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Edited Transcript of ADS.DE earnings conference call or presentation 8-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 adidas AG Earnings Call

Herzogenaurach Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of adidas AG earnings conference call or presentation Wednesday, March 8, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sebastian Steffen

adidas AG - VP of IR

* Kasper Rorsted

adidas AG - CEO

* Robin Stalker

adidas AG - CFO

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Conference Call Participants

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* John Guy

MainFirst - Analyst

* Simon Irwin

Credit Suisse - Analyst

* Antoine Belge

HSBC - Analyst

* Piral Dadhania

RBC Capital Markets - Analyst

* Adrian Rott

Deutsche Bank - Analyst

* Andreas Inderst

Macquarie - Anlayst

* Geoff Lowery

Redburn - Analyst

* Jurgen Kolb

Kepler Cheuvreux - Analyst

* Cedric Lecasble

Raymond James. - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the adidas Group conference call for the full year 2016 financial results. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Sebastian Steffen. Please go ahead, sir.

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Sebastian Steffen, adidas AG - VP of IR [2]

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Thanks very much, Tracy, and good afternoon, ladies and gentlemen, and welcome to our full year 2016 results conference call. Our presenters today are Kasper Rorsted, adidas CEO; and our CFO, Robin Stalker. I guess we all know that we have a lot of topics to cover today. But before I will hand over to the two gentlemen, let me quickly remind you that as always, first of all, our revenue-related figures will be discussed on a currency neutral basis and all figures will refer to our continuing operations and will be discussed excluding goodwill impairment losses.

And before I turn it over, just one other housekeeping item. I mentioned that we have a lot of topics to cover today and given the amount of participants in the call today. I would ask everyone to limit your questions to two to give more people the chance to ask their question.

And now, over to you Kasper.

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Kasper Rorsted, adidas AG - CEO [3]

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Thank you very much, Sebastian, and welcome everybody to our call for the fiscal year 2016, outlook 2017 and also strategy outlook. I will speak about 2016 highlights, Robin will take us through the financial results in detail, and then, we'll come to the outlook for 2017 and longer term. But before I go as far, I want to immediately recognize Robin on behalf of the entire company for the outstanding efforts that he has done during his long tenure at the company. He's been with the company for more than 20 years, been the CFO for more than 16 and during that period of time, sales have more than tripled, earnings more than fivefold and the company value is more than tenfold. I think you have to look very hard for finding another tech CEO that has been able to deliver those results. On behalf of the entire company, Robin, thank you very much. To be more formal, Robin will, of course, still be around, he will be the CFO until our AGM on May 11, so there'll be no change in that responsibility until May 11. We'll have the AGM on May 12, Harm Ohlmeyer (inaudible). Harm, we are very happy that we have been able to find an internal candidate. Harm is also doing different periods of time in (inaudible) organization and has joined the management board with immediate impact -- effect. He's also participating in today's call, and those of you who remember, the transition between Herbet and I will have exactly the same transition between Harm and Robin. That means that Harm is present today, will not take any questions and the same will be the case. Next week, in order to make sure that we have a very clear level of responsibility within the company, but of course, it's in our most interest that Ham would introduce to the work that has been done on the port level and (inaudible), we'll take care of that, very similar to whatever did to me. So, that is a side note, but the side note is not. Thank you, Robin, and thank you very much, Robin, and we'll have a chance to say good bye to Robin, not only during next week, but also during several road shows following the end of the fiscal year, and this was your last fiscal year.

Now, let me move on to the operational highlights of 2016. It is clear that we have a strategy of creating the new, that is delivering results, and we're diligently executing upon that strategy now in the second year and particularly putting emphasis around four areas; open source, key cities and speed, which are our strategic choices, and also, of course, the culture level of our company, how do we actually get people to perform up to their level that we want. The outcome is, of course, that we increase brand desire, i.e., the attractiveness of the brand, but not just for the attractiveness of the brand, we want to be able to see it in our numbers, so the outcome should be top-line in market share growth, gross margin expansion, operating leverage, and you will see that in 2016, we've been capable of delivering on all of those elements very similar to what we set ourselves out to.

Let me take you through and give you some highlights of the progress we have made, three strategic choices; speed, cities and open source. It's clear that the more we can move our business to full price share of sales, the higher the margins will be. And right now, we've been able to increase that by 10%. The speed range is generating 20% of sales, so we are capable of making certain that we deliver within season to our key partners across the board, and this is only the beginning. Markets that will be on boarding will continue in North America and Greater China. So, it is getting a much more flexible and agile supply chain and being able to service our consumers in a much better level, while at the same time ensuring full price share-through, which, of course, will give us a better margin.

When we move to our key cities, as you probably remember, we announced six key cities that are selling the trends and have immense impact on the overall evolution of the global markets we are active in; two in Europe, London and Paris; two in North America, LA and New York; and two in Asia, Tokyo and Shanghai, and we have seen it's time to pay off. We are growing more than 30%, which is incremental to the group where the growth was almost 20%. We are seeing an overproportional improvement in market share and also in our NPS, and we are now almost done with implementing the first iteration of our organization in the key cities. This is, of course, an evolution that will take place over time and also evolve, but we are so far very happy with the progress we have done with our key city initiatives.

Moving on to open source, this is third strategic choice, and this is about whom do we partner with and how do we partner. It will be a partnership with Kanye West that has driven an enormous commercial success and particularly a brand heat, making our brand more attractive than ever is our partnership around Parley, where we deliver upon our promise and sustainability and really having a varying position. I'm unaware of any product, any company where the product that they actually deliver is a fully sustainable product and the success we had commercially is only the beginning. We sold 50,000 -- I would say differently, we delivered 50,000 pairs of shoes last year. Because we have sold many more, our plan will be to deliver (inaudible) this year and of course dramatically scale it next year. It is really a huge contribute to our efforts in sustainability. Also our Futurecraft, where upper is 100% biodegradable, will really cement our opposition as a leader within sustainability.

So, on a very macro level, of course, we'll speak more next week, we are executing a plan, we're creating the news about in the areas of speed, cities and open source, which of course is driving part of the success we're seeing today. So, when we look upon 2016 in a more balanced view, and I do wanted to spend one second on the macro before I move to the detail. While we've enjoyed tremendous success in 2016, I think it's important that we also recognize areas where we can do better because should that be the case, it would be hard to deliver upon future promises. So, this is not an impression of that things are feeling, but it's, I would say, a much more impression of or articulation of the areas that we'll need to improve in order to continue to improve our performance, but let me start with the past developments.

We've seen a very broad-based top-line momentum, which is extremely important, that we're not depending upon one single region, one single product franchise, but it's really been a broadbased top line momentum that we've experienced. We've seen market share and NPS gains in key categories and markets, again very similar. We made progress across almost all key categories and almost all key markets. Thirdly, we are seeing major progress in the US with more than 30% growth. The US is the largest sporting goods market in the world with more than the third of the total global market, and it's one that is of immense importance for us as a company. And lastly, strong profitability improvements, which of course is the consequence of the upper three despite severe FX headwinds with the strength of the dollar throughout 2016. But while we are very happy with the overall results, there are also areas where we believe we can do better.

On the performance categories, not all performance categories grew at the same level, and we believe that there is still much more to be gotten by making certain that everybody will contributes. When it comes to Reebok, we spoke about this following the third quarter call. The performance is still below the expectations we have to Reebok, and we have initiated a turnaround plan that we call muscle up, that we've spoken to most of you about, and we spoke to everybody about in the November. We're clearly executing a ton, some of the hotter elements of the plan like headcount, structures, locations and retail, but we still have a long way to go. We are happy with where we are. But as I said, this is a three to four-year turnaround plan and you should expect that it will take that long. We will continue to report to you diligently about the progress we're making and when appropriate, also in detail.

We are, when it comes to the US, unhappy about market position. I just said, we are very happy with the progress and those statements go hand in hand. We are very happy with the progress we made in the last two years, but it's clear that we're not happy with the overall market position. This is due to the past, so to speak, the last 10 years, it is not due to the last two years. It's unrealistic to expect that we'll catch up within two years. That's why we're saying with we are unhappy with the position despite our satisfaction with the progress. And then also, since the acquisitions moving forward, we need to continue the current performance we've seen in the US also in the future.

And lastly, we did miss opportunities due to limited supply. This is (inaudible) contribute really to the attractiveness of our products and brand at this stage, but of course it also means we left money sitting with our consumers. We were not capable of fully applying the consumer demand that was particularly around our Boost products, which is where the demand has tripped the supply. We're working diligently and very constructively with our supplier Boost, and we're confident that over the coming years that we'll have a supply situation that will meet the demand base. But I do think of two evils we would much rather be in a position where we have more demand and supply than the other way around. But overall, as you can see, a number of things that we are immensely proud about, but also, and I'm aware that we can improve and make the Company an even better Company.

And that brings me to the major P&L developments. Revenue increase on a 16% -- 18% level when it comes to currency neutral development and 14% in nominal terms, moving the company top-line more than EUR16 billion to more than EUR19 billion, a tremendous step ahead in 2016. Despite adverse development in currency, our gross margin rose 30 basis points to 48.6, which also was, what do you call, visible on the bottom line where the operating margin improves 130 basis points to 7.7. So, we are seeing not only on the gross margin, but also the operating margin significant improvements. The net income for the first time in the history of the company surpassed a billion and grew by 41% compared to previous years, so a stellar performance when it comes to operating profit.

Moving on to the brand, it's clear that -- as this brand is really delivering upon its tremendous promise, we're keeping up the momentum with a growth of 22% of the adidas brand, which has been an exceptionally strong year for our company. When you break it down to our two different categories, in our performance, we grew 13%, so our performance category, and our lifestyle category grew 45%.

And let me spend just a couple of seconds on this and elaborate on it because I'm sure there will also be questions. Those of you who have followed us for a long period of time, you will also have seen the evolution of the growth both in performance and in lifestyle. We believe that the artificial or the defined difference between performance and lifestyle is somewhat artificial. There's clear that in lifestyle, we have a small part which is very best in driven, but the sporting part of it, being a lot of our footwear and apparel, it is categorized as a lifestyle, but it's equally used as a performance product. So, we did this many years ago, we'd be relieved that to a certain extent, it is becoming misleading because the difference between sport and lifestyle is frankly very, very difficult to define at this stage. We are very happy with both growth rates and I want to iterate we are a sports company and that is very important of course, we are not a fashion company, we are sports Company. Of course, we like to have fashionable products, but we are a sporting company. Reebok also made progress, grew 6% in the past year. Almost all the growth came outside the US, so you can see we do not have a growth issue with Reebok. Clearly, we'd like to grow more on a macro level. Our challenge with Reebok is around the profitability, which we are addressing, so we need to ensure that we have the right growth profile, not just a growth profile, and we're confident that, that will come over time, but from a growth standpoint, 6% is an acceptable growth for the position we have with Reebok today.

And lastly, before I hand over to Robin, we saw an outstanding e-commerce growth, which was led by Harm Ohlmeyer and his team, 59% for the first time, we surpassed a billion. And clearly, that is also helping the profitability of our company, but much more importantly, it allow us a direct interaction between us and the consumer and gives us much better feedback on how consumers shop, what they like, what they don't like, and it allows us also to streamline and also to sign-off products much more to the likes of the consumers moving forward. This is the most strategic shop we have in the world. Before leaving, it is not an isolated shop, it's clear that a lot of the initiatives we're doing, we are also doing that interaction with our wholesalers today. So it is not a conflictual message. The reason why this growth is coming at the level of this is this is how young consumers shop. So we're not looking upon this as a conflict, it is complementary to our go-to-market route, but it's vital for us for success moving forward.

These were the highlights from 2016, and I'd like to hand over to Robin, who will take us through the financial highlights of 2016. And welcome, please.

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Robin Stalker, adidas AG - CFO [4]

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Great. Thanks very much, Kasper. And thank you also very much for the kind words. Good afternoon, ladies and gentlemen. So you've obviously seen a significant operational performance of 2016. My task now is really to put that in the context of how that works through in the financial results. If we look at the top-line, as Kasper said, this growth has been extremely broad-based. We've had, in almost all of our regions with the exception of Russia, a double-digit growth and in fact in the three most important regions of North America, Western Europe and Greater China, a growth of over 20%. So I think that's a fantastic confirmation to what Kasper say that our growth is broad-based.

If we look at it in a bit more detail, starting first with Western Europe, you can see the revenues increased 20%, which was represented by growth across all of the various markets in Western Europe with the adidas growth actually being 20% also, but that's on top of a growth of 18% already in the previous year. This growth was largely driven by in performance running category and then obviously in the leisure lifestyle area, Originals and neo, but for me, one of the big call-outs is that even though we didn't have the tailwind of the sales in the fourth quarter that we had in fourth quarter 2015 for the UEFA Football Chairmanship, we also were able to grow at the football category and increase our market position in this and win back football leadership in the Western European market, which is extremely positive for us.

The Reebok business also grew in Western Europe, up 18%, and this is led mainly by the training and Classics categories. In Western Europe, obviously, the majority of our business there was selling in euros, of course sourced in dollars, and so this is the region where the appreciation of euro and inferior hedging rates 2016 over 2015 have had the most negative impact, and we see the gross margins down slightly 3 percentage points, but with the good discipline in the cost base and also the increasing leverage that we're getting here, we are able to limit the decline of the operating margin level to just 2 percentage points, bringing us to strong operating results of 18% for the year.

North America, and this is clearly the region that is getting the most coverage, particularly in terms of the emotion related to us growing significantly again after so long in this important market, up 24% for the total business and with the adidas brand obviously leading the way here with 30%, and actually at 30%, North America was the fastest growing region for the adidas brand. That's coming from both performance and obviously the leisure lifestyle segments, both increasing double-digit rates, running up 40% and call out here US sports actually have 25% in the period.

Now, no surprise that the Reebok sales were down 1 percentage point, but that is also reflecting the ongoing challenges we have here, Kasper has already mentioned, the efforts that we are taking to improve the situation in not just the US, but particularly the US and on the top-line basis, actually the fourth quarter showed that we were growing again in North America under the Reebok brand at a same percent, there's still a lot of work to do, and we've already guided for 2017 about the assets (inaudible) the revenues to decline.

Gross margin for the region North America increased 1.1 percentage points. We're still a long way away from the profitability of some of the other regions, but at the operating margin level, a 3.8 percentage point increase was significant, but we're still only at 6.3% profitability in that region.

Greater China, I've often said that this is the star region, this is the one that has been growing so significantly in the last several quarters and continues to grow, continues to deliver superior profitability and yes, ladies and gentlemen, this growth is continuing. We're up another 28% again for the full year, so it's the fastest growing of all our regions for the total business and that's coming here from both adidas and Reebok. Adidas up 28%, here leisure lifestyle, but also performance growing significantly, running up 14% and also football up 22%. You may be aware that we collaborating with the Chinese Ministry of Education to help them promote football in this market and attracting here a lot of the new generation itself football plans. Reebok, however, is also benefiting from the whole approach in China to healthier living, more emphasis on sports and fitness in general. This general sports trend has helped Reebok grow 17% in the year under review, let's say, not just (inaudible) like framing and running in the Reebok brand. So I think this together with the improvement again at the gross margin level of 40 basis points and the slight improvement of 10 basis points on the overall profitability, more reason to believe that this significant performance in Greater China is sustainable, and we now have operating profit in China of 35.2%.

Latin America, another double-digit growth region for us, although it's fair to admit here that the Brazil market only grew at low single-digit with the other ones growing double-digit in the other major markets there. I think that's particularly impressive if you consider the financial economic challenges that some of the big markets in South America has lost several months. The adidas brand up 19%. Here, football, running, training, but also originals and neo, key drivers there. Reebok up 1% only for the total year. You might recall that we were repositioning and also changing the business model for Reebok at the beginning of the year, but in the third and fourth quarters, we were getting back to more normalized growth rate of 4% and 13%, respectively. And obviously, here, Latin America also suffered from those headwinds with the increased FX costs, but we're able to offset a lot of these with pricing channel and product mix, and so we ended up with a pretty stable gross margin in Latin America and an operating margin only down 10 basis points to 13.1%.

Other business is a bucket of various other non-adidas or Reebok businesses that the Group has, made obviously by the TaylorMade adidas gold segment, but also including CCM Hockey and some of the other centrally managed businesses such as Y-3, and in total, everything up about 1%, but that finds a good development of Y-3, a double-digit growth there with it; however, sales decline in TaylorMade adidas golf of 1%. CCM was also down 13%. Obviously, this is a result of that very challenging North American hockey market. But from a margin point of view, this was an area as we had guided to at the end of last year that we were expecting a good positive development and it's coming in total gross margin of 3.6 percentage points to 37.5%, driven largely by that significant uptick in the TaylorMade adidas golf. So we were able to improve operating margin by 5 percentage points, but obviously because of the last stage of the TaylorMade business and CCM businesses, we still ended the operating profits negative.

In terms of the total P&L, I think the biggest call-out here is our success in the gross margin. Fourth quarter up 1.6 percentage points, largely because the FX pressure in that quarter was a lot lower than it had been in the previous quarters, but we were able to aim the year up 13 basis points to 48.6%. And if you look at it in terms of the detailed -- the gross margin throughout the year, we've had significant hedging headwinds, almost 4 percentage points year, but the increase in prices, the increase in the favorable mix of our product, of our channels and also the country mix, that has helped us to overcompensate for that and actually aimed out with the 30 basis point improvement.

Going down further the rest of the P&L, other operating expenses grew 13% in the year. It's due in many cases to the increase in (inaudible) POAS marketing, but also higher as we grow, but a lot of those other overheads were related specifically to the investments in strategic business plan creating the new and also our success has been increased bonus payments, et cetera, some of the restructuring costs that we've identified over the year for TaylorMade and also obviously playing a role there. Nevertheless, in total, we were able to get leveraged here operating expenses of 30 basis points. That together with everything that happened through the risk P&L has enabled us to come in with an operating profit of EUR1.5 billion, representing a 1.3 percentage point increase along the operating margin to 7.7%. There were several non-recurring items in the -- for 2016. They head, however, both in negative and also a positive impact.

On this chart here, I'll try to summarize for you the key impact on with the summary being that actually, it was a pretty much plus, minus, zero (inaudible). Although we had two very positive extraordinary one-off gains in 2016, specifically, the termination of the Chelsea football contract and also the divestiture of Mitchell & Ness. We're also against that as we have communicated last year. So we're taking all proceeds of the sale of Mitchell & Ness and putting that into further investments into creating new. We financed the Reebok restructuring, and we've also financed the improvements in the TaylorMade business as well in the period. And therefore, as you see, in total, our success in 2016 can very honestly be relating to the significant improvement in the underlying operating business.

Further down through the P&L, we have net financial expenses being in Ness a little bit more than we had in 2015. But here, that is simply because we don't have the benefit that we had in 2015 of some positive exchange rate thing. So, in total, that has left us with income from taxes and for almost just EUR1.4 billion. Our tax rate came in at 29.5%, better than previous year, obviously, and that means that we were able to end the year over the EUR1 billion for net income first time in our history and increased 41% compared to the prior year. And all that translated into diluted earnings per share of EUR4.99.

Just on the balance sheet with me and here, yes, we've had an increase in our inventories supporting the strength of the business and our demand for products in the coming year of 19% here, contracted by the increase in the tables, obviously also directly related to that and a very managed increase in receivables of only 7% meant that we had a good improvement again in our operating working capital to rate the end of 2016 at 20.2% of sales, I think a pretty healthy level. Not surprisingly, we've continued to generate a good amount of cash, we've been able to decrease our net debt position again over EUR350 million this year (inaudible), financing further share buybacks of period under review here, we would have had another EUR250 million something out of preferred tranche financed by the end of December. But we are also benefiting from the start of bondholders starting to actually convert their bonds from the convertible to be issued some years ago. The other thing on this slide that you should recognize is that our equity ratio remains at a very strong 42.6%.

So, ladies and gentlemen, all the results that Kasper and I just shared with you, but also our confidence in the continued growth in 2017 and indeed even further gives us the confidence to recommend to the shareholders in May that we should again increase our dividend payout, this time full 25% to nice around EUR2 per share and that will represent then the midpoint of our strategic dividend payout policy range of 30% to 50% at a ratio of 39.6%.

Well, ladies and gentlemen, it's a quick count to credentials, and now, I'd like to hand back to Kasper to share the outlook for 2017.

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Kasper Rorsted, adidas AG - CEO [5]

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Many thanks, Robin, for giving us insight into the details of 2016, which you can clearly see has been an extremely strong financial performance, but also in terms of market share and peers, a very strong performance. So, let me speak about 2017 and also beyond the 2017, but I do want to just stop here for a second and then reiterate a statement that I made in November. When a new CEO come on board, of course, you have the option to change the strategy, but that can only be if there is a necessity to change the strategy. And as you can see from the numbers that we've taken you through, first from a highlight stand point and from (inaudible) standpoint, the numbers to the outstanding results and that's why, of course, we will continue to execute our upon creating the new. We'll add different elements to it, we'll have more emphasis on certain activities, but there is absolutely no reason why we should deviate from the current plan we set ourselves out to. And you will see that first on 2017 picture, but of course also when we start articulating, what we are going to do to accelerate creating the new towards 2020. For 2017, we expect the key performance in lifestyle categories to drive top-line expansion, so we continue to see strong growth momentum in our key categories, and we also expect double-digit sales to increase in our key markets. And we -- when we break that down to our categories and let's stop there, our target is to cement on market share leadership position in football, and we will see by the end of the year in the fourth quarter the first positive impacts coming from world championships, the world cup from 2018.

What we're also seeing, which I did speak about a bit before, that how the stadiums of the street trend is further strengthened, that means that how you take sports products and move in to more lifestyle-oriented products. And we are seeing that from the football side also, where you see great football boots or cleats really being redesigned and from an optical standpoint, we sector the same, but with a very different soul and thereby you have a full-on off-the-court shoe. Again, running, it's important that we further strengthen our market share and build that position with a strong focus on the franchise across all price points, and I think this is an important strategic point. Some years ago, I believed, also rightfully so, we were criticized for not being competitive at all price points. This is definitely not the case before, we are extremely strong with the offering across all price points.

And I think you'll see that also moving forward, this is one thing that we have been able to address successfully. We'll continue to expand our women's business as also alluded to in creating the new because it is still a small part of our business in the male business and represents a huge opportunity, not only in terms of revenue, but of curse also profitability. When it comes to training, we'll focus on apparel franchises, and we believe also here we can get further traction with the female athletes. It's key that we'll continue to leverage collaborations like a Karlie Kloss or James Harden. James harden, as you know, is right now the hottest NBA player in the US, and we're probably most -- also won the award of being NBA player of the year. So, a very key athlete carefully that we have under contract. On the asset -- on the Originals, our brand heat continues -- will continue. It's important that we see further roll out of our franchise portfolio, so we expect still a very strong growth in our Originals business. Also, as l said before, because it's very difficult really to segregate Originals from the overall performance business, and we are also seeing a very new evolution, we are seeing a new chapter we call Nostalgia. So we're taking the Boost technology, which is very unique technology, and we bring that to one of our oldest franchises, the unique issue. So we've combining all the new and getting a great franchise on the market. So a lot of interesting, I would say, initiatives and launches within our different categories. So from a category standpoint, we are quite comfortable that we'll see very attractive post-rates from the categories I just spoke through. And if you then flip then coin and get to the regions, you'll see Western Europe, North America and Greater China, we expect all of them will enjoy double-digit sales growth, as we've seen in the previous year. But we are on different positions in the different markets.

Let me just go through them one by one. In Europe, we have a very strong position, and it's important that we really defend and strengthen our leadership position across the board, but also that we recognize that Europe is becoming much more of a one market, and we start driving high levels of process harmonization across the entire region to ensure that we get the scale benefits that we have not always gotten in these territories.

Whereas in North America, we're in a different position. We are very happy with the progress, but we're not happy with the position. So that means we need to ensure the continued momentum, but then also while we invest very heavily in North America, focus on operational efficiency, so the investments that we do in infrastructure and systems and processes and facilities that they will allow us to continue to increase the margin that Robin already spoke about. So the more scale we get, of course, the better return we have to enjoy.

In China, which I use -- Robin's word has been the star of our company, we need to focus on the footwear to complement our leadership in apparel, but also expand our branded retail business. We continue to see strong growth rates in China, and we still have high expectations for China also in 2017.

For Latin America, we're seeing a different picture, and this is, I would say, almost irrespective of which company or industry, we continue to see ongoing macroeconomic uncertainties, whether it's the economic crisis in Brazil or also challenges around currencies in other countries across the board. Despite that, we do believe that we'll have high single-digit sales growth. It's clear that we need to also to adjust the structure in our Brazilian business to the actual size through the high level of economic crisis that Brazil has experienced in the last four years. Clearly, our financial results in Brazil are not satisfactory, and we are taking the appropriate actions to ensure that we have infrastructure matching the top-line also for the future. So you can see we're looking upon different dimensions, and we take and put the dimension on the job, then the outlook brings us to a sales rate increase of approximately of 11% to 13% in currency-neutral terms, a gross margin increase of approximately 50 basis points to a level of 49.1% and operating margin to grow between 60 and 80 basis points to a level of 8.3% to 8.5%, which will give us -- will be a substantial step in the right direction. The consequence of that is that the net income from continued operations will continue to grow at a rate between 18% and 20% and that means in real money between EUR1.2 billion and EUR1.225 billion. So, again, a very attractive growth scenario, not only in the top-line, but particularly in the bottom line where we're starting to see some of the scaling benefits that we should be seeing with the size of the company that we have.

And that brings me to the strategy acceleration, where are we and what are the key messages we want to bring across today without going to a greater level of detail because we want to make certain that we spent the day next week with you and try to answer your questions in appropriate way.

As I said before, creating the new is the foundation of our strategy, and of course, it's built around open source, cities and speed and one very important element, our culture in the organization, because it's this one thing that drives different performance in organization is you get aligned, very performance-oriented culture.

And let me just spend a couple of minutes on that, but before I go there, the belief we have in our company is the belief we're also transmitting to our constituencies is through sport, we have the power to change life. We actually have a meaningful belief that people relate to and makes us meaningful with our consumers, but also makes us a very meaningful and attractive employer of choice that allows us to hire the right caliber and the right competence into our company, which brings me on to our culture of the Company.

As I said before the culture, in my opinion and also the opinion of our management team, is really to make a huge difference when it comes to performance. We have an extremely strong team, but it doesn't mean that we can't do better, and I think that one of the challenges or one of the opportunities we have ahead of us is to unify the culture and get everybody to pull even more in the right direction.

And let me speak about five different elements that are important for us. When it comes to diversity, we've done a very good job as it relates to the past quarter. We're an extremely international organization at all levels of the organization that reflect the businesses that we have in our countries, that we can be very proud of. We have not done a similar good job when it comes to be female leadership. We are an organization where approximately 50% of all our employees are female; of our top 300 people, approximately 17% is female. That's where you can see there is room for improvement, that we'll work diligently on moving forward because we also believe that among other areas where we can be much better, it is in the entire woman's part and of course, with a higher ratio of females at the top of the house, that should help us.

Improved talent management. We received approximately 1 million application in the past year. And if you correlate our revenue growth to application growth, that would mean that we'll get between 1.1 and 1.2 million applications for 2017. So, you can see it is not the problem of getting the right people on board, but we need to do a much better job in our talent management, ensure that we have the right turn at the right place with the right competence and be more strict and also be more rewarding early on in a career so we can get the best out of our people. This is up to the senior management of the organization to really ensure that we have the right capabilities in the organization. Moving the company with a speed we're doing right now, it is changing tremendously over two to three-year timeframe. That is why it's paramount that we really take this in our own hand and ensure that we don't hire externally for key positions, but we predominantly, not exclusively, but predominantly can deliver upon the requirements we have within.

And in that context, it's important that we have a more outspoken performance culture. And what I mean by that, I mean, by celebrating success, we should celebrate success, but they have to courage to speak about problems and performance that is not satisfactory and deal with it in terms of promotion, in terms of salary and also in terms of leaving the company. We will not be a hire and fire company, but we will be a company that will overly reward people that does an overly good job. I think that is in interest of the company that's in interest of -- in the interest of our employees and that is also in the interest of our shareholders, which brings me to the next point, we will imminently be implementing an equity-based compensation system for the 300 top leaders in our company, and that means that the share price evolution over time will be the currency that we want people. So people will hold shares in our company and of course, with the increase in share price, that we would like to see assuming it corresponds to our results, we will have -- people will make money when the company does well. I want to stress, this is an LTI program. This is not about what the number is in 2017 or 2018. You will get allocations in one year and you have a holding period. Because we want to make sure that all our leaders are equally incentivized to deliver upon the long-term ambition of the company, the 2020 SAR in the short-term, we're very confident that this will be a well appreciated program, not only within our organization, but hopefully also among all of you who have dialed in today.

And then, we are in the process of refining our leadership structure, making clear to whom -- to all our -- in our company, who the key leaders are and communicating in a very direct and uncomplicated matter with these. Approximately two months ago, we defined our top 20 leaders in our company. By the end of this month, we will define and announce the next top 100, and we will ensure that those leaders will be very tightly integrating the way we run the company. They understand the processes that we have, and we ensure consistent execution on what we're doing to ensure that we get the scale benefits, we can get and don't act as a company with 10 subsidiaries where we reduce our size from big to small. We've also developed what we call an acceleration plan because we believe that there are things that offer more opportunity for us and will generate more value for the company moving forward.

And I'll speak very briefly to each of the four elements today, but of course, at greater level with my colleagues next week. I'll start with the portfolio. The overriding message is that every member of the portfolio has to contribute to the profit of the company. It is not acceptable if a brand or legal entity or country does not deliver to the overall profitability of the company. That does not mean that each member has to deliver the same amount or the same percentage, but it means that there is a clear expectation that everybody will have an active contribution to the positive number of our company. We also see when it comes to growth of North America, Western Europe and China will continue to contribute above average to new ambition, also when it comes to the actual contribution of profit.

In North America, we are on the right track, but we only have two years behind us, and we have a lot of years ahead of us. So we'll continue to invest, particularly in people, infrastructure, marketing, that allow -- that we can develop our business strongly moving forward. We also need to step up our representation digital and key accounts. We're seeing very, very positive feedback on key accounts like Foot Locker and DICK's sporting goods, but we're still fairly early on. We did approximately EUR3.5 billion in the US last year. The market represents a much bigger opportunity, but we need to do it in the right way and in a sustainable way. We should not shortcut the progress in North America for the sake of short-term margin, but we should, along the lines, the revenue out lines, look for sustainable improvement in our margin, while we see a sustainable improvement in our market share and our NPA score.

One adidas, this means that we're building a scalable and surprise. We need to ensure that across the board that we improve our effectiveness and increase our efficiency, and we'll do that through standardization and harmonization of processes, whether its definition our processes, its systems, its use of shared services of further automization generalization. We believe this represents a very large opportunity for us as a company, building a scalable enterprise, but it requires a very high level on focus of execution. This is a long-term transformation of our company to ensure that we start acting as a global company and not optimizing locally. I'm certain that this will be a very exciting project, but it's also one that will take time, but at the same time deliver scalable and sustainable benefits to our company, which brings me to the last part of our acceleration plan, which is digital.

We are convinced as a management team that digital will revolutionize our industry. It will also revolutionize our company, whether it's in the way we design products, manufacture products, deliver products or engage with consumers. We spoke about speed manufacturing, we spoke about 3D creation and product production. But it also is -- it is the aggressive drive of e-commerce to ensure that we capture what the consumer has about and the way we engage with consumers. This is, as you probably will know, margin accretive, so the quicker we can grow our digital business, the more we'll grow our overall margin. You saw, we enjoyed 59% growth last year, bringing it to EUR1 billion, and that is only the early days. At the same time we also see the opportunity to connect our digital activities with many of our key partners. So it's not going to be an either-way scenario.

Let me just go briefly to the portfolio. What is our plan? We have announced the sale of TaylorMade and that process is still ongoing, and we'll report when that transaction has been completed. We have announced as of today that we'll separate ourselves from our CCM business, which is our hockey business based out of Canada, and we are looking for a divestiture.

Our Five Ten business, which is a smaller business on outdoor, we will take that, close it down, integrate the Five Ten brand back into our adidas outdoor, so it will be a similar sub-brand as a Stan Smith. The adidas golf business that today is an integral part of TaylorMade, we will separate TaylorMade and integrate back into the adidas core organization.

And on Reebok, we have, as we defined, a turnaround plan that we're executing upon. That means right now, of the EUR19 billion revenue, we have EUR3 billion that are, so to speak, in the workshop. We believe that we have tremendous opportunities in working on these five assets in different directions to create additional value for shareholders and for the company overall by ensuring they get the appropriate attention or (inaudible).

Than brings us to where we see the new targets compared to the initial ambition, and I need to be now very specific. We've guided very clearly on 2017, what we are showing on our updated financial ambition is looked upon in the same context as our initial ambitions, so within the context of 2015 to 2020. And I'll take you through the different line items. What we originally guided on when this was announced, creating the new strategy was a currency-neutral growth of high single-digit for the period 2015 to 2020. We are now guiding a growth rate between 10 and 12 percent points -- 10% and 12% for the period 2015 to 2020. We guided originally for the same period and net income growth of 15% on (inaudible). Now, we are guiding a range between 20 and 22, and we guided e-commerce business to the tune of EUR2 billion. Now, we are guiding to the tune of EUR4 billion.

Let me now go through the implied numbers. So if you run through and said if you imply -- what are the implied absolute number, if you take our initial ambition. With a high single-digit, you will get to a net sale of approximately EUR22 billion and you will get to an implied margin of approximately EUR9.9 billion. In the new ambition, you will get it to a net sale between 25 and 27. And 25 and 27, these numbers do not include CCM nor do they include TaylorMade.

The reason why the severance is of course that we expect currency losses throughout this period of time, that we cannot predict at this stage, and we expect an implied margin of 11%. But I want to go back and say the key performance indicator are our sales growth, the 10 to 12 versus high single-digit, the net income 20 to 22 versus 15 before, I did articulate what we believe are the implied consequences that we're doing, which are the 22 before in revenue terms and now 25 to 27 and the operating margin of 9.9 to 11.

E-commerce, of course, is an absolute number we are striving towards, and it's in the range of 4. Whether it's 4.1 or 3.9 is not really important. But it is the 4 we're striving for, because we believe it will make a substantial difference to our business. The profitability we have in the way we engage with consumers.

That gets me to the end of the presentation and subsequent to that, of course, we'll have (inaudible) take your questions and maybe answer them.

Summary, we are in a highly effective industry, we are in a growth industry which you will be very fortune about. Creating the new is the right strategy, where using that as a foundation and accelerating the execution of creating a new and putting specific emphasis on certain areas. We believe we achieved exceptional results in 2016, and we expect strong top and bottom line growth in 2017 with bottom line growth of approximately 18% to 20%, which is, I would say, leading our industry. And we plan to accelerate to grow revenues and profit even faster than initially projected.

That is what we presented. We'd be happy to take your questions, but of course, we do want to also leave a lot of feature for next week, so forgive us if we would push some of the questions or maybe answer them shorter than that might be to your liking. Sebastian?

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Sebastian Steffen, adidas AG - VP of IR [6]

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Thanks very much. Tracy, we're now ready for the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) John Guy, MainFirst.

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John Guy, MainFirst - Analyst [2]

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And Robin, I wish you all the best for the future, and welcome to Harm. Maybe if I could start with digital, please. Kasper, you've doubled the initial target into EUR4 billion. If we think about the richest gross margin distribution channel for you, it probably is digital with a gross margin of an excess of 60%. So when you're guiding to an 11% operating margin for 2020, how much incremental or I guess extra gross margin are you effectively reinvesting into the business because the EUR3 billion target on my estimates would drive roughly 90 basis points of incremental EBIT margin, so EUR4 billion, you could be looking at 12% to 13% of EBIT margin. So maybe you could just give us an idea of how much you'll have to reinvest in the business to drive those top-line expectations? And then, maybe just around price mix opportunities versus growth. You've guided in 2017 to a gross margin of up to 50 basis points, but if we think about the higher full price sell-through, which is probably running at close to 50% now, the higher evolution of the e-commerce sales and of course, the unhedged position on Russian ruble and Argentine peso, et cetera, that tailwind running through into 2017. Again, you being a little bit conservative. Thank you.

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Kasper Rorsted, adidas AG - CEO [3]

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So let me just give you some details, but of course, not all. It's clear that the dramatic expansion that we're expecting in e-commerce, those also require substantial more investments in systems, in infrastructure and the way we run the business. So it has a different OpEx profile. So not only it does have a different OpEx profile, but it has substantially different CapEx profile. We need to build new warehouses, we need to have different systems, and we're on the process of doing that. So we are -- it's going to be -- I'm not saying a flush because (inaudible), of course, there is no reason doing it, but it does require substantially higher CapEx, and then we've seen before, and that's really where I'll leave it. Right now, we are guiding EUR1.1 billion CapEx expense in 2017. So you can see we are investing very heavily to ensure that we can actually deliver upon consumer expectation, but of course, it does have an accretive impact for us, but it does carry -- fund some costs that we don't have in the system today because we have a different business model. That's pretty much that I want to leave at that because I don't want to go down and reveal something further. I can't comment on your model (inaudible).

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Robin Stalker, adidas AG - CFO [4]

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And John, the question about gross margin development and price mix, yes, we are very confident that we are still increasing the amount of our business that we're getting at full price. There's still a long way to go, however, and don't forget also that despite the tailwind of the unhedged portion of the ruble and the Argentine peso, as you've mentioned, we've still got for the total year 2017 an inferior hedge rate compared to 2016. It's not as bad as obviously we had from 2016 over 2015, but we're still a few points behind that and that will also put pressure on the gross margins.

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John Guy, MainFirst - Analyst [5]

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Thanks, Robin. So just one very quick follow-up. Kasper, you mentioned just at the end with regards to the EUR25 billion to EUR27 billion turnover target that excluded TaylorMade and CCM Hockey, and you also talked around some unforeseen FX, which I appreciate because when I was looking at my calculations on that 10% to 12% growth, you should be getting around EUR27.9 billion to EUR30.5 billion. So are you basically factoring in roughly 2% negative FX a year just to be on the safe side? I mean, the actual shortfall of around EUR2.5 billion basically would take out the TaylorMade elements, CCM and also Reebok, so I'm just wondering whether or not I'm on the right track or thinking about something different?

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Robin Stalker, adidas AG - CFO [6]

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They're not far away. Basically, what we said is it's completely unpredictable four years on. And if we build a model and when we look back, it everything is reported. And we thought -- if we then say everything moving forward, we have no currency loss, we don't believe that there will not be a currency loss. So we've made a call, which is very similar to what you're looking for. It's very much a management call and say what do we think is a realistic number looking upon history and some parts and that gets us to that range. I think the most important part was we driving the EPS at the primary range, but we wanted to convert the EPS into a meaningful revenue figure. And that was why we give this range, so that's where it is, but I just want to stress for us, it's more important to drive the EPS. But of course, in the context of driving markets, we are not going to drive EPS up and then lose market share. So getting the balance right and that gets us to that 25 to 27 number. Whatever the currency will that be, we'll always smile in 2020.

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Operator [7]

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Antoine Belge, HSBC.

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Antoine Belge, HSBC - Analyst [8]

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It's Antoine Belge, HSBC. Just three questions, but I will only do two this time. The first is regarding your marketing investment, and if I remember correctly in the previous plan, I think the first two years for basically 2015 and 2016 were supposed to be seeing a sort of dilution on margin from marketing and then some 2017, some kind of leverage on our marketing, and I think you've announced your willingness to be sustaining the growth in the US market, also the development of e-commerce, which may require some investments. Could you maybe guide towards how the marketing to sales ratio is supposed to be evolving from 2017? And my second question relates to the US markets and have you done some analysis of what could be the consequence of, on the one hand, the implementation of some kind of bold attacks and then maybe on the positive side, if the tax rate was going to be declining in the US? Thank you.

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Kasper Rorsted, adidas AG - CEO [9]

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I think this is -- I'll answer that latter and then Robin will answer the first. Of course, we've done considerations, but if you start having text barriers, it will hit the entire industry. If you start having different tax breaks, you can say it might benefit some of our competitors that are paying the primary tax rates in the US, but also I would say we've got high levels of consumer spends. So we've looked upon it, we have not model it, because I believe that the current planning or the current outlook for the US regarding those two scenarios are so uncertain at this stage that it makes very good sense for us actually to model it. I think there could be an upside should you have tax cut at both levels, even at individual level, but also at corporate level, because corporate level eventually will get into the market. On borders, we have not done it because everybody will be in the same boat. Robin?

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Robin Stalker, adidas AG - CFO [10]

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So, Antoine, that's correct, we said that we will continue to invest heavily in marketing, we would believe that that's also one of the reasons why we're being so successful at the moment in America, particularly. But actually, what's happened in 2016, because the businesses has grown so much faster than initially anticipated, the actual percentage of marketing as a percent of sales is actually come down somewhat and that level we should be able to maintain. Maybe it'll be a little bit less than in 2017, but don't be concerned, we continue to do strongly in marketing, we have to continue to grow up. We've guided also last year also I think to the change in where we are putting the weighting on our marketing spend to get more of our total spend into the activation of it and therefore somewhat less than what we've previously had 50% of our marketing spend being on sports marketing to have that somewhat under 50% as we go through towards 2020.

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Antoine Belge, HSBC - Analyst [11]

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Maybe just from a qualitative, some point regarding marketing related to the sort of a step-up in digital, what would be the share of that budget dedicated to digital and what could it be by 2020 versus today?

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Kasper Rorsted, adidas AG - CEO [12]

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Good question, Antoine, but I mean, we don't go into that detail. But what you can definitely take from all of the comments we've had over the last few quarters from our cash percent today as well, we are investing heavily in digital and over the last various quarters, more and more of our communication with our consumers in any case have been digitally let. So away from the traditional activation, more into the digital platform, that's a common I think not just in our industry.

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Operator [13]

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Simon Irwin, Credit Suisse .

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Sebastian Steffen, adidas AG - VP of IR [14]

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Simon?

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Simon Irwin, Credit Suisse - Analyst [15]

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Sorry, can you hear me now?

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Sebastian Steffen, adidas AG - VP of IR [16]

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Now. we hear you.

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Simon Irwin, Credit Suisse - Analyst [17]

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Okay. Could you just talk a little bit about Originals. Obviously, with lifestyle up 45% and footwear up 21%, there's some very big drivers here. In the past, I think you have given us volume numbers for the key franchises. Can you do that again? And is any thought in your -- that at some stage, you may need to slow down the growth in some of these key franchises in order to not over-expose the? And just a second question, which is on your digital, are you expecting all of this digital to come direct or does that include using other online platforms.

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Sebastian Steffen, adidas AG - VP of IR [18]

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So the EUR4 billion is excepted to come direct. We'll, of course, impale a lot of work throughout platforms, and we've had great experience with working with the partner (inaudible) here in Germany. So we believe that offers an additional opportunity for us of close. We have partners like (inaudible) DICK's Sporting Goods or Foot Locker that all represent opportunities for further really exploring additional space, but the number we put out here was the number that we can directly influence, which is the EUR4 billion, but we believe that the partnering model evolve over time and of course, it is the element of the partner -- partnering model will become more and more important also for our traditional retailers, wholesalers. Robin do you want to discuss comment on some of the originals.

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Robin Stalker, adidas AG - CFO [19]

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Yes, thanks Kasper, you're right Simon at various times over the few years we might have mentioned volume of a particular product or so, but it's not something we do regularly. We're not going to continue volumes today. I think the most important thing to note is that I think we're managing the exposure here to a fashion or lifestyle trend, I think, extremely well as Kasper said in any case the border between what is performance and what is lifestyle is very blurred and for us in terms of the product, that we have been very successful with under the lifestyle branding is including now a new product that is being used also for sport or it can be used for sport. We have in the 17th year about a 50-50 split between what you might know as the iconic originals product and that would be the Stan Smiths and Gazelles and the Superstars whatever -- and that's 50% would be however also, these new franchises of NND and similar products. We think here it's important that we are managing now much better these franchises over the lifestyle -- of the life of those franchises and thereby managing risk in this area.

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Simon Irwin, Credit Suisse - Analyst [20]

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Okay. So Robin could you just explain that, when you talked about 50-50 split between the two. You saying that in last year, the new franchise is made up 50% of sales within say originals or lifestyle?

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Robin Stalker, adidas AG - CFO [21]

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No. I'm not saying that, I'm saying from yes 17 onwards our offering if we have.

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Operator [22]

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Piral Dadhania, RBC Capital Markets.

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Piral Dadhania, RBC Capital Markets - Analyst [23]

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Good afternoon, gentlemen. Thank you for taking my questions. If I could just go back to ANP, could you confirm that the corridor as a percentage of sales remains at 13% to 14%. I appreciate you've come out towards the lower end of that corridor in 2016 as a result of the increase in the sales base. But if I think about the market environment and the fact that competitors are performing perhaps not as well as you they expect, could be that they might step up marketing spend. So I'm just curious to understand why you might take the foot off the [GAS] in 2017? That's my first question. And then my second question just relates to your CapEx guidance. Should we expect this level of spend EUR1.1 billion to be the go forward rate from 2018 onwards or is this more of a one-off? Thank you.

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Robin Stalker, adidas AG - CFO [24]

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First question is about the marketing spend up, you're right, we had guided around 13% to 14%, we were definitely come into the lower end of that and I think over the medium term, you should be expecting somewhere more between the 12% and the 13%.

In terms of CapEx, the significant uptick in the CapEx here has a lot to do with our investment in our direct to consumer, Kasper quote out digital previously but also, we have about 2,700 of our own shops and these need to be refurbed in the new formats of our presentation to consumers, such as the wonderful stadium concept we have in our new shop in New York and within that CapEx budget, we have further investments in our systems, IT, but also investments in our infrastructure, in some cases, warehousing, but also here on our headquarter locations and hence, look at Germany, significant investments in new buildings. So over the next year or two, I think you'll still see this around this level and then in the future guidance that you'll have to wait for a future period, but that will depend very much on our best in the retail.

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Operator [25]

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Adrian Rott, Deutsche Bank.

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Adrian Rott, Deutsche Bank - Analyst [26]

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Firstly, one on the limited availability of product that you've called out, I guess, this relates to boost first and foremost, whereas the bottleneck currently is that the supply of raw material from BSF or is it capacity constraints that you and the likes. I'm quite sure you've managed to convince your partners to scale up, but how do you incentivize them and what's the timeline for the boost capacity ramp? And then secondly, one in Russia where you expect double-digit growth in 2017, after 3% in 2016 and a negative exceed rate, I'm just wondering what's the latest from Russia, any anecdotes that point to an inflection that would will be helpful? Thank you.

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Robin Stalker, adidas AG - CFO [27]

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So, let's start with the boost. The capacity constraints appears that we have a great relationship with BSF this consensus and I would argue that before we say in and positive platform drive, I'm happy that we don't have the other platform with respect to take another 18 to 24 months, before we get the full capacity up. But what we are -- we are working towards a moving target, what I mean by that is through every meeting with (inaudible) every quarter. We've asked for more supply, they have helped us give more supply, but we have asked consistently of taking the number up, so it would be wrong to point the finger in the certain direction. Where we can point the finger is that it has been an immensely successful market shake up and that's why the demand continues to grow forward and that's why we are in supply constraint position. So, we believe it's a -- of course, it's not the ideal position, but it's a better position to be in and we have a very strong and very productive relationship with BSF and I can only praise their flexibility. The reason why the interest is, if you ask the question is, because they make more money, that is like anybody would be here to make money and they more sell, they more they make, so I don't think it's more complicated than that.

When it comes to Russia, let's start with the overall company guidance, because I think that is the most important one. On the overall company, we are very confident with the guidance we put out, Russia today equates for approximately 4% of total revenue. In the heydays, it's was more nine to 10, so you can see not only -- it's a very, very big difference between the heydays and now. And when it comes to profitability, Russia has been able to through making its cost base, much more flexible and variable really to adjust to a different market environment and we've seen that through the last two or three years. And as you know, the Russian prices didn't come around yesterday and won't go away tomorrow. So, while it might get charge is depending on how the market situation will evolve in Russia, we don't see that impacting our overall guidance and we actually also pretty convinced the profit contribution, that we should be getting from Russia, we'll be getting -- we might get a different growth profile, but frankly, that is at this stage, particularly to expand upon, you can see that, of course, the Russian currency could further weaken, but you're also seeing a strengthening of the oil price.

So, there is a lot of moving parts, so this is where the current size of Russia. From a revenue standpoint, the stability, we've been able to derive from an earnings standpoint, one of our key concerns for 2017.

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Operator [28]

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Geoff Lowery, Redburn.

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Geoff Lowery, Redburn - Analyst [29]

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A couple of questions around China, please. Can you help us understand the performance of top line, in terms of you and your partners adding space, e-commerce growth, price and volume. How are you managing to sustain these sort of sales numbers. And second, we sort of long been waiting for the China margin to fall and it's another year of stability, despite the growth in the investment, what would be your sort of three year guess estimate margin trajectory for Greater China.

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Robin Stalker, adidas AG - CFO [30]

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You're right, I mean China continues to be extremely strong. The good news right at the start of the transfer is that we seeing nothing that would suggest that is weakening at all I'm the brands that we have are being very well received. I think we've got an extremely solid management in China with a great experience in communicating with the consumer very credibly, there are positive trends for our overall industry was what the government is doing in terms of encouraging healthy living and sport generally that plays into our hands of the skin. That's why you see also significant growth in sports categories such as quote out in my comments, the 22% increase in football, I think we have a solid base of franchise partners. We have over 10,000 modern branded franchise shops in China at the moment I think here we've worked properly better than our competitors with our franchisees and helping them understand how they can be more profitable also in their own franchise stores and one of our key franchises we manage some of the product purchasing and other operational items for them and they can see those areas more profitable than some of their own ones.

At the moment. I can't give any guidance on longer-term operating margin, but I can only repeat that we are very comfortable with operating margin is more sustainable than we had thought. Although at that sort of level. I still believe is still very, very high percentage and I think what I've always guided to as we grow absolutely business and continue to grow absolute business in China. It could well be that the operating margin but same comes down, but it's still that sort of level fundamentally accretive to the Group and helps us improve the overall group operating margin that's our view at the moment.

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Operator [31]

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Andreas Inderst, Macquarie

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Andreas Inderst, Macquarie - Anlayst [32]

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Hello, everyone. I have two questions, the first one on your speed program you made excellent progress in 2016 reaching out 25% speed capability that's actually take better than you initially guided 20%. So, how comps that you have been faster here, what has been the impact on the gross margin actually from the full price sales and if the 50% target to reach 50% of sales on those Speed program by 2020 is that still a valid target or could we reached at the earlier? That's my first question. The second one on cash flows, very strong in 2016, well done. Now you will use or reinvest some in CapEx, as you have guided for the next one, two years, but what else on the agenda, but you've given you might get some triple-digit cash inflows from the two or three disposals, maybe you can elaborate on that, what is the plan here? Thank you.

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Robin Stalker, adidas AG - CFO [33]

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Andreas, thank you very much. So in terms of Speedfactory I just need to a correct cover of the numbers. I can confirm that we are still believe it's 50% of our offering that we want to get on this short and lead times of the Speed programs and it is not 25% -- so there is 25% of what we are offering at the moment, what we expecting is 20% uplift on our full price sell-through. We haven't articulated exactly how much of our progress is on full price sell-through at the moment, but clearly reported as it's improving. I can't give you a specific breakdown of what that has had as an impact on the gross margin, but clearly it was a positive, and that's one of the reasons that we've been able to compensate for the negatives on the FX. So, good news on the Speed but I think the details we've shared with you.

In terms of cash generation, yes, we've been able to generate good cash some time now and had to reconfirm we are not expecting to do anything with this cash in terms of acquisitions or anything like that we believe that we have a good portfolio, Kasper given more detail about the portfolio today. What we have done however, as we have internally increased our dividend payout and we put focus on shareholder return program completing also in the last few months of the third tranche of our share buyback program and there is still some open amounts that should run choose in the future to differ the function.

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Operator [34]

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Cedric Lecasble, Raymond James.

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Cedric Lecasble, Raymond James. - Analyst [35]

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Actually I had questions also on Speed, if I could follow-up, could you tell us what exactly you can do today and how much, what should we expect from your two factories in Germany and Atlanta by 2020? What would be the ramp up phase and what products would go soon in these factories, would they be dedicated to e-commerce or to some as a usage? That would be very helpful, I imagine that you will give better more at the Investor Day next week, so I will only ask you this one.

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Robin Stalker, adidas AG - CFO [36]

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So, we'll give you much more next week, because we believe that this actually does require, greater level of detail that we feel comfortable, giving on the phone, but we'll be happy to answer to a certain level of detail of course not to the level that you asked, we'll elaborate next week, if that's okay.

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Sebastian Steffen, adidas AG - VP of IR [37]

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Tracy we have time for one last question please.

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Operator [38]

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Jurgen Kolb, Kepler Cheuvreux.

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Jurgen Kolb, Kepler Cheuvreux - Analyst [39]

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Thanks very much. Lucky me. Thank you very much, two questions then coming back on the CapEx line. Again, Robin, you mentioned that in this CapEx -- CapEx of EUR1.1 billion, there is also a portion for the headquarter investment, I guess, that's pretty much a one-off. So could you please give us an indication how much in this EUR1.1 billion is reserved for the headquarter expansion? And then on a more performance category, Kasper you mentioned that in some categories, you obviously can still do better in the Performance category, I was wondering if you could maybe elaborate a little bit on the footwear category in here, not so much on the apparel side, but more on the footwear side. You said that you re-gained market leadership in the footwear overall, I guess that is supported by the apparel line maybe a word on how you've seen the trends in 2016 on the footwear side and then also where you see that trending maybe going forward? Thank you.

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Robin Stalker, adidas AG - CFO [40]

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Yes, we're talking about, around turn of it in being influence of the headquarter improvements here. But there is a period as long that just haven't had a little bit in 2016. We've got more in 2017, but also some sort of figure in the triple-digit millions in 2018 as well.

So on the footwear side its particular stadium to the Street concept that we do have different iterations of the different [fleets] and of course very different price points, but a very, very clear in certain hierarchy. There is no doubt, that the feedback we are getting both from consumers, but also our key retailers, that we have the leading design and also functionality in our fleets and we see that over and over again, which we are extremely happy about. And you can also see, around (inaudible) that, look what we do to is a different business model, which I find is quite interesting and you can then say it doesn't have an impact on market share this stage, but it's called glitch where it basically had a subscription on a different up on our football. So you can make it looked differently to make a subscription and over time, you get the football fleet to look different. So it is a concept stadium to street with different price points, different functionality and really I think we have the hottest products in this stage, so we are very happy with what we have with the overall football franchise, which is really we call -- of the DNA of our Company but we would be able to speak in further detail next week and also show you some of the product that we have -- not those that are coming but we believe we have a very strong lineup, not only in the store, but also for the future store that's coming. With us I like to thank everybody for the questions today and I'll hand back to Sebastian.

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Sebastian Steffen, adidas AG - VP of IR [41]

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Yes, thanks very much Kasper, thanks very much Robin. This completes our conference call for today. Thanks very much also to all of you for joining us today. As we've said, we are very much looking forward to having as many of you as possible here heard so next week for our Investor Day, those of you who accepted our invitation and signed up should have already received all the information on the logistics and the agenda. If you have any questions, be it on the Investor Day or one of the releases today or on any other topic I guess you know how to track us down and please don't hesitate to reach out to [Christian] myself or any other Member of the Investor Relations team. That's it for today. Have a great day. See you next week and bye-bye.

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Operator [42]

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This concludes today's call. Thank you for your participation, you may now disconnect.