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adidas-Salomon 1999: Operating profit and income before taxes at record level - Earnings per share improved by 11% - Higher dividend proposed

Net sales above DM 10 billion for the first time

Herzogenaurach, 02/03/2000 - adidas-Salomon increased consolidated net sales in 1999 by 6% to DM 10.5 billion. The Salomon brand reported the highest increase, growing 25%. The Taylor Made brand recorded an increase of 11%, while the adidas brand showed an improvement of 3.5%.

Footwear again largest product division

Footwear showed solid growth in 1999, becoming the largest product division again for adidas-Salomon. Net sales of Footwear reached DM 4.3 billion, up DM 341 million or 8.5% on the previous year. Apparel sales, in contrast, were impacted by changing consumer preferences. Total Apparel sales, at DM 4.3 billion, decreased by 0.5% compared to 1998. As the products of the Salomon and Taylor Made brands are primarily included in the Hardware division, and as both brands also recorded strong sales growth, this division showed a correspondingly strong increase, growing by 15.1% to DM 1.8 billion.

Asia top performer

In terms of regional performance, Asia delivered the highest growth rates. The increase of 70.3% to DM 1.3 billion was partly driven by the first-time inclusion of the sales of adidas Japan. North America managed to grow sales by only 1.9%, after having delivered the highest growth rate the previous year. Product sales under the adidas brand were very strong in the first half of the year but declined in the second half, recording an overall decrease of 1% for the year. Nevertheless, the brand maintained its market share. Sales performance of the Salomon and Taylor Made brands in North America was strong, with Salomon up 21% and Taylor Made showing 11% growth. Growth in Asia, North America and Latin America was sufficient to more than offset a slight decline in sales in Europe. Despite an upward trend over the course of the year, and 10% growth in the fourth quarter, product sales under the adidas brand in Europe experienced a year-over-year decline of just under 4%. In contrast, the Salomon and Taylor Made brands performed very solidly in Europe as well. Taylor Made profited from a positive overall market development, increasing sales by 11%. Salomon achieved excellent growth rates with both summer and winter products, recording an 18% increase in sales for the full year. Gross margin at all-time high Gross profit, with an increase of 10.7%, grew at a much stronger rate than sales. Gross margin improved by 2 percentage points to an all-time high of 43.9%.

Best operating profit in the history of the Group

As a result of the margin improvement, the operating profit rose by 16% to the record level of DM 942 million. Amortization of goodwill has been taken out of the operating profit and is now included in the non-operating result. This change makes the true operating core of the business significantly more visible in the operating result than has been the case in the past. (For comparison purposes, the prior year's result has also been stripped of goodwill amortization.) Advertising and promotional expenses represented 13.5% of net sales (compared to 12.9% in 1998). This development is related to expenses for several additional agreements signed the previous year, which in 1999 drove this expenditure position well beyond the medium-term goal of around 12%. Significant improvement in the financial result Compared to the previous year (minus DM 224 million), the financial result at minus DM 164 million improved significantly in 1999, due to the non-recurrence of special effects that had impacted the previous year.

Income before taxes at record level

The significant improvement of the operating profit and financial result drove income before taxes to a new all-time high. DM 779 million represents an increase of DM 155 million or 25% year-over-year and, additionally, an improvement compared to the record result of 1997. This is the best result the Group has ever achieved.

Earnings per share improved, higher dividend proposed

Net income totaled DM 445 million, representing an increase of DM 45 million or 11%. The significant improvement of income before taxes is not fully reflected in net income due to an overproportional increase in tax expenses and in minority interests. The tax rate rose by 5.4 percentage points to 38.4%. Earnings per share in 1999 reached DM 9.82, representing a year-over-year improvement (before special effect in 1998) of DM 0.98 or 11%. The Executive Board is therefore proposing a dividend of DM 1.80 per share. The tax situation permits a full tax credit for German domestic shareholders with unlimited tax liability. This proposal remains within the previously identified payout ratio of between 15% and 20% of consolidated net income. The dividend paid for 1998 was DM 1.65.

Equity base strengthened

The equity base was considerably strengthened in 1999. Equity rose by 47% to DM 1.3 billion, as the major share of net income was retained within the Group and was thus used to strengthen the equity base. The equity ratio rose by 4.6 percentage points to 19.0%. Financial leverage, the ratio of net borrowings to equity, decreased by 123 percentage points to 234%.

Positive cash flow utilized to reduce borrowings

Net cash provided by operating activities in the amount of DM 642 million exceeded capital expenditure by DM 381 million. After deduction of the 1998 dividend payment, it was largely utilized in reducing net borrowings. Outstanding net borrowings decreased accordingly, from DM 3.2 billion at the end of 1998 to DM 3.1 billion at the end of 1999. This decrease would have been approximately DM 170 million higher if it had not been for the negative impact that the weaker exchange rate for the Deutsche Mark had on the valuation of outstanding US Dollar bank loans.

Increase in number of employees

The average headcount of adidas-Salomon in 1999 was 12,433 employees. This represents an increase of 772 compared to 1998. The number of employees working for the adidas and Salomon brands increased by 4% in each case. The strong sales growth of Taylor Made led to a greater increase in the headcount of this brand.

Outlook

The year 2000 will be marked by a repositioning of the Group and preparations for a new phase of growth in its global business. This intention has been the guiding principle for the investment plans. It has also been the source for setting up the growth and efficiency program that was recently presented in detail. It will put in place the conditions for stronger growth from 2001 onwards, but will impact the operating profit in the year 2000. Thus, it is anticipated that net income in 2000 will be approximately 20% below the previous year's level.
 

On the basis of the measures introduced, it is expected that from 2001 onwards every single percent of sales growth will be reflected in a higher percentage improvement of the result. For the years 2001 to 2003, management aims to achieve 15% annual growth in earnings.