Working Capital Management to Improve Balance Sheet
Operating working capital management is a major focus of
our efforts to improve the Group’s balance sheet (see Internal
Group Management System). Our goal is to reduce operating
working capital as a percentage of net sales to 25% or
lower in 2007. Inventory management in particular will be an
important mechanism for the realization of further improvements.
Optimizing inventory levels for fast replenishment
and rigorous control of inventory ageing are the priorities for
our Working Capital Task Force in 2007. We will also look to
extract further improvement in accounts receivable, improving
collection efforts and optimizing payment terms with our
suppliers to best manage our accounts payable.
Investment Level Between € 300 Million and € 400 Million
In 2007, investments in tangible and intangible assets of
between € 300 million and € 400 million within the adidas
Group will be used primarily for own-retail expansion at
brand adidas as well as the increased deployment of SAP and
other IT systems in major subsidiaries within the Group. In
emerging markets, own-retail expansion of the Reebok brand
will also begin to play a more significant role. Expenditure per
brand will be roughly in line with our sales split, while some
capital expenditure will be related to the further expansion
at adidas Group headquarters in Herzogenaurach, Germany.
The most important factors in determining the exact level
and timing of the investment will be the rate at which we are
able to successfully secure retail locations and integrate new
SAP systems within existing applications. All our investments
will be financed through cash generated in our operating
business.
Free Cash Flow to Drive Reductions in Net Borrowings
We intend to further reduce our net borrowings in 2007 to
below € 2 billion through continued strong free cash flow generation
and tight working capital management. At the beginning
of 2006, our net borrowings position increased significantly
as a result of our acquisition of Reebok International
Ltd. (USA). In 2007, we will generate at least € 200 million to
€ 300 million in free cash flow, and we see the potential to
increase this level in subsequent years. Further, we are well
on track to achieving our medium-term target of financial
leverage below 50%. Due to the strong cash generation from
our operating activities, which enables us to fully meet our
financing requirements, we do not plan any significant financing
initiatives in 2007.
Dividend Payout Increases 29%
Although debt reduction continues to be a priority, we are
committed to maintaining the Group’s recommended long-term,
earnings-linked dividend payout ratio corridor of
between 15 and 25% of net income. At our Annual General
Meeting on May 10, 2007, we intend to propose a dividend
of € 0.42 per share for the 2006 financial year. As a result,
the dividend payout will increase 29% to € 85 million (2005:
€ 66 million), outpacing earnings growth for the year. This
represents a payout ratio of 18% (2005: 17%) and shows our
confidence in the Group’s future business performance.
Medium-Term Revenue Synergies from Reebok Integration
We have an ambitious target to generate at least € 500 million
of incremental revenue by 2009 related to the Reebok integration
through specific initiatives that include:
» Branded apparel: We expect to deliver € 100 million from leveraging adidas’ industry-leading branded apparel know-how to strengthen and expand Reebok’s branded apparel efforts.
» Licensed products: At brand adidas, we expect to generate € 100 million of additional sales in licensed products. By transferring the NBA contract to adidas we can further exploit this exclusive relationship more effectively, particularly outside of North America. Also, further opportunities exist for other adidas licensed product particularly in North America from utilizing Reebok’s on-field sales and production capabilities.
» Regional initiatives: We expect € 100 million of incremental revenue synergies from greater regional traction in Europe and Asia. This will result from tighter coordination of Reebok product category initiatives in underdeveloped markets with the strong adidas infrastructure.
» Distributor buyouts: We project € 200 million in incremental sales synergies through exercising more control over the Reebok brand around the globe, particularly in high growth markets in Asia and Emerging Europe. This will be achieved by buying out distributor and joint venture partners.
Our goal is to deliver these synergies in the following timeline: € 100 million in 2007, € 250 million in 2008 and € 500 million in 2009. The costs associated with achieving these synergies are minimal. With the exception of distributor buyouts, which will be classified as investments versus operating expenses, we currently estimate one-time expenses associated with all revenue synergies to average between € 15 million and € 25 million annually between 2007 and 2009.
