattening. Remember last quarter it was up because of all the football accessories. So I would say in line with our expectations. Footwear being almost 60% of the business, apparel 36%, and accessories only 6%. I think a very healthy split. You could argue that accessories which should be high margin could be bigger. But as long as footwear is above 50%, I'm very happy. Performance, basically a flattish business. Football being up slightly, running flat, training down very, very slightly, outdoor strongly up. Golf actually down now. We clearly see a stagnating side on the golf side after a series of quarters with positive numbers. Especially sports down, but that has more to do with deliveries into the market and then US sports up, especially a very healthy business in American football. which is kind of cool for us that we in America with three stripes can actually have high market share in American football that tells us that if we build the right product for America, we can actually also be good in the US sports. On the performance side, don't need to talk a lot about it, but very proud of Women's World Cup, not only winning with Spain the whole tournament, but also taking three of the four individual prizes with our players. And again, a clear commitment from us to women's football. And I think the tournament was a great, great win for women's football in general. And look forward to that investment to continue. Some cool things we're doing on women's football, not only building now shoes for her with specific models, but also starting to use collab partners. You see that one of the jerseys that Arsenal is playing is actually a collab with Stella McCartney. And you will continue to see us actually doing different branding on certain teams to make it more street relevant and build brand heat also through the combination of, I would say, partners, originals, and performance. Cool collab on the soccer football side. Here an example of what we just did with Bugatti. And again, same thing here on footwear. We will do more co-lab product to create heat, do more limited edition and create excitement in football. And we have all the vehicles to do that. Welcome home to Newcastle. You know, after a while, they're coming back to three stripes, you know, with new ownership and very, very high ambition. This is a great fit. So look forward to that. Ballon d'Or, almost as usual, Messi wants his eight. And then I think the future, Jude, you know, won the Copa Trophy, which is the Young Players Award. And again, needless to say, he's probably the superstar of the future and, of course, playing in our product. A lot of critique on us that we're not having enough innovation. I think that is not true. And I think, you know, the Pro Evo shoe here from Marizero is a good example, the lightest shoe in the market, the best performing shoe in the market. setting also the world record, you know, we did just here in Berlin, almost two minutes better than the previous one, but also in other, what should I say, records, if it's records on tracks or it's records in markets, this year has been unbelievable. And it shows that we can bring innovation very, very quickly to the market if necessary. I'm very proud of that. Then in general, In running, we are investing a lot of money into events and to athletes to build credibility. We know we still have a long way to go to actually be back again where our leaders belong. But we have the credibility now by winning races, arranging races, and having the best performances. So now the job is, of course, to build credibility also into the commercial area, and that's what we're going to do in the future. Same thing on track and field. Very important for us to be in the most, what should I say, credible sport. In Budapest, a lot of our athletes did a great job and were very visible with the footwear. Going forward, you will see a sign, again, more federation to also be visible on the apparel side. And again, as I said many times, we will invest more and more money also into the smaller sports. Same thing on outdoor. You know, I think with the Agravix Speed Ultra, we have the most innovative trail running shoe. And I hear the same thing, winning a lot of events, taking part in many events, and showing innovation. as a big part of an investment of what we're doing in Terex. Very proud also of what happened in the Rugby World Cup. You know, Sia Kwelisi, the captain of the South African team, nine months after he pulled his ACL, he captained them to the championship, a great ambassador for our brand, fantastic guy. And even if he beat the All Blacks, which is our team, you know, he's a great, great part of the family. And the same thing with the All Blacks, probably the team with the best spirit in the world in any sport doing their training camp here in our campus. Very proud to work with them and very, very happy that we extended that contract and we will extend that cooperation into also other product categories, also into the lifestyle area. If we then look at the lifestyle side, the business is up for the first time in a long time. Good growth in the higher area with originals. Basketball also growing double digits, so we clearly see that the higher end of the market is accepting our new product. Sportswear, the more commercial side, is still down a little bit. But again, with the pipeline of more commercial products for 24, we will also turn that into a positive number. And needless to say, the left side is more important in the beginning to create brand heat again, and that's what we have actually been able to do. Couple of things that we have done in the basketball area, we have signed a new multi-year contract with Overtime Elite, which is professional leagues, both in American football and in basketball, linking the college athletes into the professional leagues, the NBA and NFL, And we will do a lot of collabs and partnerships with them to be more connected to that youth culture in American sports. Then Anthony Edwards, the new superstar in NBA, launched his first signature shoe, as you see here. We launched it on the field of play in September, and it's now being rolled out in the different markets. Needless to say, he captained also the American national team, and we expect actually a lot of good stuff coming out of that cooperation. Mostly proud of, probably, is the original campaign that we launched in September, the first campaign I think RDA has done for original since 2015 or 16. Very well-received campaign, between $50 and $100 million in media money. Very well executed all over the world, both with global stars, but also connected into local celebrities. And it's a message that we will continue to use also going into 2024. The collab with Moncler, you know, launched in their fashion show a couple of months ago, now in the stores. And the same thing here. Moncler, for me, the only luxury brand that has connected into the winter culture and for us being together with them with fantastic product. Very, very thankful for, you know, their CEO that they did that and the product also selling very, very well. A couple of other things. We did the collab with Korn, sold out very quickly, you know, a collab that is also connecting to the young consumer. Then we did in China with Edison Shen, a collab, both on the global, as you see here, but also local. And here you see people lining up in front of the stores. So one of the very, very high impact core labs that we don't shortly. And, you know, this is the replacement that we have to do to replace the easy business. We need many smaller core labs that can create the heat and that we then can commercialize. Not surprising, probably, Samba is being named the shoe of the year in the U.S. So we will receive that award, I think, end of the month. And then I've said many, many times what has turned the brand lately is, of course, the terrace trend with the Samba Gazelle and Special. We have then lately seen compost outselling Samba in certain markets already, especially, I would say, in the men's area and the kids' area. So then we have something outside terrace that is working well. And then those of you who follow fashion have seen that Superstar, especially in black-white and triple black, is picking up. And that's a shoe that we will heat up for the future. Extending the terracing also into running, we are into the 70s running here with ASL 72, which is then a natural evolution for us, again, getting into running lifestyle. And you will see these products starting to seed in in Q1 and then be scaled into the second half of next year. We are also working on... four or five very interesting silhouettes on the running lifestyle side of new silhouettes to replace the successful shoes that we had, for example, the NMT. Needless to say, next year will be full of three stripes and color. This is in line with what you see on the footwear side. And we have, I think, 16 color combinations coming in different silhouettes. And you will see a lot of this in the market. And this is being very well received currently of the retailers. A couple of words about Yeezy. You know we have had two very successful launches, one in Q2 and one in Q3. We are still sitting on about 300 million of the inventory, and we have decided not to have any more launches during Q4, and will then spend the rest of the year then to evaluate what we should do next year. And I think with that, blah, blah, I'm ready to hand over to Harm, who will take you to the real reason why you're listening, the numbers.

Thank you, Bjorn. And I guess I deserved a break for a couple of minutes now as I guide you through the financial update. Well, unfortunately, there will be not a lot of news, which is probably fortunate as well, because we did the pre-release already a couple of weeks ago. So what you see in the P&L should not be a lot of news for you. Again, $6 billion on the top line in Q3, leading to a 49.3% gross profit, and then to an operating profit of $409 million. Of course, all of you are interested what is the relevance of Yeezy in these numbers, and in the $6 billion net sales, which is roughly one percentage point, the currency will increase. $350 million Yeezy are in there, as Bjorn alluded earlier. If you would do a like for like without Yeezy, it's actually 2% up currency neutral. And also on the gross profit, if we exit the easy part, the underlying business at 48%, you know, gross profit, and I'll come back to that in a second. What's also important, looking at our infrastructure, because we always said we need to have a healthy top line and we need to continue to grow the top line to grow into our infrastructure, while we also, you know, right-size infrastructure through the one-time cost. So we have 1.9 billion operating overheads. which is around 32.1%, but in there was 110 million extraordinary costs. So 80 million one-offs, which is a combination of severance, DEC closures, or retail closures and impairment, and 30 million donation linked to the Yeezy business. So if I would deduct that one, we are getting closer to the 30% line, which again would contribute also to the bottom line in a healthier way. And on the bottom line, it's 150 million Yeezys included there. So as gross margin is a very important KPI for us, I want to decompose that a little bit when it comes to Q3 compared to prior year. As you would expect, freight is a significant benefit in that gross margin bridge, but also the underlying business mix is positive compared to prior year. What is the business mix? Of course, it's a combination of category mix, market mix, channel mix, but also what kind of products we are selling when it comes to footwear versus apparel. So all of that is in, and that's why I want to say I call it business mix or underlying business, which is healthier compared to last year. Inventory allowance, given the progress that we made on the inventory, also contributed positively. And then we have a significant negative impact on the currencies on the FX because, as you know, we're hedging early on. going into this that season and that is significant negative impact on our gross margin and compared to prior year as we continue to clear some products, especially on the wholesale side and in our factory outlets and primarily in North America, it has also a negative impact compared to prior year. If I compare that quarter to quarter, you see the similar impact on the freight. It's very positive and it will continue to be positive for the next couple of quarters Discounts here is already positive because we made so much progress on the inventory. So that is also something you should expect going forward. And the business mix is slightly negative. That is a reason as we're expanding our wholesale business as a higher share of business that has an impact there. And of course, when you come to the market mix, it's a similar impact there. FX, it's also negative because we are going into a season of negative impact and that will continue to go into early next year as well. And here, like for like from Q2 to Q3, Yeezy also had a negative impact because we had on the one hand, a smaller business in Q3 versus the second quarter. And of course, it was a mix of our own D2C business and a combination of our hotel partners as well. So that hopefully shares some light. into our gross margin bridge. What probably wasn't new today is our balance sheet information in more detail. The highlight is probably the first number, the inventories of 4.8 billion. Again, 23% down reported or 90% currency neutral. And I give you one more, you know, details on that on the next page, but that is definitely a significant progress that we have achieved over the last couple of quarters. Accounts receivables are somewhat down, given our decline still on the wholesale side. And the accounts payable are significantly down as we bought less, you know, given our trajectory of the business overall. So it shouldn't be a surprise that was required to bring the inventory down as well, linked to conservative selling and making sure that they're sell-through in the market. One more number on this page is the cash on the balance sheet. It's roughly a billion on the balance sheet. Also, that is a healthy level compared to 12 months ago. I'm, as a CFO, very happy to see that development on the overall balance sheet. Very healthy situation on the balance sheet. When it comes to the inventories, we all remember Q3 was the peak on inventory last year with $6.3 billion. If you compare this to today, it's $1.5 billion down. That is significant progress. and also look at year end, 6 billion, made significant progress. We always said it will improve quarter by quarter, but now being at 4.8 billion, 300 million of that Yeezy, and still having, you know, higher, you know, product costs in 12 months, they go overall from an inventory point of view. We are now at a point where we are happy with that inventory. We are happy what we have on our side. And of course, you know, by the end, we are also happy what we have around the world, but North America, when it comes to our retail partner. Still North America, slightly too high, and especially with our retail partner, we still need to work a couple of months to get to a decent level of inventory, but tremendous progress and happy where we are, and do not expect this coming further down going forward. Now, of course, we gave a complicated guidance at the beginning of the year, and we changed it a couple of times, so I want to explain that a little bit in more detail. going from net sales through operating profit underlying and operating profit reported. We started the year with a high single-digit decline on the net sales as a guidance. We changed that to mid-single-digit decline on July 24th. And when it comes to the guidance a couple of weeks ago and today, it's now only low single-digit decline. So significant improvement on the top line over the course of the last couple of quarters. We have not changed in the last update on the underlying business, which is was reported as a break even. Now we said even that one is improving, not just on the top line trajectory, but also operating profit point of view. Now we believe, you know, $100 million is now the guidance for the underlying business, excluding any one-offs or Yeezy business. And, of course, what we're going to report is yet another number. We started with $700 million decline or loss. as a starting point, moving to 450 million. And now we believe, as we had a second drop in Yeezy, we can report a loss of 100 million. How does that relate to a probably simpler bridge? How did we get from the 700 million to the 450 million? That was linked to the first drop of Yeezy, where we generated a net 150 million in profit and 100 million less potential write-off of the Yeezy inventory. A similar thing happened now in the third quarter, another 150 million net profit from the Yeezy drop, from the second drop. Of course, with that, less risk of writing off the Yeezy inventory because we sold it. And then what's new now is also that the underlying business has improved by 100 million to now lead to a guidance of 100 million negative. I know this is not where we want to be, but we show significant progress. But now I want to hand over to Bjorn again, where we had from here.