Adidas Ag Ord

Hello and good morning, everyone. Thank you very much, Francie, and also from my end, welcome to the conference call and our preliminary full-year 2023 resource. We very much appreciate your flexibility in joining our call on such short notice, knowing that this means getting up very early or, in some cases, even in the middle of the night for you. The participants in today's call are our CEO, Bjorn Golden, and our CFO, Harm Ohlmeier. The purpose of this call is twofold. First, Bjorn will provide you with a brief overview of our preliminary full-year 2023 results, and afterwards, Bjorn will share context around our published full-year 2024 outlook and its underlying assumptions. And lastly, of course, Bjorn and Harm will be happy to take your questions. Please understand that during today's call, we will not be able to comment on our Q4 performance beyond what has been published yesterday. We will be more than happy to discuss these elements during our regular conference call on March 13th. As always, I would also like to ask you to limit your initial questions to two during our Q&A session in order to allow as many people as possible to ask questions. Thanks very much in advance for sticking to those rules. And now, without any further ado, over to you, Bjorn.

Thanks, Sebastian, and good morning, everybody. We start the presentation with a beautiful picture of our new Predator, which is launched in the last couple of weeks, doing extremely well on the pitch and also in sell-through. So one of the future successes for us. The purpose of this call is to take you through the announcement. And we have five, six slides to explain the different components. And we start, you know, with the top line. And you basically see that we have a flat sales currency neutral and reported a minus about 5%. If you then do the math, you see that only on currency translation we lost almost a billion in sales. If you then exclude Yeezy from the numbers, you will see that we were up around 2%. And then if you then take the Argentina devaluation, you will see that's another percent. So if you put those two together, that had an impact then of about 3% on our top line. If you remember, our latest guidance was a low single-digit decline, currency neutral. And when we then ended flat, we all understand that Q4 was stronger than what we had expected. If you then look at the gross margin, I do actually believe, given the inventory we started with during the year, that we have done a very, very good job actually getting through that. And as you can see, we're ending with a 47.5% gross margin. which is then 20 basis points better than what we actually had a year ago. And I think we have been very good at actually managing our inventories. And when we publish our numbers, you will see that we're very, very happy with where our inventory actually ended in the year. On the profit side, you see that we reached 268. which, of course, is much less than we had in 22, but we flagged that a long, long time ago. And if you then look at the extraordinary impact, we had another 100 million negative in Q4 because of the devaluation of the Argentina PSO. And if you remember our latest guidance, we said that we would lose 100 million. So as you can see, there's a positive swing from that guidance to the year end. of 368 million. We will try to explain that as we go through the slides. If you then look at the different guidance that we had during the year, this is my first year with the company and I would like to take that through because that explains how we are guiding and why we did what we did. We started out in the beginning of the year saying that we expected a high-significant decline, that our underlying business, taking EC out, should be break-even. And again, we were coming from a Q4 the year before with a loss-making. And then we said we will have a reported loss because of the EC inventory of a possible $700 million. Then in the second guidance, we then said now we only expect a mid-single-digit decline. The underlying business is still a break-even, but because of the sell-off of EEC, we are now looking at a possible loss of $450 million if we write off the leftover of the inventory. And then the latest guidance, we're then from mid-now to low single-digit decline. We had an improvement in our underlying business to $100 million profit. And then again, because of the easy development, that would then give a reported EBIT of around minus $100 million. And when you then look at the actuals, the low single digit has then gone to a flattish. The operating profit, the underlying business has improved by another $100 million, up to $200 million. And when we then tell you that we're not going to write off $268 million of the inventory, that then turns into a $268 million profit. So that has been the improvement during the course. If you take that into a slide to try to explain it, then again, we started with the minus 700. Then we sold off Yeezy. That generated a profit of 150. And because we sold inventory, we didn't have to write off 100 billion inventory, so we then had a guidance of 450. The same thing happened in the next phase, but here we also had an improvement of the underlying business of 100. That's where we ended at the guidance of minus 100. And now on the actual, we have a 268 decision not to write off the leftover inventory plus an improvement of the business of 100. and that gives you then the 268. To sum that all up and around, then you would see that that's an improvement from the beginning of the year to the end of the year of about a billion in our bottom line. Again, not saying that this is great. The only thing I'm saying that 12 months ago we had a easy problem that could have caused us to write off all the inventory. We sorted out half of that. We still have $268 million left of inventory, which we will now sell at least at cost. There's an upside to that. And I think the underlying business return from being on a negative downfall on the top line to actually now having a positive momentum towards the consumer and the retailer. So I think a lot of positive things have happened over the last 12 months. If we then look into the sales going forward, it's a little bit complicated, but we'll try to explain it. We ended the year with $21.4 billion in sales. All that $750 million was easy. That means that you have an underlying sales of the Adidas product of about $20.6 billion. If you then say that that business should grow high single digit, remember we said that it will start flattish and be double digit at the end, then you will end, if you say the sales line is between 7% and 9%, you will end between 22% and 22.5 billion top line. If we then add the EC sales at cost, that's another $250 million. Then you do the math. You're at $22.25 or $22.75 as currency-neutral sales. And that would be for a whole company, including EC, then amid single-digit growth. currency neutral, although the leaders underlying business is high single-chip, just so you understand the match. And then, unfortunately, we have very, very negative FX impacts around the world currently. Of course, I can't name them because even I don't know them, but that's, of course, what is then going to give the pressure on the top line during the year. And we will get back to that and explain it more in detail, and I'm sure also Harm can explain it even more to you. But that is the picture we're looking at now. And now you have to remember that our goal in the last 12 months was to get rid of bad inventory, both in the trade and in our own books. It was to solve the easy problem. It was to build the relationship with our retail partners and to get momentum towards the consumer. Twelve months ago, we did not have the terrace. We did not have the campus. We did not have the predator. We did not have the Anthony Edwards shoe. So I'm actually very happy with what we now see in the market. And that's why I think we're on the good way of actually reaching the things that we have promised you mid-term, meaning 2026. When you then look at the quarters, and of course this is just a visual indication, we say that Q1 will be flattish. There might be some upside to that. And then we should have continuous improvement quarter by quarter. Why is it like this? Well, it's especially because the American market is lagging, I would say, six to nine months behind the rest of the world. And that has to do with, of course, our performance when it gets to our inventories that are in the trade and also, of course, deliver the fresh product into the trade and get the buy-in of that at the same speed as we've gotten in all other markets. And therefore, we say, we promise you that we will start flattish, improve every quarter, and then when we get to the end of the year, we should have a double-digit growth. And of course, as always, it could happen also quicker, but this is where we are currently. If you then look at the gross margin, then FX, I think, and again, Harm will talk more about this, that just in the gross margin there is about 200 basis point pressure on the gross margin because of currencies. If you look at freight, that looked very positive, I would say, until the Red Ocean, the Red Sea problem came up, and currently there is a negative effect of that. But that negative effect will be smaller than the positive effect, but you should be aware of it that currently the spot rates are are actually exploding again. So if you don't have a long-term contract or you ship more than your contract, there is an increased cost because of that. And there is a delay currently of about three weeks, which, of course, causes some delivery issues again, especially to the European market. All other areas are actually positive that it gets to the gross margin. And I think it's fair to say that we are planning and pretty certain about that we will have a very positive development in our gross margin, despite the 200 basis point negativity that we're getting because of the FX. When you then take the second half, and the picture is ballpark the same, and remember now we are comparing to H2 2023, but the picture is ballpark the same. If you then look at our guidance, then we are currently then currency neutral, saying that we will have a mid-single-digit increase in our total company. That includes Yeezy, where you have to remember that we're currently planning with substantially less sales because we're only planning in this guidance to sell the 268 million inventory at cost. There is an upside to that. If you take easy out and you look at Adidas business, we should have high single-digit increase for the full year, and we should have double-digit increase at the back end of the year. The operating profit that this gives you is around $500 million, of course, with an upside. But as you know, it is our clear goal to always start with what we can promise you and then build from that. The assumption that we have in this is, again, to repeat it, to sell the EC at cost. That's around the 250 million, and currently without no operating profit contribution from that inventory. We talked about the FX headwind. That has, of course, a sensational effect when you convert sales in countries back again to euro, and then it has a direct impact on the gross margin, which we already talked about. around 200 basis points. And then important, we have not started any programs to optimize our cost structure. We have said that the most important thing for us is to be positive towards the consumer and positive towards the retailer. That means that we continue to overinvest in both marketing and sales. And as soon as we have a solid growth in that area, which we think we will have in the second half, we will, of course, then also start to optimize and leverage in our cost base. But I hope you understand that we first focus on the front side to turn what you said was negative 12 months ago into positive, and then we optimize the back end of it. I think if you do it the other way around, you could be in danger of actually killing something that is going to be very, very good. So that was, what should I say, a simplified explanation of where we are. And then with this second beautiful picture, this is the Anthony Edwards shoe, which is selling very well. I think it's the best-selling basketball shoe that we had for 10 years. Then I think we already harmed me and Sebastian to take any questions that you have. Sepp?

Yeah, thanks very much, Bjorn, and Francie, we're happy to take the questions now.