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Edited Transcript of AMEAS.HE earnings conference call or presentation 27-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Amer Sports Oyj Earnings Call

May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Amer Sports Oyj earnings conference call or presentation Thursday, April 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heikki Takala

Amer Sports Corporation - CEO, President and Member of Executive Board

* Jussi Siitonen

Amer Sports Corporation - CFO and Member of Executive Board

* Päivi Antola

Amer Sports Corporation - Director of Corporate Communications and IR

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Conference Call Participants

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* Adrian Rott

Deutsche Bank AG, Research Division - Research Analyst

* Chiara Battistini

JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail

* Dan F Homan

Citigroup Inc, Research Division - VP

* Kalle Karppinen

Danske Bank Markets Equity Research - Senior Analyst

* Rauli Juva

Nordea Markets, Research Division - Senior Analyst, Consumer Goods and Retail

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Amer Sports Q1 Results. Today, I'm pleased to present Päivi Antola. (Operator Instructions) Speakers, please begin.

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Päivi Antola, Amer Sports Corporation - Director of Corporate Communications and IR [2]

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Thank you very much. So welcome to this first quarter results call for Amer Sports. Together with me in this call, I have Heikki Takala, the President and CEO of the company; and Jussi Siitonen, the CFO. As usual, we'll start with a brief introduction by Heikki and then move on to Q&A. So Heikki, please go ahead.

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [3]

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Good afternoon, and good morning. We are in the context of a slight change in the marketplace. The market is changing in '16. The U.S. wholesale slowed down significantly. And into '17, we see that the wholesale market is still prudent. However, the consumer is active. The consumer-driven transformation is a must for us. And we are accelerating the transformation of our business models. We are investing into the future growth of the company.

In Q1, we had solid results despite the challenging market. Net sales were up 2% and driven by good progress. In Apparel, we were up 14%. Own retail, we're up -- was up more than 20%. E-commerce was up more than 40%. China grew double digit. Winter Sports Equipment was up double digits. And our Fitness started to rebound with a 6% growth.

Gross margin was at 45% flat level, which is basically the target over 40% level. We wanted to cement the gross margin. It is down versus year ago due to the less favorable USD hedges and they were especially favorable in Q1 in 2016 and started the -- the favorability started to go away during the quarters 2, 3 and 4 in '16.

EBIT was at EUR 38 million, down versus year ago by EUR 8 million. And we did invest at full speed into the company's transformation, responding and being proactive in light of the rapid change in the marketplace. So again, the investment went into our own retail, e-commerce, soft goods, China and basically changing our organization to be more and more aligned with the changing consumer habits and practices, especially on the shopping side where the consumer is shopping more online and looking for information online before they actually make the purchase.

Free cash flow improved significantly versus a year ago.

So with that, I actually hand over to Jussi for balance sheet.

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Jussi Siitonen, Amer Sports Corporation - CFO and Member of Executive Board [4]

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Thank you, Heikki. Our net debt was up EUR 26 million in Q1 so that share buybacks that we made especially in March, they increased it by EUR 16 million and then paid dividends by EUR 66 million. It was then partly offset by good cash flow, as Heikki mentioned.

Working capital decreased even below last year's level, the biggest driver being receivables, which came down now in EUR 67 million from the year-end. And our capital turnover, which is 12 months trading average, remained unchanged versus year-end. But due to low profitability, our return on capital employed came slightly down this year-end. Balance sheet remained strong. And our typically seasonally higher Q1 net debt to equity was 0.61, slightly better than year ago. Heikki, back to you.

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [5]

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Okay. And then as usual, we move to segment-based breakdown. And first, Outdoor. We had a solid 4% growth in Outdoor, despite a significant decline in Suunto. I'll break that down even a bit more. Market softness in -- especially in the U.S. impacted our growth ambitions in Footwear. We were up 2%. Basically in line with our expectations. We have seen that in the preorders and we see that our sales growth is good. So we are encouraged by that, but we knew going in that the preorders were prudent. Cycling down 6%. Especially, the OEM business there is pressured. The market has a lot of inventory, and we see that the inventory has not yet sold through, but it's starting to look better.

On retail, e-commerce, all-in-all, worked really well, especially for Footwear and Apparel, of course. We see double-digit growth for our Footwear e-commerce and the retail, which means that the consumer demand is there. Apparel was up 14%, driven by Arc'teryx, which had again a very strong quarter, but also Salomon apparel was up for Q1. Winter Sports Equipment, it's a small quarter for us, nevertheless a good 18% growth, showed that our brands are strong and we could enjoy the conditions, which were pretty good. The winter conditions were pretty good globally. Sports Instruments, down by a significant amount, and that seemed to reflect the launch of the pipeline. We started to ship our latest models from Suunto in the last days of Q1. So there was no business impact yet. We started to look for that impact in Q2 and especially Q3, when the full family is relaunched.

Moving on to Ball Sports. That's where we see the U.S. wholesale softness. Net sales down 4%. And clearly, we see that coming from the wholesale. Our own e-commerce direct-to-consumer grew at high, high double-digit level, but was unable to offset the prudent inventory taking in the wholesale segment. Also, there is an upcoming change. It's a baseball regulations, and there's some destocking ahead of that; however, that's not significant. EBIT down slightly versus a year ago.

Fitness, we had anticipated growth over the past couple of quarters. We had now the pipeline well in place. Product introductions have been done, and the marketplace is responding very favorably. And we are now in full execution. We had a good 6% growth for the quarter, and we anticipate the improving performance going forward and that will then again in turn drive profitability.

If we then recap a bit what's working, what's not working yet. So looking at the consumer overall. Consumer is active and engaged. We see it in our KPIs. We see that our brands are strong. And we attract more and more consumers. Business to consumer for us was up 27%. E-commerce up 43%, as said already. And we also see that our same-store growth, which is a core indicator of the health of the own retail, same-store growth, 6%, which is strong. Own building blocks are working overall for e-commerce, I mentioned already. Own retail expansion, we continue to roll out new stores during the quarter. And the core fleet is working well as well. China, double-digit growth; Apparel, double-digit growth. So all-in-all, most of our strategic acceleration areas are working well.

I mentioned already the Winter Sports Equipment market, which is now healthier. What's also working is that Precor is showing these early signs of responding to the innovation to our investments. And of course, we're looking at gaining traction in the marketplace. On Suunto, the pipeline is, as said already, more in place for Q2 and Q3. But then look at this business broader, even where there is not and when there is not growth, our shares are strong and we have grown various market share gains. We can read that through the official statistics. For example, in performance tennis, where we continue gaining share month-by-month.

What is not working is the U.S. wholesale market. It's in transformation. There is a lot of softness and prudence is there. And clearly, that's a surprise factor in the sense that the transformation is so quick and the impact is so rapid. We're dealing with that. We're moving faster. And basically, we know what we need to do. But clearly, we see now an adverse impact from the marketplace.

The other area, which is not working is our OpEx versus our own productivity targets. We realize that we need to now wait a bit more and invest faster into the transformation, making sure that we stay ahead of the curve and we are relevant where the consumer shops today. And tomorrow, hence, we continue being in the investment mode. That investment is retail, e-commerce, digital transformation, databases, all of the things we have called out already earlier.

Moving on to the outlook. In '17, our net sales in local currencies are expected to increase from 2016. And EBIT is expected to be at the level of 2016. The rationale, clearly, we see that the growth will be biased towards the second half of the year. It's also based on the preorders we are seeing. And when it comes to the EBIT, we choose to further accelerate our investment into the transformation, into omni-channel and digital to make sure that we deliver our mid- to long-term targets. And we know that these investments have a short-term adverse impact on our profits and profitability, but we see that they are fundamentally important. They are crucial for us to reach our longer-term targets.

So that's the business review, and that's the outlook. And I would like to hand it over for Q&A.

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Päivi Antola, Amer Sports Corporation - Director of Corporate Communications and IR [6]

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Thank you, Heikki. So thank you, Jussi. Now operator, we will be ready for questions from the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Dan Homan from Citi.

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Dan F Homan, Citigroup Inc, Research Division - VP [2]

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A couple from me. First of all, just on the gross margin in terms of the full year, I think you previously you said you expected it to be around flat year-on-year. It sounds like you might expect it to be [mid-year] target of 45% now. Is that correct? Or am I reading too much into it? And then second on the updated guidance and the additional cost investment, it sounds like there's an additional sort of EUR 20 million of costs going into the business. I just want to understand what's changed over the last 11 weeks since your full year results to make you need to put this cost in so suddenly?

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [3]

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Okay. Dan, first, the line was a bit poor. So I need to confirm that the questions came in right. So the first one is -- versus what we -- the way you have understood our gross margin guidance, is there a difference? Basically what we said always is that first, we need to get to a 45%-plus gross margin. That for us is a sustainable level. We say that, that's where we need to safeguard our gross margins. Already last year, we said that the hedges are disproportionately positive in the first part of the year. So they are not at the sustainable level. So we said that we first seek to safeguard gross margin north of 45%. That's what we've got to do. And then we'll seek to mitigate all of the negatives, which are hitting our gross margin. We've done them proactively, including pricing and cost actions. And then over time, the hedge levels, they evaporate, we still stay at 45%-plus and seek to be close to this level. But 45% is kind of the threshold, which we always looked at. The second question was more -- the line was worse. So I guess, you were asking about cost and what we have done over the past 11 weeks to decide what has led us to decide to increase our cost level. And really if that's the question, I'm answering it, and you can then precise if I'm answering the wrong question.

First of all, we've seen that the softness in the marketplace seems to be there to stay for a while. And we see that the wholesale index in the U.S. -- our wholesale index is down almost 10%. So we clearly see softer-than-expected market. It basically encourages us to grow faster to omni-channel, make sure that we engage consumers directly, we are more present, we are more in the omni-channel and that we proactively build that direct-to-consumer linkage even faster than we had in our glidepath. So the basic glidepath did not anticipate such a rapid decline in the U.S. market. And of course, we have now readjusted the U.S. plans over time to make sure that we stay ahead of the curve. At the same time, as we're seeing softness in the U.S., we have, of course, started to accelerate even further in other parts of the world, especially in China. All these investments, all of the actions, they take a bit of time. So you better make the call early enough. And the key here is to stay dynamic and agile, because otherwise, you're basically watching what's happening rather than making things happen. We choose to make things happen.

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Operator [4]

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Our next question comes from the line of Adrian Rott from Deutsche Bank.

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Adrian Rott, Deutsche Bank AG, Research Division - Research Analyst [5]

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Just a follow-up on the -- on OpEx and incremental investments. First, could you maybe just give 1 or 2 examples on -- just on where you invest? Those omni-channel investments, looks like those are Salomon now so increasingly taking a B2C approach, maybe also including stores. Or just 1 or 2, anecdotes would be helpful. And then secondly, you've just mentioned that some of the productivity KPIs were below your targets. So is that a hint at some of the investments that haven't sort of paid back or in the way that you expected, or is that just related to, say, it being below expectation in some parts of the world as you've discussed previously, while costs have been rising a bit? That would be helpful.

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [6]

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Yes. Adrian, thank you. Examples of the investment into omni, if we call it omni, will change in the organization. As we speak, we are putting in place new capabilities across the businesses, across the company, to basically build databases, to build them faster, to bring more consumers into the funnel, to convert the consumers better, investing into digital marketing capabilities and underlying platforms. We're building our own database faster than we were initially planning. We're also concretely opening stores as we speak. So every quarter, we go for this 5, 6, 7 store opening as fast as we can find locations. And then we continue rolling out e-commerce still into brands where e-commerce has not been established yet. So by the end of the year, I expect to have 10, 15 more e-commerce stores opened globally for our different brands. So we're doing that as well. And then, of course, we just operate in the current platform better and better. But the key thing here is a significant organization renewal and transformation to basically prepare ourselves for what we believe the new future model will look like.

Equally, we're still in an investment mode into Suunto and into Precor. So when we decided to accelerate and put our bets into them, of course, we made significant underlying investment. We're starting to see the payback now in Precor, and we see that the building blocks are well in place on Suunto. And as said already, the (inaudible) pipeline is yet to come. So to your then kind of second question is there -- did the top line not come. No, the top line did not come in Q3, Q4 last year. As we said, the top line impact was not as anticipated. But now in Q1, we see it coming from Precor. And of course, going into Q2, Q3, we're expecting that positive impact from Suunto as well. One surprise factor, if you will, I still attribute that to the rapid change in the U.S. wholesale marketplace. But that was -- that's an external thing. We need to now mitigate, and we mitigate in that for these accelerations elsewhere in the portfolio. But the building blocks are very much the same. So it's direct-to-consumer. It is soft goods. It's China. So basically just go faster there.

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Operator [7]

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Our next question comes from the line of Kalle Karppinen from Danske Bank.

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Kalle Karppinen, Danske Bank Markets Equity Research - Senior Analyst [8]

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So coming back to OpEx, can you confirm that your target is still to lower OpEx per sales ratio by 100 basis points over the next 2 years? And second question regarding depreciation. It was up quite notably year-on-year. Can you elaborate on that a little bit? And that's, I think, mostly in gross margin, right?

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Jussi Siitonen, Amer Sports Corporation - CFO and Member of Executive Board [9]

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Yes. Kalle, you see, I can confirm the OpEx efficiency target what we announced after Q4, the 100 basis points by 2018. That's still our target. Then moving this OpEx up, depreciation -- there's is depreciation of what we had, roughly EUR 4 million now in Q1. That's mainly those capitalized development costs that we have done around digital in 2015, 2016. It's there in OpEx. So if you take that out from our OpEx growth, you can see that this kind of (inaudible) OpEx is actually pretty neutral.

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Operator [10]

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Our next question comes from the line of Rauli Juva from Nordea.

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Rauli Juva, Nordea Markets, Research Division - Senior Analyst, Consumer Goods and Retail [11]

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Most of the things were already asked, but just to follow-up to Kalle's question to clarify. So basically, the 100 basis points cost improvement is still into the product cost improvement. And these further acceleration things are not kind of eating anything out of that?

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [12]

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Yes, a bit repeating myself, but exactly. It's still the target including all the acceleration investment what we have in OpEx.

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Operator [13]

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We have a follow-up question registered from the line of Adrian Rott from Deutsche Bank.

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Adrian Rott, Deutsche Bank AG, Research Division - Research Analyst [14]

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After we've [gone] through the OpEx stuff, maybe just a bigger picture question on Salomon. You've mentioned that Salomon was particularly impacted by the U.S. situation, because it's much more dependent on the wholesale. Can you share some numbers or details on how the brand did in other parts of the world? Or if you look at the preorders for the back half of the year, whether there would be some [snippets] that really suggest that we're seeing the low point for Salomon with that just 2% footwear growth?

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [15]

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Yes, Adrian. Sorry, the line is not very good. I don't know why exactly it was breaking. But I think your question was, are we seeing a low point on Salomon and how is the kind of underlying health globally? And basically, I would say that preorders going towards the second half of the year are improving. Our sell-through rates are good. Our own e-commerce and own retail sell-through rates are very strong, so double-digit growth there. We see that there is underlying demand. When you take a lot of price increases, as we have done, you get some commercial issues, you get some customer support issues and especially key promotions, key deals, you may lose them to somebody who is a bit more aggressive on pricing. That's typically temporary in nature, and you just need to kind of hold on and keep going, because you need that structural health in your P&L. The right thing to do is to protect your gross margins and basically price for it. If somebody wants to take short-term advantage on that, then he will take away a few deals from you. That's okay. That happens. I still think that for the long term, we've done right. So then the question being, okay, have you seen the low point? You might need to remember that there are 2 different things here. One is what we ship to the marketplace. And one thing is the consumer demand. The consumer demand is good. Salomon is doing well. And what -- the KPIs we are following indicate that the brand is healthy and continues to be healthy, and I expect the -- these shipments to start improving. Again, the preorders for the fall/winter indicate that we started to grow again a bit faster.

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Operator [16]

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(Operator Instructions) Our next question comes from the line of Chiara Battistini from JPMorgan.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [17]

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I have a couple left, please. First, on the gross margin in the quarter, I was wondering whether you could give us more color in terms of the different drivers of the gross margin, because I think -- if I'm not mistaken, product mix and channel mix and maybe also geographical mix were positive. So I wonder how much FX was actually negative in Q1, please. And then I was wondering, on the Footwear exposure, can you remind us of how much Footwear is in the U.S. and how Footwear outside of the U.S. is performing, please?

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Jussi Siitonen, Amer Sports Corporation - CFO and Member of Executive Board [18]

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Chiara, it's Jussi, here. I'll start with gross margin and then passing to Heikki. So when gross margin in Q1 came down 200, 210 basis points, that's less favorable [hedge] seasonal. Underlying is less favorable, because they are still favorable versus spot rate. The less favorable hedges take some 200 basis points out of this whole change. So you can see that it was predominantly driven by hedge change, whilst, of course, we have more B2C in our portfolio with much higher gross margin that was then improving it. But currency was the main and practically only big driver now in Q1.

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [19]

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Right. And I think the Footwear question, the United States, had approximately 15% to 20% of our Footwear. So approximately 15% to 20% -- say, it's 15% to 20% of Footwear. And I'd say we had significant growth targets. We continue doing well. We gained share there. We're doing fine. And we're gaining fundamentals. But -- and we also know that the sell-through has been good. But I think there is a prudent order taking, which is impacting that. In APAC, in Asia Pacific, from a lower level, we grow double digit. So Footwear is healthy there, China especially. And then EMEA, the -- that's where we're seeing some of the impact of the price increases. We are still at last year's levels, and I would attribute that to basically walking away from a couple of key big promotions where pricing is key and where we have chosen not to go to the price levels needed to get those promotions.

So it's partially our own choice. We needed to make sure that our new pricing is ticking because, otherwise, we cannot hold onto our gross margin target. So we prioritize gross margin health and then we make sure that we start to build a top line on that. Also looking at the pipeline, which is coming out of Footwear, we have very good innovation in running about to hit the marketplace. We have very strong innovation in our core trail running. And of course, if I look at our core hiking, the range is strong and very, very competitive there. And then we have all of the underlying building blocks supporting this expansion with the retail opening, the e-commerce expansion and consumer databases and the likes. So you start to add it all together, I think we have a lot of building blocks in place to, say, reignite profitable growth after the need to intervene on the gross margin, i.e., take significant pricing which we did last year.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [20]

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Understood. And may I just ask on online and the initiatives you are implementing on online, can you give us some tangible examples of where exactly you're doing in terms of online? And how is this OpEx investments and [not] CapEx investments also?

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [21]

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For tangibles, go and see our e-commerce, go and see our engagement models on the Wilson, on Salomon, on Arc'teryx. You see the tangible examples there. So clearly, the KPIs are improving rapidly. The traffic numbers have been driving our kind of share of the online fundamentals, if you will. So they're relatively visible there. And hence, they drive automatically both e-commerce as well as multi-channel, omni-channel demand. And that leads to your brand awareness. It leads to your NPS numbers. It leads to everything related to kind of brand KPIs. Then there's the underlying thing, which is the company database, company cross-brand or cross-portfolio database, our ability to engage with the consumer, with the multi-brand offering. So if you're a runner, if you're a skier, we have the head-to-toe solution. And of course, we use to have things on a brand-by-brand basis over the past year or 2. We have now invested to build that cross-selling capability, which of course emphasizes Amer as a better owner for this portfolio, as we are able to create the cross-portfolio benefit driving initiatives, offerings, which make sense. So they are not forced, but they are actually built with the target consumer in mind. Whether you are a skier, a triathlonist, whether you are a swimmer, diver, whatever, I think we have a unique portfolio for that. And it's our responsibility to make it happen, and that's what we're doing.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [22]

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And if I may, I just have one final question on the Fitness division. Are you done now -- are you done with the large majority of the shipments of the new product launches, or is there more to come in Q2, and therefore, we should expect to see sustained growth in Q2 as well?

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Heikki Takala, Amer Sports Corporation - CEO, President and Member of Executive Board [23]

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No quarterly guidance, but I think here you asked about Fitness, so Precor. No quarterly guidance, but we have rolled out and it's hopefully not a one quarter impact, but it's sustainable reignition or reigniting of the growth. And we see the order books are healthy. We see the geographical expansion. We see that we still need to tailor some of our offering to the needs of China or Japan as also the digital offering. We make in the right language, use the right consumer user face and all of that. So everything rolls in over the coming quarters. Of course, these are the building blocks which then are expected to make the growth sustainable. So of course, we always invest into sustainable profitable growth. We invest into a glidepath space thinking. And we see that there is plenty of upside potential as we continue rolling these things out. So I think we are now encouraged about Precor. It took a bit too long, but now at least we're seeing the signs. They are there. If you look at the pipeline, you look at the product, they are strong. And I think our digital offering is second to none. So one-by-one, we're turning it around.

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Operator [24]

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There are no further questions at this time. So I will hand back to the speakers.

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Päivi Antola, Amer Sports Corporation - Director of Corporate Communications and IR [25]

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If there are no additional questions, then it's time to finish this call. Thank you all for participating, and have a good day.