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adidas-Salomon 2005 First Half Year Results

Currency-neutral sales grow 11% +++ Net income from continuing operations rises 39%

  • Highest first half year gross margin ever at 48.5%
  • Income before taxes grows 33%
  • Net income attributable to shareholders from continuing and discontinued operations up 48%
  • Net borrowings reduced by € 425 million\
  • Full year net income attributable to shareholders from continuing and discontinued operations expected to increase by around 20%

Unless otherwise stated, all figures in this press release refer to the Group’s continuing operations.

Second quarter currency-neutral sales grow 10%

Second quarter net sales for adidas-Salomon increased 10% on a currency-neutral basis with double-digit improvements coming from all brands and regions except Europe where sales declined 1%. This represents revenue growth of 8% in euro terms for the Group to € 1.516 billion in 2005 from € 1.401 billion in the second quarter of 2004. The gross margin remained unchanged at 49.0% of sales. Second quarter operating profit increased 25% to € 153 million from € 123 million in 2004. The Group’s net income from continuing operations was up 33% in the second quarter, reaching € 94 million versus € 70 million in 2004. Basic earnings per share increased 34% to € 2.02 (2004: € 1.51 per share). Diluted earnings per share grew 27% to € 1.91 in the second quarter of 2005 from € 1.51 in 2004.

Income from discontinued operations, net of tax, which reflects the performance of the Salomon business segment that is planned to be divested at the end of the third quarter, declined 6% to negative € 27 million in the second quarter of 2005 (2004: negative € 25 million). Net income attributable to shareholders from continuing and discontinued operations increased 52% to € 66 million in the second quarter of 2005 versus last year’s level of € 44 million. This equates to basic earnings per share from continuing and discontinued operations of € 1.44, which represents growth of 50% compared to the prior year (2004: € 0.96 per share). Accordingly, diluted earnings per share from continuing and discontinued operations were up 44% to € 1.37 from € 0.96.

The adoption of new and revised International Financial Reporting Standards (IFRS) concerning the inclusion of royalty and commission income and goodwill amortization into operating profit as well as the discontinuation of scheduled goodwill amortization positively impacted the Group’s financial performance in 2005. On a comparable basis (The figures stated on a comparable basis are adjusted to eliminate the goodwill amortization incurred in 2004. Furthermore, operating profit reflects the inclusion of royalty and commission income in the operating profit for 2004 and 2005), the Group’s operating profit, net income from continuing operations and net income attributable to shareholders from continuing and discontinued operations would have increased 20%, 18% and 20% respectively in the second quarter.

Currency-neutral sales grow 11% in the first half year

During the first six months of 2005, the Group’s currency-neutral revenues increased 11%. In euro terms, sales grew 10% to € 3.189 billion from € 2.906 billion in 2004.

“The first half of 2005 was an important six months for adidas-Salomon,” commented adidas-Salomon Chairman and CEO Herbert Hainer. “We have strengthened the core of our business, made it more efficient, and more focused on areas where we have proven skills. And we were able to deliver an outstanding set of financial results – exceeding both market and our own expectations.”

adidas drives top-line growth in the first half

Sales growth in the adidas segment set the pace for Group performance during the first half of 2005. Currency-neutral adidas revenues increased 10% during the first six months. Drivers of this growth were strong double-digit growth in the Sport Heritage division as well as significant increases in most Sport Performance categories. Currency-neutral revenues in the TaylorMade-adidas Golf segment increased 19%, driven by double-digit growth in all categories except putters. Currency effects negatively impacted sales at adidas and TaylorMade-adidas Golf in euro terms. adidas sales in euro terms were up 9% to € 2.816 billion in the first half of 2005 from € 2.584 billion in 2004. TaylorMade-adidas Golf sales in euro terms grew 16% to € 351 million in 2005 from € 302 million in 2004.

 

1st Half Year

2005

1st Half Year

2004

Change y-o-y

in euro terms

Change y-o-y
currency-neutral

 

€ in millions

€ in millions

in %

in %

adidas

2,816

2,584

9

10

TaylorMade-adidas Golf

351

302

16

19

Total continuing operations

3,189

2,906

10

11

adidas-Salomon sales by brand in 2005, “Total continuing operations” includes HQ/Consolidation

Positive regional sales development

From a regional perspective, first half year Group sales in Europe grew 1% on a currency-neutral basis, driven by strong performance at TaylorMade-adidas Golf where currency-neutral sales increased 16% as a result of broad-based improvements throughout the region. In North America, Group sales during the first half increased 18% on a currency-neutral basis, due to double-digit growth in the adidas Sport Performance and Sport Heritage divisions as well as at TaylorMade-adidas Golf. In Asia, currency-neutral sales increased 30% in the first half of 2005, driven by strong growth in China, where sales more than doubled during the first six months of 2005, as well as strong growth in Japan, India and many other countries in the region. In Latin America, currency-neutral sales increased 36% in the first half, renewing its position as the fastest growing region within the Group. This development was driven by double-digit sales increases in Brazil, Mexico and Argentina. In euro terms, currency translation effects negatively impacted sales in the first half of 2005. Sales in Europe increased slightly in euro terms to € 1.569 billion in the first six months of 2005 from € 1.563 billion in the prior year. In North America, first half year sales in euros increased 13% to € 757 million in 2005 from € 667 million in 2004. In euro terms, sales in Asia improved 28% to € 708 million in the first half of 2005 from € 551 million in 2004. In Latin America, sales in euros grew 38% to € 135 million in 2005 from € 98 million in 2004.

 

1st Half Year  2005[1]

1st Half Year

 20043

Change y-o-y

in euro terms

Change y-o-y
currency-neutral

 

€ in millions

€ in millions

in %

in %

Europe

1,569

1,563

0

0

North America

757

667

13

18

Asia

708

551

28

30

Latin America

135

98

38

36

Total continuing operations

3,189

2,906

10

11

adidas-Salomon sales by region in 2005, “Total continuing operations” includes HQ/Consolidation

 [1]  Pro-forma figures reflect continuing operations as a result of the planned divestiture of the Salomon  business segment in accordance with the Sale & Purchase Agreement (SPA) with Amer Sports Corporation, subject to amendments agreed upon prior to transaction closing.

Group gross margin up 0.5 percentage points

adidas-Salomon gross margin grew 0.5 percentage points to 48.5% of sales in the first half of 2005 (2004: 48.0%). This represents the highest first half year gross margin in the history of the Group and mainly reflects increased adidas own-retail activities as well as the Group’s improving product mix. In addition, hedging activities that enabled adidas-Salomon to capitalize on favorable currency movements also contributed to the margin improvement. As a result of strong sales growth and the gross margin increase, the Group’s gross profit rose 11% in the first half of 2005 to reach € 1.547 billion versus € 1.394 billion in 2004.

Operating profit grows 26%

Royalty and commission income increased 5% during the first half of 2005 to € 22 million compared to € 20 million in the prior year. Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), increased 9% to € 1.211 billion in the first half of 2005 from € 1.113 billion in 2004. As a percentage of sales, this equates to 38.0%, which is 0.3 percentage points lower than the 2004 level of 38.3%. This decrease mainly reflects a reduction in the marketing working budget and virtually stable operating overhead costs, both as a percentage of sales. No goodwill impairment was incurred during the first six months of 2005. This compares to scheduled goodwill amortization of € 18 million in the first half of 2004. The Group’s operating profit increased 26% to € 357 million in 2005 from € 283 million in the first half of 2004, reflecting higher sales and gross margin as well as operating expense leverage. Similarly, the operating margin grew 1.5 percentage points to 11.2% in the first six months of 2005 versus 9.7% in the same period of 2004. The adoption of new and revised International Financial Reporting Standards positively impacted the Group’s reported operational performance in the first six months of 2005. On a comparable basis (The figures stated on a comparable basis are adjusted to eliminate the goodwill amortization incurred in 2004. Furthermore, operating profit reflects the inclusion of royalty and commission income in the operating profit for 2004 and 2005), the Group’s operating profit and margin would have increased 19% or 0.8 percentage points respectively during the first half of 2005.

Income before taxes (IBT) up 33%

Net financial expenses decreased 32% to € 20 million during the first six months of 2005 (2004: € 30 million), partly as a result of positive currency effects. In addition, lower interest expenses due to the lower average debt level, which more than offset an increase of the weighted average interest rate, contributed to this development. As a result of the operating improvements and the lower financial expenses, the Group’s IBT increased 33% to € 337 million in the first half of 2005 from € 253 million in 2004. On a comparable basis, adidas-Salomon’s IBT would have increased 24% during the first six months of 2005.

Net income from continuing operations increases 39%

The Group’s net income from continuing operations increased 39% to € 225 million in the first half of 2005 from € 163 million in 2004. Strong sales increases, coupled with improving gross and operating margins, were the main drivers of this improvement.
Minority interests declined 10% to € 6 million in the first half of 2005 (2004: € 6 million). The Group’s tax rate in the first half declined 2.7 percentage points to 33.1% from 35.8% in 2004. On a comparable basis, net income for the Group’s continuing operations would have increased 25% during the first six months of 2005.

Basic earnings per share from continuing operations at € 4.78

The Group’s basic earnings per share from continuing operations increased 39% to € 4.78 for the first six months of 2005 versus € 3.43 in 2004. First half year diluted earnings per share from continuing operations were up 31% to € 4.50 in 2005 from € 3.43 in 2004. On a comparable basis, basic and diluted earnings per share from continuing operations would have increased 25% and 18% respectively during the first six months of 2005.

Net income attributable to shareholders from continuing and discontinued operations up 48%

The Group’s net income attributable to shareholders from continuing and discontinued operations increased 48% to € 171 million in the first half of 2005 versus € 116 million in the prior year. This reflects the strong performance of the Group’s continuing operations. In the first half of 2005, net income from discontinued operations decreased 20% to negative € 49 million from negative € 41 million in 2004, reflecting a decline in Salomon’s operating activities as well as negative effects related to the planned divestiture of this business segment. On a comparable basis, net income attributable to shareholders from continuing and discontinued operations would have increased 24% during the first six months of 2005.

Basic earnings per share from continuing and discontinued operations at € 3.73

The Group’s basic earnings per share from continuing and discontinued operations increased 47% to € 3.73 for the first six months of 2005 versus € 2.54 in 2004. First half year diluted earnings per share from continuing and discontinued operations increased 39% to € 3.53 in 2005 from € 2.54 in 2004. On a comparable basis, basic and diluted earnings per share from continuing and discontinued operations would have increased 22% and 16% respectively during the first six months of 2005.

Working capital improvement continues

Receivables at adidas-Salomon were reduced by 7% to € 1.039 billion at the end of the first half of 2005 versus € 1.122 billion in the prior year, mainly because € 84 million were transferred to “Assets classified as held for sale”.(The 2005 balance sheet items excluding net borrowings and equity only include the Group’s continuing operations whereas a restatement of the 2004 balance sheet items is not possible under IFRS. In the 2005 balance sheet, the assets and liabilities for the Salomon business segment, which is planned for divestiture at the end of the third quarter, are included in the Group’s total assets in separate positions as “Assets classified as held for sale” and “Liabilities classified as held for sale”.) Receivables for continuing operations decreased 1% in euro terms. On a currency-neutral basis, this represents a decline of 3% and is the result of strict discipline in the Group’s trade terms management and concerted collection efforts. Group inventories were reduced by 12% to € 1.146 billion at the end of the first half of 2005 versus € 1.304 billion in 2004, mainly as a result of the reclassification of € 225 million inventories into “Assets classified as held for sale”. Inventories from continuing operations increased 5% in euro terms or 4% on a currency-neutral basis, which is below the current backlog level and the Group’s sales growth expectations.

Net borrowings reduced by € 425 million

Net borrowings at June 30, 2005 were € 542 million, down 44% or € 425 million versus € 967 million in the prior year. Strong bottom-line profitability and continued tight working capital management were the drivers of this reduction. As a consequence, the Group’s financial leverage improved 37 percentage points to 29% in 2005 versus 66% in 2004.

Currency-neutral backlogs grow 9%

Currency-neutral order backlogs for adidas at the end of the first half of 2005 increased 9% (+10% in euros) versus the prior year. Footwear backlogs grew 11% in currency-neutral terms (+11% in euros), reflecting improvements in particular in the Sport Heritage division. Apparel backlogs were up 8% on a currency-neutral basis (+9% in euros), highlighting the continued strength of the “Apparel Breakthrough” initiative. From a regional perspective, orders in Europe were up year-over-year (+2% currency-neutral, +3% in euros). In North America, currency-neutral order backlogs increased 9% (+10% in euros) compared to the prior year. Asian backlogs grew 29% in currency-neutral terms (+31% in euros).

 

Footwear

Apparel

Total

Change y-o-y

in %

in € 

currency-neutral

in € 

currency-neutral

in € 

currency-neutral

Europe

99(2)(3)32

North America

98109109

Asia

211938363129

Total

111198109

adidas order backlogs by product category and region as at June 30, 2005

Net income growth target confirmed

As a result of an anticipated positive macroeconomic and sector environment and in view of adidas backlog development, high expectations for adidas own-retail activities as well as positive retailer feedback for adidas and TaylorMade-adidas Golf, adidas-Salomon continues to expect mid- to high-single-digit currency-neutral revenue growth for the Group. This growth projection is based on expectations of double-digit revenue growth in Asia and Latin America, high-single-digit sales increases in North America and mid-single-digit growth in Europe. The Group’s gross margin is expected to be around last year’s level of 48.0%. The continued gross margin strength will be supported by an increased proportion of own-retail activities, an improving product mix as well as favorable hedging rates that will continue to positively impact sourcing costs. Driven by strong sales growth and continued high-level gross margin coupled with positive effects as a result of the IFRS changes as well as the planned divestiture of the Salomon business segment, adidas-Salomon expects to surpass the Group’s highest operating margin on record and achieve a level of around 11%. The Group’s net income attributable to shareholders from continuing and discontinued operations is projected to grow around 20% to approximately € 375 million from the prior year’s level of € 314 million.

Herbert Hainer stated, “We have achieved a lot so far in 2005. And with all of our regions reporting positive backlog growth, I am very confident that the second half of the year will once again underline the broad strength of our Group.”