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adidas-Salomon 2004 results

Net income up 21% to record level of Euro 314 million +++ Highest gross margin ever at 47.2%

  • Currency-neutral sales up 7%
  • Operating margin increased 1.1 percentage points to 9.0%
  • Net borrowings reduced by € 352 million, financial leverage at 36%
  • Highest year-end backlog growth in two years
  • Expected earnings growth of 10 to 15% on a comparable basis in 2005 confirmed

Currency-neutral sales up 7% in 2004

In 2004, currency-neutral sales for the adidas-Salomon Group grew 7%. In euro terms, sales grew 3% to reach € 6.478 billion in 2004 compared to € 6.267 billion in 2003.

"2004 was an outstanding year for adidas-Salomon," commented adidas-Salomon Chairman and CEO Herbert Hainer. "Our teams, athletes and products took center stage at the year's most exciting sporting events and our Group delivered impressive sales growth as well as record gross margin and earnings."

Brand adidas leads segment growth

Brand adidas was the driver of the Group's sales growth. Revenues increased 8% on a currency-neutral basis, mainly due to improvements in the Sport Performance division, in football and all major apparel categories. Salomon sales grew 2% on a currency-neutral basis with increases coming from both the winter and summer sports categories. The apparel, cycling and nordic categories delivered a particularly strong performance. TaylorMade-adidas Golf sales grew by 5% on a currency-neutral basis, driven by double-digit increases in the metalwood and apparel categories as well as solid growth in footwear. Currency effects from a strong euro, especially versus the US dollar, negatively impacted sales in euro terms. adidas sales in euro terms increased by 5% to € 5.174 billion from € 4.950 billion in 2003. Salomon revenues declined 1% to € 653 million in euro terms versus € 658 million in 2003. TaylorMade-adidas Golf sales in euro terms were down 1% to € 633 million in 2004 versus € 637 million in 2003.

 

2003

2004

Change y-o-y

in euro terms

Change y-o-y
currency-neutral

 

€ in millions

€ in millions

in %

in %

adidas

4,950

5,174

5

8

Salomon

658

653

(1)

2

TaylorMade-adidas Golf

637

633

(1)

5

Total

6,267

6,478

3

7

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

Currency-neutral sales increase in all regions

On a regional basis, currency-neutral sales for adidas-Salomon in Europe grew 3% primarily as a result of solid growth in the UK, France and Iberia as well as particularly strong performance in the region's emerging markets. In North America, sales for the Group increased 4% on a currency-neutral basis supported by higher revenues at all brands. In Asia, Group sales grew 17% on a currency-neutral basis, with double-digit increases in many of the region's countries including the most important markets, Japan and China. Currency-neutral sales in Latin America were up 34%. The main drivers of this growth were strong double-digit increases in Brazil, Mexico and Argentina. Currency effects impacted sales development in euro terms. Sales in Europe increased 3% in euro terms to € 3.470 billion in 2004 from € 3.365 billion in 2003. In North America, sales in euros declined 5% to € 1.486 billion versus € 1.562 billion in the prior year. In Asia, revenues in euros grew 12% to € 1.251 billion in 2004 from € 1.116 billion in 2003. Sales in Latin America increased 26% in euro terms to reach € 224 million in 2004 versus € 179 million in 2003.

 

2003

2004

Change y-o-y

in euro terms

Change y-o-y
currency-neutral

 

€ in millions

€ in millions

in %

in %

Europe

3,365

3,470

3

3

North America

1,562

1,486

(5)

4

Asia

1,116

1,251

12

17

Latin America

179

224

26

34

Total

6,267

6,478

3

7

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

Record level gross margin at 47.2%

The adidas-Salomon gross margin grew 2.3 percentage points to 47.2% in 2004 from 44.9% in 2003, representing the highest gross margin in the Group's history. Favorable currency effects, lower clearance sales combined with higher clearance margins, an improving product mix as well as increased own-retail activities were the major factors behind this increase. As a result of this development and the Group's sales growth, gross profit increased 9% to € 3.058 billion in 2004 from € 2.814 billion in the prior year.

Operating profit grows 18%

Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), increased by 7% to € 2.478 billion in 2004 versus € 2.324 billion in 2003. As a percentage of sales, operating expenses increased 1.2 percentage points to 38.3% in 2004 (2003: 37.1%). This development reflects increased marketing expenditures for the European Football Championships and the Olympic Games. In addition, operating expenses were also negatively impacted by the continued expansion of adidas own-retail activities, the investment in strategic initiatives in Asia and North America, production-related restructuring costs at Salomon as well as higher doubtful debt provisions at TaylorMade-adidas Golf. Since higher operating expenses were more than offset by strong sales growth and gross margin expansion, operating profit increased 18% to € 580 million in 2004 from € 490 million in 2003. Similarly, the operating margin increased 1.1 percentage points to 9.0% in 2004 from 7.8% in 2003.

Income before taxes (IBT) up 19%

Net financial expenses increased 16% to € 57 million in 2004 from € 49 million in the prior year, mainly as a result of positive effects from the valuation of balance sheet items in foreign currencies in 2003 which did not occur in 2004. Nevertheless, income before taxes grew 19% to € 520 million in 2004 from € 438 million in 2003 supported by solid top-line growth, the record-level gross margin and the resulting improvement in operating profit. As a percentage of sales, income before taxes increased by 1.0 percentage points to 8.0% in 2004 from 7.0% in 2003, reflecting further improvement of the Group’s profitability level.

Net income reaches record level of € 314 million

Net income for the Group reached a record level of € 314 million in 2004, up 21% compared to the prior year's level of € 260 million, reflecting an increase more than twice as high as the initial guidance at the beginning of the fiscal year. The main drivers of this development were strong IBT performance and lower minority interests, which declined 19% to € 9 million in 2004 from € 11 million in 2003, mainly due to the acquisition of the remaining shares of adidas Turkey and Salomon & Taylor Made Japan in 2004. In addition, a minor reduction of the Group's tax rate by 0.2 percentage points to 37.8% in 2004 (2003: 38.0%) also positively impacted net income. As a result, basic earnings per share were € 6.88 in 2004 versus € 5.72 in 2003. This represents a 20% year-over-year increase. Diluted earnings per share increased 14% to € 6.54 in 2004 from € 5.72 in 2003. The dilution mainly results from approximately four million additional potential shares that could be created in relation to the Group's outstanding convertible bond, for which conversion criteria were met for the first time at the end of 2004.

Working capital develops positively

Receivables were reduced by 3% to € 1.046 billion in 2004 versus € 1.075 billion in the prior year. On a currency-neutral basis, this equates to a decline of 1% and reflects strict discipline in the Group’s trade terms management and concerted collection efforts at all brands. In addition, successful clearance activities helped reduce inventories at adidas-Salomon by 1% to € 1.155 billion in 2004 from € 1.164 billion in 2003. On a currency-neutral basis, this represents an increase of 2%.

Net borrowings reduced by € 352 million

Net borrowings declined for the fourth consecutive year and, at December 31, 2004, were € 594 million. This represents a decrease of 37% or € 352 million versus € 946 million at the end of the prior year. A strong operating performance as well as continued tight working capital management had a significant positive impact on this decline. Positive currency effects had a minor impact, contributing 7% or € 24 million of the net borrowings improvement. As a result, financial leverage improved 33 percentage points to 36% in 2004 versus 70% in 2003.

Fourth quarter currency-neutral sales grow 10%

Fourth quarter net sales for the Group increased 10% on a currency-neutral basis with improvements coming from all regions. This represents growth of 6% in euro terms to € 1.434 billion in 2004 from € 1.354 billion in the fourth quarter of 2003. The Group’s gross margin declined 1.2 percentage points to 46.6% from 47.8% in the prior year, due to particularly positive currency effects in the fourth quarter of 2003 which were not repeated to the same extent in 2004. Fourth quarter operating profit declined 25% to € 32 million in 2004 from € 42 million in the prior year. In addition to the gross margin decline, the development reflects the negative impact of additional operating expenses for two key initiatives in Asia and North America as well as restructuring costs for Salomon. As a result, net income declined 26% to € 20 million versus € 27 million in 2003. This equates to basic earnings per share of € 0.43 and represents a decrease of 26% versus the prior year (2003: € 0.58 per share).

Proposed dividend of € 1.30 per share

The adidas-Salomon Executive and Supervisory Boards will recommend a dividend of € 1.30 per share for the fiscal year 2004 at the Annual General Meeting on May 4, 2005 (2003: € 1.00 per share). In addition, the Group has decided to extend its recommended long-term earnings-linked dividend payout ratio corridor from its long-standing 15 to 20% of net income to 15 to 25%, reflecting significant improvements the Group has made with respect to its financial health over the last few years. adidas-Salomon also intends to initiate a share buyback program for which the Group has authorization to buy back up to 10% of the Group's outstanding shares.

Strong backlogs support growth expectations for 2005

adidas backlogs at the end of 2004 increased 9% versus the prior year on a currency-neutral basis. In euro terms, this represents an increase of 7%. Apparel backlogs grew 14% on a currency-neutral basis (+12% in euros), highlighting the strength of adidas-Salomon's "Apparel Breakthrough" initiative. Footwear backlogs grew 7% in currency-neutral terms (+4% in euros), reflecting improvements in many categories, in particular Sport Performance basketball and Sport Heritage products. From a regional perspective, backlog development in Europe was unchanged at year-end versus the prior year both on a currency-neutral level and in euro terms. This, however, masks an underlying improvement as a result of at-once business and increasing own-retail activities in the region. Further, orders face a tough year-over-year comparison as a result of the European Football Championships, which drove particularly strong sales growth in the adidas football business during the second quarter of 2004. In North America, backlogs increased 7% on a currency-neutral basis (flat in euros), supported by growth in both footwear and apparel. adidas currency-neutral backlogs in Asia increased 44% (+39% in euros), underpinned by increases particularly in China and Japan.