adidas AG
Q3 2021 Earnings Call Transcript

Published: 10 Nov 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the adidas AG Q3 2021 Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. Presentation will be followed by a question-and-answer session. I would now like to turn the conference over to Sebastian Stephan, Head of Investor Relations. Please go ahead.

[Sebastian Steffen:]

Thanks so much, Stuart. Good evening, good afternoon, good morning everyone, wherever you are joining us virtually today and welcome to our Q3 results conference call. Our presenters today are our CEO, Kasper Rorsted and our CFO, Harm Ohlmeyer. We will kick it off in a second with their prepared remarks which will be followed by a Q&A session. As always, I would like to ask you that during the Q&A session, you limit your questions to two in order to allow as many people as possible to ask a question. And now, without any further ado, over to you, Kasper.

[Kasper Rorsted:]

Thank you very much. And welcome also, from my side. First, I'll provide you with a high-level view on some recent developments. And our focus areas as towards our recap, our business development in the third quarter. And then Harm will take us through the financials in greater detail. And he will also provide an update on operational -- on the operations situation and how we addressed the current external challenges. And finally, I will discuss the outlook. And despite being confronted with severe challenges on both the supply and demand side, we were on track to deliver a successful first year of our new strategic cycle. We have the right strategy in place to succeed even in challenging market environment, like the one we're currently faced with. On the game, is our growth an investment strategy is ground and sport on his -- the consumer at the heart. With clear strategic direction until 2025, we're an execution mode as 1 team together with more than 60,000 team members globally. Speaking of owning the game, I'm very proud to say our people clearly own the game. Out of 750 companies, Adidas has been ranked among the top 20 companies in Forbes World Best Employer list for 2021 and is 1 of only 4 driven companies included in the ranking. This recognition clearly goes out to our people. It's them who help us create a working environment where everyone can be successful, feel like they belong, and consistently thrive. It is also our people who contributed to forming our new people strategy that we rolled out in August. Our people strategy focuses on leadership, betterment, and performance with diversity, equity, and inclusion right across all 3 dimensions, ensuring inclusion and an equal starting line for everyone. In addition to the commitments we've already made, I'm delighted to share another concrete and measurable goal we put behind DNI. It is to increase the share women in leadership positions to above 40% by 2025. At the end of last year, the number was 34.5 for Adidas. With our people strategy, we'll set the pace even beyond our industry. We're also making great progress in another strategic focus area of our strategy; sustainability. I'm happy to report that leading rating agency, Standard & Poor's just awarded us a strong ESG rating for our outstanding sustainability performance. Adidas was given an ESG profile score of 79 out of 100, one of the highest scores applied across all companies assessed globally. Combined with a strong score of 6, the Company's overall score amounts to 85, placing Adidas 6th in the entire S&P rating universe. In its comprehensive assessment, Standard & Poor's emphasized our industry-leading approach to innovation, supply-chain management, and consumer engagement. The results further underlying our leadership approach to manage sustainability across all dimensions of our Company. I'm convinced that the continued integration of sustainability into our strategy will support ongoing future success of Adidas. Now, let me give you a business update and start with consumer highlight. On the NMD, S1 we launched this new key lifestyle product exclusively on our Confirmed app and saw a 100% sell-through, as well as strong net sales on -- in the entire NMD franchise. On the 4DFWD, we start ed to scale the 4D franchise with better-than-expected sell-through in and in EMEA. Ivy Park Rodeo, which was the last drop, our successful collaboration with Beyonce was a D2C exclusive activation driving high average order values. And when it comes to the Ajax Bob Marley pack, we sold 50,000 jerseys in the first 24 hours and created one of the highest ever consumer engagement for Club Joshi launch on Adidas football. And on form as promised, we've been diversifying the franchise for the additional durations, dedicated marketing, and exciting partnerships, leading to strong sell-out ratios. When it comes to experience, serious mounting Loft Shanghai means we've opened a flagship store with a unique outdoor retail experience. The first of its kind, and more to come. On the Confirmed app, we rolled out our Confirmed app in Canada as latest additions and continue to offer member exclusive access to Hype launches and partner interactions. And when it comes to sustainability, our UltraBOOST Uncaged lap, we've taken the next step towards ending plastic waste using tinsel, a new bio-based material, and we're also now introducing No-Dye and No-Dye footwear collection in golf. Let me speak now about our strategic enablers in more detail. Credibility. Our ground breaking innovations in running continue to deliver what matters most; record wins and podiums. In 2021, the Adidas Lightstrike Pro technology has enabled our athletes to take home more world records, more wins, and more podium positions in the top 50 road races globally than all other athletes combined. including multiple wins at the Marathon Majors in Berlin, London, Boston, and New York. Just last weekend, Peres and Albert won the New York Marathon with Adidas athletes representing 4 out of the 6 runners on the podium. With Sunday's victory, Peres is the only woman in history who has won an Olympic gold and 1 of the world's 6 major marathons and she did it in 3 months. While I'm excited to see 3 stripes reclaiming credibility in the technical running community, we're also making strong progress in driving commercial success in this category. At the top of the peer pyramid, the Eddie share of franchise strives exceptional sell-through rates with the latest iteration of Adidas Cerro Pro2, PrimeX and Boston 10 models. And at the same time, we continue to diversify our running across the board, and results speak for themselves. UltraBOOST is up strong double-digits versus 2019, while 40 is growing triple-digits. When it comes to experience, we've all reiterated that we will become a member first brand, and we're making strong progress in delivering exceptional consumer experiences. Let me provide you with two concrete examples. First, we've introduced the Terex product finder on both our app and.com, a guided 62nd digital journey for finding you the right outdoor here. With the completion rate of north of 80%, the experience creates fewer band and shopping charts and carts, higher conversion rates, low returns, and ultimately happier customer. Second, our latest member week in August provided even more of these exceptional consumer experiences. For the first time ever, we integrated and confirmed that into the sales event, driving 1 million unique sign-ups globally. Overall, 24 countries participated this time, and we overachieved our sales and acquisition targets, adding 3 million new members to our digital ecosystem during that 1 week alone. And when it comes to sustainability, being externally recognized for outstanding sustainability performance is one thing, continuous innovation to stay on top of the game is another. Our partnership with Pond Biomaterials marks the latest step in pushing boundaries to make 9 out of 10 articles sustainable by 2025. Together with Pond, we're striving to substitute fossil-based plastic materials with plant-based raw materials, all without compromising our performance proposition. We also innovating with new business models as we introduce Choose to Give Back in collaboration with ThredUP aimed at helping to extend the life cycle of sportswear apparel and footwear. The program invites consumers to send in used products via Adidas Creators Club, in order to be reused or resold. It's currently being piloted in the U.S. and will be rolled out more widely online and in stores in 2022. As mentioned before, we're committed to sustainability as part of our only game and continue to push boundaries for consumers and for a better future. Turning to strengthen weaknesses for the third quarter. Let me be very clear, we saw a strong top-line momentum in all markets that upgraded without major disruption with double-digit growth across EMEA, North America, and Latin America. Our focus on D2C is also clearly paying off, as we saw a double-digit growth in each of these markets. Unfortunately, we're still confronted with -- by severe challenges on both the demand and supply side in many other parts of the world, posing a significant drag on our top-line development. Sales decreased in Greater China as a challenging market environment, delays some of recovery while COVID-related lockdowns in Asia-Pacific, are weighing on demand in the market. On the supply side, shipping and handling delays have been impacted sales in EMEA and in North America. Well, let me just stop there for a second and just really reiterate the situation. We are seeing a tale of 2 cities. We're seeing, when the world is operating in a somewhat normalized environment, we are growing high single, low double-digits and gaining market share, which is very encouraging in the West, whether it's EMEA, North America or Latin America. But we're also clearly impacted by the East, which is growing negative double-digit, which is why we having the numbers that we have. But the underlying performance in a somewhat normalized market is very satisfying to see. In total, the charity market environment in Greater China, extensive lockdowns in Asia-Pacific, as well as industry-wide supply chain constraint, reduced revenue around -- by around $600 million in the third quarter. Despite these negative external factors, we were able to grow revenue by 3%. Excluding these external factors, our top-line growth would have been in the mid-teens, around 14%. Significant higher food price sales were more than offset by negative currency developments and a higher supply chain costs, bringing our margins to 50.1%. Our operating margin came in at a strong 11.7% despite a double-digit increase in marketing spend and $60 million of stranded costs related to the Reebok divestiture. Harm will come in more detail on the major P&L stool. And again, let me reemphasize. From a regional perspective, we experienced strong profile products, top-line momentum across all markets with largely undistributed demand, i.e., EMEA in North America and Latin America. In North America, we saw an exceptional growth in D2C, 18% year-over-year and 17% versus 90 -- 19. We saw an overall increase driven by double-digit growth in lifestyle and football categories, while outdoor was up, triple-digit. In EMEA, we saw strong growth in D2C, again, 11% up, or 28% up over 19, an overall increased driven by robust growth in running, football, lifestyle, and outdoor also grew at an exceptional rate. And in Greater China, we remain confronted by challenges. The geopolitical situation, the resurgence of COVID-19 -related restrictions as well as natural disasters, delayed top-line recovery. And again, Harm will give you more details on this. From a channel perspective, our top-line development was driven by a strong product sell-through in our own retail stores, leading to double-digit increases in EMEA, North America, and Latin America. Our e-Com revenue grew 8% to almost $1 billion in just 1 quarter, driven by double-digit growth in EMEA and North America, while global full-price was up by 15 percentage points. This reflects an increase of 64% compared to the 2019 level, also accounting for the exceptional high-growth in the period -- in the prior-year period. Our focus on membership and mobile offering continues to elevate the consumer experience with more than 220 million members globally by the end of the third quarter, we're almost halfway to reach our target of 500 million members by 2025. Overall, we're progressing in our D2C led business transformation to become the member brand -- first brand, deeper connection with the consumers through personalized, relevant experiences and brand moments that only Adidas can create. From a category perspective, both football and outdoor, that our growth in the performance category. Football grew strong double-digits as key football franchises such as Predator in the launch of major football club jerseys spark excitement for the game. Outdoor continued an exceptional growth trajectory with footwear like growth while sustainable and technical products launches, drive credibility. I will share more exciting news and upcoming product releases across all our strategic growth areas and our innovation outlook. But before I hand over to Harm let me just read a rate, what we said approximately 6 to 9 months ago. We're very optimistic that our performance let growth. Our performance product related to sport, i.e., our licensed product would have a strong pickup as soon as the stadiums were filling up, and we're seeing that across the globe. Whether it's in the U.S. or in Asia, or in Europe, when the stadiums are filling up, the fans are buying licensed gear again, and that is what we're seeing across all our sports in those markets where you can actually enjoy the sport in a stadium. And with this, I'll hand over to Harm.

[Harm Ohlmeyer:]

Thank you, Kasper And good morning, good afternoon to everyone on the call. Let's start with the financial update and then I will go a little deeper into the operational update as well to give you some more transparency on what has happened in Q3 and what will happen in the next quarters. But let's start with the overall top-line development in Q3 that was negatively impacted by the challenging environment in Greater China, extensive lockdowns in Asia-Pacific, as well as an industry-wide supply chain constraints, which I will cover in more detail later. When we look at the revenue growth per market segment, we can basically divide our business into 2 parts. On the positive side, net sales growth was driven by strong momentum across all markets operating result major disruptions

[Kasper Rorsted:]

Thank you very much, Harm. Before we turn to our financial outlook, let me stress that we remain focused in driving brand heat by launching new product innovations, excluding expiring campaigns and celebrating major events. As crowds return to major sport events, whether the Champions League, the NFL, the NHL, or marathons, we bring brand and product stores to life through our athletes and teams. And through our global brand campaign, Impossible is Nothing, we will ensure that brand awareness and visibility also cuts through to all the everyday athletes and consumers. You've heard me before, and I remain very confident about our brand and product momentum going into 2022. Before I give you the latest detail in our innovation, let me briefly walk you through some exciting product drops in key categories . running a dedicated boost stay with new durations of our most successful UltraBOOST models will drive continuous strong growth of our assets Blanc Franchise. In football, we just launched our first ever 100% vacant football boot, the Predator Freak, matching elite performance standards with our sustainability leadership ambition. This product is a result of unique collaboration between Stella McCartney and Paul Pogba. And talking about sustainability, we continue to push boundaries with the introduction of Prime Adopt Apparel collection in October, combining high-quality insulation materials and recycled highly ocean plastic. Yeezy continues to drive brand heat and with new drops such as the Boost 350 Oat or Beluga Reflective mainly available in our Confirmed app in North America . Originals is celebrating the 30th birthday of the equipment franchise by reissuing fan-favorite models with both classics and never seen before styles. Across the entire brand we continue to drive credibility through partnerships and stay tuned for our latest drop in collaboration with Prada as we expand our reach into the lifestyle segment. Last, but not least, we're making great progress on our women premium offering, introducing the Stella McCartney Earth Explorer collection. Innovation is in our DNA and we can't wait to provide you with an exclusive and comprehensive preview of all that is yet to come on our upcoming Innovation Day on December 13 and 14. The focus is set on 2022 product highlights across our strategic growth categories

[Operator:]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. . We're using speaker equipment today, please lift the handset before making your selections. . One moment, for the first question, please. First question is from the line of Graham Renwick from Berenberg. Please go ahead.

[Graham Renwick:]

Hi. Good afternoon, everyone. Thanks for taking my 2 questions. And just firstly on China, and on the last call, you said China sales in June were already back to 2019 levels. If we were to exclude the impact of the lockdowns in Q3, do you think you would have seen a continued progressive improvement in China, for matching level or maybe put another way. How are you performing in regions of China the one on the lockdown, did you continue to see a sales recovery back above 2019 levels trying to get a sense of the underlying trend there? And second, on fiscal '22 guidance, to very healthy with a bridge for revenue growth, thanks for that. I was just wondering how we should be thinking about the puts and takes to margin next year. It looks like there's several margin tailwinds building for you with higher DTC FX turning to tailwinds. You got the recovery in China and some of those Reebok costs are also going to roll-off. And you did mention that you'd be raising prices as well, which should help mitigate some of that cost inflation. So, alongside the 8% to 10% revenue growth, would it be reasonable for us to think that Adidas can return to, say 2019 margin levels in '22? Thank you.

[Kasper Rorsted:]

What we're seeing in China is we're seeing a light deceleration. So basically, in the regions that -- where we don't have -- that we are seeing a fairly healthy situation and we are seeing a, I would say, lightning of the political tension or the BCI situation in China. And on the '22 guidance,

[Harm Ohlmeyer:]

Yeah, Graham, of course you're interested in what our guidance is in '22, and I would relate to 2019. It's too early to give you a guidance, we will do that in March. But rest assured everything that we're seeing right now, including the price increases that we plan for next year and what we're seeing in how we want to expand our D2C business, again, the gross margin will definitely be up to our 2021 levels. And of course, we'll see growth that we're planning next year where we say it's at least the 8% to 10% growth that we have an average now on the game plan, we clearly want to leverage that to the bottom -line. Whether that is exactly comparable to '19 already, again, this is what we'll see in March. But very clearly, you can leave today with confidence that the gross margin will be better than '21 and the operating margin will be expanded over '21.

[Graham Renwick:]

Great. Thank you.

[Operator:]

Next question is from the line of Warwick Okines, from Exane BNP Paribas. Please go ahead.

[Warwick Okines:]

Yes. Thanks very much for taking my questions. So, in my two are --especially how much would you say that the external conditions have delayed you putting units in front of the customer or if at all? I mean, you talked before about quadrupling forum and just to -- I am just wondering whether you feel like the improvements to your product roster and brand hits are being a bit disrupted or whether all of the supply constraints have really been in more mid-priced products? And then secondly, I've got a question on inventory. I think you said that about 30% of your inventory is goods-in-transit, which doesn't seem like a particularly unusual number. I think it was 28% in 2019 or so, perhaps I missed that. But maybe you could explain, because presumably, transit is unusually high at the moment. Thank you.

[Kasper Rorsted:]

I'll take the first question and Harm more take the second. If you look upon that crudely, the overall impact on what we're seeing in Asia has been more volume-based and newness-based. We have not seen a disruption to the creation of new products, and if you take the forum as social, while we are seeing a slight delay, like we're seeing a slight delay of introduction of the NMDH1, but the newness is not really -- the innovation is not being impacted, it is more the speed of introduction. And that's why we're quite confident that we'll continue -- we'll look upon the current ramp up of forum. We feel very comfortable where we are, of course, we'd like to have more products into the market. But I think that the more important part is that we have created the product innovation, and is coming through the pipeline. And you will see that in the fourth quarter, I assume you're going to be here next month. And you're going to see it in the first and the second quarter, where of course, you're going to have a different ramp, so it's more delay and it's more volume-related than it's newness related. But of course, if you don't have the volume then you might have the newness, but you don't get the revenue.

[Harm Ohlmeyer:]

Warwick, on the inventory situation, you're absolutely right, our goods-in-transit is normally between 25% and 28%. But you've got to look at the 30%, first, it's not the same in every market, and in some markets it's more like 40%, especially when it comes to North America and EMEA. And then secondly, this is 30% without having production in Vietnam which would have led to more goods-in-transit as well being on trips or whatever. That's why the 30% is end of Q3, and this number will increase significantly in the fourth quarter, and that's where the supply challenges come in. Again, we're not worried about the gift under the Christmas tree. There will still be different choices, but we got to buy early on this, so don't wait for December.

[Warwick Okines:]

Okay. Thanks very much.

[Operator:]

Next question is from the line of Elaina Mariani from Morgan Stanley, please go ahead.

[Elaina Mariani:]

Good afternoon Kasper and Harm. Thanks for a very comprehensive presentation. I actually have one broader question. If we take average performance of your largest global peers. They were able to grow sales up double-digit versus 2019, both year-to-date and in Q3, despite facing the exact same supply chain challenges, COVID restrictions in Asia, and also, I challenging market environment in China. So, what is holding you back in European? What explained this gap considering the fact that you have restarted investing in marketing and have really pushed the button further on product innovation.

[Kasper Rorsted:]

Thank you for asking an easy question. I think if we were to -- instead of trying to go through the nitty -gritty details I think there's a couple of things, so let me try to outline those. One is that we have relative a higher share in Asia than most of our competitors, which means it has a higher impact. Of course, you'll see that we have a half footwear share also, which is where it's coming from, and we were more impacted, particularly in the beginning of the year, through the close-down of sports because we're more dependent on selling of licensed products. If we're to look upon those, these will be probably the 3 buckets that we have. If you look upon the western world, we actually have a lesser -- a disconnect to our peers at this stage in the western world than we have in Asia. Of course, we're working very hard and diligent on bringing new products into the market and investing heavy in marketing to make certain that we get back and have similar growth rates to that of our competitors.

[Elaina Mariani:]

Thank you.

[Operator:]

Next question is from the line of Zuzanna Pusz from UBS. Please go ahead.

[Zuzanna Pusz:]

Good afternoon and thank you for taking my question. So, my first question is on China. When we look at your performance in China on a 2-year stock, you've been -- basically seen only a small deceleration sequentially, especially if we compare to some of your peers. So now given that the majority of the business I think in China is still wholesale driven, given the franchise model. Would you be able to comment if you've actually seen a similar level of deceleration if we look at the sell-out, or maybe there was some unusual activity related to orders and things like that? Just to get an idea of whether this was actually the underlying trend in the market, which would have suggested that actually you didn't see such a big deceleration as perhaps, maybe some other companies have seen in the market. And the second question is, I guess maybe more specific in Q4 outlook. You've provided some very useful information in the presentation, but given that your outlook calls for an increase of up to 20%, I guess the lower end of that could be read in a different way. And I guess if I just take them roughly 14% underlying growth, you suggest you -- so in Q3, if we excluded the headwinds and if I applied it to Q4 and remove the headwind which you provided us with related to Vietnam, that would probably get me to roughly mid-single-digit growth on FX-neutral basis in Q4. I'm just wondering if you would be able to comment on that. I understand there's a lot of uncertainty, but just to get an idea of what kind of growth rate, given the current visibility you would expect in Q4. Thank you very much.

[Harm Ohlmeyer:]

Yeah, thanks, Zuzanna. First on Q4. Of course, Q4 is not just Vietnam, there are other factors as well, and that's what we're clearly saying -- we're talking more about a flattish Q4. And then we can do the calculation, so the lower end of -- up to 20% would mean then 17% to 18% if you look at the flattish Q4. But again, this is not just Vietnam related, it's a continuation of what we're seeing in China right now as well. On the other question on the 2-year in China, you're absolutely right with the deceleration trend. There's nothing special in the franchise channel. That's a trend in the overall market that we're seeing, it's not specific to the franchise channel or to other channels. It’s the overall trend that we're seeing.

[Zuzanna Pusz:]

Thank you. And just to clarify, follow-up on China. Given that there was quite a lot of intra -quarter volatility, would you say that there was a similar exit rate from China in Q3 or that there wasn't any further deceleration? Just to get an area of also what we should think of Q4 in China.

[Harm Ohlmeyer:]

It's steadily improving, but slowly improving. That's similar. I don't want to compare Q3 with Q2 exit or whatever, it's too volatile as a market. But that's really what we're seeing. It's a steady improving trend. But again, not to the satisfaction that we would have liked to see or that we had planned originally.

[Zuzanna Pusz:]

Perfect. Thank you. That's great to hear.

[Operator:]

Next question is from the line of Jurgen Kolb with Kepler Cheuvreux. Please go ahead.

[Jurgen Kolb:]

Yeah. Thank you very much. 2 questions from my side. On page 26, you detailed your actual plan for China. I was wondering how much of those plans are just plans or initiatives that are here in the short-term, will be changed, or will they extend it? You said you have more than 100 marketplace expansion with new Terrex and Y-3 point-of-sales. Is that a new program that you planning to open more of these specific Terex and Y-3 and Stella stores in China. And then secondly, it also seems as if you're experiencing a lower promotional environment. I was wondering if you could comment on how you see the current environment on a market-by-market basis and how long do you think these lower promotional environment will ask from your observations? Thank you.

[Kasper Rorsted:]

So, let me take the first one what we are asking is when we put in place of course, the set of actions now and this is a dynamic way of looking at VA1. So, we're not going to say when we do these and we over, what you can see it from -- as an example Saman from a store standpoint, by introducing a 100 new Terex stores and by 3 stores instill points, we are entering into higher price points. And that is, of course a key power strategy. Terrex goes back to outdoor while goes back to women and goes back to high-end leisure. What you'll continue to see is pending where they are an expanse in what we're doing, but of course also a continued, I would say, review of what are the appropriate measures to make sure that we turn China around in sustainable way. We're giving you an insight to what we are doing, but I think that the Chinese market is such a fast-evolving market that will continue to have a game plan on what to do, but here are some of the measures that we believe are the right ones now, and we've spoken about that also in previous meetings with you, what we're doing. It's an evolution and it, of course, will scale up if we believe that it makes sense to scale up. I will give it over to Harm.

[Harm Ohlmeyer:]

Yeah, Jurgen, the promotional environment you've got to differentiate the East from the West. And of course, there's a promotional environment in China as our plans or other brands plans didn't come to fruition, so there's clearly -- there's too much inventory in the market. That's why we also mentioned that we already moved 10 million units, which is significant for the market to other markets that are in the demand. Yes, China, I would say it's too promotional given the inventory they have in the market it's different than in again. But on the flip side you see Latin America has the lowest inventory ever, and you see it in the operating profit as well in Latin America, it’s the highest ever. The same in North America, again north of 20%. And that gives us confidence also in the future profitability of the Company now being consistently in North America above 20%, and it's the healthiest environment that we have seen for many, many years. The same in EMEA as well. So, it's really a 2-story of the East and the West. Very healthy environment in the West. And yes, we got to work through some of the geopolitical challenges in China, but also that we will work through it.

[Kasper Rorsted:]

Jurgen, let me just reiterate what Harm said North America. About 3 years ago, we had an operating margin North America of 6%. Right now, if you could criticize as anything in North America, is that our full-price sales was going up in every single channel across the U.S. and that's why you're seeing that. You can almost say that the margin is hindering our top-line. We are getting the right balance and that's why the important part was we have a, "More equal distribution of revenue and margin by country. " But definitely, you're seeing a very, very strong improvement in the U.S. from mid-single digits to now a margin of 20% at the highest sales through that we -- the highest full-price sales that we've had for many, many years.

[Jurgen Kolb:]

Understood. Thank you very much, guys. All the best.

[Kasper Rorsted:]

Thanks.

[Harm Ohlmeyer:]

Thanks, Jurgen.

[Operator:]

The next question is from the line of Cedric Lecasble from Stifel. Please go ahead.

[Cedric Lecasble:]

Yes. Thank you for taking my questions. I have 2 also. The first one is on China. Just to know what you can do or not do in terms of conducting marketing operations, organizing events using ambassadors. You had some constraints over the past months because of what happened in March. Where do you stand today? And are you on par with what local competitors can do? That's question number 1. And the second one on your forecast of easing problems from Q2 are at least not material hits on your top-line in Q2. How do you see the U.S. situation, the bottlenecks, the ports congestion, also delays in the U.S., going into next year -- into '22? Do you think -- from Q2, do you see any easing of these issues or do you still have some negative assumptions for this in your forecast in '22? Thank you very much.

[Kasper Rorsted:]

So, Cedric, let me try to answer the China question in the most appropriate way. As you know, that most Western brands were -- didn't lost their brand versus in -- at the end of the first quarter, bidding on the second quarter, we are seeing a somewhat normalization, but abide at a very slow rate. So, the recent event -- a trade event in Shanghai that took place last week and branch, at New Hampshire picture of it. We had a very well-known, valuable female sports star on the podium. So, we are seeing a normalization, but at a very slow rate and there is no doubt that right now there is a difference in the use of athletes and entertainers, if it were local versus non-local companies. And that of course, is our thing, having a negative impact in our capabilities to drive traffic to our websites and to our stores. We are seeing slightly recovery, but there is a substantial difference between local and non-local companies in China. I think that would be the most appropriate way of answering that question.

[Harm Ohlmeyer:]

I hope I got your question right on the port in the U.S. Clearly, we still have a lot of challenges in the inbound, in the port, but also on the railway, and shortage of labor. And we believe this is not going away by the end of the year so, all intelligence that we have, especially in the U.S. where it's more pronounced than in Europe, it will definitely take until the summer of '22 where we have impact. And in Europe even, it's just longer lead times to get into Europe and we just need to plan for a different lead and produce the product earlier to have longer lead time. But rest assured that whatever you see in the port, this is a smaller issues than what we're dealing with in Vietnam right now. And whatever the port situation will be next year, it's already baked into our -- I wouldn't call it a guidance, but the direction that we're going with 8% to 10% top-line growth, at least next year, that's factored in there already. It's not good, but we will learn to deal with it.

[Cedric Lecasble:]

Clear. Thank you, gentlemen.

[Kasper Rorsted:]

You're welcome.

[Operator:]

Next question is from the line of Thomas Chauvet from Citi. Please go ahead.

[Thomas Chauvet:]

Good afternoon. My first question on pricing, I understand you're not going to provide detailed numbers behind your coming pricing increases. But how much do you think will come from pure pricing to offset input cost inflation, and how much from mix you're elevating the brand towards more premium lifestyle offering, collaboration, limited edition products? Secondly, on your sourcing strategy, I was wondering whether the disruption caused by COVID over the past year, of course and so what happened in some markets like Vietnam in the last few months may change the way you think about geographic origin of sourcing in the future. If we look at the split of sourcing by countries and the various product categories, would it make sense economically, industrial, to rebalance part of the footwear and apparel sourcing from Southeast Asia to Vietnam, Cambodia and Indonesia, and China, to South Asia and Western Asia, for instance, Pakistan or Turkey, where you have significant production for accessories and gear, but rarely for foot ware and apparel. And so, I was just wondering. And then just a follow-up on the goods-in - transic -- in transit, sorry. So, you said 30% over the inventories at the end of the quarter was intended more delays expected in the fourth quarter, Have these unusual delivery terms changed the way you recognize revenue with your wholesale partner? Is there any accounting impact in Q3 and Q4 to be aware of or it's just irrelevant because these are intra Company flows? Thank you.

[Kasper Rorsted:]

So, I will take the part of our manufacturing strategy to which extent are we revisiting that. We actually have acquired diversified portfolio if you look upon from a footwear standpoint. We're spread into 3 countries where the fourth, delivering a bit on the apparel. It is a less consolidated industry and thereby, frankly, you can't even do it in this country, so that's why we've spread out more. Footwear is a dedicated competence that is not so easy to find, and that's why it would make very little sense to try to diversify even more because you also have to go back and say, where is the original origin of the materials? You might be able to spread the factories in theory, but if the vast majority of the materials come from less countries, then you're going to have the same impacts. I think while it's interesting to look upon, I think we also need to understand that right now what we've experienced in the last 18 months have been situations that has never occurred before, and we have to assume that vaccination will bring the world back to somewhat of a normal position. If not, we'll continue ever a completed disrupted world moving forward that will have profound negative impact across all economies and all industries. So actually, we believe that with the diversification we've done, in the last couple of years, we have actually mitigated a lot of it. And moving footwear out of the three main countries, is going to be an extremely difficult test and will not be short of the test when it comes to the diversification of the origin of the materials. I'll then hand over to Harm.

[Harm Ohlmeyer:]

Yeah, Thomas, first on the price increases. First and foremost, it will be more significant on pretty much the same product where we increased the prices. You can call it an inflation as well, but that's what we're going to do. And you will see a more pronounced increase in the fall, winter '22 season versus spring, summer '22 season because a lot products have been sold in already, so there will be some on a speed creation timeline that will be impacted by higher prices if you have D2C exclusives, where we take advantage of that. But some of the products, or many of the product we have sold in for spring, summer '22 already, so it will be more pronounced to the second half when it comes to the main -- same product pricing. At the same time, with the new brand architecture that we're rolling out next year with Performance Sports Band, and also Originals to definitely take advantage of preimmunizing. Originals, it's much more than today, not just for Core Labs, but also for the product itself, and that's where we go, further in the lifestyle segment and there is a premium pricing that will be throughout the year with new products coming in. Secondly, you asked about the goods in transit. Has nothing to do from an accounting point of view, so we will account for the inventories and the goods in transit. And the balance sheet has nothing to -- from a revenue recognition point of view, the only impact on revenues is if a product is on a ship or in a harbor, and it's being stuck there, it’s not available to ship to an account or sell to an end-consumer. That's why we have the impact through the lateness, but from an accounting point of view, there's absolutely no impact.

[Thomas Chauvet:]

Thank you.

[Operator:]

Next question is from the line of Omar Saad from Evercore ISI. Please go ahead.

[Omar Saad:]

Thanks for taking my questions. Good afternoon. My first one is on your comments around the supply chain issues. I think in the market people are pretty concerned that that's going to drag well into '22. Sounds like you guys are pretty confident that it's not going to persist beyond the first quarter. Maybe you could talk about some of the factors giving you confidence that things should realign by that timeframe. And then also, another follow-up on China. Sorry. I know you mentioned that you saw some deceleration and in non - COVID regions, but it'd be helpful to know how much of the China slowdown or shortfall, if you will, is related to COVID, COVID restrictions, travel restrictions versus other, whether it's competitive issues, geopolitical issues, consumer sentiment, real estate concerns, stuff like that? Thanks.

[Kasper Rorsted:]

Omar, when we look upon the factory opening, we look at how many factories are open? Which is factual. How many people are being vaccinated within the factory? How many has first vaccination? How many have second vaccination? And how many workers are back? And that is the statistical data we're looking upon, and that's the only thing we can do there's nothing else. So, we can be worried and onward, we're taking a very statistical and very effective in approach and saying this is the level workers in the factory. This is a level of output, this level of vaccination. This is a little vaccines they have at hand. And based on that, we're getting their projections. And I think that is the only thing we can do. So, we're not passing any adjustment on -- we're taking and just simply looking upon a short fuel, a pure number standpoint, and then fast-forwarding that. Does that mean that there is a guarantee you're not going to have a Corona infection in Country B? No. You don't know that and we don't know that, but we can only do it with the best capability with the data we have at hand and the data we have at hand we showed very clearly to you in this presentation today.

[Harm Ohlmeyer:]

On China, it is really difficult to go through the details of what the impact is, of what, but rest assured the geopolitical attention is easing. And it is just to remain to volatile environment, we see no natural disaster, this COVID outbreaks here and there. And a different restrictions in the one of the other district, but now decomposing a district by district is difficult. But again, it's improving every week and every month and that's why we remain confident going back to a -- in a gross paths and market share gains going into '22.

[Omar Saad:]

Thank you.

[Sebastian Steffen:]

Stuart, we have time for 2 more questions, please.

[Operator:]

Okay. Thank you. The next question is from the line of James Grzinic from Jefferies International. Please go ahead.

[James Grzinic:]

Yes. Thank you. Good afternoon, everybody. I just had a quick follow-up actually on China. Kasper, you talked to the BCI tailwinds in your view -- headwinds rather, becoming less of an issue recently. And that's despite you not really being able to talk to the brand like others in the market. Can you perhaps -- what gives you that confidence? What sort of KPIs are you thinking when you get that feeling in terms of that backdrop improving for you and western brands?

[Kasper Rorsted:]

I'm looking for and traffic. That's what we're looking upon and that's the only way we can judge it.

[James Grzinic:]

Okay. Understood. Thank you.

[Operator:]

Next question is from the line of Ann Laurie business from HSBC. Please go ahead.

[Anne-Laure Bismuth:]

Hi, guys. Thanks for taking my question. I have 2. The first one is on China, so some competitors are thinking about reinvesting around the winter Olympic. So just the right window or do you seem to further reinvest in China? And my second question is about the percentage of sales that. Put price are you where you want to be? Thank you very much.

[Kasper Rorsted:]

When it comes to the Olympics and investing into athletes, I spoke about what we're doing, so we will continue to increase our investment into athletes to make sure that we actually support the Chinese governmental plan that we're engaging people in sport. The Olympics is one, but I think what is even more exciting is the growth in investment that we're seeing into outdoor will continue to open new stores and of course, will on athletes. The second part, I didn't get if that was a question about full-price sell -through. I simply didn't hear it.

[Anne-Laure Bismuth:]

Are you where you want to be on full-price sales?

[Kasper Rorsted:]

I think that -- are you speaking about which market because it's a bit like the global weather forecast then.

[Anne-Laure Bismuth:]

No, but globally, the percentage of sales at full-price, are you where you want to be?

[Kasper Rorsted:]

Sorry, I think if you go back you can say in the West, it's almost too high and the East is too low. You can look upon the margin where we are. The margin is pretty much as a -- on a Company level where we need to be, but we're at very different situations. And if you look upon in the -- in China, of course your inventory surplus, so that you will have a probably less sell-through at full price. And the West, we are going to have shortages in the products and you're going to have quote-on-quote, almost too high of a full-price sales rule. Overall, what we have is we're more or less in line where we need to be, and we're very clear on what we guided on the margin for this year, but we're also very clear on the margin guidance for 2025 is 12% to 14%. We were 11% in '19, so we're confident that we can get that mix, right. Also moving forward, but we got to have somewhat of a stabilized environment. So, we don't have 2 markets that they're operating in very different scenarios where one is growing double-digit and one is declining double-digit. With this, I think I'll hand over to Sebastian will close the session for now

[Sebastian Steffen:]

Thanks very much, Kasper, thanks very much Harm and also thanks very much, Stuart. Ladies and gentlemen, this concludes our Q3 results conference call. If you have any further questions and I'm sure there's going to be. If you'll be at today over the next couple of weeks, feel free to reach out to any member of the IR team or myself, obviously, actually Kasper, Harm and I are very much looking forward to meeting many of you during our upcoming roadshow to London, New York, Boston, Frankfurt, over the next couple of weeks. But believe it or not, we cannot wait to get stuck in New York traffic again, this is not the only thing that we're actually looking forward to as you've heard from Kasper, our innovation day is just around the corner and we're very excited to hopefully be able to welcome many of you here at our unique World of Sports in five weeks’ time. And with that, thanks very much for your participation. Have a good remainder of the day, all the best, bye.

[Operator:]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.