adidas-Salomon 2004 First Half Year Results: Net income rises 39%; Highest first half gross margin ever at 47.1%

Strong second quarter performance

Second quarter sales for the Group increased 7% on a currency-neutral basis with improvements coming from all brands and regions. Currency-neutral sales in North America grew 4%, marking the first positive performance in four quarters. Total Group sales improved by 5% in euro terms to € 1.468 billion in 2004 from € 1.392 billion in the second quarter of 2003. Gross margin increased 3.7 percentage points to 48.4% of sales from 44.8% in the prior year. Second quarter operating profit increased 49% to € 92 million in 2004 from € 62 million in the prior year. Net income was up 36% reaching € 44 million versus € 32 million in 2003. This equates to basic earnings per share of € 0.96 and represents an increase of 36% versus the prior year (2003: € 0.71 per share).

First half year Group sales up 5% on a currency-neutral basis

Currency-neutral sales for the Group increased 5% in the first half of 2004. In euro terms, revenues increased 1% to € 3.091 billion in 2004 from € 3.061 billion in the first half of 2003.

"adidas-Salomon has delivered outstanding operational and financial performance in the first half of 2004," commented adidas-Salomon Chairman and CEO Herbert Hainer. "We have strong momentum, with quarter-on-quarter sales improvements for all brands, a record gross margin and earnings growth of almost 40%. This is the strongest first half year performance in the Group's history."

Top-line currency-neutral growth driven by all brands

From a brand perspective, sales growth at adidas set the pace for Group performance in the first half of 2004. Currency-neutral revenues increased 5%. The success of the football category as well as the "Apparel Breakthrough" initiative were the main contributors to this development. At Salomon, revenues increased by 4% on a currency-neutral basis in the first half of 2004, driven by positive developments in the apparel, cycling and nordic categories. Revenues at TaylorMade-adidas Golf increased 3% on a currency-neutral basis driven by the success of the new r7 Quad metalwood which was launched halfway through the second quarter. The putter and apparel categories also reported solid growth. Currency effects from a strong euro, especially versus the US dollar, negatively impacted sales at all brands in euro terms. As a result, adidas sales in euro terms increased 2% to € 2.584 billion in the first half of 2004 from € 2.542 billion in 2003. Salomon sales in euros were up 2% to € 194 million in the first six months of 2004 from € 191 million in the prior year. TaylorMade-adidas Golf sales in euro terms declined 3% to € 302 million in 2004 from € 311 million in 2003.

adidas-Salomon sales by brand in 2004, “Total” includes HQ/Consolidation

Positive regional sales development

From a regional perspective, Group sales in Europe grew 3% on a currency-neutral basis, driven in particular by solid increases in France, Iberia, the UK and the emerging markets. In North America, Group sales during the first half declined 1% on a currency-neutral basis due to a decrease in footwear sales in the adidas Sport Performance division. However, this figure hides strong second quarter developments. In Asia, currency-neutral sales increased 15% driven by double-digit growth in Japan, China and Australia. In Latin America, currency-neutral sales increased 34% in the first half, making it the fastest growing region within the Group. Higher sales in Argentina, Brazil and Mexico were the main drivers of this improvement. In euro terms, currency translation effects negatively impacted sales in the first half year in all regions. Sales in Europe increased 2% in euro terms to € 1.691 billion in the first half of 2004 from € 1.657 billion in the prior year. In North America, sales in euros declined 11% to € 707 million in 2004 from € 790 million in 2003. In euro terms, sales in Asia improved 11% to € 566 million in 2004 from € 509 million in 2003. In Latin America, sales in euros grew 27% to € 99 million in the first six months of 2004 from € 78 million in 2003.

adidas-Salomon sales by region in 2004, “Total” includes HQ/Consolidation

Group gross margin up 3.6 percentage points

adidas-Salomon gross margin grew 3.6 percentage points to 47.1% in the first six months of 2004 (2003: 43.5%). This represents the highest first half gross margin in the history of the Group and reflects favorable currency effects, an improving product mix and increased adidas own-retail activities. As a result of the strong gross margin expansion, gross profit for the Group rose 9% in the first six months of 2004 to reach € 1.456 billion versus € 1.331 billion in 2003.

Operating profit grows 33%

Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), increased by 6% to € 1.220 billion in the first half of 2004 from € 1.154 billion in 2003. As a percentage of sales, this equates to 39.5%, which is 1.8 percentage points higher than the 2003 level of 37.7%. This development reflects increased marketing expenditures for the UEFA EURO 2004™ European Football Championships and the Athens 2004 Olympic Games™. Operating expenses were also impacted by the continued expansion of adidas own-retail activities as well as higher doubtful debt provisions at TaylorMade-adidas Golf in the first quarter of this year. Group operating profit increased 33% to € 236 million in 2004 from € 178 million in the first half of 2003, reflecting the Group's strong gross margin development in the period. Similarly, the operating margin grew 1.8 percentage points to 7.6% in the first six months of 2004 versus 5.8% in the same period in 2003.

income before taxes up 36%

As a result of the strong operational improvements during the first half of 2004, the Group's income before taxes grew 36% to € 202 million from € 148 million in 2003. Financial expenses grew 15% to € 32 million in 2004 from € 28 million in the first six months of 2003. This reflects difficult comparisons in exchange rate effects on balance sheet items. Goodwill amortization was € 23 million in the first half of 2004 versus € 22 million during the same period in 2003. Royalty and commission income increased 3% to € 21 million in 2004 from € 20 million in 2003.

net income surges 39%

Net income for the Group increased 39% to € 116 million in the first half of 2004 from € 83 million in 2003. Solid currency-neutral sales increases, coupled with the strong gross and operating margins, were the drivers of this improvement. Minority interests increased 9% to € 6 million in 2004 (2003: € 6 million). The Group tax rate declined 0.2 percentage points to 39.6% in the first six months of 2004 from 39.8% in 2003. As a result, basic earnings per share increased 39% to € 2.54 for the first six months of 2004 versus € 1.83 in 2003.

Net borrowings reduced by € 616 million

Net borrowings at June 30, 2004 were € 967 million, down 39% or € 616 million versus € 1.583 billion in the prior year. Strong bottom-line profitability and continued tight working capital management were the drivers of this improvement. As a consequence, the Group's financial leverage improved 77 percentage points to 66% in 2004 versus 143% in 2003.

Successful working capital management continues

Group inventories grew 1% to € 1.304 billion at the end of the first half of 2004 from € 1.285 billion in 2003. On a currency-neutral basis, this represents an increase of 4%. Due to continued tight inventory management, however, the increase in inventories is below the adidas backlogs growth and the Group's sales increase expectations for the third quarter of 2004. Receivables at adidas-Salomon were reduced by 8% to € 1.122 billion at the end of the first half versus € 1.217 billion in the prior year. On a currency-neutral basis, this represents a decline of 6%.

Currency-neutral order backlogs grow at double-digit rates

Currency-neutral order backlogs for adidas grew 10% (+8% in euros) at the end of the second quarter of 2004, reflecting sequential improvement in all regions. Overall apparel orders increased 18% on a currency-neutral basis, or 17% in euro terms, reflecting the successful "Apparel Breakthrough" initiative to grow sales in this product category. Footwear backlogs grew 2% on a currency-neutral basis and were stable in euros, driven primarily by growth in Asia.

adidas order backlogs by product category and region as at June 30, 2004

Full year net earnings target again increased

As a result of the Group's performance during the first half of the year and business expectations for the rest of 2004, adidas-Salomon is increasing the sales guidance provided earlier this year and again raising the Group's earnings target. Group revenues are expected to increase by around 5% on a currency-neutral basis, with double-digit currency-neutral growth in Asia and Latin America and mid-single-digit sales growth in Europe. Positive sales development is also expected in North America on a full year basis. Group gross margin is projected to clearly exceed 45% for the first time ever and operating margin will improve by at least one percentage point versus the prior year's level of 7.8%. As a result of the strong first half year performance, Group earnings for the full year are now expected to grow by around 20%.

Herbert Hainer stated, "I have never felt more confident in our Group's capacity to deliver sustained strong performance than I do today. With our great results in the first half year and double-digit order backlog growth, I am confident of our ability to perform significantly better than we'd originally anticipated at the beginning of the year."