Annual Report 2005

Interview with Herbert Hainer

Mr. Hainer, 2005 was a busy and exciting year for adidas. What led you to choose the title "scoring on all fields" for the annual report?
Yes, it certainly has been a great year. The acquisition of Reebok and the sale of Salomon clearly generated a lot of attention for us, and we also completed an impressive turnaround in our business in North America - a top strategic priority since 2003. But despite all of the changes at adidas this year, we remained focused and delivered, once again, record financial results, and that's what I think this annual report's title really highlights. Our brands are the strongest they've been in years, and when I look to the future I see tremendous opportunities to develop and strengthen them even more.

The Reebok acquisition really caught the public's attention in 2005. What was your motivation to do the deal and where do you see the greatest opportunities?
The Reebok acquisition was a once-in-a-lifetime opportunity to bring together two companies whose brand positioning and products really complement one another. adidas and Reebok speak to distinct consumer groups, and I truly believe that all of our brands are innovative, exciting and unique. Together, we have a wider range of products and a stronger presence across teams, athletes, events and leagues. We now hold the number one or number two position in every market we service, which gives us a much more competitive platform.

You also sold your Salomon business segment in 2005. Why now, and what did you learn from this investment?
Selling Salomon was a decision we reached after a lot of thought and careful consideration of industry trends. Salomon has a great family of brands, which we developed and shaped, and which we believe still have excellent potential. But Salomon's sales are largely generated in the winter sports segment and require extensive own production, neither of which are our core competencies. Furthermore, when we looked at the dynamics of the segment we saw that it would be very difficult to meet the profitability levels we expect in the Group.

We learned a lot over the last eight years, about what to do and not to do when it comes to acquiring companies. What we could have done better and are focused on doing with Reebok is more hands-on involvement from top management both in establishing the right foundation for financial success and in troubleshooting as appropriate. Better integration of people between organizations is also a high priority.

Your performance in North America improved significantly in 2005. What are the main reasons for your turnaround and is it sustainable?
North America is a crucial market for adidas and for the sports footwear and apparel sector overall. Our turnaround there came as a result of hard work – getting the right people in place, making profitability our most important performance metric, improving the product mix and enhancing our communications to better position the adidas brand. We also understand the sales channels in North America much better now. Historically, our business was always driven by a few outstanding products and skewed towards one channel of distribution. Now we’re growing across all product categories and all channels and we’ve deepened our knowledge of what works and what does not work with retailers. For that reason, I believe the improvements are sustainable if we continue to stay focused.

In 2005, you became the market leader in Japan. How did you do it?
Japan is the second largest sporting goods market in the world, so having a strong presence there is very important to us. Since we took over distribution in Japan seven years ago, our goal was always to become the market leader. Our strategy was simple: make the brand desirable with a clear focus on performance, bring top-quality products to a demanding market, and deliver the best all-around service in the industry. We feel the success we’re enjoying in Japan can be replicated in other Asian markets, notably Korea and China, and we are intent on maximizing all the growth opportunities this region presents.

What about your golf segment? TaylorMade-adidas Golf delivered its best performance in North America in three years, but profitability declined somewhat. How do you explain this performance, and do you expect the golf segment to be an integral part of the adidas Group’s business going forward?
TaylorMade-adidas Golf had a great 2005, with our best performance coming from North America. Our industry-leading product pipeline, including the r7® quad driver, rac™ irons and ClimaCool®, helped us to translate innovations into market share gains and sales growth of 21%. However, it is also true that profitability for the segment was down in 2005, primarily due to costs associated with the buy-out of our golf ball manufacturing contract with Dunlop Slazenger. We have since made the strategic decision to move a large portion of this production to Asia, which is much more cost-efficient. TaylorMade-adidas Golf is a core brand, and we expect continued growth in sales and an impressive profitability increase this year.

The World Cup is coming, what are your expectations for the German economy and the adidas brand?
Well, to put it simply: Even our marketing guys couldn’t have come up with any better scenario. Football is our lifeblood, and Germany is our home market, so the stars are certainly aligned for us to have a very special year. The tournament will capture the attention of the entire world – a cumulative total of over 38 billion viewers are expected to watch during June and July, and they will be seeing adidas everywhere. We expect that the World Cup will help us drive football footwear, apparel and equipment sales up around 20%, allowing us to generate over € 1 billion in football revenues for the first time ever.

After a slow start in 2005, you delivered a spectacular Q4 performance in Europe with revenues up 17%, which was heavily influenced by sales of your first World Cup products. Are you concerned about your growth opportunities in Europe after the World Cup?
The World Cup is only one factor in what’s going to drive our growth in Europe moving forward. Europe’s retail sector is going to rebound – the question isn’t if but when this will happen. And our involvement around the World Cup has allowed us to acquire valuable shelf space, which will continue to pay off for adidas long after the tournament finishes. I see other growth areas such as the running segment, where we are clearly leading the market in terms of innovation and are now focused on further commercializing this strength in functional running products. Also, the women’s athletic apparel business will be a future growth driver in the region. Europe is a tough market, but I am confident that the marketing and sales improvements we are executing will have a lasting effect.

You delivered excellent top- and bottom-line performance in 2005. What are your expectations for 2006?
In 2006, our Group will approach the € 10 billion revenue mark for the first time ever, with all regions contri buting to our revenue increase. You’ll see the most growth at adidas in 2006, but TaylorMade-adidas Golf will deliver solid results and we will also initiate a much needed turnaround for the Reebok brand in North America. As a result, we expect earnings will grow at double-digit rates for the sixth year in a row.

Looking out beyond 2006 now, adidas has been named the Official Sportswear Partner to the 2008 Olympics in Beijing. What will this mean for you?
I am convinced that China will make the Beijing Games in 2008 the biggest and best-run Olympics ever. And, just like this year’s World Cup, adidas will be at the center of it all – in 2008, but also every day in the run-up to the event. The Olympics will be an important milestone in the shaping of China’s future role on the world stage. The Games will also help in the development of our brand identity and sales momentum in Asia, and will be instrumental to achieving our sales target of € 1 billion in China by 2010.

What do you see as the critical factors to achieving the ambitious medium-term targets you have already announced for the combined Group?
In the medium term, we expect to achieve mid- to high-single-digit sales growth each year, a gross margin of 46 to 48%, an operating margin of 11% and regularly deliver double-digit earnings growth. This will come on the back of an energized and efficient integration of Reebok, the success of our brands and products, and our continued focus on efficiencies and cost savings.

What is your biggest challenge going forward?
We work in one of the world’s most competitive industries. We have to continuously improve our game, and that means staying ahead of ever-changing consumer tastes and matching our products and brand identities accordingly. To this end, it is critical that we integrate Reebok successfully and capitalize on the opportunities this acquisition offers.

What is your vision of the sporting goods market five years from now?
I think that consumers will be presented with more and more choices as far as what and how they buy, which increases the need for adidas to set itself apart from the pack. In our products, you will see greater focus on customization, “intelligent” solutions and cutting-edge design. I think sport – whether it be the high-level competition of World Cup tournaments and Olympic Games or just the increased attention to fitness in all our lives – will be even more important than it is today. And I know for certain that the adidas Group will be there, stronger than ever, and ready to meet and exceed consumer needs and expectations.

Mr. Hainer, thank you for this interview.

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