ADIDAS ANNUAL REPORT TARGETS – RESULTS – OUTLOOK TARGETS 2016 1, 2 RESULTS 2016 2 OUTLOOK 2017 CURRENCY-NEUTRAL SALES DEVELOPMENT: INCREASE AT A RATE BETWEEN 10% AND 12% Gross margin 47.3% – 47.8% Operating margin AT LEAST STABLE versus prior year level (6.5%) Average operating working capital (in % of net sales) AROUND PRIOR YEAR LEVEL Capital expenditure AROUND € 750 MILLION Gross borrowings MODERATE DECLINE Net borrowings/EBITDA ratio TO BE MAINTAINED BELOW 2 CURRENCY-NEUTRAL SALES DEVELOPMENT: INCREASE OF 18% Group sales of € 19.291 BILLION Gross margin 48.6% Operating margin 7.7% CURRENCY-NEUTRAL SALES DEVELOPMENT: INCREASE AT A RATE BETWEEN 11% AND 13% Gross margin INCREASE TO A LEVEL OF UP TO 49.1% Operating margin INCREASE TO A LEVEL BETWEEN 8.3% AND 8.5% Average operating working capital (in % of net sales) decreases 0.3pp to 20.2% Average operating working capital (in % of net sales) MODEST INCREASE Capital expenditure € 651 MILLION Gross borrowings decrease 12% to € 1.618 BILLION Net borrowings/EBITDA ratio 0.1 Capital expenditure AROUND € 1.1 BILLION Gross borrowings MODERATE DECLINE Net borrowings/EBITDA ratio TO BE MAINTAINED BELOW 2 Net income from continuing operations INCREASE AT A RATE BETWEEN 10% AND 12% to around € 800 million Net income from continuing operations INCREASES 41% to 1.019 billion Net income from continuing operations INCREASE AT A RATE BETWEEN 18% AND 20% to a level between € 1.200 billion and € 1.225 billion Shareholder value FURTHER INCREASE adidas AG share price INCREASES 67% Shareholder value FURTHER INCREASE Dividend per share INCREASE OF 25% TO € 2.00 3 1 As published on March 3, 2016; the outlook was updated several times over the course of the year. 2 Figures reflect continuing operations as a result of the divestiture of the Rockport business. 3 Subject to Annual General Meeting approval. FINANCIAL HIGHLIGHTS 2016 FINANCIAL HIGHLIGHTS 2016 (IFRS) Operating Highlights (€ in millions) Net sales 1 EBITDA 1 Operating profit 1, 3 Net income from continuing operations 1, 3 Net income attributable to shareholders 2, 3 Key Ratios Gross margin 1 Operating expenses in % of net sales 1 Operating margin 1, 3 Effective tax rate 1, 3 Net income attributable to shareholders in % of net sales 2, 3 Average operating working capital in % of net sales 1 Equity ratio Net borrowings/EBITDA 1 Financial leverage Return on equity 2 Balance Sheet and Cash Flow Data (€ in millions) Total assets Inventories Receivables and other current assets Working capital Net borrowings Shareholders' equity Capital expenditure Net cash generated from operating activities 2 Per Share of Common Stock (€) Basic earnings 2, 3 Diluted earnings 2, 3 Net cash generated from operating activities 2 Dividend Share price at year-end Other (at year-end) Number of employees 1 Number of shares outstanding Average number of shares 1 Figures reflect continuing operations as a result of the divestiture of the Rockport business. 2 Includes continuing and discontinued operations. 3 2015 excluding goodwill impairment of € 34 million. 4 Subject to Annual General Meeting approval. 2016 2015 Change 19,291 1,883 1,491 1,019 1,017 48.6% 42.8% 7.7% 29.5% 5.3% 20.2% 42.6% 0.1 1.6% 15.7% 16,915 1,475 1,094 720 668 48.3% 43.1% 6.5% 32.9% 4.0% 20.5% 42.5% 0.3 8.1% 11.2% 15,176 13,343 3,763 3,607 2,121 103 6,472 651 1,348 5.08 4.99 6.73 2.00 4 150.15 3,113 3,003 2,133 460 5,666 513 1,090 3.32 3.32 5.41 1.60 89.91 60,617 55,555 201,489,310 200,197,417 200,188,276 201,536,418 14.0% 27.7% 36.3% 41.5% 52.2% 0.3pp (0.3pp) 1.3pp (3.4pp) 1.3pp (0.3pp) 0.2pp (6.5pp) 4.5pp 13.7% 20.9% 20.1% (0.6%) (77.6%) 14.2% 26.9% 23.7% 53.3% 50.6% 24.5% 25.0% 67.0% 9.1% 0.6% (0.7%) OUR CORE BELIEF THROUGH SPORT, » WE HAVE ADIDAS ADIDAS BRAND REEBOK BRAND IN THE WORLD. IN THE WORLD. SPORTS BRAND TO BE THE BEST TO BE THE BEST TO BE THE BEST SPORTS COMPANY OUR MISSION THE POWER TO CHANGE « LIVES. FITNESS BRAND IN THE WORLD. We are calling all creators. They are our creative capital, the source of our inspiration. The game changers, the difference makers, the shapers of tomorrow. True athletes at heart, who set the pace, always first to break new ground and rewrite the rules as we know them. Their drive and courage invigorates our brands and helps us create unique experiences. We need creators in order to continually push boundaries, to re-invent, to make something out of nothing. We need them to Create the New. That’s why we invite all Creators, whether inside or outside our company, to come in and work with us. We give them spaces where their ideas can spark and where collaborative exchange is encouraged. Empowering this creative force is the essence of our Open Source approach. It will take us an essential step further towards making our brands the most relevant and desirable for all consumers. ADIDAS ANNUAL REPORT 2016 1 TO OUR SHAREHOLDERS OPERATIONAL AND SPORTING HIGHLIGHTS LETTER FROM THE CEO EXECUTIVE BOARD SUPERVISORY BOARD SUPERVISORY BOARD REPORT CORPORATE GOVERNANCE REPORT INCLUDING THE DECLARATION ON CORPORATE GOVERNANCE COMPENSATION REPORT OUR SHARE 2 GROUP MANAGEMENT REPORT – OUR COMPANY CORPORATE STRATEGY adidas Brand Strategy Reebok Brand Strategy GLOBAL OPERATIONS RESEARCH AND DEVELOPMENT OUR PEOPLE SUSTAINABILITY 3 GROUP MANAGEMENT REPORT – FINANCIAL REVIEW INTERNAL MANAGEMENT SYSTEM BUSINESS PERFORMANCE Economic and Sector Development Income Statement Statement of Financial Position and Statement of Cash Flows Treasury Financial Statements and Management Report of adidas AG Disclosures pursuant to § 315 Section 4 and § 289 Section 4 of the German Commercial Code BUSINESS PERFORMANCE BY SEGMENT Western Europe North America Greater China Russia/CIS Latin America Japan MEAA Other Businesses 6 10 14 18 20 27 32 41 48 55 60 62 67 72 78 86 90 90 92 96 101 104 107 1 1 1 111 111 112 112 113 113 113 114 115 115 115 118 123 131 133 138 140 1 4 1 142 143 144 159 188 194 202 204 208 209 2 1 2 2 1 6 2 1 9 220 SUBSEQUENT EVENTS AND OUTLOOK Subsequent Events Outlook RISK AND OPPORTUNITY REPORT Illustration of Material Risks Illustration of Opportunities MANAGEMENT ASSESSMENT OF PERFORMANCE, RISKS AND OPPORTUNITIES, AND OUTLOOK 4 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES Notes to the Consolidated Statement of Financial Position Notes to the Consolidated Income Statement Additional Information STATEMENT OF MOVEMENTS OF INTANGIBLE AND TANGIBLE ASSETS SHAREHOLDINGS Responsibility Statement Auditor’s Report 5 ADDITIONAL INFORMATION TEN-YEAR OVERVIEW GLOSSARY DECLARATION OF SUPPORT FINANCIAL CALENDAR Group Management Report: This report contains the Group Management Report of the adidas Group, comprising adidas AG and its consolidated subsidiaries, and the Management Report of adidas AG. PUBLICATIONS FOR THE 2016 FINANCIAL YEAR ADIDAS MAGAZINE ADIDAS ANNUAL REPORT ADIDAS GROUP SUSTAINABILITY PROGRESS REPORT MAGAZINE ANNUAL REPORT SUSTAINABILITY REPORT (available from mid-April onwards) Printed versions of our Annual Report with condensed consolidated financial statements (excluding the Notes) as well as our Magazine can be ordered online. www.adidas-group.com/en/investors/financial-reports T O O S U R R E E R OLD A H S H 5 S R E T O O U R E R OLD A H H S To our Shareholders 1 — OPERATIONAL AND SPORTING HIGHLIGHTS — LETTER FROM THE CEO — EXECUTIVE BOARD — SUPERVISORY BOARD — SUPERVISORY BOARD REPORT — CORPORATE GOVERNANCE REPORT INCLUDING THE DECLARATION ON CORPORATE GOVERNANCE — COMPENSATION REPORT — OUR SHARE 6 10 14 18 20 27 32 41 5 OPERATIONAL AND SPORTING HIGHLIGHTS 1 TO OUR SHA REHOLDERS Operational and Sporting Highlights 1 TO OU R SHAR E HO LD E RS Operational and Sporting Highlights OPERATIONAL AND SPORTING HIGHLIGHTS Q1 2016 — adidas Originals launches its ‘Future’ campaign. With its unique point of view on creating the future by re-inventing the past, adidas Originals is inspiring a new generation not to follow but to challenge the status quo. — Following the success of M1, TaylorMade- adidas Golf unveils its M2 drivers, fairways and rescue clubs to complete the M family. Similar to M1, the M2 product line meets the challenge of delivering more performance to players of all skill levels with the utilisation of multi-material construction. — adidas launches PureBOOST X, a running shoe created exclusively for women by women. PureBOOST X features a new floating arch, a stretch mesh upper and a lock-down lacing system that provide a personalised fit for every woman’s foot. JANUARY — Leo Messi underlines his status in football with a record fifth Ballon d’Or. The award is the greatest acknowledgement of individual success in football. — adidas and Stella McCartney announce the continuation of their long-term collabor- ation. The iconic designer will continue to create cutting-edge designs alongside the adidas brand until 2020. — Reebok launches Reebok Classic Leather, a shoe created in collaboration with US rapper and songwriter Kendrick Lamar. The shoe repre- sents Kendrick’s powerful vision of unity and sold out within 30 minutes. — adidas Football releases the world’s first high-performance laceless boot: ACE 16+ PURECONTROL. Only a short period of time after its launch, this disruptive football boot, which is worn by international football stars such as Mesut Özil and Ivan Rakiti´c, was sold out in almost every channel. — Playing in her first Grand Slam final, adidas brand ambassador Angelique Kerber wins the 2016 Australian Open in Melbourne. — The Supervisory Board of adidas AG resolves upon the successor for the long- standing adidas AG CEO Herbert Hainer. Effective August 1, 2016, Kasper Rorsted is appointed as ordinary member of the Executive Board and effective October 1, 2016 as CEO of adidas AG. — Reebok is awarded the ISPO Communi- cation Award 2016 in the multi-channel category for its ‘Be More Human’ campaign. — adidas is listed in fifth place among the Global 100 Most Sustainable Corporations in the World (Global 100 Index) and is recognised as the industry leader. It is the third consecutive year that adidas is included in the top ten of the Global 100 Index, compiled annually by Corporate Knights. FEBRUARY — adidas continues its Sport 16 brand campaign with ‘I’m here to create’, a series of videos showing the personal creator stories of famous female athletes such as WNBA All-Star Candace Parker, tennis icon Caroline Wozniacki and fitness artist Nicole Winhoffer. — The adidas brand and Wanderlust, producer of the largest yoga lifestyle events in the world, announce a US-focused, multi-year partnership. — Reebok launches ZPump Fusion 2.0, a running shoe that conforms to the shape of the athlete’s foot to give a custom fit. The seamless compression sleeve upper and the tyre-inspired ZRated outsole provide comfort and control. MARCH — adidas Football announces a long-term partnership with Juventus Turin midfielder Paul Pogba, one of the world’s most in-demand footballers. Continuing on his extraordinary journey from the streets to superstar status, Pogba has already won three Italian league titles and three domestic cup trophies. — adidas Originals launches further colourways of its successful footwear franchise NMD. The franchise, for which consumers were queuing in front of stores, was sold out immedi- ately, with more than 400,000 pairs sold within just one day. — Together with YouTubers Amanda Steele and Marcus Butler, adidas neo presents its new sneaker innovation Cloudfoam. The Cloudfoam sneakers with a lightweight midsole and a thick sockliner provide a classic silhouette plus comfort. 6 7 1 TO OUR SH AREHOLDERS Operational and Sporting Highlights OPERATIONAL AND SPORTING HIGHLIGHTS Q2 2016 APRIL — adidas opens its first Brand Centre in Hong Kong. With a retail area of nearly 6,500 square feet, it is the largest sports brand speciality store in the city’s Central district. MAY — Reebok launches ‘25,915 Days’, a striking campaign reminding people that they have, on average, 25,915 days to live. With this campaign, Reebok repeats its fitness mantra and motivates fitness enthusiasts to live up to their fullest potential. — adidas Originals launches its official Snapchat channel, taking an Open Source approach and allowing influencers to showcase and personify the brand. — Shortly before the kick-off of the UEFA EURO 2016, the adidas brand unveils the Mercury Pack, a cutting-edge range of boots inspired by the trophies that players around the world strive to win. — For the second time, Sergio García wins the AT&T Byron Nelson in Irving/Texas, USA. García wins playing a full TaylorMade bag including an M2 driver, M1 fairway woods and PSi irons. — Reebok launches ‘Hunt Greatness’, a campaign and platform inspired by American football star J. J. Watt that encourages people to pursue a better version of themselves, every day, through fitness. — adidas Originals relaunches its iconic Gazelle. With this silhouette that was first introduced in the 1960s, adidas Originals continues defining a contemporary street look for the future. — adidas Running introduces UltraBOOST Uncaged. The shoe was inspired by fans and combines the performance and innovation of the original UltraBOOST with the unique flair of the adidas brand’s creative fan base. — Reebok and three-time Defensive Player of the Year J. J. Watt announce the release of the JJ I, the ultimate training shoe which was developed in close collaboration with the American football star. — Together with other partners, Reebok hosts the 2016 International Day of Yoga in India’s biggest cities, reaching more than 25,000 participants. — adidas establishes a new strategic partnership with Chinese real estate and sports business giant Wanda Group. In future, adidas will sponsor two of Wanda’s IRONMAN events and will help to further develop football and basketball in China. — The adidas brand announces the cementing of its long-term relationship with creative pioneer Kanye West in the launch of adidas + KANYE WEST. — As the second-youngest player ever, TaylorMade-adidas Golf staffer Rich Berberian wins the 49th PGA Professional Championship in Verona/New York, USA. JUNE — The adidas brand and Zalando, one of Europe‘s biggest online retailers, launch a new pilot to meet the needs of today’s consumer faster than ever. Consumers in Berlin are able to place orders for adidas products on Zalando’s app and get the delivery on the same day. — In the USA, adidas Running launches AlphaBOUNCE, a running shoe that offers an adaptive fit and feel for runners and versatile athletes. Men’s pairs were sold out within less than twelve hours. — adidas announces that its football business is expected to reach new record sales of € 2.5 billion in 2016. — The adidas brand announces its contract extension with the German Football Association (DFB) until 2022. — The NBA’s most sought-after draft prospects Brandon Ingram, Jaylen Brown, Jamal Murray, Dragan Bender and Kris Dunn choose to join adidas Basketball. 7 1 TO OUR SHA REHOLDERS Operational and Sporting Highlights 1 TO OU R SHAR E HO LD E RS Operational and Sporting Highlights OPERATIONAL AND SPORTING HIGHLIGHTS Q3 2016 JULY — Reebok launches its new CrossFit training shoe Nano 6.0. It offers athletes strength and comfort to overcome every obstacle in the CrossFit box and beyond. — CCM launches the ‘CCM Skills App’. The app allows users to train virtually alongside NHL Player Lance Pitlick, in a series of fun and challenging drills intended to help improve players’ technique on the ice. — The adidas brand announces the launch of its adidas Athletics range, designed to deliver a fresh take on traditional pre- and post-match outwear. The first highlight product of this range is the adidas Z.N.E. Hoodie. — Reebok and Vogue Fitness launch the first women’s-only CrossFit facility in Abu Dhabi. AUGUST — Kasper Rorsted joins adidas as member of the Executive Board. Following a two-month induction period with Herbert Hainer, Kasper Rorsted becomes CEO on October 1, 2016. — The adidas brand presents the Creator Studio, a digital platform giving football fans the chance to design the third jersey for some of the world’s biggest football clubs such as FC Bayern or Manchester United. The kits with the most likes will be entered into a top 100 gallery per club. — adidas announces the opening of SPEEDFACTORY in the Atlanta area in late 2017. This state-of-the-art facility will focus on running footwear and targets production of 50,000 pairs in 2017. In the mid term, adidas aims to produce one million pairs of shoes for running and other categories in its SPEEDFACTORY facilities. — adidas Originals opens the doors to its new flagship store on Spring Street in New York City. The store celebrates the New York street culture and will serve as a hub for sneakerheads and streetwear enthusiasts. SEPTEMBER — adidas AG is announced as the newest member of the EURO STOXX 50 Index, Europe’s leading blue-chip index. For adidas, this is a big milestone as the EURO STOXX 50 is a representation of the so-called ‘supersector leaders’ in the Eurozone. — The adidas brand and the United States Tennis Association announce a new partnership to support American tennis on multiple levels by impacting the future of American tennis through a number of initiatives and programmes. — adidas launches the next chapter of Sport 16 with the brand campaign video ‘Sport Needs Creators’. The video debuted on air with the start of the NFL season and is a call to athletes everywhere who think and act beyond the norm of sport. — adidas is confirmed as a member in the Dow Jones Sustainability Indices (DJSI) World and Europe, the most recognised global sustainability benchmark. As one of few companies worldwide, adidas has remained in this index for 17 consecutive years. — adidas Originals and Alexander Wang confirm their partnership during New York Fashion Week. The Alexander Wang x adidas Originals collection consists of 84 pieces that celebrate the athleisure style in an unprecedented way. — adidas Football and the Irish Football Association announce a four-year contract extension. adidas will continue to supply kit and training gear to Northern Ireland teams until at least 2020. — At the adidas Runbase in Berlin, adidas launches the Futurecraft M.F.G. (Made for Germany), the first shoe created at the industry- changing adidas SPEEDFACTORY that is now available to consumers in limited quantities. — adidas Originals x Pharrell Williams presents adidas Originals Hu, a collection of apparel and shoes that celebrates cultural diversity around the globe. — After more than 15 years as adidas CEO, Herbert Hainer retires from office and hands over to his successor, Kasper Rorsted. 8 9 1 TO OUR SH AREHOLDERS Operational and Sporting Highlights OPERATIONAL AND SPORTING HIGHLIGHTS Q4 2016 OCTOBER NOVEMBER DECEMBER — Gigi Hadid, style icon, fitness advocate and trendsetter, joins Reebok’s female community as the newest face of the brand’s #PerfectNever movement, a call to action that asks women around the world to celebrate the beauty of imperfection and champions Reebok’s message of self-betterment. — adidas Basketball and James Harden reimagine the signature shoe game with the debut of Harden Vol. 1. The collection represents the first chapter of the collaborative partnership that began in October 2015 with the goal of co-creating footwear and apparel. — adidas and Parley for the Oceans unveil the first football products with the launch of the adidas x Parley Real Madrid and Bayern Munich home jerseys, made from Parley Ocean Plastic. — adidas opens ‘adidas NYC’, its largest brand flagship store worldwide. Set at the intersection of 5th Avenue and 46th Street in New York City, ‘adidas NYC’ heralds a new era in how consumers experience creativity and sport in stores. Inspired by high school stadiums, the store features the new stadium retail concept. The store has a tunnel entrance, stands for live-game viewing on big screens, locker rooms instead of dressing rooms and track and field areas where consumers can test and experience products. — Kristaps Porzingis of the New York Knicks joins the adidas Basketball family. While the young superstar is entering just his second year in the NBA, with his one-of-a-kind game and personality, he has already made significant waves. — The adidas brand launches Glitch exclusively in London. Glitch is a revolutionary product concept that speaks to the creative footballer and those who crave a boot with a flexible design. The two-piece interchangeable construction, made of an inner shoe and outer skin, is designed to suit the modern game with a focus on adaptability. — In a game-changing move for a more eco-innovative future, the adidas brand unveils the UltraBOOST Uncaged Parley, the first mass-produced running shoe created using Parley Ocean Plastic. The limited edition of 7,000 pairs was sold out within 24 hours. — adidas Running is presented with the esteemed Runner’s World International Best Update Award for its adizero adios 3.0 shoe, the latest iteration of the record-breaking adizero adios. the world’s — adidas unveils first performance shoe made using Biosteel fibre – a replication of natural silk – at the Biofabricate Conference in New York: the Futurecraft Biofabric. — adidas Football launches the first versions of its Ace and X boots created explicitly for female players around the world. These boots have been engineered to specifically fit the female foot by featuring a totally unique combination of shape, design and traction. 9 — adidas by Stella McCartney announces its collaboration with world-leading female Formula 1 development driver Carmen Jordá. A rising name in her sport, with a fast-paced and dynamic lifestyle that inspires women around the world, Carmen joins the likes of Karlie Kloss, Caroline Wozniacki and Garbiñe Muguruza in bringing to life the adidas by Stella McCartney brand ethos. — adidas opens a new pop-up store called ‘Knit for You’ in the Bikini Berlin shopping mall for a temporary three-month trial period. It aims to test localised and personalised consumer experiences in stores. adidas invites consumers to design their very own Knit for You Merino wool sweater that will be knitted in the store within a few hours. The Knit for You store is the first milestone of the Storefactory research project, supported by BMWi German Federal Ministry for Economic Affairs and Energy. LETTER FROM THE CEO 1 TO OUR SHA REHOLDERS Letter from the CEO 1 TO OU R SHAR E HO LD E RS Letter from the CEO R F E E T S R M O R O D 1 1 E E C O R R L T E P S E T T H A K 10 1 TO OUR SH AREHOLDERS Letter from the CEO DEAR SHAREHOLDERS, 2016 marked the first full year of ‘Creating the New’. The strong results we recorded are proof positive that the company’s strategy is paying off. Focusing on our strategic choices Speed, Cities and Open Source already makes us much more impactful in the marketplace compared to two years ago. Our new operating model – Brand Leadership – ensures a high level of commonality worldwide when it comes to the appearance of our brands. In combination with our consumer- obsessed mindset, it is helping us to increase the desirability of our brands and products around the globe. Going forward, we will build on Creating the New and accelerate our strategic priorities within the plan. Thus we will ensure that we continue our momentum in 2017 and achieve significant top- and bottom-line improvements in the period until 2020. Last year, our products resonated extremely well with consumers across the globe. Several of our key footwear franchises such as the UltraBOOST, NMD or Yeezy took top spots in all sneaker rankings and caused long queues in front of stores. adidas was named ‘The most relevant brand’ in the recent Highsnobiety Crowns, one of the most prestigious annual awards in our industry. As a result, we have been gaining market share in those categories – Running, Football, Training, Originals and neo – and markets – North America, Greater China and Western Europe – that we have identified as strategic growth drivers. All of this drove a strong financial performance: — We achieved record sales of € 19.3 billion, up 18% currency-neutral, representing our highest organic growth rate in almost twenty years. — The adidas brand has been experiencing unparalleled brand heat, with currency-neutral revenues increasing a strong 22%. This growth was driven by key performance and lifestyle categories in the brand’s major markets, almost all of which grew at strong double-digit rates. — Despite severe headwinds from negative currency effects, the gross margin climbed 30 basis points to 48.6%. — The operating margin improved 130 basis points to 7.7%, supported by the increase in gross margin, operating expense leverage as well as an extraordinary gain related to the early termination of the Chelsea F.C. contract. — Driven by the operational improvements, our net income from continuing operations grew 41% to a new record level of more than € 1 billion. Our strategy Creating the New is based on the fundamental belief that through sport we have the power to change lives. And we do this every day as a company: by empowering people to live an active life, by teaching life skills through sport and by creating sustainable products. As a result, we continue to be a leader in our industry in the area of sustainability. This is reflected in our continued inclusion in some of the most recognised sustainability indices. One example is our membership in one of the most important global sustainability benchmarks, the Dow Jones Sustainability Indices, where we have been listed for 17 consecutive years. 11 1 TO OUR SHA REHOLDERS Letter from the CEO 1 TO OU R SHAR E HO LD E RS Letter from the CEO Our focus on sustainability also excites our employees and is a major reason why young people from all over the world would like to work for us. Our company culture built around creativity, confidence and collaboration is an integral part of Creating the New and will help us to attract and retain the right talent. However, we can still do a lot better in managing their careers. This is why a structured executive and talent development programme is one of the strategic focus areas my Board colleagues and I are working on to accelerate Creating the New. In fact, we have already started to do so by establishing an executive leadership group. The main responsibilities of this group consisting of 18 leaders across different functions and geographies will be to detail out and oversee the cross-functional execution of our strategic agenda, to accelerate strategic projects and to develop our future bench of leaders. Other initiatives in this area include a new talent management programme with a focus on developing female leaders, as well as a new equity-based long-term incentive programme to align the objectives of our senior leaders with the interests of our shareholders. Another important area to accelerate Creating the New will be to actively manage the portfolio of brands, categories and countries within our company to ensure all parts of our business contribute to our overall success. 2016 already saw important decisions in this regard with the divestiture of Mitchell & Ness as well as the decision to exit the golf hardware market and therefore to sell the TaylorMade, Adams Golf and Ashworth brands. Now we have decided to also actively seek a buyer for our CCM Hockey business. While the brand is well known for its high-end ice hockey equipment, the focus of our company will increasingly be on operating a brand portfolio that builds on our strength in the athletic footwear and apparel market. This will allow us to reduce complexity and pursue our target consumer more aggressively with the adidas and Reebok brands. While the adidas brand is enjoying strong momentum, Reebok has been growing slower than the competition in recent years, especially in the US. The brand’s profitability is significantly below the company’s average. Therefore, we have developed a plan as to how we want to unlock the brand’s full potential. We will execute against this plan to make the brand stronger, accelerate top-line growth and increase profitability. North America remains a strategic priority for our company. We will expand our adidas brand business and build a sustainable position for Reebok in the fitness market. We have every reason to be proud about the progress adidas has been making in the US last year. In 2016, we grew our adidas brand business by more than 30%, due to double-digit increases in both our performance as well as our lifestyle categories. However, despite these promising developments we still cannot be satisfied with our overall position in this market. We remain heavily under-indexed in the largest market in our industry. Therefore, we will continue to invest into our team, our infrastructure and our business in the US to accelerate our growth, improve the quality of our sales and increase profitability. Together with Western Europe and Greater China, North America will be the biggest contributor to our sustainable business success globally. 12 1 3 1 TO OUR SH AREHOLDERS Letter from the CEO A strategic topic that will transform our company over the next years is digital. Digital touches our company at every point along the value stream – how we design, develop, manufacture and sell our products. Already today, adidas.com and Reebok.com are our largest and fastest-growing shops and we will further accelerate our investments in this area to create competitive advantages through digital. Growing our digital capabilities will ultimately also help us do a better job on margin enhancement. While our top-line growth over the last years has been strong, we have to acknowledge that we have not been as good in translating this growth into scale and, ultimately, profitability gains. To fulfil our mission to be the best sports company in the world, we need to ensure we excel in both top-line growth and margin expansion. We have therefore identified efficiency drivers that will enhance profitability in the years to come. All of these activities taken together will help us to accelerate the top- and bottom-line growth and grow even faster than we initially outlined with our strategic business plan Creating the New. Building on our strong results in 2016, we will continue our momentum in 2017 and achieve significant top- and bottom-line improvements in the years to come. We are now targeting currency- neutral sales growth in the range of 10% to 12% on average per year between 2015 and 2020 and EPS growth of 20% to 22% per annum on average during this period. These are ambitious, yet realistic long-term objectives. I am looking forward to updating you regularly on the progress we are making. Yours sincerely, KASPER RORSTED 13 1 TO OUR SHA REHOLDERS Executive Board EXECUTIVE BOARD 1 TO OU R SHAR E HO LD E RS Executive Board ROLAND AUSCHEL GLOBA L SALES KASPER RORSTED CHIEF EX ECU TI VE O FF IC ER ERIC LIEDTKE G LO BA L BRANDS 1 TO OUR SH AREHOLDERS Executive Board OUR EXECUTIVE BOARD IN THE MAKERLAB, NEWLY OPENED AT THE ADIDAS HEADQUARTERS IN HERZOGENAURACH, GERMANY, IN 2016. ROBIN J. STALKER CHIEF FINANCIAL OFFICER GLENN BENNETT G LO BA L OP ERATION S 1 TO OUR SHA REHOLDERS Executive Board 1 TO OU R SHAR E HO LD E RS Executive Board OUR EXECUTIVE BOARD IS COMPRISED OF FIVE MEMBERS. EACH BOARD MEMBER IS RESPONSIBLE FOR AT LEAST ONE MAJOR FUNCTION WITHIN THE COMPANY. FOR MORE INFORMATION ON THE ADIDAS AG EXECUTIVE BOARD: WWW.ADIDAS-GROUP.COM / EXECUTIVE-BOARD KASPER RORSTED CHIEF EXECUTIVE OFFICER 1 Kasper Rorsted was born in Aarhus, Denmark, in 1962. After studying Business Economics at the International Business School in Copenhagen, he completed an Executive Programme at Harvard Business School. Kasper Rorsted then gained valuable experience within the IT sector through various management positions at Oracle, Compaq and Hewlett Packard. In 2005, Kasper Rorsted joined consumer goods manufacturer Henkel as Executive Vice President Human Resources, Purchasing, Information Technologies and Infrastructure Services. Three years after joining Henkel, he was appointed Chief Executive Officer. In August 2016, Kasper Rorsted joined adidas. After two months as a Board member, he took over as Chief Executive Officer of the sporting goods manufacturer in October 2016. Kasper Rorsted is married, has four children and lives near Munich. Kasper Rorsted is also: — Member of the Supervisory Board, Anheuser-Busch InBev SA, Leuven, Belgium 2 — Member of the Supervisory Board, Bertelsmann SE & Co. KGaA, Gütersloh, Germany — Member of the Supervisory Board, Danfoss A/S, Nordborg, Denmark 1 Member of the Executive Board since August 1, 2016, Chief Executive Officer since October 1, 2016. 2 Until October 10, 2016. HERBERT HAINER CHIEF EXECUTIVE OFFICER AND MEMBER OF THE EXECUTIVE BOARD UNTIL SEPTEMBER 30, 2016 Herbert Hainer is also: — Deputy Chairman of the Supervisory Board, FC Bayern München AG, Munich, Germany — Member of the Supervisory Board, Allianz Deutschland AG, Munich, Germany — Member of the Supervisory Board, Deutsche Lufthansa AG, Cologne, Germany ROLAND AUSCHEL GLOBAL SALES Roland Auschel was born in Bad Waldsee, Germany, in 1963. After obtaining his Bachelor’s degree in European Business Studies in Germany and the UK as well as an MBA in the United States, he joined the adidas team as a Strategic Planner in 1989. During his career with the company, he has held many senior management positions, including Business Unit Manager, Key Account Manager Europe and Head of Region Europe, Middle East and Africa. In 2009, he became Chief Sales Officer Multichannel Markets. In 2013, Roland Auschel was appointed to the Executive Board where he assumed responsibility for Global Sales. He is married, has two children and lives in Erlangen, Germany. 16 1 7 1 TO OUR SH AREHOLDERS Executive Board GLENN BENNETT GLOBAL OPERATIONS Glenn Bennett was born in New Hampshire, USA, in 1963. With a degree in Computer Science, he began his professional career with Reebok International Ltd. in 1983, where he worked in various operations and product functions, of which the latest was Director of Footwear Development. In 1993, Glenn Bennett joined adidas AG and began working as the Head of Footwear Development. He ROBIN J. STALKER CHIEF FINANCIAL OFFICER was subsequently promoted to Senior Vice President of Footwear Robin J. Stalker was born in Palmerston North, New Zealand, in Operations and, in 1997, appointed to the Executive Board where his 1958. In 1982, following his degree in Business Studies, he began responsibilities were expanded to include Footwear, Apparel and his professional career and qualified as a Chartered Accountant. He Accessories & Gear Development, Global Sourcing, Supply Chain worked for Arthur Young in New Zealand and London and subsequently Management and, most recently, IT. Glenn Bennett is married, has held financial and controlling positions in the entertainment one daughter and lives in Hingham, Massachusetts, USA. industry, including United International Pictures and Warner Bros. International, and also worked as an independent consultant. Robin J. Stalker joined adidas AG in 1996. Since February 2000, he has been Chief Financial Officer of adidas AG and was appointed to the Executive Board, responsible for Finance, in 2001. In 2005, he assumed additional responsibility as Labour Director. Robin J. Stalker is married and lives near Herzogenaurach, Germany. Robin J. Stalker is also: — Member of the Supervisory Board, Schaeffler AG, Herzogenaurach, Germany ERIC LIEDTKE GLOBAL BRANDS Eric Liedtke, a US citizen, holds a Bachelor of Arts degree in Journalism from the University of Wisconsin-Madison. He joined adidas in 1994 as Global Line Manager for Cross Training in Portland/ Oregon. During his 20-year career with adidas, he has held senior management positions of increasing responsibility at adidas America, including Director of Footwear Marketing and Vice President Brand Marketing. In 2006, Eric Liedtke moved to the corporate headquarters in Herzogenaurach, Germany, to become Senior Vice President Global Brand Marketing. From 2011, he held the position of SVP adidas Sport Performance, responsible for all adidas brand sports categories globally. Eric Liedtke has been Executive Board member since March 2014, responsible for Global Brands (the adidas and Reebok brands). In addition to his Executive Board position, he is a passionate member of the Steering Committee of Parley for the Oceans. Eric Liedtke lives in Erlangen, Germany. 17 1 TO OUR SHA REHOLDERS Supervisory Board 1 TO OU R SHAR E HO LD E RS Supervisory Board SUPERVISORY BOARD IGOR LANDAU CHAIRMAN residing in Lugano, Switzerland Pensioner, Member of the Board of Directors, Sanofi-Aventis S.A., Paris, France 1 — Member of the Board of Directors, Sanofi-Aventis S.A., Paris, France 1 SABINE BAUER * DEPUTY CHAIRWOMAN residing in Erlangen, Germany Full-time member of the Works Council Herzogenaurach, adidas AG Chairwoman of the Central Works Council, adidas AG Chairwoman of the European Works Council, adidas AG IAN GALLIENNE 2 residing in Gerpinnes, Belgium Co-Chief Executive Officer, Groupe Bruxelles Lambert, Brussels, Belgium — Member of the Board of Directors, Pernod Ricard SA, Paris, France — Member of the Board of Directors, SGS SA, Geneva, Switzerland — Member of the Board of Directors, Umicore SA, Brussels, Belgium — Member of the Board of Directors, Erbe SA, Loverval, Belgium Mandates within the Groupe Bruxelles Lambert: — Member of the Board of Directors, Imerys SA, Paris, France — Member of the Board of Directors, Sienna Capital S.à r.l., Strassen, Luxembourg — Member of the Board of Directors, GBL Verwaltung SA, Strassen, Luxembourg DIETER HAUENSTEIN * residing in Herzogenaurach, Germany Full-time member of the Works Council Herzogenaurach, adidas AG DR. STEFAN JENTZSCH residing in London, Great Britain Corporate Finance Consultant/Partner, Perella Weinberg Partners UK LLP, London, Great Britain — Deputy Chairman of the Supervisory Board, AIL Leasing München AG, Grünwald, Germany HERBERT KAUFFMANN residing in Stuttgart, Germany Independent Management Consultant, Stuttgart, Germany — Chairman of the Supervisory Board, Uniscon universal identity control GmbH, Munich, Germany 3 — Member of the Supervisory Board, DEUTZ AG, Cologne, Germany WILLI SCHWERDTLE DEPUTY CHAIRMAN residing in Munich, Germany Independent Management Consultant as well as Partner, WP Force Solutions GmbH, Bad Homburg v. d. Höhe, Germany — Member of the Supervisory Board, Eckes AG, Nieder-Olm, Germany — Chairman of the Supervisory Board, Windeln.de AG, Munich, Germany DR. WOLFGANG JÄGER * residing in Bochum, Germany Managing Director in charge of Public Relations and Scholarships, Hans-Böckler-Stiftung, Düsseldorf, Germany KATJA KRAUS residing in Hamburg, Germany Author/Managing Partner, Jung von Matt/sports GmbH, Hamburg, Germany BIOGRAPHICAL INFORMATION ON OUR SUPERVISORY BOARD MEMBERS IS AVAILABLE ONLINE. WWW.ADIDAS-GROUP.COM / SUPERVISORY-BOARD 18 1 9 1 TO OUR SH AREHOLDERS Supervisory Board KATHRIN MENGES residing in Neuss, Germany Executive Vice President Human Resources and Infrastructure Services, Henkel AG & Co. KGaA, Düsseldorf, Germany Mandates within the Henkel Group — Member of the Supervisory Board, Henkel Central Eastern Europe GmbH, Vienna, Austria — Member of the Supervisory Board, Henkel Nederland B.V., Nieuwegein, The Netherlands — Member of the Board of Directors, Henkel Norden AB, Stockholm, Sweden — Member of the Board of Directors, Henkel Norden Oy, Vantaa, Finland UDO MÜLLER * 4 residing in Herzogenaurach, Germany Director Future, adidas AG ROLAND NOSKO * residing in Wolnzach, Germany Trade Union Official, IG BCE, Headquarter Nuremberg, Nuremberg, Germany — Deputy Chairman of the Supervisory Board, CeramTec GmbH, Plochingen, Germany HEIDI THALER-VEH * residing in Uffenheim, Germany Member of the Central Works Council, adidas AG HANS RUPRECHT * residing in Herzogenaurach, Germany KURT WITTMANN * 4 residing in Markt Bibart, Germany Vice President Customer Service Central Europe West, adidas AG Full-time member of the Works Council Herzogenaurach, adidas AG First Deputy Chairman of the Works Council Herzogenaurach, adidas AG 5 NASSEF SAWIRIS 2 residing in London, Great Britain Chief Executive Officer, OCI N.V., Amsterdam, The Netherlands — Member of the Board of Directors, LafargeHolcim Ltd., Jona, Switzerland Mandates within the OCI N.V. Group: — Member of the Board of Directors, OCI Partners LP, Wilmington, Delaware, USA Employee representative, court-appointed with effect from June 24, 2016 and until October 6, 2016: ROSWITHA HERMANN Chairwoman of the Works Council Herzogenaurach, adidas AG MICHAEL STORL Full-time member of the Works Council Herzogenaurach, adidas AG STANDING COMMITTEES Steering Committee — Igor Landau (Chairman), Sabine Bauer *, Willi Schwerdtle General Committee — Igor Landau (Chairman), Sabine Bauer *, Roland Nosko*, Willi Schwerdtle Audit Committee — Herbert Kauffmann (Chairman), Dr. Wolfgang Jäger*, Dr. Stefan Jentzsch, Hans Ruprecht * Finance and Investment Committee — Igor Landau (Chairman), Sabine Bauer *, Dr. Wolfgang Jäger *, Herbert Kauffmann Nomination Committee — Igor Landau (Chairman), Kathrin Menges, Willi Schwerdtle Mediation Committee pursuant to § 27 section 3 Co-Determination Act (MitbestG) — Igor Landau, Sabine Bauer *, Willi Schwerdtle, Heidi Thaler-Veh* * Employee representative. 1 Until May 4, 2015. 2 Since June 15, 2016. 3 Until January 12, 2016. 4 Since October 6, 2016. 5 Since November 15, 2016; formerly full-time member of the Works Council Herzogenaurach, adidas AG. 19 SUPERVISORY BOARD REPORT 1 TO OUR SHA REHOLDERS Supervisory Board Report 1 TO OU R SHAR E HO LD E RS Supervisory Board Report S B U O P A E R R D V I R S E O P R O Y R T I G C H O O A H M E A R L A IR F T U B S P O U Y R O D A N V I S D N A E R R 2 0 21 1 TO OUR SH AREHOLDERS Supervisory Board Report DEAR SHAREHOLDERS, We look back on an extremely successful financial year 2016. Thanks to strong brands and partnerships in the world of sport as well as a consistent focus on our consumers’ needs, which is reflected in attractive products and inspiring marketing campaigns, the company was able to achieve a significant increase in sales and earnings. In this respect, the earning targets set at the beginning of the year were clearly exceeded. The high level of desirability currently experienced by our core brands adidas and Reebok around the globe has contributed significantly to this. These successful developments are the result of numerous measures which have been implemented in the context of the strategic business plan ‘Creating the New’, which was introduced in 2015. Double-digit growth rates in nearly all regions – also, and above all, in the priority market North America – and in all key categories show that the company’s success is based on a broad range of success factors. The sale of the Mitchell & Ness brand and the plan to sell the golf brands TaylorMade, Adams Golf and Ashworth were two major strategic decisions which were made last year and which will allow the company to focus even more strongly on the core competencies in the areas of footwear and apparel in the future. Furthermore, with Kasper Rorsted taking over as Chief Executive Officer, adidas made sure that the transition at the helm of the company was as smooth as possible. Therefore, the company is extremely well positioned to continue growing profitably this year and in the years to come. SUPERVISION AND ADVICE IN DIALOGUE WITH THE EXECUTIVE BOARD In the year under review, we performed all of our tasks laid down by law, the Articles of Association and the Rules of Procedure carefully and conscientiously. We regularly advised the Executive Board on the management of the company and diligently and continuously supervised its management activities. We assured ourselves of the legality, expediency and regularity of the management activities and found that there were no objections to be raised. The Executive Board involved us directly and in a timely and comprehensible manner in all of the company’s fundamental decisions. After in-depth consultation and examination of the detailed information submitted to us by the Executive Board, we approved individual transactions where required by law. The Executive Board informed us extensively and in a timely manner through written and oral reports. This information covered all relevant aspects of the company’s business strategy, business planning, including finance, investment and personnel planning, the course of business and the company’s financial position and profitability. We were also kept up to date on matters relating to the risk situation, risk management and compliance as well as all major decisions and business transactions. The Executive Board always explained immediately and in a detailed manner any deviations in business performance from the established plans, and the Supervisory Board as a whole discussed these matters in depth. The Executive Board regularly provided us with comprehensive written reports for the preparation of our meetings. We thus always had the opportunity to critically analyse the Executive Board’s reports and resolution proposals within the committees and within the Supervisory Board as a whole and to put forward suggestions before passing resolutions after in-depth examination and consultation. In the periods between our meetings, the Executive Board also provided us with extensive, timely monthly reports on the current business situation. In the year under review, we held five regular meetings of the entire Supervisory Board as well as one extraordinary meeting by way of a conference call. The attendance rate of the members in the Supervisory Board meetings was 97% in the year under review. All committee meetings, with the exception of one Audit Committee meeting from which one member was excused, were always fully attended. The external auditor, KPMG AG Wirtschaftsprüfungsgesellschaft (hereinafter referred to as ‘KPMG’), attended all regular meetings of the Supervisory Board, insofar as no Executive Board matters were dealt with. KPMG also attended all meetings of the Audit Committee. 21 1 TO OUR SHA REHOLDERS Supervisory Board Report 1 TO OU R SHAR E HO LD E RS Supervisory Board Report In the periods between meetings, the Supervisory Board Chairman and the Audit Committee Chairman maintained regular contact with the Chief Executive Officer and the Chief Financial Officer, conferring on matters such as corporate strategy, business development and planning, the risk situation and risk management as well as compliance. In addition, the Executive Board immediately informed the Supervisory Board Chairman about any significant events of fundamental importance for the management and for evaluating the situation and development of the company, where necessary also at short notice. TOPICS FOR THE ENTIRE SUPERVISORY BOARD Our consultations and examinations focused on the following topics: SITUATION AND BUSINESS DEVELOPMENT The development of sales and earnings, the employment situation as well as the financial position of the company and the business development of the company’s individual business areas and markets were presented to us in detail by the Executive Board at the Supervisory Board meeting following the close of the respective quarter and were discussed regularly. Further topics which were always discussed were the possible impact of global economic developments as well as the development of our individual brands and markets. In February 2016, the Supervisory Board dealt with retail profitability. At the Supervisory Board meetings in May and August, the Supervisory Board addressed the topic ‘Digital Brand Commerce’. In this context, a report was given on the initiation of the next ‘digital transformation’ stage. Digital transformation is of major importance for adidas as consumers communicate and share information on various different digital platforms – from social media to apps – and increasingly only via mobile devices, with e-commerce and digital communication being closely interwoven. In August 2016, the Executive Board also informed us about the current status of target achievement in the context of the long-term strategic business plan ‘Creating the New’ for the period until 2020. Against the background of the planned relocation from Canton to Boston in the USA, at the November 2016 meeting of the Supervisory Board, the Executive Board explained the corresponding new developments and measures taken at Reebok USA. TRANSACTIONS REQUIRING SUPERVISORY BOARD APPROVAL In accordance with statutory regulations and the Rules of Procedure of the Supervisory Board, certain transactions and measures require a formal resolution or the prior approval of the Supervisory Board. The topic of our February meeting was, after thorough discussion, the resolution on the 2016 Budget and Investment Plan presented by the Executive Board. In March, we resolved upon the resolutions to be proposed to the 2016 Annual General Meeting, including the proposal regarding the appropriation of retained earnings for the 2015 financial year. At the meetings in February and May, the Executive Board presented to us the new Employee Stock Purchase Plan and we approved the Plan Rules. At our March meeting, the Executive Board informed us about the current status of the strategic review regarding a possible sale of parts of the golf segment. At our meetings in May, August and November, the Executive Board updated us about the respective current status of the negotiations regarding the planned sale of the golf brands TaylorMade, Adams Golf and Ashworth. COMPOSITION OF THE EXECUTIVE BOARD Following in-depth discussions about the resolution proposal prepared by the General Committee on the appointment of Kasper Rorsted as successor to the long-standing Chief Executive Officer Herbert Hainer, we resolved at our extraordinary meeting in January 2016 to appoint Kasper Rorsted as full member of the Executive Board with effect from August 1, 2016 and as Chief Executive Officer with effect from October 1, 2016, and to conclude his Executive 2 2 23 1 TO OUR SH AREHOLDERS Supervisory Board Report Board service contract. As Kasper Rorsted was already available to assume his new position from summer 2016, Herbert Hainer had agreed to relinquish his Executive Board mandate effective September 30, 2016. At our May meeting, we discussed in detail the termination agreement to be concluded with Herbert Hainer and subsequently approved it. In March 2016, we resolved to renew Eric Liedtke’s mandate as member of the Executive Board prematurely and to extend his Executive Board service contract. With this personnel decision, we acknowledged his outstanding performance and ensure continuity on the Executive Board. EXECUTIVE BOARD COMPENSATION All matters regarding Executive Board compensation were prepared comprehensively by the General Committee, as provided for in the Rules of Procedure of the Supervisory Board, explained to the Supervisory Board as a whole and submitted for resolution. Each year at our February meeting of the entire Supervisory Board, the main subject is Executive Board compensation. At this meeting, following an in-depth review of the performance of the individual Executive Board members and their respective achievement of the targets set in the 2015 Performance Bonus Plan, we resolved upon the bonuses to be paid to the Executive Board members based on the 2015 Performance Bonus Plan. Furthermore, we also discussed in detail the criteria and key targets for the 2016 Performance Bonus Plan and the individual bonus target amounts and resolved upon them for each Executive Board member. In line with the German Corporate Governance Code (hereinafter referred to as the ‘Code’), in the year under review we commissioned an external, independent compensation expert to review the structure of the Executive Board compensation and the individual compensation levels of the Executive Board members. The review found that the compensation meets the requirements of the German Stock Corporation Act (Aktiengesetz – AktG) and of the Code. However, current compensation levels could be oriented even more towards market standards. At our meetings in February and November, we considered in detail the results of the review of the compensation levels and structure. We agreed with the compensation expert’s assessment. CHANGES ON THE SUPERVISORY BOARD In the year under review, the Annual General Meeting resolved on May 12, 2016 in accordance with a proposal put forward by the Executive Board and the Supervisory Board to increase the number of Supervisory Board members from twelve to sixteen. Two of the four additional Supervisory Board members were to be elected by the Annual General Meeting and two were to be elected by the employees. As further shareholder representatives on the Supervisory Board, the Annual General Meeting on May 12, 2016 elected Ian Gallienne and Nassef Sawiris. As additional employee representatives, Roswitha Hermann and Michael Storl were appointed by court with effect from June 24, 2016 upon request of adidas AG’s Central Works Council. Their term of office ended with the announcement of the election result of the employees supplementary election on October 6, 2016. In this supplementary election, Udo Müller and Kurt Wittmann were elected as employee representatives. With regard to the representation of women and men, the Supervisory Board complies with the statutory minimum quota pursuant to § 96 section 2 sentences 1, 3 and 4 AktG. Both the shareholder representatives and the employee representatives resolved in accordance with § 96 section 2 sentence 3 AktG that the minimum quota of 30% women and 30% men on the Supervisory Board shall be fulfilled separately for the shareholder representatives and the employee representatives. 23 1 TO OUR SHA REHOLDERS Supervisory Board Report 1 TO OU R SHAR E HO LD E RS Supervisory Board Report The term of office of all Supervisory Board members, including the four members who were elected as new shareholder or employee representatives in the supplementary election, will expire as scheduled at the end of the Annual General Meeting in May 2019. CORPORATE GOVERNANCE The Supervisory Board regularly monitors the application and further development of the corporate governance regulations within the company, in particular the implementation of the regulations of the Code. In March, an intra-year change was made to the Declaration of Compliance dated February 15, 2016, declaring another deviation from the Code. The updated 2016 Declaration of Compliance was made permanently available to our shareholders on our corporate website. The amendment had become necessary because for one of the two shareholder representative seats on adidas AG’s Supervisory Board, which were newly created as part of the enlargement of the Supervisory Board (in this respect, see ‘Changes on the Supervisory Board’ above), the Supervisory Board had resolved to propose to the Annual General Meeting a candidate for election who holds more than three mandates on supervisory boards in group-external public listed companies or supervisory bodies of group-external companies with similar requirements. At our meeting on February 13, 2017, we discussed in depth the current 2017 Declaration of Compliance and then resolved upon it and made it permanently available to our shareholders on our corporate website. At our November meeting, after the conclusion of the election of the additional employee representatives on the Supervisory Board, the targets set by the Supervisory Board for its composition in February 2016 were discussed by the enlarged entire Supervisory Board and then confirmed. In view of the EU Market Abuse Regulation, which came into force on July 3, 2016, we dealt with the respective new statutory regulations, in particular with the new regulations regarding ‘managers’ transactions’ and ‘insider rules’, in May 2016. The topic of the Supervisory Board meetings in August and November were the results of the efficiency examination of the Supervisory Board carried out on the basis of a comprehensive, company-specific questionnaire in the 2015 financial year. On the basis of the analysis of the efficiency examination, a corresponding catalogue of measures was prepared and its implementation was discussed. In the year under review, no conflicts of interest arose in regard to the Executive Board members. There were also no conflicts of interest within the Supervisory Board. In order to avoid a potential conflict of interest, the Supervisory Board member involved in the subject matter described in the following neither participated in the respective discussions nor in the resolutions. In December 2015, the Supervisory Board approved the conclusion of a three-year contract, effective January 1, 2016, with a company in which one Supervisory Board member is involved. The order volume to be confirmed annually by the Supervisory Board was approved by the Supervisory Board for the 2017 financial year at its meeting in November 2016. Further information on corporate governance within the company can be found in the Corporate Governance Report. see Corporate Governance Report including the Declaration on Corporate Governance, p. 27 EFFICIENT COMMITTEE WORK In order to perform our tasks in an efficient manner, we have established a total of six standing Supervisory Board committees. The committees prepare resolutions and topics for the meetings of the entire Supervisory Board. Within the legally permissible framework and in appropriate cases, we have furthermore delegated the Supervisory Board’s authority 24 25 1 TO OUR SH AREHOLDERS Supervisory Board Report to pass certain resolutions to individual committees. With the exception of the Audit Committee, the Supervisory Board Chairman also chairs all the standing committees. The committee chairpersons inform the Supervisory Board about the content and results of the committee meetings at the subsequent meeting of the entire Supervisory Board. — The Steering Committee did not meet in the year under review. — The General Committee held four meetings in the 2016 financial year. The main focus of the meetings was the preparation of the resolutions of the Supervisory Board as a whole, detailed individually above, in particular the resolution on the targets for the 2016 Performance Bonus, the target achievement of the 2015 Performance Bonus and the determination of the Executive Board compensation and the review of its appropriateness. — The Audit Committee held five meetings in the year under review. The Chief Financial Officer and the auditor were present at all meetings and reported to the committee members in detail. In addition to the supervision of the accounting process, the committee’s work also focused on the comprehensive review of the first quarter report, the first half year report and the report on the first nine months together with the Chief Financial Officer and the auditor before the respective dates of publication, also the preliminary examination of the annual financial statements and the consolidated financial statements for 2015, including the combined Management Report of adidas AG and the Group, as well as the Executive Board’s proposal regarding the appropriation of retained earnings. Following an in-depth review of the audit reports with the auditor, the committee decided to recommend that the Supervisory Board approve the 2015 annual financial statements and consolidated financial statements. In addition, after obtaining the auditor’s declaration of independence and after conclusion of a disclosure agreement, the Audit Committee prepared the Supervisory Board’s proposal to the Annual General Meeting concerning the selection of the auditor of the annual financial statements and the consolidated financial statements for the 2016 financial year and for the quarterly financial statements and interim management reports for the 2016 financial year and the first quarter of the 2017 financial year. Following extensive discussion by the committee, the priority topics for the audit of the 2016 annual financial statements and consolidated financial statements were determined and the audit assignment was granted. In this regard, the implications of the EU Auditor Reform were also discussed and permitted non-audit services and a fee cap for non-audit services were resolved upon. Furthermore, the Audit Committee dealt intensively with the monitoring of the effectiveness of the risk management system, the compliance management system, the internal control system and the internal audit system. Moreover, the committee addressed the findings of Internal Audit and the audit plan. Furthermore, at every meeting of the Audit Committee, the Chief Compliance Officer gave regular reports. — The Finance and Investment Committee held two meetings in the year under review, one of which was held by way of a conference call. At its April meeting, the committee dealt with the sale of the Mitchell & Ness brand and approved its divestiture to a newly founded company which is majority-owned by Juggernaut Capital Partners. Against the background of the share buyback programme initiated in autumn 2014, the committee discussed the commencement of a third tranche based on the authorisation granted by the Annual General Meeting in May 2016 and approved the proposal of the Executive Board to repurchase shares up to and including January 31, 2017. — The Nomination Committee held one meeting in February 2016 by way of a conference call and, against the background of the planned increase in the number of Supervisory Board members (in this respect, see ‘Changes on the Supervisory Board’ above), prepared the resolution on two additional shareholder representatives’ candidates for election to the Supervisory Board which was to be proposed to the Annual General Meeting. — The Mediation Committee, established in accordance with the German Co-Determination Act (Mitbestim- mungsgesetz — MitbestG), did not have to be convened in 2016. 25 1 TO OUR SHA REHOLDERS Supervisory Board Report Corporate Governance Report including the Declaration on Corporate Governance TO OU R SHAR E HO LD E RS 1 EXAMINATION OF THE 2016 ANNUAL FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENTS KPMG audited the 2016 consolidated financial statements prepared by the Executive Board in accordance with § 315a German Commercial Code (Handelsgesetzbuch – HGB) in compliance with IFRS and issued an unqualified opinion thereon. The auditor also approved without qualification the 2016 annual financial statements of adidas AG, prepared in accordance with HGB requirements, and the combined Management Report of adidas AG and the Group. The financial statements, the proposal put forward by the Executive Board regarding the appropriation of retained earnings and the auditor’s reports were distributed by the Executive Board to all Supervisory Board members in a timely manner. We examined the documents in depth, with a particular focus on legality and regularity, in the presence of the auditor at the Audit Committee meeting held on March 3, 2017 and at the Supervisory Board’s March 7, 2017 financial statements meeting, during which the Executive Board explained the financial statements in detail. At both meetings, the auditor reported the material results of the audit with a focus on the priority topics of the year under review as agreed with the Audit Committee and was available for questions and the provision of additional information. The auditor did not report any significant weaknesses with respect to the internal control and risk management system relating to the accounting process. We also discussed in depth with the Executive Board the proposal concerning the appropriation of retained earnings, which provides for a dividend of € 2.00 per dividend-entitled share and adopted this increase to € 2.00 compared with the previous year under consideration of the company’s good financial situation and future prospects as well as the expectations of our shareholders. Based on our own examinations of the annual and consolidated financial statements, we came to the conclusion that there are no objections to be raised. At our financial statements meeting, therefore, following the recommendation of the Audit Committee, we approved the audit results and the financial statements prepared by the Executive Board. The annual financial statements of adidas AG were thus approved. EXPRESSION OF THANKS On behalf of the entire Supervisory Board, I wish to thank the members of the Executive Board, including Kasper Rorsted, who has been a Board member since August 1, 2016 and Chief Executive Officer since October 1, and all adidas employees around the world for their tremendous personal dedication and their ongoing commitment, as well as the employee representatives for their good collaboration. Moreover, we would like to thank Herbert Hainer, who resigned from the Executive Board at his own request at the end of September, for his tremendous contribution to the company’s great success over the past three decades. During his 15-year term of service as Chief Executive Officer, thanks to his outstanding leadership and expertise, sales increased more than three-fold, the number of employees four-fold, profits five-fold and the company’s value rose from € 3 billion to € 30 billion. What is more, with Herbert Hainer at the helm, adidas became the most sustainable company in Europe and one of the most attractive employers in the world. We would like to express our gratitude and respect for these outstanding achievements. For the Supervisory Board IG OR LANDAU Chairman of the Supervisory Board March 2017 26 27 1 TO OUR SH AREHOLDERS Corporate Governance Report including the Declaration on Corporate Governance CORPORATE GOVERNANCE REPORT INCLUDING THE DECLARATION ON CORPORATE GOVERNANCE 1 Corporate Governance stands for responsible and transparent management and corporate control oriented towards a sustainable increase in value. We are convinced that good corporate governance is an essential foundation for sustainable corporate success and enhances the confidence placed in our company by our shareholders, business partners, employees and the financial markets. The following report includes the Corporate Governance Report and the Declaration on Corporate Governance issued by the Executive Board and Supervisory Board. DECLARATION BY THE EXECUTIVE BOARD AND SUPERVISORY BOARD OF ADIDAS AG ON THE GERMAN CORPORATE GOVERNANCE CODE PURSUANT TO § 161 GERMAN STOCK CORPORATION ACT (AKTIENGESETZ – AKTG) is of the opinion that an extended length of membership of individual Supervisory Board members may, in the individual case, be in the interest of the company and of those entitled to elect members to the Supervisory Board, which would not be taken into consideration if there was a general limit. The Executive Board and Supervisory Board of adidas AG issued Maximum number of non-group mandates held by their last Declaration of Compliance pursuant to § 161 AktG on members of the Supervisory Board February 15, 2016 and made an intra-year change on March 3, 2016. For the period from the publication of the last complete Declaration (section 5.4.5 subsection 1 sentence 2) One member of the Supervisory Board, Ian Gallienne, holds of Compliance, the following Declaration refers to the German more than three mandates in supervisory bodies of non-group Corporate Governance Code (hereinafter referred to as the ‘Code’) companies with similar requirements. Ian Gallienne is Co-Chief as amended on May 5, 2015, which was published in the Federal Executive Officer of Groupe Bruxelles Lambert (GBL). GBL is a Gazette on June 12, 2015. holding company and, in its capacity as a professional investor represented by, inter alia, its Co-Chief Executive Officer, regularly The Executive Board and Supervisory Board of adidas AG declare holds mandates in supervisory bodies of its portfolio companies. All that the recommendations of the ‘Government Commission on the companies in which Ian Gallienne holds mandates in supervisory German Corporate Governance Code’ have been and are met with bodies are portfolio or group companies of GBL and these mandates the following deviations: thus have to be attributed to his main occupation as Co-Chief Executive Officer. Therefore, we are of the opinion that, as regards Definition of the target level of provision its intent and purpose, the recommendation of section 5.4.5 (section 4.2.3 subsection 3) For Executive Board members of adidas AG initially appointed on subsection 1 sentence 2 is not applicable to Ian Gallienne. However, as a precaution, we declare a deviation based on the good reasons or after October 1, 2013 and for Executive Board members to be set out above. Moreover, the Supervisory Board has assured itself appointed in future, there are defined contribution pension plans that Ian Gallienne has sufficient time to perform his Supervisory which, due to their structure, do not aim to reach a defined target Board mandate at adidas AG. level of provision. In the view of the Supervisory Board, this structure leads to a higher degree of control and future planning capability with Herzogenaurach, February 13, 2017 regard to the company’s expenses for pension plans. Specification of a regular limit of length of membership KASPER RORSTED IGOR LANDAU for Supervisory Board members Chief Executive Officer Chairman of the Supervisory Board For the Executive Board For the Supervisory Board (section 5.4.1 subsection 2 sentence 1) In accordance with section 5.4.1 subsection 2 sentence 1 of the Code, the Supervisory Board has specified concrete objectives for its composition. However, it has not specified a regular limit of length of membership for Supervisory Board members. The Supervisory Board 1 The Corporate Governance Report including the Declaration on Corporate Governance is an unaudited section of the Group Management Report. 27 The aforementioned Declaration of Compliance dated February 13, 2017 has been published on and can be downloaded from our website. www.adidas-group.com/s/corporate-governance 1 TO OUR SHA REHOLDERS Corporate Governance Report including the Declaration on Corporate Governance Corporate Governance Report including the Declaration on Corporate Governance TO OU R SHAR E HO LD E RS 1 SUGGESTIONS OF THE GERMAN CORPORATE GOVERNANCE CODE FULFILLED At the Supervisory Board meetings, the Executive Board reports in writing and orally on the agenda items and resolution proposals In addition to the recommendations, the Code contains a number and answers all questions from the individual Supervisory Board of suggestions for good and responsible corporate governance, members. The CEO and the CFO maintain regular contact and compliance with which is not required to be disclosed separately by consult with the Chairman of the Supervisory Board and the Audit law. adidas is fully compliant with all suggestions of the Code. Committee Chairman on key aspects of strategy, planning and business development as well as on questions of risk management and compliance within the company. DUAL BOARD SYSTEM As a globally operating public listed company with its registered seat in Herzogenaurach, Germany, adidas AG is, inter alia, subject to the provisions of German stock corporation law. A dual board system, COMPOSITION AND WORKING METHODS OF THE SUPERVISORY BOARD which assigns the management of the company to the Executive Our Supervisory Board consists of 16 members. It comprises eight Board and advice and supervision of the Executive Board to the shareholder representatives and eight employee representatives Supervisory Board, is one of the fundamental principles of German in accordance with the German Co-Determination Act stock corporation law. These two boards are strictly separated both (Mitbestimmungsgesetz – MitbestG). see Supervisory Board, p. 18 The in terms of members and of competencies. In the interest of the company, however, both Boards cooperate closely. shareholder representatives are elected by the shareholders at the Annual General Meeting, and the employee representatives by the COMPOSITION AND WORKING METHODS OF THE EXECUTIVE BOARD The composition of our Executive Board, which consists of five employees. The last periodic election took place in 2014. In the 2016 financial year, supplementary elections of the Supervisory Board took place. The term of office of the current members of the Supervisory Board expires at the end of the 2019 Annual General Meeting. members, reflects the international character of our company. At its meeting in November 2016, due to the supplementary election No member of the Executive Board has accepted more than a of the Supervisory Board in the 2016 financial year, the Supervisory total of three supervisory board mandates in non-group listed Board confirmed the following objectives for its composition, which companies or in supervisory bodies of non-group companies were last resolved upon in February 2016 in accordance with the with similar requirements. see Executive Board, p. 16 The Executive recommendations of the Code: Board is responsible for independently managing the company, determining the company’s strategic orientation, agreeing this with the Supervisory Board and ensuring its implementation. Further, it — The composition of the Supervisory Board including members with international background shall be maintained to the current defines business targets, company policy and the organisation of the extent. Diversity in terms of expertise and experience on the company. Additionally, the Executive Board ensures appropriate risk grounds of origin, education or professional activity shall continue management and risk controlling as well as compliance with statutory to be taken into account in the future. regulations and internal guidelines. It is bound to the company’s interest and obligated to strive for a sustainable increase in company — The number of women on the Supervisory Board, namely four, but no less than the number stipulated by law, shall be maintained. value. Furthermore, one woman shall be a member of the Nomination Committee. Irrespective of the Executive Board’s overall responsibility, its members are individually responsible for managing their respective — As in the past, all members of the Supervisory Board shall be independent. This presupposes that all employee representatives business areas in accordance with the Executive Board’s Business also in principle meet the independence criteria as defined by Allocation Plan. There are no Executive Board committees. The CEO the Code. Substantial, not merely temporary conflicts of interest is responsible in particular for leading the entire Executive Board as shall be avoided. well as for guiding business development, including the coordination — The members of the Supervisory Board shall dispose of sufficient of the business segments, brands and markets. The members of time for performing their mandate. the Executive Board keep each other informed on all significant — The age limit of, in general, 72 years at the time of election shall developments in their business areas and align on all cross-functional be taken into account. measures. Further details on collaboration within the Executive Board are governed by the Rules of Procedure of the Executive Board and In accordance with the reasons stated in the Declaration of the Business Allocation Plan. These documents specifically stipulate requirements for meetings and resolutions as well as for cooperation with the Supervisory Board. Compliance, we do not follow the recommendation to specify a regular limit of length of membership for Supervisory Board members. 28 29 1 TO OUR SH AREHOLDERS Corporate Governance Report including the Declaration on Corporate Governance The Supervisory Board’s proposal with regard to shareholder The Supervisory Board supervises and advises the Executive Board in representative candidates for the supplementary election was questions relating to the management of the company. The Executive prepared by the Nomination Committee. For its recommendations, Board regularly, expeditiously and comprehensively reports on the Nomination Committee took into consideration the statutory business development and planning as well as on the risk situation requirements, the requirements of the Code and the Rules of including compliance and coordinates the strategy of the company Procedure of the Supervisory Board as well as the objectives and and its implementation with the Supervisory Board. The Supervisory criteria determined by the Supervisory Board for its own composition. Board examines and approves the annual financial statements of adidas AG and the adidas Group, taking into consideration the auditor’s Together, the members of the Supervisory Board have the knowledge, reports, and resolves upon the proposal of the Executive Board on the skills and professional expertise required to properly perform their appropriation of retained earnings. Additionally, it resolves upon the tasks. All of them are familiar with the sector in which the company resolution proposals to be presented to the Annual General Meeting. operates. As they furthermore have extensive knowledge of various Certain business transactions and measures of the Executive Board professional fields and many years of international experience, with fundamental significance are subject to prior approval by the they bring a broad spectrum of expertise and experience to the Supervisory Board or by a Supervisory Board committee. performance of the Supervisory Board’s function. The number of female Supervisory Board members currently amounts to four. The Supervisory Board is also responsible for the appointment and Assuming all of the employee representatives in principle meet the independence criteria for Supervisory Board members as defined by the Code, in the Supervisory Board’s assessment, all of its members are independent. The members of our Supervisory dismissal of members of the Executive Board. When appointing members of the Executive Board, the Supervisory Board pays attention to the best possible composition of the Executive Board. Inter alia, experience, industry knowledge and personal expert qualifications Board do not exercise directorships or similar positions or advisory play an important role in this regard. The Supervisory Board further tasks for key competitors of the company. Further, they do not have determines the Executive Board compensation system, examines it business or personal relations with adidas AG, its Executive Board regularly and decides on the individual overall compensation of each and Supervisory Board or a controlling shareholder which may cause Executive Board member. To this end, the relation between Executive a substantial and not merely temporary conflict of interest. The age Board compensation and that of senior management and employees limit of, in general, 72 years at the time of election was taken into overall is taken into account, also in terms of its development over account in the selection process. The composition of the Supervisory time. Further information on Executive Board compensation is Board consequently fully complies with the specified set of objectives. compiled in the Compensation Report. see Compensation Report, p. 32 The basis for every Supervisory Board function is the personal In order to increase the efficiency of its work and to deal with complex qualification of the Supervisory Board members. Therefore, additional topics, the Supervisory Board has formed six permanent expert important criteria will also be considered when nominating candidates committees from within its members, which, inter alia, prepare its for election. Personality, integrity and sufficient diversity in terms of resolutions and, in certain cases, pass resolutions on its behalf. These expert and industry knowledge as well as particular experience, e.g. committees are the Steering Committee, the General Committee, in the fields of accounting or annual auditing, will continue to be taken the Audit Committee, the Finance and Investment Committee, the into account as at present. Also, the best interests of the company Mediation Committee in accordance with § 27 section 3 MitbestG and play a decisive role when nominating candidates for election. www. the Nomination Committee. The chairmen of the committees report adidas-group.com/s/supervisory-board to the entire Supervisory Board on the results of the committee work on a regular basis. The composition of the committees can be found in our overview of the Supervisory Board. Further information on the FURTHER INFORMATION ON CORPORATE GOVERNANCE committees’ tasks is available on our website. see Supervisory Board, p. 18 More information on topics covered in this report can be found on our website www.adidas-group.com/s/corporate-governance including: — Articles of Association — Rules of Procedure of the Executive Board — Rules of Procedure of the Supervisory Board — Rules of Procedure of the Audit Committee — Supervisory Board Committees (composition and tasks) — CVs of Executive Board members and Supervisory Board members www.adidas-group.com/s/supervisory-board-committees Apart from the tasks and responsibilities, the Rules of Procedure of the Supervisory Board and of the Audit Committee also set out the individual requirements expected of the members and the procedure for meetings and passing resolutions. These Rules of Procedure are available on our website. The Supervisory Board Report provides information on the activities of the Supervisory Board and its committees in the year under review. see Supervisory Board Report, p. 21 2 9 1 TO OUR SHA REHOLDERS Corporate Governance Report including the Declaration on Corporate Governance Corporate Governance Report including the Declaration on Corporate Governance TO OU R SHAR E HO LD E RS 1 The members of the Supervisory Board are individually responsible AVOIDING CONFLICTS OF INTEREST for undertaking any necessary training and professional development measures required for their tasks and, in doing so, are supported by The members of the Executive Board and Supervisory Board are obligated to disclose any conflicts of interest to the Supervisory Board adidas AG. The company informs the Supervisory Board regularly without any delay. Substantial transactions between the company about current legislative changes as well as opportunities for external and members of the Executive Board or persons in a close relation training, and provides the Supervisory Board with relevant specialist with them require Supervisory Board approval. Contracts between literature. the company and members of the Supervisory Board also require Supervisory Board approval. The Supervisory Board reports any Every two years, the Supervisory Board and the Audit Committee conflicts of interest, as well as the handling thereof, to the Annual examine the efficiency of their work by means of questionnaires General Meeting. In the year under review, neither the members of and individual interviews. As a result, suggestions for even better the Executive Board nor the members of the Supervisory Board faced cooperation can be made. The last efficiency examinations were conflicts of interest, with the exception of the matter outlined in the conducted in 2015. Supervisory Board Report. see Supervisory Board Report, p. 21 COMMITMENT TO THE PROMOTION OF THE EQUAL PARTICIPATION OF WOMEN AND MEN IN LEADERSHIP POSITIONS SHARE OWNERSHIP OF AND SHARE TRANSACTIONS CONDUCTED BY THE EXECUTIVE BOARD AND SUPERVISORY BOARD When filling leadership positions in the company, the Executive At the end of the 2016 financial year, individual ownership of shares Board takes diversity into consideration and especially aims for an in the company or related financial instruments held by members appropriate consideration of women. The Supervisory Board is also of the Executive Board and the Supervisory Board was below 1% convinced that an increase in the number of women in leadership of the shares issued by adidas AG. The same applies for the total positions within adidas is necessary to ensure that, in the future, an number of shares held by all members of the Executive Board and increased number of female candidates are available for Executive the Supervisory Board. Board positions. The Supervisory Board thus supports the diversity and inclusion initiatives of the company, particularly concerning the An overview of the managers’ transactions notified to adidas AG by promotion of women in leadership positions. see Our People, p. 72 persons discharging managerial responsibilities pursuant to § 15a German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) Pursuant to the ‘Law on Equal Participation of Women and Men in and Article 19 of the Market Abuse Regulation is published on our Leadership Positions in the Private and Public Sector’ the following website. www.adidas-group.com/s/managers-transactions targets have been determined for adidas AG: — On August 5, 2015, the Supervisory Board of adidas AG resolved to appoint a woman to the Executive Board of adidas AG by RELEVANT MANAGEMENT PRACTICES June 30, 2017 at the latest. Our business activities are oriented towards the legal systems in the — On July 2, 2015, the Executive Board of adidas AG resolved to increase the female representation on the first management various countries and markets in which we operate. This implies a high level of social and environmental responsibility. Further information level below the Executive Board of adidas AG to 18% by June 30, on company-specific practices which are applied in addition to 2017. The female representation on the second management statutory requirements, such as our Code of Conduct, on compliance level below the Executive Board is to be increased to 30% within with working and social standards, environmental responsibility, the same implementation period. — With regard to the quota of women and men on the Super- visory Board, the Supervisory Board complies with the statutory minimum quota pursuant to § 96 section 2 sentences 1, 3 and 4 AktG. Both the shareholder representatives and the employee chemical management and our social commitment is available in this Annual Report and on our website. see Sustainability, p. 78 http://www.adidas-group.com/en/sustainability/managing-sustainability/general-approach/ representatives resolved in accordance with § 96 section 2 COMPLIANCE AND RISK MANAGEMENT sentence 3 AktG that the minimum quota of 30% women and 30% Compliance with laws, internal and external provisions and men on the Supervisory Board shall be fulfilled separately for the responsible risk management are part of corporate governance at shareholder representatives and the employee representatives. adidas. Our compliance management system is organisationally linked to the company’s risk and opportunity management system. As part of our global ‘Fair Play Concept’, the compliance management system establishes the organisational framework for company-wide awareness of our internal rules and guidelines and for the legally compliant conduct of our business. It underscores our strong commitment to ethical and fair behaviour in our own organisation and 3 0 31 1 TO OUR SH AREHOLDERS Corporate Governance Report including the Declaration on Corporate Governance FURTHER INFORMATION ON THE PRINCIPLES OF OUR MANAGEMENT More information on topics covered in this report can be found on our website at including: www.adidas-group.com — Code of Conduct — Sustainability — Social commitment — Risk and opportunity management and compliance — Information and documents on the Annual General Meeting — Managers’ transactions — Accounting and annual audit also sets the parameters for how we deal with others. The risk and opportunity management system ensures risk-aware, opportunity- oriented and informed actions in a dynamic business environment in order to guarantee the competitiveness and sustainable success of adidas. see Risk and Opportunity Report, p. 118 TRANSPARENCY AND PROTECTION OF SHAREHOLDERS’ INTERESTS It is our goal to inform all institutional investors, private shareholders, financial analysts, business partners, employees and the interested public about the company’s situation, at the same time and to an equal extent, through regular, transparent and up-to-date communication. We publish all essential information, such as press releases, ad hoc announcements and voting rights notifications as well as all presentations from roadshows and conferences, all financial reports and the financial calendar on our website. With our comprehensive Investor Relations activities, we maintain close and continuous contact with our current and potential shareholders. www.adidas-group. com/investors see Our Share, p. 41 In addition, we also provide all documents and information on our Annual General Meeting on our website. The shareholders of adidas AG exercise their shareholders’ rights at the Annual General Meeting. Each share grants one vote. Our shareholders are involved in all fundamental decisions at the Annual General Meeting through their participation rights. It is our intention to support our shareholders in exercising their voting rights at the Annual General Meeting. At our next Annual General Meeting, taking place on May 11, 2017 in Fuerth (Bavaria), we will again provide our shareholders with the best possible service. Shareholders have the possibility, inter alia, to electronically register for the Annual General Meeting through our shareholder portal or to participate in voting by granting powers of representation and voting instructions online to the proxies appointed by the company. Further, all shareholders can follow the Annual General Meeting in full length live on the company’s website, subject to technical availability of the website. ACCOUNTING AND ANNUAL AUDIT adidas AG prepares the annual financial statements in accordance with the provisions of the German Commercial Code (Handelsgesetzbuch – HGB) and the Stock Corporation Act. The annual consolidated financial statements are prepared in accordance with the principles of the International Financial Reporting Standards (IFRS), as adopted by the European Union (EU). KPMG AG Wirtschaftsprüfungsgesellschaft was appointed as auditor for the 2016 annual financial statements and annual consolidated financial statements by the Annual General Meeting. The Supervisory Board had previously assured itself of the auditor’s independence. see Auditor’s Report, p. 209 31 1 TO OUR SHA REHOLDERS Compensation Report 1 TO OU R SHAR E HO LD E RS Compensation Report COMPENSATION REPORT The Compensation Report is a component of the combined Management Report and outlines the principles of the compensation system for the members of the Executive Board and Supervisory Board as well as the level and structure of the compensation in accordance with the legal requirements and the recommendations of the German Corporate Governance Code (the ‘Code’) as amended on May 5, 2015. For adidas, transparent and comprehensible reporting on the compensation of the Executive Board and Supervisory Board is an essential element of good corporate governance. COMPENSATION OF THE EXECUTIVE BOARD MEMBERS In case of 100% target achievement, the total compensation (without other benefits and pension payments) is made up of around one-third COMPENSATION SYSTEM Following preparation by the Supervisory Board’s General fixed compensation and around two-thirds performance-related compensation components. In addition, there are various pension Committee, the compensation system for our Executive Board and commitments. Moreover, at its equitable discretion, the Supervisory the total compensation of each member of the Executive Board is determined and regularly reviewed by the entire Supervisory Board. Board may grant a special bonus in case of extraordinary performance by an Executive Board member which is not related to performance The compensation and personnel topics dealt with by the Supervisory criteria that were already decisive for granting the Performance Board and General Committee for the year under review are described Bonus or the LTIP Bonus. Such special bonus is limited to a maximum in the Supervisory Board Report. see Supervisory Board Report, p. 21 of 100% of the annual fixed salary of the calendar year for which the The compensation system is geared towards creating an incentive for successful, sustainably value-oriented corporate development The compensation system for the members of the Executive Board and management. Against this background, more than 50% of the which has been applicable since the 2015 financial year was adopted variable target compensation component is based upon multi-year by the shareholders at the Annual General Meeting on May 7, 2015. special bonus is granted. performance criteria. The variable compensation components are It consists of the following components: designed in such a way that the incentive to achieve the long-term targets decisive for the multi-year variable target compensation component is higher than the incentive to achieve the targets decisive Non-performance-related components Fixed compensation for being granted the one-year variable compensation component. The fixed compensation consists of the annual fixed salary, which is Corresponding contractual provisions ensure that this weighting can based, inter alia, on the tasks and responsibilities of the individual be maintained in the future. In terms of the appropriateness of the Executive Board member. It is paid in twelve equal monthly Executive Board compensation, when determining the compensation, instalments and generally remains unchanged during the term of the Supervisory Board takes into consideration factors such as the the service contract. size and the global orientation, the economic situation, the success and outlook of the company, as well as the common level of the Other benefits compensation in comparison with peer companies and with the The other benefits primarily consist of paying for, or providing the compensation structure applicable for other areas of the company. monetary value of, non-cash benefits and of other benefits such To this end, the relation between the Executive Board compensation as contributions to insurance schemes normal for the market, and that of senior management and employees overall is taken into assumption of relocation costs, the provision of a company car or account, both in total and in terms of its development over time, the use of the internal driver service. The total amount of these with the relevant groups of persons having been determined by the other benefits is capped at 5% of the total compensation comprising Supervisory Board. In addition, when determining the compensation, the fixed salary and a (possible) Performance Bonus granted in the the tasks and contribution of each Executive Board member to the respective financial year. company’s success, their individual performance as well as the overall performance of the Executive Board are taken into consideration. The compensation system aims to appropriately remunerate exceptional Performance-related components Performance Bonus performance, while diminishing variable compensation when targets As the annual variable component, the Performance Bonus serves are not met. Thus, in the Supervisory Board’s opinion, an appropriate level of compensation, which is reviewed annually by the Supervisory Board and adjusted if required, can be ensured. as compensation for the Executive Board’s performance in the past financial year in line with the short-term development of the company. At the beginning of the financial year, the Supervisory Board establishes the differently weighted performance criteria with their respective clear targets, and determines the individual amount of the 32 33 1 TO OUR SH AREHOLDERS Compensation Report 01 COMPENSATION OF THE EXECUTIVE BOARD MEMBERS Fixed compensation Fixed compensation is paid out monthly in twelve equal instalments. 2016 Performance Bonus For the performance criteria determined at the beginning of the 2016 financial year, see the section ‘2016 Performance Bonus’ on page 35. LTIP 2015/2017 For the performance criteria determined in the 2015 financial year, see the section LTIP 2015/2017 on page 35. The bonus amount is payable following approval of the consolidated financial statements of the past financial year. Payout of the LTIP Bonus will be effected after the 2017 consolidated financial statements are approved. Target direct compensation (in case of 100% target achievement) Cap of overall compensation (maximum compensation) Fixed compensation 2016 Performance Bonus The Performance Bonus is capped at a maximum of 150% of the individual Bonus target amount. If the overall degree of target achievement lies at or below 50%, the Executive Board member is not entitled to the Performance Bonus. LTIP 2015/2017 The LTIP Bonus is capped at a maximum of 150% of the individual LTIP target amount. If the overall degree of target achievement lies at or below 50%, the Executive Board member is not entitled to the LTIP Bonus. For the ultimate evaluation of the Executive Board’s performance, qualitative criteria such as the further development of company health management as well as occupational health and safety, are taken into account. Fixed compensation One-year performance-related compensation Multi-year performance-related compensation Performance Bonus target amount for each member of the Executive Long-Term Incentive Plan (LTIP Bonus) Board, based on a target achievement of 100% (Bonus target amount). The target values of the individual performance criteria include Based on the Long-Term Incentive Plan 2015/2017 (LTIP 2015/2017) measured over a three-year period, the LTIP Bonus serves – in threshold values; if the target achievement of this performance line with sustainability-oriented development of the company – as criterion is below these threshold values, it is valued at zero. This compensation for the long-term performance of the Executive means that if targets are clearly not achieved a Performance Bonus Board. On this basis, at the beginning of the 2015 financial year, may not be paid at all. the Supervisory Board defined the performance criteria oriented towards sustainable growth of the company and also defined the At the end of the financial year, the precise target achievement of individual amount of the LTIP Bonus target amount for each Executive each Executive Board member, which is based on a comparison of the Board member, based on a target achievement of 100% (LTIP target predefined target values with the values achieved in the year under amount). review, is examined. The sum of these degrees of target achievement constitutes the factor by which the Bonus target amount is multiplied. At the end of the 2017 financial year, the precise target achievement The result is the individual amount of the Performance Bonus to be of each Executive Board member, which is based on a comparison of paid (bonus amount). Moreover, when determining the bonus amount, the predefined target values with the values achieved at the end of the all other sustainable performance by the Executive Board can be three-year period covering the years 2015 to 2017, will be examined. taken into account in an appropriate manner. The bonus amount is The sum of these degrees of target achievement constitutes the capped at a maximum of 150% of the individual Bonus target amount. factor by which the LTIP target amount is multiplied. The result is If the overall degree of target achievement lies at or below 50%, the the individual amount of the LTIP Bonus to be paid (bonus amount). Executive Board member is not entitled to the Performance Bonus. Payout of the LTIP Bonus will be effected after the 2017 consolidated financial statements are approved. If an Executive Board member takes or leaves office during a financial year, the Performance Bonus is generally calculated pro The LTIP Bonus is capped at a maximum of 150% of the individual rata temporis based on the degree of target achievement determined LTIP target amount. If the overall degree of target achievement lies at at the end of the financial year. In certain cases defined in the Terms or below 50%, the Executive Board member is not entitled to the LTIP & Conditions of the Performance Bonus, entitlement to the payout of Bonus. If an Executive Board member takes or leaves office during a Performance Bonus is generally forfeited, unless the Supervisory Board determines otherwise at its equitable discretion. The bonus amount is payable following approval of the consolidated financial statements of the past financial year. the term of the LTIP 2015/2017 (Performance Period), the LTIP Bonus is generally calculated on a pro rata basis. In certain cases defined in the Terms & Conditions of the LTIP 2015/2017, entitlement to the payout of an LTIP Bonus is generally forfeited, unless the Supervisory Board determines otherwise at its equitable discretion. 33 1 TO OUR SHA REHOLDERS Compensation Report 1 TO OU R SHAR E HO LD E RS Compensation Report Pension commitments The pension entitlement of the Executive Board members Herbert Hainer, Glenn Bennett and Robin J. Stalker, who were appointed As part of the pension commitments, an amount equalling a percentage determined by the Supervisory Board, which is related to the individual annual fixed salary, is credited to the virtual pension before September 30, 2013 and who were active members in the account of the individual Executive Board member each year. The 2016 financial year, will be covered by the defined benefit pension Supervisory Board annually resolves on this percentage, which most plans granted to them. The Executive Board members Kasper recently was set at 50%. When making its decision, the Supervisory Rorsted, Roland Auschel and Eric Liedtke, who were appointed after Board takes into account the targeted individual pension level and September 30, 2013, were granted defined contribution pension plans. the resulting annual and long-term expenses for the company. The The defined benefit pension plans granted to the Executive Board pension assets existing at the beginning of the respective calendar members Roland Auschel and Eric Liedtke for the period from their year shall yield a fixed interest rate of 3% p.a., however for no longer appointment until December 31, 2014 were converted into defined than until the pension benefits initially become due. As a rule, interest contribution pension plans with effect from January 1, 2015. In future, shall be credited as at the close of December 31 in each calendar year, Executive Board members appointed by the Supervisory Board will and on the due date in the year in which the pension benefit is first also be granted defined contribution pension plans. due. Entitlement to the pension benefits becomes vested immediately. Defined benefit pension plans Starting from a base amount totalling 10% 1 of the respective pensionable income granted in the pension plan, a module of two or three percentage points 2 of the pensionable income is created for each Executive Board member for each full year of tenure as an Executive Board member. The entitlements to pension benefits comprise pensions to be received upon reaching the age of 65, or, on application, early retirement pensions to be received upon reaching the age of 62 (early pensions), or invalidity and survivors’ benefits. On occurrence of the pension-triggering event, the pension benefits generally correspond to the balance of the pension account including As its targeted level of provision, the Supervisory Board has accumulated interest on that date. In case of invalidity or death prior determined for the Executive Board members a pension entitlement amounting to a maximum of 50% 3 of an Executive Board member’s pensionable income. The amount of pensionable income currently to reaching the age of 62, for the minimum coverage, the Executive Board member’s pension account will be credited with the outstanding pension contributions for the time until the Executive Board member equals the individual fixed annual salary indicated in the table would have reached the age of 62, but no longer than for 120 months ‘Benefits granted’. (without interest accrual). The pension benefits due upon death of the Executive Board member are payable to the widow, the widower The pension benefits comprise retirement pensions to be received or the registered civil partner and the children entitled to pension upon reaching the age of 65 as well as disability and survivors’ benefits as joint creditors. benefits. At the Executive Board member’s choice, the payout of all pension In the event that an Executive Board member leaves the company benefits is made either as a one-time payment or in up to ten equal prior to reaching retirement age, the non-forfeiture of the pension annual instalments. If no choice is made by the Executive Board entitlement will be in line with legal provisions. The pension member, the pension benefits are paid out in three equal annual entitlement is not, as legally envisaged, reduced pro rata temporis, instalments. As a rule, in case of a payout in annual instalments, i.e. it amounts to at least the base amount of the pension commitment the instalment will be paid out in January of the respective year. made to the Executive Board member, plus the pension modules The still outstanding instalments of the benefit phase bear the accumulated annually during the term of office. maximum interest rate of the first due date of the pension benefits for the calculation of the actuarial reserve according to the German Following the pension-triggering event, ongoing pensions are Actuarial Reserve Ordinance (DeckRV) for life insurance companies. adjusted in line with the development of state pensions. Defined contribution pension plans Insolvency insurance for the pension commitments granted to the Executive Board members as of October 1, 2013 is ensured by the The defined contribution pension plans, each in the form of a direct integration of the pension plans in the existing trust model, the commitment, basically have the same structure as the existing Contractual Trust Arrangement (CTA). ‘adidas Management Pension Plan’ for managers. 1 Deviating provision for Glenn Bennett: instead of his initial appointment date (effective March 6, 1997), January 1, 2000 is used for the calculation of his pension entitlements with a base amount of 20% of pensionable income; initial appointment of Herbert Hainer: effective March 6, 1997; initial appointment of Robin J. Stalker: effective January 30, 2001. 2 Increase of the annual pension components of Glenn Bennett and Robin J. Stalker to three percentage points of the pensionable income effective March 6, 2015. 3 For Herbert Hainer, the targeted level of provision is 40%. 3 4 35 1 TO OUR SH AREHOLDERS Compensation Report adidas Management Pension Plan Executive Board members 4 who belonged to the group of senior executives of adidas AG prior to their Executive Board appointments bonus 5. The follow-up bonus is payable in two tranches, 12 and 24 months following the end of the contract. There is no entitlement to a follow-up bonus if the service contract expires after release from will at the time of their retirement receive additional payments from service with continued compensation or if it is terminated for good the ‘adidas Management Pension Plan’. Until their appointment cause. as Executive Board members, adidas AG had contributed pension components under these supplementary provisions which were EXECUTIVE BOARD COMPENSATION 2016 introduced for all of these senior executives of the company in 1989. Commitments to Executive Board members upon premature termination of tenure Executive Board service contracts are usually agreed with a contractual 2016 Performance Bonus At the beginning of the 2016 financial year, the Supervisory Board determined an increase — in net income from continuing operations, — in net sales of the adidas and Reebok brands in the US term of three years. This term will be shortened accordingly if the (currency-neutral), Executive Board member reaches the age of 65 prior to expiration. — in net sales in the adidas Running category ‘Footwear & Apparel’ (global, currency-neutral), and In case of premature termination of tenure in the absence of — in the popularity of the adidas brand as measured by the Net good cause, the Executive Board service contracts cap potential compensatory payments at a maximum of twice the total annual Promoter Score (global) as success parameters with different weightings for the Performance compensation, not exceeding payment claims for the remaining period Bonus. Based on the targets actually achieved, this results in a degree of the service contract (Severance Payment Cap). In this context, the of target achievement of 150% of the individual Bonus target amount total annual compensation means the Executive Board member’s total for the year under review. This percentage simultaneously constitutes compensation paid for the last full financial year prior to departure the cap for the payout of the 2016 Performance Bonus. from the Executive Board. In calculating the total compensation, a multi-year variable compensation component and the service costs will only be taken into consideration with the proportion attributable to the last full financial year prior to departure. When determining the total compensation, a possible follow-up bonus 5 is not included, but the expected total compensation for the current financial year is considered, taking into account the outlined provisions. LTIP 2015/2017 From the LTIP 2015/2017, for which the Supervisory Board determined as Performance criteria for the 2015 financial year the — achievement of a defined net income from continuing operations, — increase in the presence on the US market measured/assessed by the increase in market shares of adidas footwear and an improvement of the brand’s popularity, If the service contract is terminated due to a change of control, a possible severance payment is limited to 150% of the Severance — increase in the adidas share price over three years and relative outperformance of the adidas share compared to the DAX-30 Payment Cap. price index, If an Executive Board member dies during his term of office, his spouse or partner receives or, alternatively, any dependent children — increase in profitability of the retail segment, — improvement of sustainability measured/assessed by the improvement of employee satisfaction and an increase in the receive, in addition to pension benefits due to contractual stipulations, percentage of female representation in management positions the pro rata annual fixed salary for the month of death and the within the company following three months, but no longer than until the agreed end date no payout was made given the three-year performance period, of the service contract. but will be made at the end of the 2017 financial year depending on the degree of target achievement. For the ultimate evaluation Commitments to Executive Board members of the Executive Board’s performance, qualitative criteria such as the further development of company health management as well as occupational health and safety are also taken into account. upon regular termination of tenure Unless otherwise agreed, upon regular termination of the service contract, i.e. in case of non-renewal of the service contract or termination upon reaching the age of 65, the departing Executive Board member is entitled to receive not only his annual fixed salary on a pro rata basis up to the date on which he leaves office, but also a potential pro-rated Performance Bonus and a potential pro-rated LTIP Bonus as well as, under certain circumstances, a follow-up 4 Herbert Hainer, Roland Auschel, Eric Liedtke and Robin J. Stalker. 5 This bonus amounts to 75% for Roland Auschel, Glenn Bennett and Eric Liedtke, 100% for Robin J. Stalker, and 125% for Herbert Hainer and is based on the Performance Bonus granted to the respective Executive Board member for the last full financial year. 35 1 TO OUR SHA REHOLDERS Compensation Report 1 TO OU R SHAR E HO LD E RS Compensation Report Commitments to Executive Board members in connection with termination of tenure In connection with Herbert Hainer’s termination of tenure by mutual Overall compensation for 2016 in accordance with the Code Based on the Supervisory Board’s determination outlined above, the overall compensation of the Executive Board for the 2016 financial consent on September 30, 2016, it was agreed that the contractual year amounts to € 16.086 million (2015: € 9.177 million). Due to the commitments on the part of the company will continue to be granted until expiry of his service contract on March 31, 2017. For this high Performance Bonus paid for the successful financial year and the appointment of Kasper Rorsted as member of the Executive period, Herbert Hainer receives the following compensation: fixed Board and successor to Herbert Hainer from August 1, 2016, the compensation in the amount of € 800,000 and other benefits in the total compensation for the year under review is higher than the total amount of € 14,165. His past service costs for this period amount to compensation for the 2015 financial year. € 207,295. In accordance with the termination agreement, Herbert Hainer will receive a Performance Bonus in the amount of € 2,032,500 The recommendations of the Code to individually disclose the for the 2016 financial year. For the 2017 financial year, however, he compensation components for each Executive Board member and will not receive a Performance Bonus. In addition, he will receive two to use the sample tables attached to the Code are implemented in thirds of the LTIP Bonus which the Supervisory Board may decide to the following. grant in February 2018. For the LTIP Bonus amount, reserves in the amount of € 4,655,112 have been set up. At the end of April 2018 and at the end of April 2019, he will be paid out 75% and 50%, i.e. € 1,524,375 and € 1,016,250, of the Performance Bonus granted to Benefits granted in accordance with the Code In the following table, the benefits granted for the 2015 and 2016 financial years are disclosed including other benefits and service him for the 2016 financial year as a follow-up bonus. In accordance costs, and also including the maximum and minimum achievable with the stipulation in his service contract, he will be paid monthly compensation in the amount of € 66,667 gross for the post-contractual compensation. competition prohibition for a period of 24 months. This corresponds In accordance with the requirements of the Code, the Performance to 50% of the last fixed monthly salary. The reserves set up for Bonus is disclosed with the amount granted in case of 100% target compensation for post-contractual competition prohibition amount achievement. Pursuant to the recommendations of the Code, the LTIP to € 1,600,000. Furthermore, Herbert Hainer is entitled to keep his Bonus resulting from the LTIP 2015/2017 measured over a three-year supervisory board mandate at FC Bayern München AG until the end of period is to be indicated with the pro rata temporis target amount of his term of office. The claims to pension payments deriving from the an ‘average probability scenario’ at the time of granting, whereas adidas Management Pension Plan and the pension commitment dated adidas AG takes the 100% target amount as a basis. March 6, 1997, as amended on August 6, 2014, remain unaffected and will be paid out in accordance with the contractual regulations. Pension commitments The service costs for the pension commitments granted to the Executive Board members in the 2016 financial year and the cash values of the vested rights are set out individually: 02 PENSION COMMITMENTS IN 2016 FINANCIAL YEAR IN € Executive Board members incumbent as at December 31, 2016 FY 2015 FY 2016 FY 2015 FY 2016 Service costs Accumulated pension obligation for the pension commitments excluding deferred compensation Kasper Rorsted 1 Roland Auschel Glenn Bennett Eric Liedtke Robin J. Stalker Total n.a. 361,000 251,162 336,000 379,868 587,372 360,846 260,911 359,588 346,914 n.a. 738,627 5,778,313 724,482 5,051,190 611,250 1,129,796 6,994,391 1,192,719 6,060,004 1,328,030 1,915,631 12,292,612 15,988,160 Executive Board members incumbent until September 30, 2016 Herbert Hainer 2 Total 428,648 428,648 2,837,209 2,837,209 11,983,870 11,983,870 n.a. n.a. 1 Member of the Executive Board as of August 1, 2016 and Chief Executive Officer as of October 1, 2016. 2 Chief Executive Officer and member of the Executive Board until September 30, 2016. The service costs 2016 for Herbert Hainer also comprise the contractually agreed follow-up bonus in the amount of € 2,540,625 due to his departure with effect from the end of September 30, 2016 as the follow-up bonus is a commitment for other pension benefits in the case of a member leaving office prematurely which is concluded in advance. 3 6 37 1 TO OUR SH AREHOLDERS Compensation Report 03 BENEFITS GRANTED IN € Fixed compensation Other benefits Total One-year variable compensation 1 Multi-year variable compensation LTIP 2015/2017 2 Total Service costs 3, 4 Overall compensation Kasper Rorsted Executive Board member, Chief Executive Officer since August 1, 2016 and October 1, 2016 Roland Auschel Executive Board member, Global Sales 2015 2016 2016 (min.) 2016 (max.) 2015 2016 2016 (min.) 2016 (max.) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 833,333 18,800 852,133 625,000 833,333 833,333 833,333 18,800 852,133 0 0 0 2,310,466 587,372 852,133 587,372 833,333 18,800 852,133 937,500 1,250,000 1,250,000 3,039,633 587,372 550,000 17,742 567,742 412,000 616,667 616,667 650,000 17,943 667,943 557,000 616,667 616,667 650,000 17,943 667,943 0 0 0 650,000 17,943 667,943 835,500 925,000 925,000 1,596,408 1,841,609 361,000 360,846 667,943 360,846 2,428,443 360,846 2,897,838 1,439,505 3,627,005 1,957,408 2,202,455 1,028,789 2,789,289 Glenn Bennett Executive Board member, Global Operations Eric Liedtke Executive Board member, Global Brands 2015 5 2016 6 2016 (min.) 2016 (max.) 2015 2016 2016 (min.) 2016 (max.) Fixed compensation Other benefits Total One-year variable compensation 1 Multi-year variable compensation LTIP 2015/2017 2 Total Service costs 3, 4 680,560 30,993 711,553 662,132 901,101 901,101 721,474 34,435 755,909 686,602 903,665 903,665 721,474 34,435 755,909 0 0 0 2,274,786 2,346,176 251,162 260,911 755,909 260,911 721,474 34,435 755,909 1,029,903 1,355,497 1,355,497 3,141,310 260,911 516,667 15,656 532,322 412,000 616,667 616,667 650,000 13,396 663,396 557,000 616,667 616,667 650,000 13,396 663,396 0 0 0 650,000 13,396 663,396 835,500 925,000 925,000 1,560,989 1,837,062 336,000 359,588 663,396 359,588 2,423,896 359,588 Overall compensation 2,525,948 2,607,087 1,016,820 3,402,221 1,896,989 2,196,650 1,022,984 2,783,484 Robin J. Stalker Chief Financial Officer Herbert Hainer Chief Executive Officer until September 30, 2016 2015 2016 2016 (min.) 2016 (max.) 2015 2016 7 2016 (min.) 2016 (max.) Fixed compensation Other benefits Total One-year variable compensation 1 Multi-year variable compensation LTIP 2015/2017 2 Total Service costs 3, 4 654,603 19,817 674,421 520,000 741,800 741,800 665,500 20,018 685,518 540,000 741,800 741,800 665,500 20,018 685,518 0 0 0 1,936,221 1,967,318 379,868 346,914 685,518 346,914 665,500 20,018 685,518 810,000 1,112,700 1,112,700 2,608,218 346,914 1,582,258 1,200,000 1,200,000 1,200,000 34,987 26,917 26,917 26,917 1,617,245 1,226,917 1,226,917 1,226,917 1,311,270 1,355,000 1,694,000 1,694,000 1,694,000 1,694,000 0 0 0 2,032,500 2,541,000 2,541,000 4,622,515 4,275,917 1,226,917 5,800,417 428,648 2,837,209 2,837,209 2,837,209 Overall compensation 2,316,089 2,314,232 1,032,432 2,955,132 5,051,163 7,113,126 4,064,126 8,637,626 1 Contractually agreed Performance Bonus target amount 2016 for Kasper Rorsted due to his intra-year appointment to the Executive Board with effect from August 1, 2016. 2 Contractually agreed LTIP Bonus target amount 2015/2017 due to the appointment of Kasper Rorsted to the Executive Board (with effect from August 1, 2016) during the plan term. Contractually agreed LTIP Bonus target amount 2015/2017 due to termination of Herbert Hainer‘s Executive Board mandate (with effect from the end of September 30, 2016) during the plan term. 3 Service costs 2016 stated pro rata temporis due to intra-year termination of Herbert Hainer’s Executive Board mandate with effect from the end of September 30, 2016. 4 The service costs 2016 for Herbert Hainer also comprise the contractually agreed follow-up bonus in the amount of € 2,540,625 due to his departure with effect from the end of September 30, 2016 as the follow-up bonus is a commitment for other pension benefits in the case of a member leaving office prematurely which is concluded in advance. 5 Exchange rate 1.10690 $/€ (annual average rate 2016). 6 Exchange rate 1.11005 $/€ (annual average rate 2015). 7 Executive Board compensation stated pro rata temporis due to intra-year termination of Herbert Hainer’s Executive Board mandate at the end of September 30, 2016. Herbert Hainer’s service contract terminates with effect from March 31, 2017. The variable compensation components (Performance Bonus and LTI) granted for the 2016 financial year were already fully earned by Herbert Hainer during his term of office as Executive Board member. In addition to the overall compensation set out, Herbert Hainer received the following compensation for the period from October 1, 2016 to December 31, 2016: fixed compensation in the amount of € 400,000 and other benefits in the amount of € 7,083. This compensation and the service costs for the period from October 1, 2016 to December 31, 2016 in the amount of € 98,861 are set out in the Compensation Report as part of the overall payments to former members of the Executive Board. 37 1 TO OUR SHA REHOLDERS Compensation Report 1 TO OU R SHAR E HO LD E RS Compensation Report 04 ALLOCATION IN € Fixed compensation Other benefits Total One-year variable compensation 3 Multi-year variable compensation LTIP 2015/2017 Other Total 4 Service costs 5, 6 Overall compensation Fixed compensation Other benefits Total One-year variable compensation 3 Multi-year variable compensation LTIP 2015/2017 Other Total 4 Service costs 5, 6 Overall compensation Kasper Rorsted Executive Board member, Chief Executive Officer since August 1, 2016 and October 1, 2016 Roland Auschel Executive Board member, Global Sales Glenn Bennett Executive Board member, Global Operations 2015 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2016 2015 2016 2015 1 2016 2 833,333 18,800 852,133 937,500 n.a. n.a. n.a. 1,789,633 587,372 2,377,005 550,000 17,742 567,742 412,000 n.a. n.a. n.a. 979,742 361,000 1,340,742 650,000 17,943 667,943 835,500 n.a. n.a. n.a. 1,503,443 360,846 1,864,289 680,560 30,993 711,553 662,132 n.a. n.a. n.a. 1,373,685 251,162 1,624,847 721,474 34,435 755,909 1,029,903 n.a. n.a. n.a. 1,785,813 260,911 2,046,724 Eric Liedtke Executive Board member, Global Brands Robin J. Stalker Chief Financial Officer Herbert Hainer Chief Executive Officer until September 30, 2016 2015 2016 2015 2016 2015 2016 7 516,667 15,656 532,322 412,000 n.a. n.a. n.a. 944,322 336,000 1,280,322 650,000 13,396 663,396 835,500 n.a. n.a. n.a. 1,498,896 359,588 1,858,484 654,603 19,817 674,421 520,000 n.a. n.a. n.a. 1,194,421 379,868 1,574,289 665,500 20,018 685,518 810,000 n.a. n.a. n.a. 1,495,518 346,914 1,842,432 1,582,258 34,987 1,617,245 1,311,270 n.a. n.a. n.a. 2,928,515 428,648 3,357,163 1,200,000 26,917 1,226,917 2,032,500 n.a. n.a. n.a. 3,259,417 2,837,209 6,096,626 1 Exchange rate 1.11005 $/€ (annual average rate 2015). 2 Exchange rate 1.10690 $/€ (annual average rate 2016). 3 Contractually agreed Performance Bonus target amount 2016 for Kasper Rorsted due to his intra-year appointment to the Executive Board with effect from August 1, 2016. 4 The compensation components set out above constitute both the overall compensation for the 2016 financial year and for the previous year, which have to be set out individually in accordance with German Commercial Law. 5 Service costs 2016 stated pro rata temporis due to intra-year termination of Herbert Hainer’s mandate with effect from the end of September 30, 2016. 6 The service costs 2016 for Herbert Hainer also comprise the contractually agreed follow-up bonus in the amount of € 2,540,625 due to his departure with effect from the end of September 30, 2016 as the follow-up bonus is a commitment for other pension benefits in the case of a member leaving office prematurely which is concluded in advance. 7 Executive Board compensation stated pro rata temporis due to intra-year termination of Herbert Hainer’s Executive Board mandate at the end of September 30, 2016. Herbert Hainer’s service contract terminates with effect from March 31, 2017. The variable compensation components (Performance Bonus and LTI) granted for the 2016 financial year were already fully earned by Herbert Hainer during his term of office as Executive Board member. In addition to the overall compensation set out, Herbert Hainer received the following compensation for the period from October 1, 2016 to December 31, 2016: fixed compensation in the amount of € 400,000 and other benefits in the amount of € 7,083. This compensation and the service costs for the period from October 1, 2016 to December 31, 2016 in the amount of € 98,861 are set out in the Compensation Report as part of the overall payments to former members of the Executive Board. 38 39 1 TO OUR SH AREHOLDERS Compensation Report Allocation in accordance with the Code Pursuant to the recommendations of the Code, the fixed compensation, Review of Executive Board compensation In the 2016 financial year, the Supervisory Board had the Executive other benefits and the service costs as well as the Performance Bonus Board compensation system reviewed with regard to appropriateness are to be disclosed as an allocation for the financial year in which by an independent external compensation expert. In doing so, the the compensation was granted. As stipulated by the Code, the LTIP overall target annual compensation of the individual Executive Board Bonus resulting from the LTIP 2015/2017 measured over a three-year members and the structure of the Executive Board compensation were period is disclosed in the year in which the plan ends, i.e. in the 2017 examined in detail. This review found that while the compensation financial year and consequently not in the 2016 financial year (also meets the requirements of the German Stock Corporation Act and the not on a pro rata basis). Code, it could be aligned even more closely with customary market Overall payments to former members of the Executive Board levels. and their surviving dependants In the 2016 financial year, overall payments to former members of Miscellaneous The Executive Board members do not receive any additional the Executive Board and their surviving dependants amounted to compensation for mandates within adidas. The Executive Board € 8.754 million (2015: € 3.524 million). The increase is attributable, members have not received any loans or advance payments from in particular, to the fact that the compensation, the service costs adidas AG. for the period from October 1, 2016 to March 31, 2017 as well as the compensation for post-contractual competition prohibition and the follow-up bonus for the former Chief Executive Officer Herbert Hainer are included in the total amount. For details, see the section ‘Commitments to Executive Board members in connection with termination of tenure’. see p. 36 COMPENSATION OF THE SUPERVISORY BOARD MEMBERS COMPENSATION SYSTEM In accordance with § 18 of adidas AG’s Articles of Association, after the end of the respective financial year, the members of the Supervisory Provisions for pension entitlements for the former members of the Board receive a fixed compensation amount for their function as Executive Board who resigned on or before December 31, 2005 and their well as compensation for the chairmanship of or membership in surviving dependants were created, amounting to € 45.821 million committees, in accordance with the Code. For meetings requiring (2015: € 42.730 million) in total as at December 31, 2016. The increase personal attendance, an attendance fee amounting to € 750 is is mainly attributable to a decline in the underlying interest rate from granted. Additional variable compensation is not granted to the 2.5% to 1.8%. Supervisory Board members. Supervisory Board members who have not been members of the Supervisory Board for the entire financial There are pension commitments towards four former Executive Board year receive a pro-rated amount of compensation. members who resigned after December 31, 2005, which are covered by a pension fund or a pension fund in combination with a reinsured For the 2016 financial year, each individual member of the Supervisory pension trust fund. From this, indirect obligations amounting to Board received € 50,000 as fixed annual compensation; three times € 29.472 million (2015: € 12.644 million) arise for adidas AG, for this amount was paid to the Chairman of the Supervisory Board and which no accruals were established due to financing through the twice this amount was paid to each Deputy Chairperson. Members of pension fund and pension trust fund. This increase is attributable, the General Committee and of the Finance and Investment Committee in particular, to the resignation of Herbert Hainer and the decline in received additional compensation of € 25,000 and members of the the underlying interest rate. Audit Committee received additional compensation of € 50,000. In addition to their fixed compensation, the Chairmen of the General The dynamisation of the pensions paid to former Executive Board Committee and of the Finance and Investment Committee received a members is effected in accordance with statutory regulations or compensation amount of € 50,000 each, and the Chairman of the Audit regulations under collective agreements, unless a surplus from the Committee received compensation of € 75,000. The compensation pension fund is used for an increase in pension benefits after pension paid for a committee chairmanship also covers the membership payments have already begun. in such committee. The members of the Steering Committee, the Mediation Committee, the Nomination Committee and committees which are established ad hoc do not receive additional compensation. If a Supervisory Board member is in more than one committee, the member only receives compensation for his/her task in the committee with the highest compensation. 39 1 TO OUR SHA REHOLDERS Compensation Report 1 TO OU R SHAR E HO LD E RS Our Share 04 COMPENSATION OF THE SUPERVISORY BOARD MEMBERS IN € 2016 Fixed compensation 2016 Compensation committee work 2016 Attendance fees 2015 Fixed compensation 2015 Compensation committee work 2015 Attendance fees Supervisory Board members incumbent as at December 31, 2016 Igor Landau (Chairman of the Supervisory Board, Chairman of the General Committee, Chairman of the Finance and Investment Committee) Sabine Bauer (Deputy Chairwoman of the Supervisory Board, Member of the General Committee, Member of the Finance and Investment Committee) 150,000 50,000 5,250 150,000 50,000 8,250 100,000 25,000 5,250 100,000 25,000 8,250 Willi Schwerdtle (Deputy Chairman of the Supervisory Board, Member of the General Committee) 100,000 25,000 Ian Gallienne 1 Dieter Hauenstein Roswitha Hermann 2 Dr. Wolfgang Jäger (Member of the Audit Committee, Member of the Finance and Investment Committee) Dr. Stefan Jentzsch (Member of the Audit Committee) Herbert Kauffmann (Chairman of the Audit Committee, Member of the Finance and Investment Committee) Katja Kraus Kathrin Menges Udo Müller 3 Roland Nosko (Member of the General Committee) Hans Ruprecht (Member of the Audit Committee) Nassef Sawiris 1 Michael Storl 2 Heidi Thaler-Veh Kurt Wittmann 3 Total 1 Supervisory Board member with effect from June 15, 2016. 2 Supervisory Board member for the period from June 24, 2016 to October 6, 2016. 3 Supervisory Board member with effect from October 6, 2016. 27,322 50,000 14,208 n.a. n.a. n.a. 5,250 1,500 3,750 750 100,000 25,000 n.a. 50,000 n.a. n.a. n.a. n.a. 7,500 n.a. 3,750 n.a. 50,000 50,000 6,750 50,000 50,000 7,500 50,000 50,000 7,500 50,000 50,000 6,000 50,000 50,000 50,000 11,885 75,000 n.a. n.a. n.a. 7,500 3,000 3,750 750 50,000 50,000 50,000 n.a. 75,000 n.a. n.a. n.a. 7,500 3,750 2,250 n.a. 50,000 25,000 5,250 50,000 25,000 7,500 50,000 27,322 14,208 50,000 11,885 50,000 n.a. n.a. n.a. n.a. 7,500 1,500 750 3,750 750 50,000 50,000 n.a. n.a. 50,000 n.a. n.a. n.a. n.a. n.a. 7,500 n.a. n.a. 3,000 n.a. 906,831 350,000 70,500 800,000 350,000 72,750 Expenses The Supervisory Board members are reimbursed for necessary that the Annual General Meeting on May 12, 2016 approved the amendment of the Articles of Association regarding the enlargement expenses and travel expenses incurred in connection with their of the Supervisory Board from 12 to 16 members. The term of office of mandates as well as for the VAT payable on their compensation, the two new shareholder representatives commenced with effect from insofar as they charge for it separately. June 15, 2016. The term of office of the two employee representatives began with effect from June 24, 2016. see Supervisory Board Report, p. 21 SUPERVISORY BOARD COMPENSATION 2016 Fixed compensation and attendance fees The total compensation paid to the Supervisory Board in the 2016 Miscellaneous The Supervisory Board members have not received any loans or financial year amounted to € 1.26 million (2015: € 1.15 million). In advance payments from adidas AG. addition, attendance fees totalling € 70,500 (2015: € 72,750) were paid. The increase in the total compensation for the 2016 financial year compared to the 2015 financial year is attributable to the fact 4 0 41 1 TO OUR SH AREHOLDERS Our Share OUR SHARE Despite a weak start into the year, most international stock markets recovered during the second half of 2016 and ended the year on a positive note. While the DAX-30 and the EURO STOXX 50 increased by 7% and 1%, respectively, the MSCI World Textiles, Apparel & Luxury Goods Index declined 1%. The adidas AG share significantly outperformed international stock markets in 2016, driven by a strong financial performance as well as positive company-specific and sector-related newsflow. As a result, the adidas AG share reached a new all-time high during the course of the year and ended 2016 with an increase of 67% compared to the prior year, making it the top performer within the DAX-30 for the second consecutive year. As a result of the strong operational performance in 2016 as well as Management’s confidence in the strength of the company’s financial position and long-term growth aspirations, we intend to propose a dividend per share of € 2.00 at our 2017 Annual General Meeting. INTERNATIONAL STOCK MARKETS SHOW MIXED PERFORMANCE IN 2016 ADIDAS AG SHARE ONCE AGAIN BEST-PERFORMING STOCK IN THE DAX-30 INDEX International stock markets were characterised by a volatile performance throughout 2016, as reflected by a weak start into the In 2016, the adidas AG share significantly outperformed international stock markets. In particular, the release of strong financial results, year and a recovery during the second half. Disappointing economic driven by the successful execution of the strategic business plan data in China, the unexpected outcome of the EU referendum in the ‘Creating the New’, which resulted in subsequent increases in the UK (‘Brexit’) as well as declining oil prices put pressure on global company’s full year 2016 outlook, strongly supported the positive equity markets in the first and second quarter of the year. Accordingly, trend of the adidas AG share during the course of 2016. In addition, the DAX-30 declined 10% in the first half of 2016. However, stabilising positive company and sector-related newsflow, including the CEO economic data in China as well as recovering oil prices, improving succession, the addition of the adidas AG share to the EURO STOXX 50 economic indicators and the extension of the ECB’s quantitative as well as the company’s third IR Tutorial Workshop, helped to build easing programme until the end of 2017 provided significant support further trust in adidas and the company’s ability to sustainably drive for international stock markets in the second half of 2016. In addition, revenues and increase margins in the years to come. Consequently, hopes that US President Donald Trump would pursue a pro-growth the adidas AG share reached a new all-time high of € 159.50 on policy triggered another stock market rally towards the end of the October 20, 2016. As a result of some profit-taking and strategic year. The DAX-30 benefited from these developments, resulting in asset re-allocation executed by capital market participants towards a 19% increase in the second half. In total, the DAX-30 showed an the end of 2016, the adidas AG share closed the year at € 150.15. This improvement of 7% for the full year. At the same time, the EURO translates into an increase of 67% compared to the end of December STOXX 50 increased 1% in 2016. The Dow Jones was the strongest 2015, making the adidas AG share the top performer within the performer in 2016 with an increase of 13%, hitting a new all-time high DAX-30 for the second consecutive year. see Table 02 of 19,975 on December 20, 2016. The MSCI World Textiles, Apparel & Luxury Goods Index, however, was not able to fully recover in the second half, leaving the index with a slight decline of 1% at the end LEVEL 1 ADR PERFORMS IN LINE WITH COMMON STOCK of 2016. see Table 01 01 HISTORICAL PERFORMANCE OF THE ADIDAS AG SHARE AND IMPORTANT INDICES AT YEAR-END 2016 IN % adidas AG DAX-30 EURO STOXX 50 MSCI World Textiles, Apparel & Luxury Goods Source: Bloomberg. 1 year 3 years 5 years 10 years 67 7 1 (1) 62 20 6 (8) 199 95 42 45 298 74 (20) 91 Our Level 1 ADR closed 2016 at US $ 78.55, representing an increase of 62% versus the prior year level (2015: US $ 48.51). The less pronounced increase of the Level 1 ADR price compared to the ordinary share price was due to the appreciation of the US dollar versus the euro at the end of 2016 compared to year-end 2015. The number of Level 1 ADRs outstanding increased slightly to 8.8 million at year-end 2016 compared to 8.6 million at the end of 2015. The average daily trading volume increased to around 101,200 ADRs in 2016 (2015: around 92,100). Further information on our ADR Programme can be found on our website. www.adidas-group.com/adr 41 1 TO OUR SHA REHOLDERS Our Share 1 TO OU R SHAR E HO LD E RS Our Share ADIDAS AG SHARE AT A GLANCE 02 FIVE-YEAR SHARE PRICE DEVELOPMENT 1 | Dec. 30, 2011 Dec. 30, 2016 | 300 250 200 150 100 50 1 Index: December 30, 2011 = 100. — adidas AG — DAX-30 — EURO STOXX 50 — MSCI World Textiles, Apparel & Luxury Goods Index 03 THE ADIDAS AG SHARE Number of shares outstanding 1 Basic earnings per share Diluted earnings per share Cash generated from operating activities per share Year-end price Year high Year low Market capitalisation 3 Dividend per share Dividend payout 3 Dividend payout ratio 3 Dividend yield Shareholders’ equity per share 3 Price-earnings ratio at year-end 2016 2015 Important indices shares 201,489,310 200,197,417 € € € € € € € in millions € € in millions % % € % 5.08 4.99 6.73 150.15 159.50 83.45 30,254 2.00 4 403 39.6 1.3 32.12 30.1 3.32 2 3.32 2 5.41 89.91 93.41 54.61 18,000 1.60 320 47.9 2 1.8 28.30 27.1 2 — DAX-30 — EURO STOXX 50 — MSCI World Textiles, Apparel & Luxury Goods — Deutsche Börse Prime Consumer — Dow Jones Sustainability Indices (World and Europe) — ECPI Ethical Equity Indices (Euro and EMU) — ECPI ESG Equity (Euro and World) — Ethibel Sustainability Indices (Global and Europe) — Euronext Vigeo (Eurozone 120, Europe 120) — FTSE4Good Index Series — MSCI Global Sustainability Indexes — MSCI SRI Indexes — STOXX Global ESG Leaders Average trading volume per trading day 5 shares 892,646 1,199,167 1 All shares carry full dividend rights. 2 Excluding goodwill impairment of € 34 million. 3 Based on number of shares outstanding at year-end. 4 Subject to Annual General Meeting approval. 5 Based on number of shares traded on all German stock exchanges. 42 43 1 TO OUR SH AREHOLDERS Our Share 04 2016 ADIDAS AG HIGH AND LOW SHARE PRICES PER MONTH 1 IN € Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 170 150 130 110 90 70 0 0 . 4 1 1 5 3 . 2 0 1 5 0 . 6 1 1 0 5 . 9 0 1 0 6 . 4 0 1 6 5 . 5 9 8 9 . 4 9 5 4 . 3 8 4 3 . 9 9 6 4 . 6 8 5 5 . 6 5 1 0 0 . 5 4 1 5 5 . 5 5 1 5 0 . 5 4 1 0 5 . 9 5 1 0 4 . 9 4 1 0 1 . 7 4 1 0 7 . 1 3 1 5 1 . 0 5 1 5 6 . 7 3 1 5 7 . 6 4 1 5 5 . 5 2 1 5 4 . 8 2 1 5 0 . 5 1 1 — 30-day moving average ■ High and low share prices 1 Based on daily Xetra closing prices. Source: Bloomberg. ADIDAS AG SHARE MEMBER OF IMPORTANT INDICES callable by the issuer or putable by the bondholders until June 2017. The adidas AG share is included in a variety of high-quality indices In 2016, 2,947,127 shares were transferred following the exercise of around the world, most importantly the DAX-30 and the MSCI World conversion rights, all of which were serviced from treasury shares Textiles, Apparel & Luxury Goods Index, which comprises our major of the company. The remaining bonds were convertible into up to competitors. In addition, as of September 16, 2016, the adidas AG 3,182,525 million new or existing adidas AG shares. Consequently, as share is a member of the EURO STOXX 50 Index, reflecting the at December 31, 2016, 48% of the convertible bond was converted. strong increase of adidas AG’s free-float market capitalisation in The convertible bond closed the year at € 183.40, well above the prior 2016. At December 31, 2016, our weighting in the DAX-30, which year level of € 125.82. see Note 18, p. 166 is calculated on the basis of free float market capitalisation and twelve-month share turnover, improved to 2.89% (2015: 2.15%). Our higher weighting compared to the prior year was due to the increase DIVIDEND PROPOSAL OF € 2.00 PER SHARE in market capitalisation of adidas AG, which more than offset the As a result of the strong operational performance in 2016, the decrease in share turnover. Within the DAX-30, we ranked 14 on company’s robust financial position as well as Management’s market capitalisation (2015: 17) and 12 on turnover (2015: 16) at confidence in our long-term growth aspirations, the adidas AG year-end 2016. Our weighting in the EURO STOXX 50 Index, which Executive and Supervisory Boards will recommend paying a dividend is based on free-float market capitalisation, amounted to 1.31% on of € 2.00 per dividend-entitled share to shareholders at the Annual December 31, 2016. Additionally, in recognition of our social and General Meeting (AGM) on May 11, 2017. This represents an increase environmental efforts, adidas AG is listed in several key sustainability of 25% compared to the prior year dividend (2015: € 1.60). Subject indices. see Table 03 to the meeting’s approval, the dividend will be paid on May 16, 2017. The total payout of € 403 million (2015: € 320 million) reflects a payout ratio of 39.6% (2015: 47.9%, excluding goodwill impairment CONVERTIBLE BOND CLOSES THE YEAR AT € 183.40 losses) of net income attributable to shareholders, which is within In March 2012, adidas AG successfully issued a convertible bond, due the target range of between 30% and 50% of net income attributable on June 14, 2019, for an aggregate nominal amount of € 500 million. to shareholders as defined in our dividend policy. see Table 03 Proceeds from the offering have allowed the company to further optimise its debt structure. The bonds were priced with a 0.25% annual coupon and a conversion premium of 40% above the reference price of € 59.61, resulting in an initial conversion price of € 83.46 per share. As a consequence of contractual provisions relating to dividend protection, the conversion price was adjusted to € 81.57 per share. This adjustment became effective on May 13, 2016. The bonds are not SHAREHOLDER RETURN PROGRAMME CONTINUED On October 1, 2014, adidas AG announced a multi-year shareholder return programme of up to € 1.5 billion in total to be completed by December 31, 2017. The shareholder return programme is being executed primarily by buying back shares via the stock exchange 43 1 TO OUR SHA REHOLDERS Our Share 1 TO OU R SHAR E HO LD E RS Our Share under the authorisation given by the Annual General Meeting on 05 SHAREHOLDER STRUCTURE 1 May 8, 2014, and on May 12, 2016, for the period through to May 11, 2021. The authorisation covers the repurchase of up to 10% of the company’s share capital on the stock exchange. 4 <1 8 On November 7, 2016, adidas AG announced the commencement of the third tranche of the share buyback programme with an aggregate acquisition cost of up to € 300 million (excluding incidental purchasing 87 costs). Within the third tranche up to and including January 31, 2017, adidas AG bought back 2,128,200 shares. This corresponds to a notional amount of € 2,128,200 in the nominal capital and 1 As of January 2017. consequently 1.02% of the company’s nominal capital. The average purchase price per share for this third tranche was € 140.96. 87% Institutional investors 8% Private investors and undisclosed holdings 4% Treasury shares <1% Members of adidas AG Executive and Supervisory Boards The total number of shares bought back by adidas AG within the framework of the shareholder return programme since November 7, 2014, amounted to 11,146,969 shares as of January 31, 2017. This corresponds to a notional amount of € 11,146,969 in the nominal capital and consequently 5.33% of the company’s nominal capital. As at January 31, 2017, adidas AG had successfully completed 60% of its multi-year shareholder return programme. 06 SHAREHOLDER STRUCTURE BY REGION 1, 2 58 9 17 21 40 40% North America 21% United Kingdom 17% Rest of the world 9% Belgium 8% Germany 5% France STRONG INTERNATIONAL INVESTOR BASE Based on our share register, we estimate that adidas AG currently has slightly more than 60,000 shareholders. In our latest ownership analysis conducted in January 2017, we identified almost 100% of 1 As of January 2017. 2 Reflects institutional investors only. our shares outstanding. Institutional investors represent the largest investor group, holding 87% of shares outstanding. Private investors MANAGERS’ TRANSACTIONS REPORTED ON CORPORATE WEBSITE and undisclosed holdings account for 8%. Current members of the Managers’ transactions involving adidas AG shares (ISIN Executive and Supervisory Boards hold less than 1% in total. Lastly, DE000A1EWWW0) or related financial instruments, as defined by adidas AG currently holds 4% of the company’s shares as treasury § 19 of the European Market Abuse Regulation (MAR), which came shares, reflecting shares purchased as part of our share buyback into force on July 3, 2016, conducted by members of our Executive programme which were partly used for shares transferred following or Supervisory Boards, by key executives or by any person in close the exercise of conversion rights from the convertible bond. see relationship with these persons, are reported on our website. Diagram 05 www.adidas-group.com/s/managers-transactions In 2016, adidas AG received five notifications concerning managers’ transactions pursuant to In terms of geographical distribution, the North American market § 19 MAR: Igor Landau, Chairman of the adidas AG Supervisory currently accounts for 40% of institutional shareholdings, followed Board, purchased a total of 20,000 shares in five transactions on by the UK with 21%. Identified German institutional investors hold November 15, 2016. 8% of shares outstanding. Belgium and France account for 9% and 5%, respectively. 17% of institutional shareholders were identified in other regions of the world. see Diagram 06 VOTING RIGHTS NOTIFICATIONS PUBLISHED ADIDAS AG SHARE RECEIVES STRONG ANALYST SUPPORT Both the company and the adidas AG share continued to receive strong analyst support in 2016. Around 35 analysts from investment All voting rights notifications received in 2016 and thereafter in banks and brokerage firms regularly published research reports accordance with §§ 21 et seq. of the German Securities Trading Act on adidas. The vast majority of analysts are confident about the (Wertpapierhandelsgesetz – WpHG) can be viewed on our corporate medium- and long-term potential of the company. This is reflected website. www.adidas-group.com/voting_rights_notifications Information on reportable shareholdings that currently exceed or fall below a certain threshold can also be found in the Notes section of this Annual Report. see Note 26, p. 173 in the recommendation split for our share as at December 31, 2016. 27% of analysts recommended investors to ’buy’ our share (2015: 38%). 56% advised to ‘hold’ our share (2015: 48%) and 17% of the analysts recommended to ‘sell’ our share (2015: 14%). 4 4 45 1 TO OUR SH AREHOLDERS Our Share SUCCESSFUL INVESTOR RELATIONS ACTIVITIES adidas AG strives to maintain close contact to institutional and private shareholders as well as analysts. In 2016, Management and the Investor Relations team further intensified communication with financial market participants. In total, we spent 47 days on roadshows (2015: 44) and also spent 28 days presenting at 16 national and international conferences (2015: 19 days at 13 national and international conferences). Furthermore, 2016 saw the continuation of our ‘Investor Relations Tutorial Workshops’, as we hosted one of these workshops in Herzogenaurach, with more than 100 investors and analysts attending the event either on site or online. The purpose of these half-day events is to provide further insights into key strategic areas as well as topics with high relevance due to specific circumstances. For the third time in four years, adidas was awarded a Red Dot Communication Design Award for its Annual Report, this time even with the prestigious ‘Best of the Best’ honours. In addition, we ranked first across all indices in the ‘Best Annual Report’ ranking of German business magazine ‘Bilanz’, which focuses on the quality of content and transparency in reporting amongst German corporations. Lastly, our 2015 Annual Report won a silver award in the ‘Best of Content Marketing’ competition, Europe’s largest corporate publishing competition. EXTENSIVE FINANCIAL INFORMATION AVAILABLE ONLINE We offer extensive information around our share as well as the company’s strategy and financial results on our corporate website. Our event calendar lists all conferences and roadshows we attend and provides all presentations for download. In addition to live webcasts of all major events such as the Annual General Meeting, Investor Days and our IR Tutorial Workshops, we also offer webcasts of our quarterly conference calls. www.adidas-group.com/investors 45 O U R Y N PA M O C 47 Group Management Report – Our Company 2 O U R — CORPORATE STRATEGY adidas Brand Strategy Reebok Brand Strategy — GLOBAL OPERATIONS — RESEARCH AND DEVELOPMENT — OUR PEOPLE — SUSTAINABILITY 48 55 60 62 67 72 78 GROUP MANAGEMENT REPORT This report contains the Group Manage ment Report of the adidas Group, comprising adidas AG and its consolidated subsidiaries, and the Manage ment Report of adidas AG. 47 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Corporate Strategy CORPORATE STRATEGY Everything we do is rooted in sport. Sport is central to every culture and society and is core to an individual’s health and happiness. With sport playing an increasingly important role in people’s lives, we operate in a highly attractive industry. Through our authentic sports brands, we push the boundaries of products, experiences and services to drive brand desire and capitalise on the growth opportunities in sport. The importance of sport, however, goes far beyond that: We believe that, through sport, we have the power to change lives. And we work every day to inspire and enable people to harness the power of sport in their lives. OUR MISSION: TO BE THE BEST SPORTS COMPANY IN THE WORLD — Innovation: We will continue to challenge the boundaries of functionality, performance and design by leveraging our It is our mission to be the best sports company in the world. Best extensive R&D expertise within the company and also by means that we design, build and sell the best sports and fitness products in the world, with the best service and experience. Best is what our consumers, athletes, teams, partners and media will say about us. Once people are saying that we are the best, market share, defining Open Source as a key strategic choice. In addition, enhancing services for customers and consumers alike as well as implementing improved internal processes and systems are see other areas where our organisation strives to innovate. leadership and profitability will follow. Research and Development, p. 67 To achieve our mission we focus on the following initiatives: — Authentic sports brands: Our brands are driven to create and innovate through a common passion for sport and a sporting — Focusing on sustainability: We are committed to further striking the balance between shareholder interests and the needs and concerns of multiple other stakeholders, including our own employees, the people making our products and the lifestyle. At the same time, the adidas and Reebok brands each environment. On our website, we provide detailed information have a unique identity and focus on their core competencies. on the steps we take to have a sustainable positive impact on This approach allows us to develop and create products, experi- society and the planet. see Sustainability, p. 78 www.adidas-group.com/s/ ences and services tailored to the individual needs and desires sustainability-strategy of a broad spectrum of consumers, increasing our leverage in the marketplace. — Creating long-term shareholder value: Creating long-term value for our shareholders drives our overall decision-making — Investments focused on highest-potential markets and channels: As a company, we target strong market positions in all markets in which we compete. However, we have prioritised process. Therefore, we are focused on rigorously managing those factors under our control, making strategic choices that will drive sustainable revenue and earnings growth and, ultimately, our investments based on those markets which offer the best operating cash flow. We are committed to increasing returns to medium- to long-term growth and profitability opportunities. shareholders with above-industry-average share price perfor- In this respect, we have identified extensive growth opportu- mance and dividends. see Internal Management System, p. 86 nities in North America and Latin America and aim for dramatic market share gains. In addition, we place considerable emphasis on expanding our activities in Greater China and Western Europe to gain market leadership. STRATEGIC BUSINESS PLAN: CREATING THE NEW PUTS BRANDS FIRST — Creating a flexible supply chain: Speed and agility are key to outpacing the competition, providing a constant flow of new and In March 2015, we presented our new strategic business plan until the year 2020 named ‘Creating the New’. At the epicentre of Creating relevant products for our consumers and high service levels for the New is our ambition to further accelerate growth by significantly our customers. We are committed to meeting the full range of increasing brand desirability. Creating the New therefore focuses consumer needs by providing game-changing technical innova- on our brands as they connect and engage us with our consumers. tions for sport, creating and driving trends in streetwear through Its consumer-centric approach is already driving significant our sports-inspired lifestyle products, while ensuring constant improvements in the desirability of our brands and has increased our product availability in the correct size and colour to the highest relevance with consumers around the globe. We are gaining market quality standards. see Global Operations, p. 62 shares in those categories, cities and markets that we have identified as future growth drivers for our company. 4 8 49 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy 01 OUR STRATEGY FOR CREATING THE NEW E C R U O S N E P O E R U T L U C CITIE S FOCUS D E E P S BRAND DESIRE Top-line and market share growth Gross margin expansion Operating leverage STRATEGIC CHOICES Our new strategic business plan is based on our unique corporate Being fast will give us decisive competitive advantages. These include: — Improve product availability: Enable constant product availability culture and built around the three strategic choices that will support and ensure faster delivery of products. us in intensifying our focus on our consumers and will drive brand desirability in the years to come: Speed, Cities and Open Source. — Decrease risk: Reduce the risk of overbuying and decrease end-season clean-up by creating more relevant product propositions. Culture At adidas, we are convinced that a corporate culture of confidence, — Create additional net sales: Capture higher demand with shorter lead-time production and avoid seasonal product successes going creativity and collaboration is key to enable us to create the new. This out of stock. culture is defined and inspired by our People Strategy, as our people’s — Generate more contribution: Reduce markdowns on articles sold performance, well-being and knowledge have a significant impact on by increasing the share of volumes sold at full price. brand desire, consumer satisfaction and, ultimately, our financial performance. We are proud of the strong level of diversity within our Over the last years, we have built the foundation for Speed with adidas workforce, fostering different ideas, strengths, interests and cultural neo, in which a big proportion of the product range to date already backgrounds, as this helps us to better fulfil the needs and multi- runs on so-called ‘Speed programmes’. In 2016, we continued to faceted demands of our consumers around the world. In the future, adapt the learnings from neo and built Speed capabilities across all our People Strategy will include a stronger focus on developing our other categories for a defined share of their business, in particular internal talents and increasing women’s representation in leadership the adidas brand’s key categories Running, Football, Training and Originals. In addition, from a market perspective, 2016 saw a further roll-out of Speed globally, with most markets currently able to participate in the Speed programmes. positions. see Our People, p. 72 Speed Driving brand desirability begins with putting our consumers at the heart of everything we do and serving them in the best possible way. This involves ensuring that consumers always find fresh and desirable products where and when they want them and with an unrivalled brand experience. This, in turn, means to us being able to anticipate what consumers want and react accordingly in a timely manner. Speed is therefore a very critical and powerful lever for us and we have set ourselves the goal to become the first true fast sports company by 2020. see Global Operations, p. 62 49 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Corporate Strategy We are using our industry-leading experience to re-shape our entire business model end-to-end, from range planning to product creation, Our 2020 targets for Speed: Today, around 15% of our sales are generated on Speed programmes. It is our ambition to increase the sourcing, supply chain, go-to-market and sales. In this context, we share of speed-enabled products to at least 50% of our net sales base our Speed ambitions on three global and centralised initiatives by 2020, with all key categories contributing to this development. that are deployed consistently across our markets and channels: — Never out of stock: We standardise and strengthen our existing ‘never-out-of-stock’ business proposition by setting a global, As these initiatives will put us in a position to provide consumers with appealing and up-to-date products, we expect this part of our business to achieve a 20% higher share of full-price sales compared permanent offer with longer life cycles and continuous repro- to the regular range. duction and replenishment. This ensures our most iconic and desired products are permanently available to our consumers. — Planned responsiveness: Based on sell-through data, which we receive and analyse at the beginning of the season, we can better Cities Major metropolitan centres are playing an increasingly influential role in shaping global trends and consumers’ perception, perspectives read demand signals, re-order seasonal products on shorter and decisions. By 2030, it is forecasted that around 60% of the global lead times and deliver them within the season. By doing so, we population will live in cities. Given this megatrend of urbanisation are able to repeat seasonal product successes and fulfil higher and the dominance of a few global mega cities in terms of economic consumer demand than initially forecasted. strength, population size, presence of media and degree of sports — In-season creation: We plan ranges to be created later in the season in order to create or capture the latest trends in the participation as well as their influence on global cultural trends, adidas has defined Cities as one of its strategic choices. Creating the industry. This, in turn, helps us to create unexpected newness New therefore focuses on six global cities: London, Los Angeles, New and drive brand desire to new heights. York, Paris, Shanghai and Tokyo. The combination of these three initiatives will transform our current Starting in 2015, adidas began to disproportionately invest into these set-up to a new speed-enabled end-to-end business model, with the cities in the areas of marketing, retail experiences and organisational goal of winning the consumer with constantly fresh and desirable set-up. The primary goal is to connect with the most influential products. see Research and Development, p. 67 consumers and elevate the presence and impact of our brands on the most important global platforms. We will constantly evaluate Besides focusing on Speed in our current supply chain and production our activities and, if necessary, expand our focus of Cities beyond process, we also look into new, disruptive business models and the initial six named. technologies to make us faster. A prime example in this area is our Speedfactory project: using smart manufacturing instead of We aim to deliver extraordinary experiences to consumers in these centralised production, it brings production to where the consumer cities across all touchpoints by engaging more deeply with them in is. It opens doors to the creation of products completely unique to communities where they live, places where they work, fields, courts the fit and functional needs of consumers, through a combination and streets where they play and doors where they shop. At the same of the craft of shoemaking and cutting-edge technology. While the time, we strive to create high synergies between our activation and pilot Speedfactory was set up at the end of 2015 in partnership with commercial efforts. This also includes aligning our initiatives with industry experts to provide a testing ground for this model, 2016 saw similar activities of key retail partners. the introduction of the first pairs of high-performance footwear to come out of the Speedfactory. Furthermore, in 2016, we announced It is our goal to create an end-to-end ecosystem that connects the expansion of our Speedfactory production facilities in Ansbach, consumer communities to relevant products, activation and retail Germany, which will begin large-scale production in 2017. As a next step, we will open a new Speedfactory in Atlanta, USA, in 2017, to create products more quickly for and closer to the US consumer. see experiences through the lens of the various sports categories: — Consumer communities: We further developed our strong relationships with consumers who identify with key sports by Global Operations, p. 62 see Research and Development, p. 67 cultivating sports communities and tribes directly through our own resources and in partnership with external groups. Together with the U.S. Soccer Foundation and the New York City Football Club, in 2016 adidas announced the launch of the New York City Soccer Initiative, a public-private partnership that will build and maintain 50 soccer fields in under-served neighbourhoods across the five districts over the next five years. Our efforts also include scaling successful models that were piloted in the past, such as the Paris Battle Runs, which helped us establish scalable running communities in France. 5 0 51 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy — Products: We continue to drive a multi-pronged strategy of product introductions, focused across all six cities, including Open Source Open Source is a collaboration-based innovation model that aims global campaign launches and exclusive collections. We amplify to build brand advocacy by opening the brands’ doors to the creator the impact of our product introductions through higher marketing and by inviting him in to help shape the future of sport and sports investments and stock allocations of key strategic products to culture with us. Open Source is a mindset that is based on creativity, these cities, in addition to pursuing more innovative distribution collaboration and confidence. It is about learning and sharing, about approaches. Key successes in 2016 included the release of limited starting conversations between the brand, external experts and editions such as the adidas UltraBOOST Uncaged Parley or the consumers and about giving them the chance to have an impact on Alexander Wang x adidas Originals collection, which both were what we do. exclusively available in our six key cities. — Activation: Based on our commitment to drive meaningful inter- actions and continuous engagement with our consumers, we adopt an ‘always on’ approach. In this context, our activation playbook highlights hyperlocal connections and a relentless By defining Open Source as one of its strategic choices, adidas intends to: — Provide access for externals to tools and resources we use to create (e.g. materials, factories, data, experts, athletes, social delivery of value and inspiration to individuals and groups. platforms and business models). Through our nine global newsrooms, which span across the entire — Acquire and nurture creative capital, new insights, skills, compe- world, we drive continuous dialogue with consumers while at tencies and specialised knowledge. the same time leveraging our global assets and local partners — Explore new territories to create unprecedented brand value for to create special moments for them. For example, in 2016, the the consumer beyond mere transactional businesses. launch of the new football boot concept ‘Glitch’ in London repre- sented a new and revolutionary way to launch a concept digitally — Strengthen the consumer’s perception of our brands as leaders in sport, by providing consumers access to the progress of our and in the most targeted way. Available through an app, Glitch is projects and creation processes. only accessible for an exclusive consumer subset that is invited to participate in the ecosystem by receiving an online code from one of the Glitch ambassadors or pro players who were seeded the boots in late summer. We have defined three strategic initiatives for Open Source: — Creative collaborations: Creative collaborations are targeted on increasing our creative capital through new tools, new environ- — Retail experiences: The environments where consumers find and interact with our products are important focus areas for us. ments and new perspectives from outside creative thinkers. They are meant to give creativity a platform and provide the right tools We are committed to providing premium retail experiences to for ideas to blossom. With the Brooklyn Creator Farm, a design our consumers with executions that connect, engage and inspire space and creation hub, we offer young urban creative talent a them. We view our own-retail stores as a valuable point of sale to platform and invite them in to fuel innovation in sport with their excite consumers, by setting high standards for our brand presen- ideas, outside any regular seasonal product creation calendars. tations and experiences. In 2016, the opening of our first flagship In addition, recognising the influence, success and global brand store in New York and the remodelling of key concept stores such power that began almost two years ago with YEEZY for adidas as in our key strategic cities Paris and London were important Originals, we announced an unprecedented new alliance in milestones to further elevate our most important own-retail 2016 with adidas + Kanye West, a YEEZY branded entity creating destinations. We will apply the learnings from these initiatives footwear, apparel and accessories for both genders across street across our entire global distribution, including our wholesale and sport. The partnership – the most significant collaboration partner doors. Our 2020 targets for Cities: Our Cities initiative is off to a strong start, as indicated by improvements in key performance indicators such as NPS and market share. Across all six cities, NPS grew in the course of 2016 with a relative outperformance versus our key competitors. In between a non-athlete and an athletic brand so far – aims at redefining the future of sport by uniting the technical, innovative expertise and capabilities of the adidas brand with the visionary imagination of Kanye West. — Athlete collaborations: The strategic initiatives of athlete collab- orations aim to build communities of athletes that help shape the addition, revenues increased at a strong double-digit rate in most of future of their sport with us. The adidas brand has a far-reaching the six cities, resulting in significant market share gains. We remain history in sport, working with top athletes, and will continue to committed to achieving a leading position within these cities, by further strengthen its network around male creator athletes. doubling revenues by the end of 2020 compared to 2015. In recent years, the brand signed long-term partnerships with two of the world’s most in-demand athletes – football icon Paul Pogba and basketball superstar James Harden – who are both recognised as two of the most creative athletes in world sport, on and off the pitch. In addition, we aim to further expand our roster of female influencers in the years to come. In this context, 51 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Corporate Strategy in 2016, we announced collaborative partnerships with super- ‘CREATING THE NEW’ ACCELERATION PLAN model Karlie Kloss, who joined adidas by Stella McCartney as At the beginning of 2017, based on the initial success of Creating the the face of its fall/winter 2016 campaign, as well as style icon New, which is reflected in the strong financial performance in 2016, and fitness advocate Gigi Hadid, who joined Reebok’s community we implemented a number of initiatives to foster brand momentum of inspiring women as the newest face of the brand’s #Perfect- and accelerate the overall growth path: Never movement. Lastly, to directly engage and interact with a broader consumer community, we continue to focus on our digital space (e.g. Runtastic) and physical space (e.g. Paris Battle — Active management of brand portfolio: Going forward, the focus of our company will be even more on operating a limited Run) projects. — Partner collaborations: The strategic initiatives in the area of partner collaborations intend to open up our knowledge of brand portfolio with a clear focus on our core strength in the athletic footwear and apparel market. This will allow us to reduce complexity and pursue our target consumer more aggressively sport to collaborate with the best partners in other fields. By with both the adidas and the Reebok brand. In this context, in exchanging core competencies, we will create unique value for 2016 we announced our decision to exit the golf hardware market our brands and ultimately also for our consumers. The consumer and therefore to sell the TaylorMade, Adams Golf and Ashworth touchpoints in this field include sport, entertainment experience, consumer specialists, manufacturing and sustainability as well as sports health and monitoring. Our partnership with Parley for the Oceans serves as a prime example. As a Founding Member brands. In addition, we have decided to also actively seek a buyer for our CCM Hockey business. 1 — Sustain momentum for the adidas brand in North America: By authenticating the brand through sports, accelerating our existing of the organisation, our support goes far beyond financial aid to initiatives and introducing new measures aimed at further fund beach clean-ups. In 2016, this partnership took the stage elevating brand desirability amongst US consumers, we want to at the Rio Olympic Games, had football teams FC Bayern Munich and Real Madrid play in jerseys made of Parley Ocean Plastic and strongly improve our market position and significantly increase profitability in this all-important market. unveiled the UltraBOOST Uncaged Parley, the first performance footwear made out of the equivalent of eleven recycled plastic — Drive the digital transformation: Improving our digital capabil- ities along the entire value chain will enable us to accelerate bottles. The adidas brand is committed to making one million building direct relationships with the consumer and drive direct pairs of running shoes using Parley Ocean Plastic in 2017 and sales through our eCommerce platform. has restated its ultimate ambition to eliminate virgin plastic from its supply chain. — Pull value levers across the organisation: By leveraging our Brand Leadership model, increasing our marketing effectiveness and improving our overall operating efficiency, we aim to enhance Our 2020 targets for Open Source: With Open Source, our 2020 goal profitability in the years to come. is to embed external creative capital in our processes to extend our possibilities in creating the future of sport. In the initial phase of Open Source until 2017, we have identified two key targets. The first FINANCIAL AMBITION UNTIL 2020 is to drive brand heat and advocacy by inviting consumers to become Our unique corporate culture and the three strategic choices will be part of our creative culture. By the end of 2017, our goal is that 30% step-changers with regard to brand desirability and brand advocacy. of shared content on our brands through social media and other In combination with the initiatives that are part of our acceleration channels is user-generated content. Our second target is to grow the number of users in our digital ecosystem to over 250 million. This will ensure we are at the pulse of the consumer journey at key moments and touchpoints in their lives. By using the insights we will generate from these sources, we will craft better products and services for our consumers, driving improvements in Net Promoter Score, sales, market share and profitability. plan, this will enable us: — To achieve top-line growth significantly above industry average: We aim to increase currency-neutral revenues annually between 2015 and 2020 at a rate between 10% and 12% on average. — To win significant market share across key categories and markets: We have defined key categories within the adidas and Reebok brands that will spur our growth going forward. From a market perspective, we have defined clear roles for each of our markets, depending on macroeconomic trends, the competitive environment and our brand strength in the respective markets. 1 The company refrains from providing detailed strategic updates for its TaylorMade-adidas Golf and CCM Hockey businesses, due to its focus on the adidas and Reebok brands. 52 53 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy — To improve our profitability sustainably: We plan to substantially improve the company’s profitability, growing our net income from ROLE OF OUR CHANNELS With more than 2,800 own-retail stores, more than 12,000 continuing operations by an average of between 20% and 22% mono-branded franchise stores, over 120,000 wholesale doors and per year between 2015 and 2020, significantly faster than our more than 50 own eCommerce sites, we have an unrivalled network of targeted top-line growth. — To deliver on our commitment to increase shareholder returns: Creating the New includes a strong commitment to generating consumer touchpoints within our industry. By seamlessly integrating the channels within our market portfolio, we are uniquely positioned to pursue and succeed in strategies that not only deliver premium increasing returns for our shareholders. Given our firm confi- consumer experiences but also increase the productivity of our dence in the strength of the company’s financial position and distribution footprint. As we replicate this model to capitalise on future growth ambitions, we target a dividend payout ratio in a new consumer opportunities through own-retail destinations and range between 30% and 50%. wholesale managed spaces, we are able to create halo effects across all consumer touchpoints, resulting in further marketplace expansion. OUR SALES AND DISTRIBUTION STRATEGY: FOCUS ON OMNI-CHANNEL In 2016, we advanced our Global Sales strategy with a number of initiatives focused on premium consumer experience, productivity Our Global Sales function drives the commercial performance of the of the sales platform and marketplace expansion. company by converting brand desire into profitable and sustainable business growth. It is our ambition to deliver the best shopping experience within the sporting goods industry across all consumer touchpoints. ROLE OF OUR GLOBAL MARKETS 1. Premium consumer experiences In order to be ‘omni-present’ for the consumer and to capture the full sales potential by minimising occasions when consumer demand is not met, we continue to focus on the following omni-channel initiatives: — ‘Inventory Check’ which allows online shoppers to view in-store Our Global Sales strategy is crafted by a centralised integrated product availability. marketplace team which supports the flawless execution of our — ‘Click & Collect’ which allows consumers to purchase or reserve Global Brands strategies and drives operational excellence across items for pick-up in a local store. our nine global markets. In a changing global landscape, our diverse market portfolio is an important asset in maximising the business, — ‘Ship from Store’ which allows us to service consumers faster than before by turning our stores into mini distribution centres elevating our competitiveness and achieving our ambitions towards that are closer to consumers. 2020. Clear roles have been defined for each of our markets: Extend: In markets where we are currently the market leader, we plan to leverage and grow our market leadership. These are Russia/CIS, Japan and South Korea. Lead: In markets where we are a strong player but not the number one yet, we aim for market leadership. These are Western Europe, — ‘Buy Online, Return to Store’ which not only provides consumers with a convenient way to return product purchases but also offers new buying opportunities. — ‘Marketplace & Partner Programme’ which expands our online offering to a larger group of consumers across several channels. — ‘Endless Aisle’ which provides in-store visitors with access to our full range of products through our eCommerce platform. Greater China as well as Emerging Markets. In 2016, we deployed a strategic mix of these capabilities in our Grow: In markets where we have identified extensive growth opportunities, we seek dramatic market share gains. These are: own-retail operations in Western Europe, North America, Latin America and Russia/CIS. In this context, a major milestone was achieved in Western Europe, as we were able to integrate and North America, Latin America and Southeast Asia/Pacific. expand our relationships with marketplaces and wholesale partners, including an innovative pilot programme in Berlin where our own-retail stores started to partner with a leading online retailer to deliver a premium, same-day shopping experience to our consumers. In addition, 2016 saw the successful introduction of ‘Endless Aisle’ to North America with the opening of our new adidas flagship store in 53 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy 2 2 New York City. In 2017, we will continue to roll out our omni-channel initiatives across the various markets. For example, in North America, 3. Marketplace expansion Our goal is to leverage and scale the success of our initiatives across we will start to connect to selected wholesale partners in order to our channels in order to better serve consumers. The key contributor create a truly seamless experience for our consumers, independent to this approach is controlled space. Whenever we are able to actively of where they shop. In addition, ‘Endless Aisle’ and ‘Click & Collect’ manage the way our brands and products are presented at the point of will be rolled out across the North American market. sale, the impact on the consumer is in most cases significant. We have 2. Productivity of sales platform We are committed to further driving productivity improvements across our sales platform through a multi-faceted approach: — Premium presentation: Our physical selling spaces are an important factor in driving Net Promoter Score (NPS) and full- the power to do so in own retail (including eCommerce), in franchise and in wholesale managed space. By 2020, we aim to generate more than 60% of our revenues through controlled space. We leverage own retail as a catalyst to our controlled space ambition. We amplify our success in own retail by translating key learnings to price sell-through. We further evolved the brand experience franchise stores and expanding franchising as a business model in through the launch and expansion of premium store concepts existing as well as into new geographies. In 2016, we successfully such as Stadium and Neighbourhood for the adidas brand as launched our adidas flagship in New York City, featuring the new well as FitHub for the Reebok brand. Our own-retail environ- Stadium concept, which was also implemented at selected wholesale ments are designed for scalability and we continue to expand these concepts and benefit from their impact across channels, partners. We expect the flagship to set new standards in terms of presentation, execution and service that will be replicated across all including our wholesale and franchise partners. other channels. eCommerce will continue to be the fastest-growing — Consumer service excellence: In 2016, we further advanced our successful ‘Connect-Engage-Inspire’ service model, which was channel that we operate, with revenues expected to grow from below € 1 billion in 2016 to € 4 billion in 2020. In wholesale, we will continue launched in 2015. The model helps us transform the culture to expand our footprint with a keen focus on prioritised accounts, and effectiveness of our own-retail teams, and consumers enjoy targeting important consumer hotspots and trade zones, especially significantly elevated service levels which have proven commer- those that are part of our Cities initiative. Strategic partnerships cially rewarding through higher conversion rates and increased to operate controlled space remain an important thrust of this average selling prices. expansion. — Personalised interaction: Our commitment to deliver a premium shopping experience is reflected online through our digital brand We are confident that our Global Sales focus on both markets flagship stores, adidas.com and reebok.com. E-commerce and and channels will realise significant wins in our key performance digital communication are powerful tools for our brands to indicators – brand desirability, net sales, market share and engage with consumers. In 2016, we combined all our digital profitability. see Internal Management System, p. 86 activities in a new function, Digital Brand Commerce, to not only accelerate our e-commerce business but also expand our effec- tiveness in all forms of digital communication. — Insight-driven decision-making: We continue to invest in our analytical capabilities and technical infrastructure to become faster and more insight-driven in decision-making. Leveraging data such as cross-channel product sell-through and consumer purchasing behaviours delivers actionable insights in areas such as assortment planning and product life cycle management. 5 4 55 55 2 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy – adidas Brand Strategy ADIDAS BRAND STRATEGY CONSUMER OBSESSION: CREATING FOR THE CREATORS MISSION: TO BE THE BEST SPORTS BRAND IN THE WORLD The adidas brand has a long history and deep-rooted connection with The consumer is at the heart of everything the adidas brand does. By constantly developing desirable products and inspiring experiences, sport. Its mission is to be the best sports brand in the world, helping the brand strives to build a strong image, trust and loyalty with athletes of all levels to make a difference – in their game, in their consumers. Through Creating the New, the adidas brand has refined lives, in their world. This is anchored in our belief that through sport its strategic direction, operational processes and management we have the power to change lives. incentive system, to foster a culture of consumer obsession in its organisation. The adidas brand’s broad and diverse sports portfolio, from major global sports such as football and running, to regional heartbeat sports such as American football and rugby, has enabled the brand — Organisational structure: In 2015, a major reorganisation of roles and responsibilities at the adidas brand was completed under to transcend cultures and become one of the most recognised and the Brand Leadership programme. The aim of this programme iconic global brands. is to provide an organisational structure which enables a ‘consumer-obsessed’ culture that can act with speed, agility and Driven by a relentless pursuit of innovation in sports product empower ment. This has been achieved by adapting the ownership design, development and manufacturing as well as decades of accumulating sports science expertise, the adidas brand has a truly of decision-making from a horizontal functional model to a vertical consumer model, where the business owner, for example unique and comprehensive sports offering. Spanning footwear, the General Manager of adidas Running, now has clear decision- apparel, equipment and services, the brand caters for all, from elite making authority across all functional marketing disciplines. In professional athletes and teams to any individual who wants to make addition, our Global Brands organisation now has a centralised, sport part of their lives. global role for key decisions relating to the appearance of our brands and products around the world. With this approach, we With this powerful platform, the adidas brand is in a very strong ensure that our product offering in the markets enjoys a high position for profitable and sustainable growth. level of commonality, while at the same time we ensure that major initiatives such as product launch and communication activities are managed centrally before they are executed locally by the markets. In 2016, we implemented additional measures 02 ADIDAS RUNNING ULTRABOOST UNCAGED 03 ADIDAS ORIGINALS NMD_XR1 55 55 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy – adidas Brand Strategy 2 04 ADIDAS TRAINING Z.N.E. 05 ADIDAS FOOTBALL ACE 17+ PURECONTROL to capture the full potential of Brand Leadership. The decisions taken to accelerate Brand Leadership include the creation of a — Consumer centricity: Companies that pursue a strategy of putting the consumer’s voice and input as a centrepiece of their opera- global merchandising function responsible for developing one tional and decision-making process have proven higher levels global range architecture to ensure maximum impact of our of success in creating brand advocacy. Therefore, investing in creation efforts as well as for the deployment of the global range and rolling out a global Net Promoter Score ecosystem is one of into the marketplace. In addition, we have combined all of the the key change pillars of Creating the New, in order to drive the individual digital activities across Brand, Sales, IT and Markets in adidas brand’s consumer-obsessed ambition in a measurable a new function, Digital Brand Commerce, to create an industry- and objective manner. The Net Promoter Score (NPS), first intro- leading, holistic, digital consumer experience. duced in 2015, is the central KPI of the adidas brand’s advocacy — Creator archetype: Based on the rapid evolution of sport and sports culture, with Creating the New, the adidas brand evolved its programme. Through this programme, the adidas brand strives to understand the consumer perception (positive and negative) of consumer segmentation strategy. The consumer grid comprises the brand and the key drivers which motivate them to recommend six key quadrants, which are not mutually exclusive. Within this the brand to their friends. see Internal Management System, p. 86 grid, the key is to win the most influential consumers, defined as the creator archetype. The creator focus is at the top of the grid, on male and female athletes as well as streetwear hounds. True to the brand’s values, these influential consumers define FRANCHISES: CREATE THE MOST ICONIC AND DESIRED SYMBOLS IN SPORT themselves as a work in progress – are all doers, first to adopt, We are convinced that footwear has the highest influence on brand creating their own inspiring content and are focused on what’s perception and, more importantly, on innovation, on creativity and new and what’s next. A large portion of creators live, play and on design perception. Footwear is also the best driver of NPS, work in the world’s most influential and aspirational cities, a which in turn correlates directly into consumer purchase intent key reason for the company’s Cities strategic choice. In 2017, the and our potential to grow market share. Therefore, until 2020, the adidas brand will accelerate global and local marketing initiatives adidas brand is placing a higher emphasis in terms of investment to amplify the brand’s creator positioning in the marketplace with and resources into footwear. In addition, the brand also has a clear a specific focus on women’s. strategy to reduce the number of footwear models, putting a stronger focus on key franchises that can really make a difference for the brand. 5 6 57 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy – adidas Brand Strategy Such footwear franchises are defined as long-term concepts that we commit to for a multi-year period. The goal of franchises is not WOMEN’S: ADDING A NEW DIMENSION TO DRIVE GROWTH only to shape sport, but also to influence culture. They are built to Winning the female consumer is an imperative for the adidas brand create trends, rather than follow. They are targeted directly at the and offers tremendous growth potential. Women are active in all creator consumer through iconic features, stories and functions, and sports and, to a large extent, dominate social media and household have the potential to be iterated and expanded over time. The mix shopping behaviour. Given the magnitude of the business opportunity, of franchises is expected to be representative of the brand’s annual in 2016, the adidas brand further invested resources in building a category priorities, and their life cycles will be carefully managed, to cross-functional women’s organisation and support infrastructure ensure longevity and avoid overheating. to set direction for creative, ranging, merchandising and marketing and to steer cross-category planning. In addition, franchises will be prioritised throughout the value chain, highly leveraging and benefiting from the company’s strategic choices The adidas brand will relentlessly focus on five products: the bra, of Speed, Cities and Open Source. By 2017, the adidas brand expects the tee, the tank, the tights and the running shoe. These are the five its top franchises to represent at least a 30% share of the footwear products the brand will innovate against, with the aim to create the business. In 2016, key adidas brand franchises included a blend of best the industry has ever known in these five items. In 2016, the past icons such as the Stan Smith, Gazelle and Superstar as well as first results of this approach proved successful. A key highlight in future icons such as the UltraBOOST, PureBOOST X, Ace and NMD. this context was the launch of PureBOOST X, an innovative running shoe designed only for women. The adidas brand teamed up with In 2016, the adidas brand extended its franchise methodology and female athletes from around the world to study the female foot and approach to apparel, introducing the Z.N.E. Hoodie as part of the how it moves during running to create the ultimate women’s running new Athletics apparel product line, which more extensively bridges shoe. While most running shoes are adaptations of male shoes, athletes’ style and on-field performance needs and expectations. PureBOOST X was designed with only the female athlete in mind. The Z.N.E. Hoodie is a perfect example of this new approach, with a fresh take on traditional pre-game outwear, specifically engineered to remove distractions and maximise athletes’ focus in the make-or- break period before they compete. 06 ROLE OF CATEGORIES Focus Categories LEAD GROW AMPLIFY AUTHENTICATE #1 in every market Dramatic market share gains Largest business in every market Regional players/ growth business Football Originals Running neo Training Basketball Heartbeat Sports Digital Outdoor 57 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy – adidas Brand Strategy 2 MARKETING INVESTMENTS: MEAN MORE BY DOING LESS In terms of partnership assets, while reducing the ratio of marketing spend and number of partnerships, the adidas brand will nonetheless The adidas brand is focused on creating inspirational and innovative continue to bring its products to the biggest stages in the world marketing concepts that drive consumer advocacy and build brand equity. The brand spends almost half of its marketing investments on partnership assets, with the remainder on brand marketing activities through: — Events: such as the FIFA World Cup, the UEFA EURO, the UEFA Champions League, Roland Garros (French Open) and the Boston such as digital, advertising, point-of-sale and grassroots activations. Marathon. The adidas brand intends to decrease the ratio of marketing investments spent on promotion partnerships to less than 45% by — High-profile teams: such as the national federations of Germany, Spain, Argentina, Russia, Mexico, Colombia, Belgium and Japan, 2020. In addition, the brand will consolidate and focus resources to as well as top clubs such as Manchester United, Real Madrid, AC have the biggest effect on the creator and brand franchises. This will Milan, FC Bayern Munich, Juventus and Flamengo in football, be achieved by focusing on three priorities: — Reason to believe: By harnessing the brand’s creator positioning, the emotion of sport, and the power of sport to change lives, the adidas brand will communicate a reason to believe in the the New Zealand All Blacks and France in rugby, and American universities such as Miami, Arizona State and Texas A&M. — High-profile individuals: such as football stars Lionel Messi, Paul Pogba, Gareth Bale, Mesut Özil and James Rodríguez, basketball brand, letting the world know what distinguishes adidas from stars James Harden, Derrick Rose and Damian Lillard, marathon the competition. record holder Dennis Kimetto, American football players Aaron — Reason to buy: The second priority is to harmonise and deliver globally consistent and impactful communication around the Rodgers and Von Miller, baseball rookies Kris Bryant and Carlos Correa as well as tennis stars Angelique Kerber and Simona brand’s key franchises. By investing more money against fewer Halep. items, the adidas brand will strive to elevate and maintain its key franchises iconic status, giving the consumer clear and In addition, the adidas brand also has a number of strategic compelling reasons to buy the product. partnerships and collaborations with top designers and design — Locker room: The locker room is where loyalty is built and earned. The adidas brand defines the locker room as those places studios, such as with Yohji Yamamoto, Stella McCartney, Raf Simons and Alexander Wang. The brand also has similar relationships with where athletes are fully immersed in their sport with peers and many of the most creative and influential personalities from across friends. It’s the football cage, the run base or the street court. the entertainment industry, including Kanye West, Pharrell Williams Until 2020, the brand will therefore significantly step up its grass- and Rita Ora. roots and local activation efforts, led by initiatives in the world’s most influential cities. 07 ADIDAS BASKETBALL JAMES HARDEN SIGNATURE COLLECTION 58 59 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy – adidas Brand Strategy ROLE OF CATEGORIES The adidas brand has assigned each category a role and ambition until 2020, allowing the brand to exploit short- and medium-term Grow — The running category is the adidas brand’s biggest growth oppor- tunity across all genders and price points. The brand’s goal is potential, while at the same time incubating and further developing to double sales in the category by 2020 compared to the 2015 long-term opportunities for the brand. There are four overarching financial year. Many innovations in the sports industry start in roles: Lead, Grow, Amplify and Authenticate. running. With groundbreaking innovation in materials such as Lead — To lead in the sporting goods industry, we believe it is a must to lead in the world’s most popular sport, football. As such, the Boost and pioneering new manufacturing processes being driven through Speedfactory, the timing is perfect for the adidas brand to strike in this category. To spur growth, amongst other things, adidas Running will significantly refine and evolve its franchise adidas brand aspires to be the number one football brand in strategy for the male and female athlete, increase its investment every market by 2020. This will be driven by focusing on winning in running communities and grassroots activations such as the the football creator in key cities as well as increasing investment Boston Runbase, as well as play a central role in driving the future in the brand’s football footwear franchises. In 2016, the adidas of digital in sport in cooperation with Runtastic. brand pursued its full reset of its football footwear business with the continued focus on the Ace and X franchises. In addition, 2016 — The second category where the adidas brand is focused on driving significant market share gains is with adidas neo. adidas neo saw the successful launch of Glitch, an interchangeable football boot concept. The customisable football boot allows athletes to combine differently coloured uppers (skins) and chassis (inner targets a younger, more price-conscious consumer, particularly in the emerging markets. To ensure success, the adidas neo formula employs a ‘fast fashion’ business model. This means shoes) for an even more personal football boot experience and quick reaction to emerging trends through shorter lead times therefore speaks directly to the creative footballer who craves a and excellence in retail execution. see Research and Development, p. 67 boot which lets them change their style and performance needs instantly. — The adidas brand also strives for leadership in every market with Originals. Not only is adidas the original sports brand, it also Amplify — The training category is the adidas brand’s largest category and is also the apparel engine of the brand. Led by cutting- was the first brand to bring sport to the street. Brand credibility edge innovation in fabrics and materials, the adidas brand and heritage is an important prerequisite to win the discerning aims to significantly increase its apparel footprint under two streetwear hound consumer. These consumers are looking for pillars – Training, which provides products for general training substance and craft and are inspired by stories and design. purposes as well as for specific sports, and Athletics, which is Growth in this category will be driven by iconic products from geared to capturing the sports mindset of every athlete off the the brand’s past such as the Stan Smith, Gazelle and Superstar pitch. As a result of the high visibility of its products in all markets, as well as pioneering new contemporary silhouettes inspired by this category plays a central role in amplifying the brand message elements from the past and the future, such as NMD, EQT and and DNA. Tubular, which over the next years are forecasted to account for approximately 50% of the adidas Originals footwear offering. Authenticate — To be the best sports brand in the world, the adidas brand also needs to be true to sports on a local level. As such, the brand will continue to offer a wide range of sports and sports activities such as basketball, American football, baseball, outdoor, rugby, tennis, handball, volleyball, swimming, cycling and boxing. To maximise impact and resources, in key markets and cities, the adidas brand will prioritise those sports that are most significant in terms of local culture, participation and national pride. At the same time, the brand will use online channels and third-party distributors to ensure that consumers of any sport the brand serves can access its best-in-class products, thus maximising growth and providing avenues for future expansion. 59 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Corporate Strategy – Reebok Brand Strategy 2 REEBOK BRAND STRATEGY MISSION: TO BE THE BEST FITNESS BRAND IN THE WORLD For this reason, Reebok is heavily investing into franchises, making this a key priority going forward. By 2020, Reebok expects footwear franchises to represent at least 25% of the brand’s total footwear business. In 2017, key franchises will include Classics products Reebok is an American-inspired global brand with a deep fitness unique to Reebok’s fitness DNA such as the Classic Leather and heritage and the mission of being the best fitness brand in the world. Club C, while continuing to build on the success of the Nano, a product To realise this mission, the past years have been characterised by a that is continually enhanced by the CrossFit community and has transformation from traditional sports to fitness. The three sides of deep-rooted authenticity. In addition, 2017 stands as a pivotal year the Reebok Delta, a symbol of change and transformation, represent for Reebok Running and will include the launch of the FloatRide and the physical, mental and social changes that occur when individuals Pump Plus as well as the newest evolution of the Print Run. embrace the challenges of fitness. WOMEN’S: WINNING WITH HER Through this journey, Reebok has invested in its training and running Reebok is putting women at the heart of everything the brand businesses to develop products that cater to an evolving fitness does. This female-centric approach, where women are the focal routine, while returning to its fitness roots in Classics to support a point of content strategy, marketing activation and distribution, is fashion-forward lifestyle outside of the gym. Driven by its ambition to a fundamentally different approach relative to other brands in the be the innovation leader in fitness, Reebok is pioneering new fitness activities as well as developing new technologies and products to industry, which will allow Reebok to become a truly dual-gender brand with its women’s business representing 50% of the brand’s reinvent the uniform of fitness and inspire people to be their absolute net sales. best. CONSUMER OBSESSION: THE FIT GENERATION MARKETING INVESTMENTS: AMPLIFYING THE BRAND’S PURPOSE Reebok is focused on creating inspirational marketing capabilities Reebok strives to lead fitness through a more social and more intense that build brand equity and consumer advocacy, while unleashing version of fitness that transcends any traditional workout regimen. powerful brand messages. A key tenet of Reebok’s marketing and The ‘Fit Generation’ is at the epicentre of this fitness movement communication strategy is that movement is essential to living a and therefore Reebok’s target consumer group. These consumers, full life. equally men and women, are driven by mental, social and physical challenges. They are constantly setting new goals and recalibrating their definition of success. These consumers believe that fitness — Be More Human: Inspiring people to be their absolute best physically, mentally and socially is not only the brand’s guiding is not just something they do; rather, it is part of their identity. principle, but also the essence of Reebok’s global marketing They approach fitness with a holistic mindset, engaging in fitness campaign ‘Be More Human’. Launched in 2015, ‘Be More Human’ activities several times a week and taking care to constantly mix up celebrates everyday people who have reconnected to a primal their routine to avoid complacency. Through robust research and physicality that allows them to live more fulfilling and less self- interaction with consumers, Reebok has taken significant time to focused lives. For these individuals, fitness isn’t just a physical understand the complexities of their fitness lifestyle as well as their activity – it’s something that enhances their entire life and product needs and desires. FOOTWEAR FRANCHISES: CREATING THE FOUNDATION FOR FITNESS empowers them to reach their full human potential. In 2016, Be More Human saw continued success with the latest chapter, ’25,915 Days’, which delivers the important message of living each day in one’s life to the fullest. Reebok recognises the importance of building strong footwear franchises, establishing repeatable product lines that become — Partnerships: To amplify the brand, Reebok has entered into a series of groundbreaking partnerships with some of the fastest- annuities for the brand and core items for the consumer. This is growing and most innovative organisations in the fitness world, not only essential for enhancing consumer perception and brand such as CrossFit, UFC, Spartan Race, Ragnar and Les Mills. consideration, but also essential for the overall efficiency of the Reebok also partners with a number of highly influential music Reebok brand. artists and athletes such as Kendrick Lamar, Ronda Rousey and J. J. Watt. Most recently, talented music artist Future and high- profile supermodel Gigi Hadid have joined Reebok’s strong roster of brand ambassadors. 60 61 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Corporate Strategy – Reebok Brand Strategy — Instructors: With over 100,000 instructors currently part of its global network, Reebok seeks to be the brand of choice last 15 quarters. Despite all progress, Reebok continues to grow at a slower pace compared to many of its competitors. In addition, for instructors around the world, providing them a platform to there has been no growth in Reebok’s home market, North America, share consumer insights and collaborate on product innovation. over the last years and the brand’s margins are not accretive to the Continuing to build relationships with fitness instructors is a company’s overall profitability. crucial component of Reebok’s goal of connecting with the global fitness community. ROLE OF THE CATEGORIES Therefore, in 2016, we announced a plan, starting in 2017, to accelerate Reebok’s top-line growth and improve its profitability going forward. As part of this plan, the company has created one united team for Reebok in North America, combining the Global and US organisations Reebok Running, Training and Classics each serve vital roles for under one leadership team, aimed at sharpening the brand’s focus the Fit Generation. Running is the original fitness activity and will on the needs of the US consumer. This also allows us to streamline remain a staple within the Fit Generation’s exercise routine. Reebok Reebok’s current organisation and create an environment that is fully Running’s insight-driven and consumer-led approach fosters dedicated to Reebok and fitness. In this context, Reebok will move its continually innovating the use of technologies that support authentic organisation to a new location in the heart of the city of Boston in 2017. and desired cushioning experiences. Reebok Training is central to Reebok’s fitness mindset and offers a complete range of both highly specialised and versatile products that are at the forefront of fitness Furthermore, to win in North America, efficient and effective distribution is key to Reebok’s future success in this all-important and true to the culture and community the Fit Generation trains in. market. The company is therefore accelerating its initiatives to Reebok Classics fuses the brand’s fitness heritage with the modern streamline Reebok’s store base in the market. In 2016, the company looks of fitness reflected in Running and Training to support the Fit closed another 23 own-retail stores, including half of its Reebok Generation consumer who seeks to reflect a fitness lifestyle in every FitHub concept stores compared to the prior year. It is forecasted that aspect of life. 2017 will see an even higher number of store closures. REEBOK REORGANISATION: STRENGTHENING THE BRAND’S GROWTH FOUNDATION IN NORTH AMERICA We are confident that the initiated changes will have a positive impact on Reebok’s operational and financial performance and will accelerate the brand’s top-line growth, particularly in the US market, Over the last years, Reebok has made major progress in its and significantly lift the brand’s profitability in the years to come. transformation from a general sports brand to a 100% fitness- focused brand and has witnessed continued top-line growth in the 08 REEBOK #PERFECTNEVER CAMPAIGN WITH GIGI HADID 09 REEBOK TRAINING JJ I 61 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Global Operations 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Global Operations GLOBAL OPERATIONS Global Operations manages the development, production planning, sourcing and distribution of the majority of our products. The function strives to increase efficiency throughout the company’s supply chain and ensures the highest standards in product quality, availability and delivery for our customers as well as our own-retail and eCommerce activities at competitive costs. Additionally included under the banner of Global Operations, Global IT manages all digital platforms for the adidas business solutions. It enhances the core systems to be future-proof, builds an open digital platform to connect to consumers and employees, and drives continuous change and innovation. CLEARLY DEFINED PRIORITIES FOR GLOBAL OPERATIONS brand products in 2016. It is also planned to further roll out OTIF to those markets that are currently not in scope, thereby increasing the The strategy of Global Operations is an extension of the overall overall share of adidas and Reebok brand products measured against adidas strategy – thus the consumer is at the centre of everything. ‘on time’ and ‘in full’. see Internal Management System, p. 86 The function strengthens brand desirability by providing the right product to consumers – in the right quality, size, colour and style, in the right place, at the right time, across the entire range of the BECOME THE FIRST FAST SPORTS COMPANY company’s channels and brands. Additionally, Global Operations ‘Speed’ is a strategic priority for both the company as a whole and builds capabilities that further improve supply chain efficiencies, for Global Operations. Our ambition is to be the first fast sports while mitigating costs, thereby ensuring a continuously competitive company in the sporting goods industry. see Corporate Strategy, p. 48 supply chain. Global Operations delivers upon its mission to: — Create the best product by focusing on innovative materials and manufacturing capabilities. — Provide the best service by enabling product availability as the consumer chooses through the company’s omni-channel approach to supply chain agility. We will leverage market and sell-through data in new ways, respond quickly to deliver concepts that are fresh and desirable and made available when and where they are wanted by the consumer across our wholesale, retail and eCommerce channels. Bringing products to market faster allows our customers and direct-to-consumer channel to place orders closer to the actual time of sale, facilitating buying decisions that are based on better market knowledge. Consequently, adidas will move away from predominantly developing product ranges — Enable the best experience by creating tools that engage consumers through interactive mobile platforms, in-store in advance of seasonal merchandising calendars and towards creation and production capabilities that respond to consumer demands with technology and the ability to co-create. an in-season development and rapid replenishment manufacturing. Fresher and more desirable products will increase the company’s Within our strategic business plan ‘Creating the New’, Global full-price share of sales and reduce the risk of overbuying. By 2020, Operations focuses on delivering against three strategic priorities our target is to achieve 50% of the company’s net sales through driven by several initiatives: — Become the first fast sports company. — Create a seamless consumer experience. — Transform the way we create and manufacture. speed-enabled articles. For this part of our business, we expect to achieve a 20% higher share of full-price sales compared to the regular range which, driven by higher brand and product desirability, will also see significant increases in the full-price sell-through. By delivering on these priorities, Global Operations leverages Global Operations is scaling the fast replenishment capabilities of efficiencies across infrastructure and processes and ensures a best-selling seasonal articles, creating more articles within season competitive digital ecosystem and supply chain. This continues based on sales data and ensuring constant availability of long life to be underlined by our strong ‘On-Time In-Full’ (OTIF) metric, a cycle products. To adjust product supply flows to the changing non-financial KPI for our company, measuring the adidas delivery demands of markets, the function is building a more integrated and performance towards our customers and our own-retail stores. In agile planning environment with flexibility for deploying products to 2016, adidas delivered 77% (2015: 81%) of its adidas and Reebok markets. In 2016, Global Operations continued to expand its efforts brand products ‘on time’ and ‘in full’. While this is broadly in line to ‘enable later ordering’ and further reduced production lead times. with the target of around 80%, the decline compared to the prior year reflects the strong increase in volumes throughout 2016. For 2017, Global Operations strives to increase OTIF to a strong level of 80%. OTIF was measured for 68% of net sales of all adidas and Reebok The function succeeded in providing 60-day production lead times on 80% of apparel volumes in the fall/winter ‘17 season. The majority of footwear volumes are already on 60 days or less production lead times. 62 63 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Global Operations 01 GLOBAL OPERATIONS IN GO-TO-MARKET PROCESS Global Operations Marketing Design Product Development Sourcing Supply Chain Management & Market IT Global Sales Briefing Concept Product Creation Manufacturing Distribution Sales Global IT adidas is leveraging its strengths in sourcing and partnering with In 2016, Global Operations focused on further optimising the industrial and academic experts to develop smart manufacturing solutions that can react quickly to consumer trends. In this context, Speedfactory is one way we are moving production closer to key distribution centre network, while at the same time preparing it for rapid business growth. In this context, we opened a new distribution centre in Hong Kong/China. 2016 also saw extensions markets while developing high-quality performance products faster and improvements in our distribution centres in Pyeongtaek/South than ever before. Powered by intelligent robotic, process and material Korea, as well as Manchester/UK. Lastly, Global Operations kicked technologies, Speedfactory allows us to support the growing demands off its new e-commerce distribution centre ‘Campus North’ in Rieste/ for product individualisation, in a socially and environmentally Germany – a multi-million euro project focused on ensuring we get responsible way. As well as providing fast reaction times to consumer our e-commerce products to our consumers across Western Europe needs, we envision a Speedfactory network which will enhance the whenever and wherever they want them. consumer experience, enabling them to co-create in an interactive production process. see Research and Development, p. 67 Global Operations is developing further IT capabilities to build CREATE A SEAMLESS CONSUMER EXPERIENCE platforms that support key initiatives which drive brand desire, such as personalised footwear tools. With the close collaboration of Global IT and our brands, efforts are focused on delivering fresh and exciting Global Operations has a strong track record for establishing state- consumer services with a ‘mobile first’ approach, allowing consumers of-the-art infrastructure, processes and systems that are required to connect to our brands at every touchpoint – from own-retail stores to support the company’s growth ambition. It has been successfully to e-commerce to social networks. consolidating and improving legacy structures, thereby reducing complexity and costs for adidas. The function is focused on innovative distribution and IT capabilities, with the goal of providing the best service by enabling product availability as the consumer chooses TRANSFORM THE WAY WE CREATE AND MANUFACTURE through the omni-channel approach to supply chain agility. Global Operations is driving innovation in new materials, new product constructions and new ways of manufacturing that deliver consumer By creating a higher commonality of our products across the value and enable competitive advantage. With the consolidation of various channels, Global Operations ensures higher flexibility at product features and investments in tools that more directly connect each consumer touchpoint. This, in turn, enables a broader range design and factory production, Global Operations is changing of products to be available at the point of sale, including online traditional models of development to deliver freshness, speed and orders able to be picked up in our own-retail stores or shipped from efficiency. a store and own-retail stores able to sell inventory available in other own-retail stores. Through the inclusion of the IT organisation, Global Through ‘Digital Creation’, Global Operations, in cooperation with Operations is prioritising being ‘insights driven’. Data generated Design and IT, has already improved the creation process from during product creation, marketing processes and at consumer idea to market. With 3D software tools, we look at products the way interactions is being linked to create actionable insights which the the consumer sees them. Digital technology will allow us to take company makes use of to react more quickly to changing consumer needs. product decisions faster, improve collaboration between creation functions and our suppliers and reduce drop rates see Glossary, p. 216. 3D technology allows for more frequent and rapid virtual product 63 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Global Operations 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Global Operations iterations without increasing the need for physical samples. In 2016, all major business units tested the new 3D software tools in apparel MAJORITY OF PRODUCTION THROUGH INDEPENDENT SUPPLIERS and footwear. From 2017 onwards, some of our business units will To minimise production costs, we outsource almost 100% of production begin using 3D technology as their new way of working in the product to independent third-party suppliers, primarily located in Asia. While creation process. see Research and Development, p. 67 we provide them with detailed specifications for production and delivery, these suppliers possess excellent expertise in cost-efficient, The utilisation of state-of-the art digital technology not only drives high-volume production of footwear, apparel and hardware. Working creativity and efficiency in product creation, it also generates closely with key strategic partners, the vast majority of our products efficiencies in manufacturing by linking the creation process are produced in fewer than 110 manufacturing facilities worldwide. directly with the factory. Global Operations continues to support the We value long-term relationships: Around half of our strategic Speedfactory programme by feeding product data straight into the suppliers have worked with adidas for more than ten years and, of Speedfactory for manufacturing without any manual interaction. these, close to 15% have a tenure of more than 20 years. The latest In 3D printing, Global Operations supports the cross-functional list of our suppliers can be found on our website. www.adidas-group.com/ initiative called Futurecraft, which places open-source collaboration sustainability adidas also operates a limited number of own production and craftsmanship at the heart of design to drive innovation across and assembly sites in the USA (4), Canada (3) and Germany (1). In all areas of production. Being at the forefront of digital technology order to ensure the high quality that consumers expect from our and modernising our approach to product creation not only supports sustainability efforts to reduce the carbon footprint, but also attracts products, we enforce strict control and inspection procedures at our suppliers and in our own factories. In addition, we promote adherence the next generation of highly qualified ‘digital native’ employees. to social and environmental standards throughout our supply chain. Transitioning to a set pre-season selection of standard product see Sustainability, p. 78 features and driving consistent executions across categories for In 2016, Global Operations managed product development, sourcing core products has been underway for several seasons in apparel. and distribution for the adidas and Reebok brands as well as for adidas Meanwhile Global Operations has fully embedded the modular Golf and Ashworth. Due to the specific sourcing requirements in their approach to creation as a ‘way of working’ that ensures a consistent respective fields of business, TaylorMade, CCM Hockey, Adams Golf brand footprint, captures cost savings in factory efficiencies and and the Sports Licensed Division were not serviced through Global expands product modules on faster production lead times. Operations, but instead utilised their own purchasing organisations. In order to quickly seize short-term opportunities in their local In 2016, we laid the technical foundation to incorporate our new digital market or react to trade regulations, subsidiaries may also source creation tools into the modular approach, which further increases from selected local suppliers outside the realm of Global Operations. speed in creation of our core products and allows us to leverage Local purchases, however, account only for a minor portion of the automation opportunities. We will gradually roll out the new digitised company’s total sourcing volume. way of working in 2017 as a first step to our vision of an end-to-end digital value chain from pre-season planning to product creation, production and sales. WORKING WITH 297 INDEPENDENT MANUFACTURING PARTNERS Furthermore, we are investing in the next generation of materials by In 2016, Global Operations worked with 297 independent manufacturing focusing, amongst others, on knitted footwear and direct-to-textile partners (2015: 320). Of our independent manufacturing partners, digital printing. In addition, we are developing footwear manufacturing 80% were located in Asia (2015: 79%), 12% in the Americas (2015: 9%), process innovations. Working cross-functionally, we intend to reduce 7% in Europe (2015: 12%) and 1% in Africa (2015: 0%). see Diagram 02 dependency on manual labour and to deliver compelling product concepts with integration into key footwear and apparel franchises. 64 65 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Global Operations 02 SUPPLIERS BY REGION 1 03 FOOTWEAR PRODUCTION BY REGION 1 7 1 12 80 80% Asia 12% Americas 7% Europe 1% Africa 12 97 97% Asia 2% Americas 1% Europe 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth, but exclude local sourcing partners, sourcing agents, subcontractors, second-tier suppliers and licensee factories. 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth. 04 FOOTWEAR PRODUCTION 1 IN MILLION PAIRS VIETNAM SHARE OF FOOTWEAR PRODUCTION INCREASES SLIGHTLY 97% of our total 2016 footwear volume was produced in Asia (2015: 96%). Production in Europe and the Americas combined accounted see Diagram 03 Vietnam for 3% of the sourcing volume (2015: 4%). represents our largest sourcing country with 42% of the total volume (2015: 41%), followed by Indonesia with 24% (2015: 24%) and China 2016 2015 2014 2013 2012 with 22% (2015: 23%). In 2016, our footwear suppliers produced 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth. approximately 360 million pairs of shoes (2015: 301 million pairs). see Diagram 04 Our largest footwear factory produced approximately 10% of the footwear sourcing volume (2015: 11%). 05 APPAREL PRODUCTION BY REGION 1 CHINA REMAINS LARGEST SOURCE COUNTRY FOR APPAREL 34 In 2016, we sourced 93% of the total apparel volume from Asia (2015: 93%). Europe and the Americas represented 4% and 3% of the volume, respectively (2015: 3% each). see Diagram 05 China is the 93 largest source country, representing 27% of the produced volume (2015: 29%), followed by Cambodia with 22% (2015: 19%) and Vietnam 93% Asia 4% Europe 3% Americas with 17% (2015: 16%). In total, our suppliers produced approximately 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth. 382 million units of apparel in 2016 (2015: 364 million units). see Diagram 06 The largest apparel factory produced approximately 11% of this apparel volume in 2016 (2015: 11%). 06 APPAREL PRODUCTION 1, 2 IN MILLION UNITS 2016 2015 2014 2013 2012 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth. 2 2012 and 2013 restated due to a reclassification of certain apparel accessories from apparel to hardware. 65 360 301 258 256 240 382 364 309 292 262 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Global Operations 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Research and Development The Sports Licensed Division sourced approximately 22 million units 07 HARDWARE PRODUCTION BY REGION 1 of apparel and 10 million units of headwear (2015: 24 million and 11 million, respectively). The majority of purchased apparel products were sourced as unfinished goods from Latin America (65%) and Asia (33%) (2015: 79% and 21%, respectively), and were subsequently finished in our own facilities in the USA. The vast majority of headwear sourced was finished products manufactured in Asia (more than 99%). CHINA SHARE OF HARDWARE PRODUCTION INCREASES SLIGHTLY In 2016, 79% of our hardware products, such as balls and bags, was produced in Asia (2015: 76%). European countries accounted for 18% 3 18 79 79% Asia 18% Europe 3% Americas 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth. (2015: 20%), while the Americas represented 3% of the total volume 08 HARDWARE PRODUCTION 1, 2 IN MILLION UNITS (2015: 3%). see Diagram 07 China remained our largest source country, accounting for 36% of the sourced volume (2015: 35%), followed by Pakistan and Turkey with 17% and 16%, respectively (2015: 15% and 19%, respectively). The total hardware sourcing volume was approximately 109 million units (2015: 113 million units), with the largest factory accounting for 12% of production (2015: 11%). see 2016 2015 2014 2013 2012 Diagram 08 TaylorMade sourced more than 99% of their hardware volumes from Asia (2015: 99%). The vast majority of golf club components were manufactured by suppliers in Asia (China, Vietnam and Taiwan) and assembled in Asia, the USA and Europe. 1 Figures include the adidas and Reebok brands, adidas Golf and Ashworth. 2 2012 and 2013 restated due to a reclassification of certain apparel accessories from apparel to hardware. 109 113 99 94 93 66 67 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Research and Development RESEARCH AND DEVELOPMENT Creating innovative products to meet the needs of professional and everyday athletes and consumers is a prerequisite to strengthening our market position in the sporting goods industry and a premise to being the best sports company in the world. We therefore remain highly committed to maintaining a full and innovative product pipeline, bringing new groundbreaking technologies and processes to life, investing into forward-looking and sustainable ways of production and exploring the many possibilities of digitalisation. True to the vision of creative collaboration, our research and development (R&D) approach is widely based on our Open Source mindset which is clearly visible in our numerous collaborations with athletes and consumers, universities, industry-leading companies as well as national and international governments. R&D AN INTEGRAL PART OF THE PRODUCT AND USER EXPERIENCE CREATION PROCESS Once conceptualised, new product technologies are engineered using state-of-the-art systems. Extensive virtual prototype testing R&D within the company follows a decentralised approach. In line and engineering loops are carried out on every technology. Once with their respective strategic and long-term visions and distinctive positioning, each brand runs its own R&D activities. However, a new product technology is deemed viable, it is produced as a physical sample. These samples are then comprehensively tested fundamental research as well as expertise and competencies in by a broad range of users, including top athletes. Only when these sustainable product creation are shared across the company. comprehensive tests have been successful are the technologies commercialised to a final product. For the adidas brand, R&D is closely integrated with the sourcing, design and product marketing functions. At the beginning of the To capitalise on our R&D achievements, we enforce the company’s product creation process, development priorities are defined, which, trademarks and patents by monitoring the marketplace for in recent years, have increasingly included sustainability targets. infringements and taking action to prevent them. Likewise, we have These are derived on a case-by-case basis from a combination of comprehensive processes, and undertake significant research, to consumer research and feedback, competition analysis and own avoid infringement of third-party intellectual property rights. see product testing. Risk and Opportunity Report, p. 118 Based on the results, employees in our so-called FUTURE teams evaluate and incubate new materials, production processes and FIVE PILLARS OF INNOVATION scientific research to increase the scope and impact of idea generation. Within the framework of our strategic business plan ‘Creating the Their scope also extends to areas such as consumer insights and New’ we identified five strategic pillars within our R&D principles, social media. This helps to promote a holistic and innovation-focused which enable us to develop the best products and experiences for our culture which gives deeper consumer insights, while also fuelling athletes, while at the same time drive game-changing innovations in creativity and synergies across the organisation. To identify innovative the fields of manufacturing, digital and sustainability. In 2016, adidas materials as well as integrate sustainability, cost and production further refined these pillars and amplified its efforts to generate process aspects into the development phase, the FUTURE teams are brand desire through collaboration with the consumer. in close contact with our sourcing and material teams within product development who, in turn, work closely with our suppliers. — ATHLETE INNOVATION Our clear focus is to produce the best and most innovative products True to the vision of creative collaboration, our R&D approach is for athletes to enable them to perform at their very best. To achieve founded on our Open Source mindset which is clearly visible in our this, we work closely together with athletes as well as numerous numerous collaborations with athletes and consumers, universities, universities and industry-leading companies, to deliver against the industry-leading companies as well as national and international needs of our target consumer. governments. We are the first sports company that invites creators to be part of our brands while already working with some of the world’s most creative and innovative people and organisations. see Corporate Strategy, p. 48 Boost: Launched in cooperation with BASF, Boost is an industry- first cushioning technology designed to deliver maximum energy return, responsiveness and comfort to athletes. In 2016, Boost saw a roll-out into additional categories and new Boost franchises. Particular highlights in this regard were the launch of the NMD, a technical runner silhouette realised as a lifestyle sneaker as well as the Colour Boost, introducing new colourways to the Boost midsole, released with the launch of the UltraBOOST Uncaged. 67 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Research and Development 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Research and Development Clima: Clima is a sports apparel concept offering adidas brand clothing for sporting activities in any weather across different Runtastic Shoe Tracking: The Runtastic Shoe Tracking feature in the Runtastic running app automatically assigns covered distances to a categories such as training, running or outdoor. The series includes designated shoe used for running workouts, hiking tours or Nordic the franchises ClimaHeat, ClimaChill and ClimaProof, which apply walking sessions. It allows athletes to track the lifespan of a pair of functional, moisture-wicking and breathable materials to ensure that running shoes and notifies consumers when to replace them in order athletes enjoy ideal conditions to perform their training 365 days a to protect joints and prevent injuries. year. Futurecraft M.F.G.: In 2016, we launched Futurecraft M.F.G. (Made for Germany), the first shoe to come out of Speedfactory, a platform Storefactory: In 2016, adidas introduced its first Storefactory in the form of a new pop-up store called ‘Knit for You’ in the Bikini Berlin shopping mall for a temporary three-month trial period. that – among several other benefits – will ultimately allow for the In addition to offering personalised manufacturing in-store in an creation of footwear made for the specific fit and functional needs urban environment, the Storefactory allows consumers to experience of consumers. The running shoe is part of an initial market test, and interact with the creation and manufacturing process of their consisting of 500 pairs, with a view to rolling it out across categories, garments in a simple and engaging manner. amplifying volumes in the years to come. — MANUFACTURING INNOVATION To simplify manufacturing, enable product innovation and increase — SUSTAINABILITY INNOVATION Our commitment to manage our business in a responsible way has long been one of the company’s principles. To stay at the forefront speed-to-market capabilities by bringing the production of apparel of sustainable innovation, adidas is pursuing a proactive approach and footwear closer to the consumer, the company’s R&D activities are also focused on new manufacturing technologies. Our goal to establish internationally recognised best practices and achieve scalable improvements. As part of our sustainability strategy we have is to combine state-of-the-art information technology with new set ourselves the target for 2020 to invest in materials, processes and manufacturing processes and innovative products. For this reason, innovative machinery which will allow us to upcycle materials into we commit ourselves to long-term cooperation with industry-leading products and reduce waste. see Sustainability, p. 78 companies and organisations to take a leading role in manufacturing innovation. Parley for the Oceans: In 2016, the partnership with Parley for the Oceans, a thought leader in ocean conservation and eco innovation Speedfactory: In 2016, the Speedfactory pilot in Ansbach, Germany, served as a ‘proof of concept’ and a testing ground for the creation that creates awareness to end the destruction of the oceans, already yielded its first commercial performance products made with Parley of high-performance footwear within a new manufacturing model. In Ocean Plastic in the form of football jerseys for the world-leading the second half of 2016, the pilot was transferred to a larger facility clubs Bayern Munich and Real Madrid, as well as the UltraBOOST for the first large-scale manufacturing starting in 2017. As a next Uncaged Parley running shoe, with 7,000 pairs available. The first step, it is planned to introduce Speedfactory to the USA in 2017. Each commercialised product made of Parley Ocean Plastic underpins our Speedfactory is designed to produce up to 500,000 pairs of shoes per commitment to accelerating the creation of innovative products and year, with an option to extend and diversify production in the future. reinventing materials. This is also underlined by our goal to produce Futurecraft: Another important part of our manufacturing innovation approach is the Futurecraft series. In addition to Futurecraft M.F.G., 2016 saw the introduction of another commercialisation of the series, one million pairs of shoes using Parley Ocean Plastic by the end of 2017, and to further follow our ultimate ambition to eliminate virgin plastic from our supply chain. see Corporate Strategy, p. 48 the 3D Runner. The shoe features an engineered 3D web structure with dense zones in high-force areas and less dense zones in the Biosteel: Another milestone in 2016 was the launch of the world’s first performance shoe made using Biosteel fibre, a nature-based low-force areas, allowing for the optimum level of performance. and completely biodegradable high-performance fibre, replicating The 3D Runner also features a 3D printed heel counter, which is natural silk, developed by the German biotech company AMSilk. The integrated into the midsole and avoids the typical process of gluing or Futurecraft Biofabric prototype shoe features an upper made from stitching. Benefits include greater elasticity, compliancy and support. 100% Biosteel fibre, making us move beyond closed-loop production A Primeknit upper ensures high style, superior fit and performance. into an infinite loop – or no loop at all. — DIGITAL AND EXPERIENCE INNOVATION The adidas brand was the first in the industry to comprehensively — FEMALE ATHLETE INNOVATION Our long-term commitment to the female athlete continues to be a bring data analytics to the athlete. With decades of continuous investment in sports science, sensor technology and digital communication platforms, adidas has already taken a leading role in terms of changing the sporting goods industry through technology. With the increasing speed of urban digitalisation, this field will remain one of our core areas. focus for the company. To fuel the growth of our women’s business, we have taken a holistic approach to understanding the female athlete’s performance and non-performance needs throughout her active life by looking at her as an integrated part of our business but from a separate and unique angle. With a focus on the female athlete, it is crucial to fully understand the particular anatomy and 68 69 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Research and Development specific product needs of the female consumer to help unlock her SUCCESSFUL COMMERCIALISATION OF INNOVATIONS athletic potential. To enable this, we are working to establish a robust We believe developing industry-leading technologies and user network of industry leaders and academic experts such as Christine experiences is only one aspect of being an innovation leader. Equally Day with our ‘Path to Expert’ approach, which will help to accelerate important is the successful commercialisation of those technological the building of insights and foresights that keep us at the forefront innovations. The awards we attained in 2016 confirm our continuous of product innovation. efforts to become the technology leader in the sporting goods Ace and X football boots: The adidas brand launched the first versions of its Ace and X boots created explicitly for female players. Using all As in prior years, the majority of adidas brand sales were generated its technical expertise and key insights provided by numerous female with products newly introduced in the course of 2016. New products players, we were able to analyse the unique shape of the female foot to tend to have a higher gross margin compared to products which have create football boots which feature a different combination of shape, been in the market for more than one season. As a result, newly design and traction to meet the special needs of the female athlete. launched products contributed over-proportionately to net income industry. see Table 01 Avenue A: In 2016, the adidas brand introduced Avenue A, a quarterly women-only subscription service that offers a curated box containing premium running and training products. While the content of each shipment is a surprise, the box is filled with three to five premium items – a mix of footwear, apparel and accessories appropriate for the season. Here, the brand collaborates with fashion-forward trendsetters and trainers to hand-pick an array of products for each shipment that exemplify style and performance. in 2016. We expect this development to continue in 2017 as we will present a wide range of new, innovative products. see Subsequent Events and Outlook, p. 115 01 2016 MAJOR AWARDS Brand Product/Campaign Category Award adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas Originals Originals Originals Originals Originals Originals Originals Originals Outdoor Running Running Running adidas Brand Highsnobiety Crown 2016 – Gold, Most Relevant Brand Your Future Is Not Mine campaign Cannes Cyber Lion – Gold, Best Music/Brand Partnership Your Future Is Not Mine campaign Cannes Cyber Lion – Gold, Use of Original Music Your Future Is Not Mine campaign Cannes Design Lion – Bronze, Music Video – Brand and/or Product Integration Strikethrough campaign Cannes Design Lion – Bronze, Logo Design: International Companies & Brands Originals Yeezy Boost 350 V2 shoe Highsnobiety Crown 2016 – Gold, Best Sneaker Originals Yeezy Boost 350 V2 shoe complex.com – The Best Sneakers of 2016 Pitch Black NMD shoe complex.com – The Best Sneakers of 2016 Pharrell Human Race NMD shoe complex.com – The Best Sneakers of 2016 TERREX Parley T-shirt Outdoor Industry Award Supernova Glide 8 Boost shoe Solerview’s top pick for 2016 – The Best Running Shoe of 2016 adizero adios 3 shoe Runner’s World (US) – Best Update 2016 Solebox x adidas Consortium UltraBOOST Uncaged shoe Highsnobiety Crown 2016 – Bronze, Best Sneaker Reebok Training Speed TR shoe Men’s Health – Best Gym Shoe TaylorMade TaylorMade TaylorMade Golf Golf Golf M1 & M2 metalwoods M1 & M2 irons TP putter collection Golf Digest Hot List 2016 Golf Digest Hot List 2016 Golf Digest Hot List 2016 69 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Research and Development 2 GROUP MANAGE ME NT RE PORT – OU R C OM PA NY Research and Development SUCCESSFUL PRODUCT LAUNCHES ACROSS ALL MAJOR ADIDAS BRAND CATEGORIES In 2016, adidas brand sales were again driven by the latest product offerings, with products launched during the course of the year accounting for 77% of brand sales (2015: 81%). Only 1% of sales were generated with products introduced three or more years ago (2015: 3%). 02 MAJOR PRODUCT LAUNCHES IN 2016 Product Crazy Explosive basketball shoe D Lillard 2 basketball shoe D Rose 7 basketball shoe Harden Vol. 1 basketball shoe X and Ace 16 football boots The adidas brand introduced numerous major product innovations X and Ace women's football boots in 2016. These included: — Glitch: Glitch is a new football concept introduced in late 2016. The two-piece interchangeable construction, made of an inner shoe and an outer skin, is designed to suit the modern game with a focus on adaptability. Glitch utilises the brand’s leading football technologies, including a laceless upper, to create a football boot experience like no other. Messi 16 football boot Copa 17 football boot Glitch football boot Confed Cup jersey Parley x Real Madrid/FC Bayern jersey adizero adios running shoe AlphaBOUNCE running shoe PureBOOST X running shoe — UltraBOOST Uncaged: Built on Open Source consumer insights, the shoe combines the performance and innovation of the original UltraBOOST Uncaged running shoe Gazelle Originals shoe UltraBOOST running shoe, providing outstanding comfort and NMD R2 Originals shoe energy return, with a full adidas Primeknit upper featuring an internal support system. Furthermore, the new UltraBOOST Uncaged also introduced new colourways to the Boost midsole alongside the iconic white midsole. — Z.N.E.: In August 2016, the adidas brand officially introduced adidas Athletics. The highlight product of this newly created Tubular Shadow Originals shoe Tubular Instinct Originals shoe Yeezy Boost 350 V2 Originals shoe Originals by Rita Ora collection Originals by Alexander Wang collection Originals by Kanye West Yeezy Season 3 collection Originals by Pharrell Williams Hu collection product line is the Z.N.E. hoodie, a fresh take on traditional pre-game outwear, using unique design elements, making it ClimaHeat apparel Stellasport training apparel a very recognisable silhouette that we can further build on in Athletics Z.N.E. training apparel the future. REEBOK INTRODUCES NEW TECHNOLOGY PLATFORMS In 2016, Reebok’s latest products continued to generate the majority of the brand’s sales, with 73% of footwear sales coming from products launched in 2016 (2015: 73%). Only 11% of footwear product sales relate to products introduced three or more years ago (2015: 14%). In 2016, Reebok presented several key product introductions. Some of the highlights included: — CrossFit Nano 6.0: In 2016, Reebok celebrated its six-year partnership with CrossFit with the launch of the CrossFit Nano 6.0. This training shoe was developed by Reebok in association with the CrossFit community and saw the first evolution of Kevlar infused on the upper to provide durability and lightweight TERREX x-king outdoor shoe Cloudfoam neo shoe Graphic Tees neo collection CrossFit Nano 6.0 training shoe JJ I training shoe ZPrint running shoe HexaWarm apparel Classic Leather shoe M2 driver line Spider Limited putter TP putter collection Tour360 Prime Boost golf shoe USA Golf Team apparel Brand adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas Reebok Reebok Reebok Reebok Reebok TaylorMade TaylorMade TaylorMade adidas Golf adidas Golf — Liquid Factory: In November 2016, Reebok introduced its Liquid Factory manufacturing concept with a 300 pair limited release of strength. The Nano 6.0 also features a re-engineered anatomical its first shoe, the Liquid Speed. The Liquid Factory ‘3D Drawing’ design for a natural and secure fit. — ZPrint: In 2016, Reebok introduced the ZPrint cushioning system, inspired by digital maps of feet in motion. The unique, foot-mapped bottom cushions high-impact zones and propels at take-off. The ride stays stable around the edges thanks to a firm perimeter grid. ZPrint delivers cushioning where it is needed most. process is an entirely new way to create shoes without moulds, allowing both rapid customisation and ultimately more local manufacturing. 70 7 1 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Research and Development INNOVATION AN IMPORTANT FACTOR FOR TAYLORMADE-ADIDAS GOLF R&D EXPENSES INCREASE 18% R&D expenses include expenses for personnel and administration, At TaylorMade-adidas Golf, current products (i.e. products launched but exclude other costs, for example those associated with the design in the last 18 months, which is the typical product life cycle in golf) aspect of the product creation process. In 2016, as in prior years, all represented 72% of total hardware sales in 2016 (2015: 80%). Products R&D costs were expensed as incurred. The company’s R&D expenses that had been brought to market three or more years ago accounted increased 18% to € 164 million from € 139 million in the prior year. for 13% of sales in 2016 (2015: 7%). Among the highlight product launches in 2016 were: — M2: Following the successful launch of the M1 in the prior year, TaylorMade expanded the M family in 2016 with the intro- As our R&D departments comprise experienced and multi-skilled people from different areas of technical expertise and from diverse cultural backgrounds, personnel expenses represent the largest portion of R&D expenses, accounting for 73% of total R&D duction of the M2. Like its predecessor, the M2 family consists of expenditure. The number of people employed in R&D activities at drivers, fairways and rescue clubs, utilising the same proprietary December 31, 2016, was 1,128, compared to 993 employees in the multi-material combination, including the seven-layer carbon prior year. This represents 2% of total employees. composite crown found in the M1, to develop a line of products that deliver two highly sought-after performance benefits: In 2016, R&D expenses represented 2.0% of other operating expenses distance and forgiveness. — Tour360 Prime Boost: In 2016, adidas Golf released the new Tour360 Prime Boost. Designed for stability and traction on uneven ground, the shoe features a flexible adidas Primeknit upper for an enhanced fit built on a responsive Boost midsole. (2015: 1.9%). R&D expenses as a percentage of sales remained stable at 0.8% (2015: 0.8%). see Table 03 03 KEY R&D METRICS 1 R&D expenses (€ in millions) R&D expenses (in % of net sales) R&D expenses (in % of other operating expenses) R&D employees 2016 164 0.8 2.0 1,128 2015 139 0.8 1.9 993 2014 126 0.9 2.0 985 2013 124 0.9 2.0 992 2012 128 0.9 2.1 1,035 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 71 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Our People GROUP MANAGE ME NT RE PORT – OU R C OM PA NY 2 Our People OUR PEOPLE At adidas, we believe that our people are the key to the company’s success. Their performance, well-being and knowledge have a significant impact on brand desire, consumer satisfaction and, ultimately, our financial performance. Through the delivery of our People Strategy, we focus our efforts on four fundamentals: the attraction and retention of the right talents, role model leadership, diversity and inclusion, as well as the creation of a unique corporate culture. PEOPLE STRATEGY ENABLES A CULTURE FOR DELIVERING ‘CREATING THE NEW’ The People Strategy is implemented through a portfolio of projects which will directly deliver into each of the four pillars. In 2016, As an integral part of ‘Creating the New’, the People Strategy is a testament to thinking that our 2020 strategy can only be executed if we we made good progress by successfully delivering the following initiatives: speak to our people on all levels and win both their hearts and minds. The People Strategy consists of four pillars that serve as a basis for creating our culture and environment for our people in order to successfully support the company strategy. see Diagram 01 These four Meaningful reasons to join and stay: — Enabled by a new global mobility policy, our Talent Carousel career development programme entered its second year. Employees from all over the world were once again asked to pillars also serve as a tool for prioritisation, sense-checking and apply for this programme that would see its 20 finalists take a measuring our HR actions and initiatives. cross-functional and international career step by starting a new role in a new location in 2017. Successful candidates remain in the programme for 24 months with the right to return to their home location while being prepared for a future senior management position. 01 THE FOUR PILLARS OF OUR PEOPLE STRATEGY Attraction & retention of the right talents Meaningful reasons to join and stay Attract and retain great talent by offering personal experiences, choices and individual careers. People Strategy Defines and inspires the right organisational culture for ‘Creating the New’ Role model leadership Diversity & inclusion Culture Role models who inspire us Bring forward fresh and diverse perspectives A creative climate to make a difference Nurture and inspire role model leadership. Represent and live the diversity of our consumers in our people. It is our goal to develop a culture that cherishes collaboration, creativity and confidence – three behaviours we deem crucial to the successful delivery of our corporate strategy. Choice & Agility & Speed 72 73 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Our People — In September 2016, we introduced a new employee Stock Purchasing Programme for Germany, the US, the Netherlands and Hong Kong. A total of 16.3% of around 16,000 eligible employees Bring forward fresh and diverse perspectives: — We successfully hired the first dedicated Diversity Director in the company’s history. Reporting into the Head of HR Strategy, the decided to participate in the first enrolment period. It is planned to extend this programme to further countries in the coming months. — A newly introduced central onboarding process at our headquarters in Herzogenaurach/Germany now ensures new starters enjoy a high-quality, consistent experience upon joining the company. Diversity Director is in charge of formulating the global diversity strategy and driving its implementation together with leaders and HR Partners. — For the second consecutive year, adidas North America achieved a perfect 100 point score on the Human Rights Campaign Corporate The new process is the result of a cross-functional continuous Equality Index. improvement initiative and provided important learnings for the global onboarding initiative which is aimed at introducing standard — We introduced a global data simulation tool that allows HR managers to calculate and set more realistic gender and onboarding tools across the company starting in 2017. age targets for their functional areas by taking criteria such — Since 2016, employees at our headquarters in Herzogenaurach have been able to take advantage of our Employee Assistance as business growth, attrition, promotions and hirings into consideration. Service. By calling an external hotline, employees can get support with finding and organising child care, elder care and household — Functional and local market teams continued to develop dedicated plans to invest in a stronger female talent pipeline, data analysis services. on gender balance and action plans to establish a more balanced organisation in terms of gender, age and race. Role models who inspire us: — In 2016, we offered our first-time people managers across EMEA, Asia and the US our Fit2Lead training. This training is specially designed for all first-time people managers who lead up to five A creative climate to make a difference: — In 2016, we cascaded and hard-wired our three company behav- iours – creativity, collaboration and confidence – into our global people. It provides them with basic knowledge on how to become Performance Management system and approach, The Score. a good people manager, manage their business and continue Creativity, collaboration and confidence – the ‘3Cs’ – are behav- to develop themselves throughout their career. The course can iours we as a company deem to be crucial for employees to also be booked by managers who would like to refresh their display on a daily basis in order to execute our Creating the New people management skills. This curriculum is complemented strategy and become an even more consumer-focused organi- by the Fit2Lead Experienced Manager training, a new offer sation. As we enter 2017, we will focus on continuing to detail out we introduced in 2016. The Experienced Manager training is the exact definition of the 3Cs and use them as the foundation of geared towards managers who bring more than five years of our company leadership framework. management experience and/or lead or influence larger teams. It is an experiential learning programme with a focus on how to — In a continued effort to provide our employees with the best work environment possible, further construction work has started on lead those around you to perform better – as a team and as an our headquarters campus in Herzogenaurach. A new landmark individual. building called ‘Arena’ will become the company’s new main — First leadership and executive groups started to take a newly designed gender intelligence training aimed at challenging office at the end of 2018, offering over 2,000 employees a new home and centralising most of the employees in Herzogenaurach gender stereotypes as well as providing leaders with data, on the World of Sports campus. A new restaurant and multi- insights and tools for practising inclusive leadership to build a purpose conference centre called ‘HalfTime’ will be set up. 2016 more balanced organisation. also saw the construction of a second future workplace space: ‘Pitch 2’. Employees based in Pitch 1 and Pitch 2 work according to the activity-based working concept: employees no longer have assigned desks but can choose from a multitude of different types of rooms and spaces (e.g. project room, focus box) based on the tasks they have on hand. Change management in these new buildings is supported through a dedicated mobile app as well as employee-led feedback groups and regular feedback surveys. 73 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Our People GROUP MANAGE ME NT RE PORT – OU R C OM PA NY 2 Our People — At our headquarters in Herzogenaurach, we also opened the MakerLab. It serves as a dedicated space providing tools such as laser cutters and 3D printers and know-how to help employees MEASURING THE SUCCESS OF OUR HR INITIATIVES: EMPLOYEE ENGAGEMENT AND EMPLOYER RANKINGS Our HR function measures the success and the effectiveness of realise their ideas and create prototypes. The MakerLab idea has the company’s efforts with regard to its people initiatives through a its roots in the ‘hacker space’ concept, where all employees are set of chosen KPIs. We will use two leading people KPIs: employee given free rein to create and bring their ideas to life. experience (eNPS) as an internal measure and employer rankings — In Moscow, we opened a brand-new office building called ‘The Home of Sport’. It includes store facilities, a state-of-the-art gym as an external measure. as well as modern offices and open-plan spaces. HR FOUNDATIONS FOR OUR PEOPLE STRATEGY Employee engagement: adidas carries out employee engagement surveys in order to measure the engagement and motivation of our employees. The results of these surveys are a non-financial KPI for our company. see Internal Management System, p. 86 Following a successful In 2016, the adidas HR function launched the People OneView pilot within HR in 2016, a new approach towards measuring the employee profile. People OneView is a self-service online portal employee experience in the company will be launched during the that allows employees, leaders and HR Partners to both access and first half of 2017. manage the most important personal and work data such as salary, career and team information as well as HR applications. By providing direct access to People OneView, users are now more empowered as Employer rankings: Our ‘employer of choice’ status continues to garner worldwide recognition and enables us to attract, retain and they can manage their most important personal data without having engage industry-leading talent to sustain the company’s success and to go via their HR Partner. HR Partners in turn gain back valuable growth. In 2016, adidas locations around the world leveraged our time to counsel and support employees. employer brand attributes for attraction, retention and engagement With the introduction of the HR Shared Service Centre for Germany, worldwide and has also enabled us to recruit some of the industry’s all employee queries relating to compensation, benefits, time top talent. see Diagram 02 strategies. This work contributed to several Top Ten rankings management and HR systems are now centrally channelled and managed through this newly founded department. HR Partners are thus enabled to focus fully on supporting line managers and employees on topics such as career counselling, people management and coaching. 02 AWARDS The World’s Most Attractive Employers/Universum Corporate Health Award ’Special Award for healthy nutrition’/EuPD Research Sustainable Management, Handelsblatt, TÜV SÜD Akademie and ias-Gruppe Best Employer 2017/glassdoor Germany trendence Graduate Barometer – Business Edition/trendence 74 75 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Our People FOCUS ON PERFORMANCE: OUR PERFORMANCE MANAGEMENT Apprenticeships and internships: Our development programmes are complemented by apprenticeship and internship programmes. To further drive high performance within the company, we use a The adidas apprenticeship offers young people who want to join performance management approach called ‘The Score’. It brings our company directly out of school the opportunity to gain business target setting, employee development and performance appraisal experience in a two- to three-year rotation programme. The under one common process. The Score also brings focus, simplicity programme includes vocational training in retail, shoe technology and alignment to the setting of team goals and individual targets. and IT, as well as integrated study programmes in fields such as Each employee is evaluated and receives feedback at least twice a digital commerce, finance or international business. At the end year. of 2016, we employed 63 apprentices in Germany (2015: 63) and 35 integrated study programme students (2015: 40). Our global Our remuneration system is based on this performance management internship programme offers students three to six months of work approach. As part of this system, we are committed to rewarding experience within adidas. In 2016, we employed 623 interns in our employees with compensation and benefit programmes that Germany (2015: 553). are competitive in the marketplace. Remuneration throughout the company comprises fixed and variable monetary compensation, non-monetary rewards as well as other intangible benefits. The cornerstone of our rewards programme is our Global Salary Management System, which is used as a basis for establishing and evaluating the value of employees’ positions and salaries in a Succession management: Our succession management approach aims to ensure stability and certainty in business continuity. We achieve this through a globally consistent succession plan which covers successors for director-level positions and above. We conduct regular reviews to ensure individual development plans are in place market-driven and performance-oriented way. The various variable to prepare successors for their potential next steps. compensation components we offer our employees include: — Bonus programme – short-term incentive programme — Profit participation programme – ‘Champions Bonus’ — Long-Term Incentive Plan (LTIP) for leaders and Executive Board ONLINE PLATFORMS TO DRIVE EMPLOYEE COLLABORATION AND LEARNING members We believe that a robust and state-of-the-art internal communication — 401-K Retirement Plan (USA) and the adidas Pension Plan platform is essential for driving employee engagement and fostering (Germany) — adidas Stock Purchase Plan. learning as well as open collaboration within our organisation. We use an enterprise collaboration platform called ‘a-LIVE’, which encourages employees to share knowledge, collaborate and Our subsidiaries also grant a variety of benefits to employees, discuss current topics. In addition, we have established an ‘Ask the depending upon locally defined practices and country-specific Management’ platform on our intranet, enabling employees to openly regulations and norms. OUR TALENT AND SUCCESSION MANAGEMENT Trainee programme: The Functional Trainee Programme (FTP) is an 18-month programme providing graduates with an international background and excellent educational credentials the opportunity to start a functional career within adidas. The programme comprises six three-month assignments in various departments. At least one of these assignments takes place abroad. At year-end 2016, we employed 49 participants in our global FTP (2015: 27). address questions to our senior leaders. Via a-LIVE we also offer all employees access to the ‘Learning Campus’, a state-of-the-art learning platform that provides opportunities for both e-learning and knowledge sharing. Employees are able to access content 24/7 in a virtual environment. 75 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Our People GROUP MANAGE ME NT RE PORT – OU R C OM PA NY 2 Our People DEDICATED PROGRAMME TO SUPPORT WORK-LIFE INTEGRATION — We provide quarterly diversity reports to management to support decision making and target setting. We aim to harmonise the commercial interests of the company with — We provide diversity training to our employees and gender intel- the professional, private and family needs of our employees. Our ligence training to our leaders. Work-Life Integration Programme includes flexible work time and place, people development and leadership competence related to — Within the company, for example, we support the 500-member strong Women’s Networking group in Herzogenaurach. work-life integration, as well as family-oriented services. In addition Additionally, we continue our support of the international LGBT to providing flexible working arrangements, teleworking, sabbaticals community, which is also driven by our employees at our major and parent/child offices, we have child-care facilities at our company locations. The key objectives and contributions to adidas of the premises in Canton, USA, and a day-care centre at our headquarters latter are providing awareness and education, acting as an infor- in Herzogenaurach, Germany. mational resource to interlinking departments and engaging with the outside LGBT communities to combat prejudice and In 2016, the employer rating service glassdoor rated adidas as the discrimination. best employer in Germany with regard to work-life balance offerings. — We have been participating in diversity career fairs in Germany, EMBRACING DIVERSITY AND INCLUSION such as the Sticks & Stones in Berlin. — adidas is listed in the genderdax — We regularly take part in benchmark studies in order to review see Glossary, p. 217. We believe it is crucial for the success of our company to have a very our activities in the fields of diversity and inclusion. diverse workforce and individuals with different ideas, strengths, interests and cultural backgrounds. We see a great benefit in the diversity of our employees as this helps us to better fulfil the wishes 03 EMPLOYEE STATISTICS 1 and multi-faceted demands of our consumers around the world. All our employees are appreciated – regardless of gender, nationality, ethnic origin, religion, world view, disability, age, sexual orientation or identity. At our global headquarters in Herzogenaurach, we have employees Total number of employees 2 Total employees (in %) Male Female from more than 80 nations. As part of our global diversity approach Management positions (in %) we proactively pursue a portfolio of internal and external activities as well as memberships: — Our active membership in ‘Charta der Vielfalt’ (‘Diversity Charter’), Prout at Work, the Diversity and Inclusion in Asia Network (DIAN) and the non-profit organisation Catalyst allows us to promote communication and the sharing of best practices and insights. — We have regular events highlighting diversity as a key topic, such as our global Diversity Day. Male Female Management positions (in %) within adidas AG 3 Male Female Average age of employees (in years) Average length of service (in years) 2016 2015 60,617 55,555 50% 50% 70% 30% 73% 27% 30 5 50% 50% 71% 29% 76% 24% 30 4 1 At year-end. Figures reflect continuing operations as a result of the divestiture of the Rockport business. 2 Number of employees on a headcount basis. 3 Calculated in accordance with German Act on Equal Participation of Women and Men in Executive Positions in the Private and Public Sector in Germany. 76 7 7 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Our People MIXED LEADERSHIP TEAMS AND PROMOTING WOMEN 04 EMPLOYEES BY FUNCTION 1 Already in 2011, adidas proactively set itself the goal of increasing the number of women in leadership positions in the coming years. Specifically, the percentage share of women in management positions is targeted to be increased globally from 30% today to 32% by 2017. Irrespective of this, German law states that, from January 1, 2016, at least 30% of Supervisory Board representatives of publicly listed companies such as adidas AG shall be women. 7 2 2 2 9 9 10 58 58% 10% Own retail Logistics 9% 9% 7% 2% 2% 2% Central functions & administration Marketing Sales Production IT Research & development As a result, the Supervisory Board and Executive Board of adidas AG 1 At year-end. have set the following specific targets to be achieved by June 30, 2017: — The Supervisory Board will appoint one woman to the adidas AG Executive Board. 05 EMPLOYEES BY REGION 1 — The percentage share of women at Board -1 level will be increased from 11% (as at July 2, 2015) to 18%. — The percentage share of women at Board -2 level will be increased from 26% (as at July 2, 2015) to 30%. A prerequisite for increasing the number of women at the highest levels of management is the general promotion of women within the company worldwide at all levels of management. www.adidas-group. com/s/employees 19 9 2 8 4 10 21 19 7 1 At year-end. 10% Western Europe 19% North America 7% Greater China 21% Russia/CIS 8% Latin America 2% Japan 9% MEAA 19% Group functions 4% Other Businesses GLOBAL EMPLOYEE BASE FURTHER INCREASES On December 31, 2016, the company had 60,617 employees, which 06 NUMBER OF EMPLOYEES BY FUNCTION 1 represents an increase of 9% versus 55,555 in the previous year. New hirings related to the global marketing and sales organisation aimed at further strengthening key growth areas and categories were the main driver of this development. On a full-time equivalent basis, Employees 2 Full-time equivalents 3 2016 2015 2016 2015 our company had 51,899 employees on December 31, 2016 (2015: Own retail 35,266 32,543 27,706 25,651 47,435). see Table 06 Personnel expenses increased to € 2.532 billion in 2016 (2015: € 2.184 billion), representing 13% of sales (2015: 13%). see Note 33, p. 189 An overview of the development of our employee base in the Sales Logistics Marketing Central functions and administration Production past ten years can be found in our ten-year overview. see Ten-Year Research & development Overview, p. 212 IT Total 4,447 6,337 5,605 5,250 1,416 1,128 1,168 3,868 6,132 4,737 4,774 1,351 993 1,157 4,333 6,021 5,349 4,948 1,352 1,058 1,131 3,763 5,598 4,580 4,508 1,286 927 1,123 60,617 55,555 51,899 47,435 1 At year-end. Figures reflect continuing operations as a result of the divestiture of the Rockport business. 2 Number of employees on a headcount basis. 3 Number of employees on a full-time equivalent basis. 77 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Sustainability GROUP MANAGE ME NT RE PORT – OU R C OM PA NY 2 Sustainability SUSTAINABILITY Our Sustainability Strategy ensures the alignment of our sustainability work with our overall business goals. While it addresses our responsibility towards our employees, the people who make our products, the environment and the communities we operate in, it also follows the ambitious plan to grow our business even further. SUSTAINABILITY STRATEGY AS A DIRECT OUTCOME OF ‘CREATING THE NEW’ CROSS-FUNCTIONAL GOVERNANCE STRUCTURE SUPPORTS EXECUTION OF STRATEGY Our new Sustainability Strategy ‘Sport needs a space’, our roadmap A cross-functional governance structure ensures timely and straight towards 2020 and beyond, is a direct outcome of our business strategy execution of the strategy. Reporting directly to the Executive Board, ‘Creating the New’. It translates our overall sustainability efforts a sponsor board composed of all functional heads from Social & into tangible goals that have a direct impact on the world of sport Environmental Affairs (SEA), Global Operations, Global Brands, we operate in. Introduced in 2016, the Sustainability Strategy builds Human Resources, Global Workplaces, Retail Concept, Sales, on existing programmes and tackles these subjects that are most material to our business and our stakeholders. It seamlessly supports Finance and Communication oversees the progress made towards our 2020 goals and gives direction for further development of the our overall business goals and is directly linked to our core DNA as strategy. The sponsor board also works in close alignment with the a global sports company. strategic working group that is tasked with the monitoring of ongoing relevant developments within the company and reporting of progress We believe that through sport we have the power to change lives. But to the sponsor board. Ultimately, the programme owners ensure sport needs a space to exist, such as a field to play on and a mountain operational execution of the strategy. to climb. These spaces are increasingly endangered due to man-made issues, including human rights violations, pollution, growing energy consumption and waste. Our holistic strategy ‘Sports needs a space’ addresses the challenges that endanger the spaces of sport and IDENTIFYING STRATEGIC PRIORITIES: ONGOING MATERIALITY ANALYSIS simultaneously our planet and people. We seek to ensure that our Sustainability Strategy addresses the SIX STRATEGIC PRIORITIES FOR 2020 topics that are most salient to our business as well as the challenges ahead. Equally, they must seamlessly support our overall business goals and are directly linked to our core DNA as a global sports ‘Sport needs a space’ identifies six strategic priorities to address the company. Our last extensive materiality assessment involved a wide issues and challenges of the spaces where sport is made (all places range of internal and external stakeholders and since then has been where products are created, designed, manufactured and shipped), regularly updated based on our ongoing stakeholder engagement. where sport is sold (own retail, wholesale and e-commerce in our www.adidas-group.com/s/materiality-analysis markets) and where sport is played (from the indoor court to the outdoor pitch all over the world). As a result we have chosen the following six strategic ambitions and embedded goals within the two dimensions of ‘product’ and ‘people’ These strategic priorities are cross-cutting and relevant for all ‘spaces’ that we aim to reach by 2020. and have been translated into tangible and measurable goals. They specifically focus on two dimensions: our products, which include materials, technologies, the manufacturing process, shop fittings and infrastructure, and people, for example our own employees as much as our factory workers, fans and athletes. see Diagram 01 A full overview of our 2020 goals and ambitions can be found on our website. For a detailed overview of the progress we have made towards these goals, please see our Sustainability Progress Report 2016 (as of April 2017). www.adidas-group.com/s/sustainability-strategy www.adidas-group.com/s/sustainability-reports 78 79 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Sustainability 01 OUR SUSTAINABILITY STRATEGY SPORT NEEDS A SPACE WE TAKE RESPONSI B I LITY FOR TH E ENTI RE LI FE CYCLE OF SPORT: IN ALL SPACES WHERE SPORT IS MADE SOLD PLAYED 1 WE VALUE WATER PRODUCT 2 WE INNOVATE MATERIALS AND PROCESSES PEOPLE 3 WE CONSERVE ENERGY 1 WE EMPOWER PEOPLE 2 WE IMPROVE HEALTH 3 WE INSPIRE ACTION PRODUCT PRIORITY NO. 1: WE VALUE WATER Further, we want to achieve rolling out a global product take-back programme to all of our key cities and markets and will be investing Water is essential for life. It is also a key resource for our industry. In in materials, processes and innovative machinery which will allow order to tackle the ever-growing issue of water scarcity and achieve us to upcycle materials into products and reduce waste. Ongoing water stewardship, we have developed an approach addressing water examples include Sport Infinity and Futurecraft Tailored Fibre. efficiency, quality and accessibility. Lastly, we plan to achieve 100% sustainable input chemistry by adopting the ZDHC Manufacturing Restricted Substances List, The goals we want to achieve by 2020 include 20% water savings at phasing out hazardous chemicals and providing our strategic our strategic suppliers, 50% water savings at our apparel material suppliers with a list of positive chemistry (the bluesign bluefinder). suppliers and 35% water savings per employee at our own sites. see Research & Development, p. 67 www.adidas-group.com/s/sustainability-innovation Additionally, we will further expand the use of waterless technologies www.adidas-group.com/s/chemical-footprint for our products and continue to develop programmes focused on providing access to clean water in the communities we operate in. www.adidas-group.com/s/environmental-approach www.adidas-group.com/s/ sustainability-innovation PRODUCT PRIORITY NO. 3: WE CONSERVE ENERGY PRODUCT PRIORITY NO. 2: WE INNOVATE MATERIALS & PROCESSES We create the best products for the athlete, while optimising our The responsible use of energy is critical for our planet to survive. In order to mitigate climate change, we are committed to reducing our absolute energy consumption and CO² emissions, transitioning to clean energy and looking into energy-harvesting opportunities. environmental impact. We are committed to steadily increasing Goals we have set ourselves for 2020 include 20% energy savings the use of more sustainable materials in our production, products and stores. At the same time, we are driving towards closed-loop solutions. at our strategic suppliers, 3% absolute annual reduction in Scope 1 and Scope 2 1 CO² emissions at our own sites, further expansion of ISO 14001 to key sites globally at our own operations and LEED certification for new corporate construction key projects. Additionally, Examples of the goals we want to achieve by 2020 include 20% we will reduce the environmental footprint of our consumer events. waste reduction at our strategic suppliers, 50% waste diversion for owned operations to minimise landfill and 75% paper reduction per In order to contribute to these ambitious targets, Green Company, employee at our own sites. Additionally, we are working on replacing the successful programme to drive environmental performance conventional cotton, with the aim of achieving 100% sustainable cotton by 2018, and on phasing out the use of virgin plastic. In 2016, we already successfully eliminated plastic bags in all our own stores and franchise stores globally. We strive to steadily increase the use of recycled polyester in our products and create a completely new supply chain for Ocean Plastic together with our partner Parley for the Oceans. at our own sites globally, was expanded in 2016 to include new aspects. For the very first time, it now covers our own-retail stores 1 Scope 1: Emissions that arise directly from sources that are owned or controlled by adidas entities, such as fuels used in our boilers; Scope 2: emissions generated by purchased electricity consumed by adidas entities. 79 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Sustainability GROUP MANAGE ME NT RE PORT – OU R C OM PA NY 2 Sustainability and includes, for example, LEED-certifying our new flagship stores. refugees, giving them a change from their everyday life through sports More information about our progress will be available in our Green activities and language tuition and offering them a positive outlook. Company Performance Analysis 2016 (as of April 2017). www.adidas- group.com/s/environmental-approach PEOPLE PRIORITY NO. 1: WE EMPOWER PEOPLE We are actively participating in refugee-related networks, such as ‘Unternehmen integrieren Flüchtlinge’ (Companies integrate refugees) or ‘Wir zusammen’ (Us Together). ‘Wir zusammen’ is an ideal platform for coordinating our activities with other companies and maximising our impact. Since the start of ‘Wir zusammen’, People are at the heart of everything we do. Like a coach ensures the number of participants in the network has risen to 150. that all of the players on the pitch are in the right position for the www.adidas-group.com/s/community-engagement www.unternehmen-integrieren- best results, we empower people to exercise their rights and unlock fluechtlinge.de www.wir-zusammen.de their potential. By 2020, we will empower our supply chain workers by expanding and refining grievance systems and skill training programmes, which PEOPLE PRIORITY NO. 2: WE IMPROVE HEALTH include the expansion of the Workers’ Hotline to the countries where Sport is the key to an individual’s health and happiness. Our aim is our strategic suppliers are located. We will further drive and support our suppliers and licensees in achieving top scores as defined by our to enable people around the world to participate in sports, while educating them on physical and mental health, fitness and nutrition. rigid sustainability assessment and scoring method using our C KPI and E KPI 2. We will foster cross-functional and cross-cultural careers and experiences for our employees – this includes volunteering This will ultimately allow them to lead a healthier and more fulfilled lifestyle. programmes together with the adidas Fund and Reebok BOKS, a By 2020, we will introduce education and upskilling measures on free before-school physical activity programme mastered by Reebok health and work-life balance topics for our employees, develop a and the Reebok foundation, which also enhances soft skills such as global Health Management strategy for our employees and utilise teamwork, leadership, decision-making and communication while sport as a tool to teach values and boost young people’s academic increasing our employees’ commitment and motivation. And lastly and physical performance, adding to their overall confidence and we will champion diversity – regardless of gender, nationality, ethnic well-being. Through the BOKS programme, we will refine and perfect origin, religion, world view, age, sexual orientation or gender identity. the collective impact model with our other partners, including those see Internal Management System, p, 86 www.adidas-group.com/s/supply-chain-approach from the healthcare industry, to provide a solution to the physical www.adidas-group.com/s/employees inactivity epidemic. We also aim to increase the number of enrolled BOKS schools by 50% in our target areas. www.adidas-group.com/s/employees Social engagement and support for people in need are key www.adidas-group.com/s/community-engagement components of our corporate culture. For many years now, we have been working closely with several organisations on both a local and global level, which the company supports with monetary and in-kind donations. In 2016, this included more than € 600,000 for refugee PEOPLE PRIORITY NO. 3: WE INSPIRE ACTION aid in Europe and the Middle East. In addition, the company donated We work hard every day to inspire and enable people to harness the considerable volumes of products for refugees worldwide, largely power of sport in their lives. Likewise, we want to keep driving change in close cooperation with ‘Luftfahrt ohne Grenzen’ (‘Wings of Help’). in our industry by leading by example. In its support for refugees, adidas follows a holistic concept based We will continue to focus on rewarding our employees’ commitment on three pillars: humanitarian help, enable and support, and and contributions to our company’s purpose, strategy and success, employment integration. In 2016, activities focused on employment and on encouraging and supporting employee volunteering. We integration and training of refugees. As a result, we were able to offer will engage with creators and influencers and drive innovative 33 refugees the opportunity to do an internship. In addition, adidas collaborations, inspire consumers, key partners, brand assets and grants every employee participating in voluntary work with refugees others to join us on our journey. Furthermore, we continue to team that exceeds a certain number of hours three days’ special leave for up with our athletes who will act as role models for young creators, such activities. In 2016, our employees invested around 1,300 hours sharing experiences and showing that sport is about passion, into the integration of refugees. This enables the company, together determination, teamwork, helping others and being active. with the adidas Fund and external partners, to help a large number of 2 The C KPI rating is our tool to measure the social compliance performance of our suppliers. The E KPI rating is our tool to measure the environmental performance of our suppliers. 8 0 81 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Sustainability OUR FUNDAMENTALS: COMPLIANCE AND TRANSPARENCY PROTECTING HUMAN RIGHTS ENABLING FAIR AND ENVIRONMENTALLY SOUND WORKING CONDITIONS IN OUR SUPPLY CHAIN Our ‘Workplace Standards’, the supply chain code of conduct established in 1997, are a contractual obligation under the adidas recognises its responsibility to respect human rights and the manufacturing agreements the company signs with its main business importance of showing that we are taking the necessary steps to fulfil partners to ensure workers’ health and safety and they provide this social obligation as a business. We do this by striving to operate provisions to ensure environmentally sound factory operations. responsibly along the entire value chain, by safeguarding the rights These standards follow International Labour Organization (ILO) and of our own employees and those of the workers who manufacture United Nations conventions relating to human rights and employment our products through our ‘Workplace Standards’, and by applying our practices, as well as the model code of conduct of the World Federation influence to affect change wherever human rights issues are linked of the Sporting Goods Industry (WFSGI). to our business activities. To enforce compliance with these standards, the SEA team regularly Since its inception in 1997, our human and labour rights programme conducts announced and unannounced social compliance and has been built on the back of intense stakeholder outreach and environmental audits and assesses suppliers by means of an engagement: seeking to understand and define the most salient innovative rating system using a score between 1C/1E (worst) and issues to address as a company. Recent highlights of our work include the publication of our approach to support human rights 5C/5E (best). According to the results, our Sourcing teams decide the course of action ranging from training needs at the factories to defenders, our participation in a pilot to create an international reinforcement mechanisms such as sending warning letters or even corporate human rights benchmark for business globally and termination of contracts. Potential new suppliers are assessed in a our ongoing disclosure of cases received through our third- similar way and orders can only be placed if SEA approval has been party complaints mechanism, which is part of our long-standing granted. www.adidas-group.com/s/supply-chain-approach see Table 02 see Table 03 approach to transparency and accountability. Our work was awarded see Diagram 04 with a leadership position in the KnowTheChain ranking in 2016. www.adidas-group.com/s/human-rights 02 PERFORMANCE DATA Factory visits Social compliance audits (external and internal) 1 Environmental audits Audits FLA Training sessions 2 Social compliance performance (C KPI) Termination for compliance reasons Better Cotton used (2018 target: 100%) 1,225 (2015: 1,255) 989 (2015: 1,135) 143 (2015: 138) 4 (2015: 4) 171 (2015: 120) see Diagram 04 10 (2015: 3) 68% (2015: 43%) 1 In 2016, the total number of social compliance audits declined slightly compared to the previous year. This has several reasons, including the increased collaboration with other brands and the decrease in the number of audits required for our high-performing suppliers. 2 Due to the restructuring of our teams into two specialised teams for Advisory and Monitoring, we had more capacities to provide considerably more training to our suppliers. 03 COMPLIANCE RATINGS Grade KPI score band Performance description 1C 2C 3C 4C 5C 0% – 29% 30% – 59% 60% – 79% 80% – 89% 90% – 100% There are numerous severe non-compliance issues and no compliance management and compliance practices in place. The factory has been given notice that business will be terminated unless there is immediate improvement. There are some non-compliance issues and no compliance management systems. However, there are some effective compliance practices being delivered. There are minor non-compliance issues. The factory has compliance management systems and some effective compliance practices in place. Generally, there are no non-compliance issues. The factory has compliance management systems in place, and most of the components are effective. There are no non-compliance issues and all of the factory's management systems and practices are well delivered and effective. 81 2 GROUP MANAGEMENT REPORT – OUR C OMPANY Sustainability GROUP MANAGE ME NT RE PORT – OU R C OM PA NY 2 Sustainability 04 DEVELOPMENT BY COMPLIANCE RATINGS 1 IN % 1C 2C 3C 4C 5C 47 43 50 34 30 32 23 16 14 2 1 1 3 3 1 50 40 30 20 10 0 ■ 2014 ■ 2015 ■ 2016 1 We saw a slight decline in the number of our high-performing suppliers as a result of the implementation of a more consistent application of our rigid audit process. To best reduce our suppliers’ environmental impacts at their manufacturing plants we help them establish sound environmental based on findings in our ongoing dialogue with scientific organisations. Both our own quality assurance laboratories and external testing management systems. We have specific guidelines and training institutes are used to constantly monitor material samples to ensure programmes in place for our suppliers, using the environmental supplier compliance with these requirements. Materials that do not performance of our own sites as best-practice examples. Our meet our standards and specifications are rejected. www.adidas-group. suppliers’ environmental impacts and progress are tracked through com/s/product-safety a tailored data management system that requires them to report environmental data such as carbon emissions, energy and water consumption as well as waste volumes on a regular basis. The majority of our footwear sourcing volume is produced in factories DRIVING STAKEHOLDER DIALOGUE AND INCREASING TRANSPARENCY which are OHSAS 18000 and/or ISO 14001 certified. The remaining We openly engage with numerous stakeholders, involving them part of our footwear sourcing volume is produced in factories that in key social and environmental decisions that shape day-to-day have management systems in place but have not yet been certified. operations. Through active participation in, for example, the Better All footwear factories are regularly assessed against our standards Cotton Initiative (BCI), the Sustainable Apparel Coalition (SAC), the on environment and workplace health and safety. www.adidas-group. Leather Working Group (LWG) and the AFIRM Working Group, we com/s/policies ENSURING OUR PRODUCTS ARE SAFE work closely with leading companies from a variety of sectors to develop sustainable business approaches and to debate social and environmental topics on a global level. This is also supported by our membership in organisations such as the World Federation of the We have company-wide product safety policies in place that ensure Sporting Goods Industry (WFSGI), the Fair Factories Clearinghouse we consistently apply physical and chemical product safety and (FFC) and the Fair Labor Association (FLA). In addition, we build conformity standards across all brands. Since pioneering the awareness, capacity and knowledge of laws and rights among factory Restricted Substances Policy in 1998, we continue to develop policies management and workers by partnering with leading providers such which ban or restrict chemicals in our products. The Restricted as the EHS+ Centre in China and the ILO’s Better Work programme. Substances Policy for product materials covers the strictest local requirements and includes best-practice standards as recommended A key element of our transparent communication is the disclosure by consumer organisations. It prohibits, for example, the use of of our global supplier factory list on our website. First published in chemicals considered harmful or toxic, the sourcing or processing 2007 and updated twice a year, it is complemented with factories of raw materials from any endangered or threatened species and that manufactured products for major sports events such as the the use of leathers, hides or skins from animals that have been FIFA World Cup or Olympic Games. www.adidas-group.com/s/partnerships inhumanely treated, whether these animals are wild or farmed. They www.adidas-group.com/s/supply-chain-approach are mandatory for all business partners and are updated regularly 82 83 2 GROUP MANAGEMENT REP ORT – OU R C OMPA NY Sustainability ADIDAS AG IN SUSTAINABILITY INDICES EXTERNAL RECOGNITION FOR OUR SUSTAINABILITY EFFORTS We have continuously received positive recognition from international institutions, rating agencies, NGOs and socially responsible investment analysts for our sustainability initiatives. In 2016, adidas AG was again represented in a variety of high-profile sustainability indices. For the 17th consecutive time, adidas AG was selected to join the Dow Jones Sustainability Indices (DJSI), the world’s first global sustainability index family tracking the performance of the leading sustainability- driven companies worldwide. As one of the top-scoring companies in our industry, adidas AG has received the Gold Class and Industry Mover distinction for excellent sustainability performance. Within each industry, companies with a minimum total score of 60 and whose score is within 1% of the top-performing company’s score receive the RobecoSAM Gold Class award. In the sector ‘Textiles, Apparel & Luxury Goods’, adidas AG was rated industry best in the criteria Brand Management, Innovation Management, Risk & Crisis Management, Environmental Policy & Management Systems, Operational Eco-Efficiency, Corporate Citizenship & Philanthropy and Stakeholder Engagement. Furthermore, in 2016, adidas was ranked fifth among the Global 100 Most Sustainable Corporations in the World (Global 100 Index), making it to the Top Ten for the third consecutive year. The company has also again received recognition for outstanding environmental performance of its supply chain in China, ranking first in the textile industry in the annual CITI (Corporate Information Transparency Index) evaluation for the second year in a row. The ranking was developed jointly by the Institute of Public & Environmental Affairs (IPE) and the Natural Resources Defense Council (NRDC) and identifies the top brands to carry out environmental management towards their supply chains in China. — Dow Jones Sustainability Index (World and Europe) — Euronext Vigeo Indices (Eurozone 120 and Europe 120) — ECPI Ethical Equity Indices (Euro and EMU) & ECPI ESG Equity (Euro and World) — Ethibel Sustainability Indices (Global and Europe) — FTSE4Good Index Series — MSCI Global Sustainability Indices & MSCI SRI Indices — STOXX ESG Leaders — Global 100 Most Sustainable Corporations in the World (Global 100 Index) — Carbon Disclosure Project Climate Change (Score B) and Water (Score B) 83 A FIN E R VIE N CIA L W 85 Group Management Report – Financial Review 3 — INTERNAL MANAGEMENT SYSTEM — BUSINESS PERFORMANCE Economic and Sector Development Income Statement Statement of Financial Position and Statement of Cash Flows Treasury Financial Statements and Management Report of adidas AG Disclosures pursuant to § 315 Section 4 and § 289 Section 4 of the German Commercial Code — BUSINESS PERFORMANCE BY SEGMENT Western Europe North America Greater China Russia/CIS Latin America Japan MEAA Other Businesses — SUBSEQUENT EVENTS AND OUTLOOK Subsequent Events Outlook — RISK AND OPPORTUNITY REPORT Illustration of Material Risks Illustration of Opportunities — MANAGEMENT ASSESSMENT OF PERFORMANCE, RISKS AND OPPORTUNITIES, AND OUTLOOK 86 90 90 92 96 101 104 107 111 111 111 112 112 113 113 113 114 115 115 115 118 123 131 133 GROUP MANAGEMENT REPORT This report contains the Group Manage ment Report of the adidas Group, comprising adidas AG and its consolidated subsidiaries, and the Manage ment Report of adidas AG. 85 FIN A N CIA L 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Internal Management System GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Internal Management System 3 INTERNAL MANAGEMENT SYSTEM In order to increase shareholder value, adidas aims to maximise operating cash flow. We strive to achieve this by continually improving our top- and bottom-line performance while at the same time optimising the use of invested capital. In addition, we focus on driving strong earnings growth in the interest of our shareholders. Our company’s planning and controlling system is therefore designed to provide a variety of tools to assess our current performance and to align future strategic and investment decisions to best utilise commercial and organisational opportunities. INTERNAL MANAGEMENT SYSTEM DESIGNED TO DRIVE SHAREHOLDER VALUE We believe operating cash flow important drivers to increase shareholder value. To support this, see Glossary, p. 218 is one of the most the company’s Management focuses on a set of major financial Key is our approach to a systematic and consistent consideration of the company’s major value drivers such as our employees, our brands, sustainability and financials in decision-making. Performance Indicators (KPIs). see Diagram 01 Increasing net sales and operating profit are the main contributors to improve operating OPERATING MARGIN AS MAJOR KPI FOR OPERATIONAL PROGRESS cash flow. In addition, strict management of operating working Operating margin (defined as operating profit as a percentage of capital and value-enhancing capital expenditure are beneficial for net sales) is one of our company’s major KPIs to drive and improve operating cash flow development. In order to maximise operating our operational performance. It highlights the quality of our top line cash flow generation across our organisation, the management and operational efficiency. The primary drivers central to enhancing teams of our operating segments are responsible for improving net operating margin are as follows: sales and operating profit as well as optimising operating working capital and capital expenditure. In addition, to keep Management focused on driving strong returns in the interest of our shareholders, — Sales and gross margin development: Management focuses on identifying and exploiting growth opportunities that not only the development of the company’s net income position, as well as provide for future top-line improvements, but also have potential earnings per share (EPS), is of high importance. see Diagram 01 to increase our gross margin. Major levers for enhancing our In order to encourage long-term performance improvements, we sales and gross margin include: — Minimising clearance activities, while at the same time measure the development of the business units over a multi-year increasing the full-price share of sales. period. In this context, we also recognise that the long-term success of our company depends on our ability to identify, measure and manage all relevant tangible and intangible value drivers of the — Optimising our product mix. — Improving the quality of distribution, with a particular focus see Glossary, p. 216. on controlled space entire organisation. As a consequence, in 2016, we continued our — Realising supply chain efficiency initiatives. efforts towards Integrated Performance Management (IPM), which 01 MAJOR KEY PERFORMANCE INDICATORS (KPIS) Net sales Operating profit Operating working capital Capital expenditure Net income/EPS Operating cash flow Shareholder return Shareholder value 8 6 87 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Internal Management System — Operating expense control: Management puts high emphasis on tightly controlling operating expenses to leverage sales growth through to the bottom line. This requires a particular focus on ensuring flexibility in the company’s cost base. Expenditure for marketing investments operating expenses and at the same time one of the most see Glossary, p. 217 is one of our largest CAPITAL EXPENDITURE TARGETED TO MAXIMISE FUTURE RETURNS Improving the effectiveness of capital expenditure is another major lever to maximise our operating cash flow. We control capital expenditure with a top-down, bottom-up approach. In a first step, Management defines focus areas and an overall investment budget important mechanisms for driving brand desirability and top-line based on investment requests from various functions within the growth sustainably. Therefore, we are committed to improving the organisation. Then, in a second step, our operating segments align efficiency of our marketing investments. This includes concen- their initiatives within the scope of assigned priorities and available trating our communication efforts on key global brand initiatives budget. We evaluate potential return on planned investments utilising and focusing our promotion spend on well-selected partnerships the net present value method. Risk is accounted for, adding a risk with top events, leagues, clubs, athletes and artists. premium to the cost of capital and thus reducing our estimated future We also aim to increase operational efficiency by tightly managing operating overhead expenses we regularly review our operational structure – streamlining see Glossary, p. 218. In this respect, business processes, eliminating redundancies and leveraging the scale of our organisation. These measures may also be earnings streams where appropriate. By means of scenario planning, the sensitivity of investment returns is tested against changes in initial assumptions. For large investment projects, timelines and deviations versus budget are monitored on a monthly basis throughout the course of the project. supplemented by short-term initiatives such as temporarily In addition to optimising return on investments, we evaluate larger curtailing operational investments, for example staff hiring. projects upon completion and document learnings for future capital expenditure decisions. TIGHT OPERATING WORKING CAPITAL MANAGEMENT Due to a comparatively low level of fixed assets required in our business, the efficiency of the balance sheet depends to a large NET INCOME AND EARNINGS PER SHARE TO FOCUS ON SHAREHOLDER INTERESTS degree on our operating working capital management. In this context, Beyond our ambition to maximise operating cash flow, we are our key metric is average operating working capital as a percentage committed to a continuous improvement in the company’s bottom line. of net sales. Monitoring the development of this metric facilitates We are convinced that, by doing so, we place an even stronger focus on the measurement of our progress in improving the efficiency of our the interests of our shareholders. Consequently, Management closely business cycle. monitors the development of both net income and earnings per share (EPS) and executes against these two major financial KPIs. see We strive to proactively manage our inventory levels to meet market Diagram 01 Our strong focus on driving the company’s bottom line is also demand and ensure fast replenishment. Inventory ageing is controlled reflected in the fact that our Management’s variable compensation is carefully to reduce inventory obsolescence and to minimise clearance linked to the company’s net income growth. see Compensation Report, p. 32 activities. As a result, inventory days lasting is an important metric as it measures the average number of days goods remain in inventory before being sold, highlighting the efficiency of capital locked up in products. To optimise capital tied up in accounts receivable, we strive to improve collection efforts in order to reduce the Days of Sales Outstanding (DSO) and improve the ageing of accounts receivable. Likewise, we strive to optimise payment terms with our suppliers to best manage our accounts payable. 87 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Internal Management System GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Internal Management System 3 NON-FINANCIAL KEY PERFORMANCE INDICATORS for our brands, underpinned by the fact that brand advocates on In addition to the major financial KPIs to assess the performance average buy more than non-advocates. In addition, a large part of and operational success of our company, as outlined above, we our consumers rely on referrals by friends or family when making have identified a set of non-financial KPIs that help us track our purchase decisions. Consequently, the results from our NPS system progress in areas that are critical for our long-term success but are, are also reflected in the variable compensation for Executive Board however, not directly reflected in the financial statements. These members and a large number of our employees. see Compensation non-financial KPIs are assessed on a regular basis and managed Report, p. 32 by the respective business functions. Non-financial KPIs which we are closely monitoring include, amongst others, Net Promoter Score (NPS), market share, backlogs and sell-through data as well Market share: To measure the operational performance of our brands relative to our major competitors, we continuously collect, on a market as our customer delivery performance (On-Time In-Full), employee and category level, market share data. see Corporate Strategy, p. 48 The engagement and a set of KPIs in the area of our sustainability findings provide detailed insights for our senior management team performance. into which markets and categories we have been able to gain market share relative to our peers, enabling us to leverage those insights Net Promoter Score (NPS): Maintaining and enhancing brand desirability through the creation of strong brand identities is crucial across the organisation. see Management Assessment of Performance, Risks and Opportunities, and Outlook, p. 133 In addition, the results help us to define for sustaining and driving profitable growth. Therefore, mainly on a market and category level, we invest in primary qualitative and clear roles and responsibilities for each of our markets and categories within our long-term strategic aspirations, based on their overall quantitative research such as trend scouting and consumer surveys positioning within the sporting goods industry. to determine brand loyalty and brand strength. Measures that are tracked include brand awareness, likeability and purchase intent. Furthermore, within the framework of Creating the New, we Backlogs and sell-through data: To manage demand planning and better anticipate our future performance, backlogs see Glossary, p. 216 comprising orders received up to nine months in advance of the actual implemented an NPS system, which strengthens our capabilities to sale are monitored closely. However, due to the growing share of more carefully review brand advocacy as NPS tells us how likely it own retail in our business mix, fluctuating order patterns among is that consumers will recommend our brands. NPS is a key pillar our customers as well as an increasing part of our business being in transforming our company into a consumer-centric organisation. realised under significantly shortened lead times, orders received It represents a holistic and transparent measure of brand from our retail partners are less indicative of anticipated revenues performance and has been successfully applied in other industries for adidas compared to the past. Therefore, qualitative feedback and organisations. NPS comes from the following question asked to from our retail partners on the full-price sell-through success of a surveyed group of people: ‘How likely is it that you would recommend our collections at the point of sale as well as data received from our this brand to a friend?’ The answer has a scale from 0 to 10 with 10 own-retail activities is becoming increasingly important. being the most likely. NPS is calculated using Promoters (consumers that answered 9 or 10) minus Detractors (consumers that answered 0 to 6). Consumers answering 7 or 8 are called Neutrals or Passives On-Time In-Full (OTIF): OTIF measures the company’s delivery performance towards customers and our own-retail stores. Managed and are not taken into consideration for the calculation of the NPS. by our Global Operations function, OTIF assesses to what degree Our efforts around NPS (both our own NPS as well as the NPS of see Global Operations, p. 62 It helps us to investigate improvement potential our major competitors) are driven by an independent agency and in the area of order book management and logistics processes. It monitored by our internal global consumer insight teams on a regular therefore also helps us to improve our delivery performance, which basis. We firmly believe that advocacy will create sustained growth is a major aspect when it comes to customer satisfaction. The OTIF customers received what they ordered and if they received it on time. assessment covers both the adidas and Reebok brands in most of our key markets. see Management Assessment of Performance, Risks and Opportunities, and Outlook, p. 133 8 8 89 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Internal Management System Employee engagement: To measure the level of engagement and motivation of our employees, adidas carries out employee engagement Taking into account year-to-date performance as well as opportunities and risks, the company’s full year financial performance is forecasted surveys. These surveys aim to provide key insights into how well we, as four times a year. In this respect, also backlogs, sell-through data, an employer, are doing in engaging our employees. They thus enable feedback from customers and own-retail stores are assessed as us to develop the right focus and future people strategies across available. Finally, as a further early indicator for future performance, our organisation. Against the background of organisational changes the results of any relevant recent market and consumer research are within the company, the existing engagement survey approach has assessed as available. been re-designed with regard to the survey’s scope and frequency. The new survey approach is planned to be introduced in 2017. see Our People, p. 72 ENHANCED INTEGRATED BUSINESS PLANNING AND MANAGEMENT APPROACH Sustainability performance: We have a strong commitment to enhance the social and environmental performance of our company. In order to further optimise profitability and working capital efficiency as well as operating cash flow development, we continue to drive our By doing so, we firmly believe we will not only improve the company’s Integrated Business Planning initiative (IBP). This initiative focuses overall reputation, but also increase its economic value. We have on developing and forming an enhanced forecasting approach by therefore implemented a comprehensive Sustainability Strategy aligning processes and timelines of major business functions such under which we regularly review our performance. We closely monitor our sustainability targets and have set ourselves clear milestones. A as marketing, sales and operations at a market and global level. The centre-point of this approach is to improve the reliability of major focus lies on monitoring and rating our supplier factories with future business planning, leading to a new efficiency level of order regard to compliance with our Workplace Standards and rating the book building and conversion. This, in turn, is expected to lead to an effectiveness of compliance systems. A rating tool helps us evaluate increase in the full-price share of sales. six fundamental elements of social compliance. see Sustainability, p. 78 We have a strong track record in sustainability reporting, with our Sustainability Progress Report being an integral part of this. All our social and environmental publications, which include more details and additional data, are provided on our corporate website. see Management Assessment of Performance, Risks and Opportunities, and Outlook, p. 133 www.adidas-group.com/s/sustainability-reports STRUCTURED PERFORMANCE MEASUREMENT SYSTEM We have developed an extensive performance measurement system, which utilises a variety of tools to measure the company’s performance. Key performance indicators as well as other important financial metrics are monitored and compared against initial targets as well as rolling forecasts When negative deviations exist between actual and target numbers, see Glossary, p. 218 on a monthly basis. we perform a detailed analysis to identify and address the cause. If necessary, action plans are implemented to optimise the development of our operating performance. To assess current sales and profitability development, Management continuously analyses the performance of our operating segments. We also benchmark our financial results with those of our major competitors on a regular basis. 89 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Economic and Sector Development 3 BUSINESS PERFORMANCE 2016 marked a year of strong operational and financial performance for adidas. Revenues increased 18% on a currency-neutral basis, driven by strong double-digit growth at the adidas brand and mid-single-digit sales increases at the Reebok brand. All market segments recorded currency-neutral sales increases, with double-digit growth across all regions except Russia/CIS, where revenues grew at a low-single-digit rate. Despite severe pressure from negative currency effects, the gross margin increased 0.3 percentage points to 48.6%, reflecting an improved pricing, product and channel mix as well as lower input costs. Other operating expenses as a percentage of sales were down 0.3 percentage points to 42.8%. In combination with a non-recurring gain related to the early termination of the Chelsea F.C. contract, the operating margin increased a robust 1.3 percentage points to 7.7%, excluding last year’s goodwill impairment losses. As a result, net income from continuing operations, excluding goodwill impairment losses in the prior year, increased 41% to € 1.019 billion. At € 4.99, diluted EPS from continuing operations grew 41%, excluding goodwill impairment losses in the prior year. ECONOMIC AND SECTOR DEVELOPMENT GLOBAL ECONOMY EXPANDS 2.3% IN 2016 1 2016 marked another challenging year for the global economy, USA, remained major sources of uncertainty and continued to weigh on economic activity. Developing economies grew 3.4% in 2016, mainly reflecting improving domestic demand, the modest stabilisation in commodity prices as well as accommodative macroeconomic policies. which grew at a slower rate than initially projected. With global gross Nonetheless, weak investment and productivity growth negatively domestic product (GDP) growth of 2.3%, 2016 experienced the lowest impacted the economic recovery in those markets. At 1.6%, growth economic expansion since 2009. The weaker-than-expected economic in developed economies decelerated, as several markets continued to activity reflects sluggish global trade, lacklustre investment spending, face significant challenges, such as weak external demand, lacklustre policy uncertainties as well as volatile financial markets. These investment activity, policy uncertainties and sluggish productivity developments, in combination with heightened geopolitical tensions growth. Nevertheless, improving labour market conditions as well and political discord such as the unexpected UK vote in favour of leaving as accommodative monetary policies supported the overall economic the European Union (‘Brexit’) as well as the electoral outcome in the activity. 1 Sources: World Bank Global Economic Prospects and HSBC Global Research. 01 REGIONAL GDP DEVELOPMENT 1 IN % Global 2 Western Europe 3 European emerging markets 3 USA 2 Asia 3, 4 Latin America 3 5 4 3 2 1 0 (1) 2.7 2.7 2.3 2.0 1.7 1.6 3.0 1.7 0.8 2.6 2.4 1.6 4.0 4.1 3.9 1.0 0.2 (0.5) ■ 2014 ■ 2015 ■ 2016 1 Real, percentage change versus prior year; 2014 and 2015 figures restated compared to prior year. 2 Source: World Bank. 3 Source: HSBC. 4 Includes Japan and Area Pacific. 90 91 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Economic and Sector Development 02 QUARTERLY UNEMPLOYMENT RATE BY REGION 1 03 QUARTERLY DEVELOPMENT OF CONSUMER IN % OF TOTAL ACTIVE POPULATION PRICE INDEX 1 BY REGION Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 USA 2 Euro area 3 Japan 4 China 5 Russia 6 Brazil 7 5.0 10.5 3.3 4.1 5.8 7.4 5.0 10.2 3.2 4.0 6.0 7.9 4.9 10.1 3.1 4.1 5.4 4.9 9.8 3.0 4.0 5.2 4.7 9.6 3.1 4.0 5.3 11.2 11.7 11.9 USA 2 Euro area 3 Japan 4 China 5 Russia 6 Brazil 7 0.7 0.2 0.2 1.6 12.9 10.7 0.9 0.0 0.0 2.3 7.3 9.4 1.0 0.1 (0.4) 1.9 7.5 8.8 1.5 0.4 (0.5) 1.9 6.4 8.5 2.1 1.1 0.3 2.1 5.4 6.3 1 Quarter-end figures. 2 Source: US Bureau of Labor Statistics. 3 Source: Eurostat. 4 Source: Japan Ministry of Internal Affairs and Communications. 5 Source: China National Bureau of Statistics. 6 Source: Russia Federal Service of State Statistics. 7 Source: Brazil Institute of Geography and Statistics. 1 Quarter-end figures. 2 Source: US Bureau of Labor Statistics. 3 Source: Eurostat. 4 Source: Japan Ministry of Internal Affairs and Communications. 5 Source: China National Bureau of Statistics. 6 Source: Russia Federal Service of State Statistics. 7 Source: Brazil Institute of Geography and Statistics. MOMENTUM IN THE SPORTING GOODS INDUSTRY CONTINUES 2 In 2016, the global sporting goods industry grew at robust rates, supported by rising consumer spending in both developing and developed markets, the ongoing athleisure trend as well as higher USA 2 sports participation and increasing health awareness around the Euro area 3 world. In addition, the industry benefited from major sporting events, such as the 2016 Olympic Games hosted by Brazil as well as the UEFA EURO 2016, held in France. Moreover, social trends including social fitness remained strong catalysts, significantly impacting the overall sports industry. The e-commerce channel continued to see rapid expansion, as retailers leveraged a wide variety of commercial opportunities across mobile technologies and social media. Nevertheless, the industry was negatively impacted by the bankruptcy of several retailers, with the majority of their business not yet fully recovered by other physical stores. From a category Japan 4 China 5 Russia 6 Brazil 7 04 QUARTERLY CONSUMER CONFIDENCE DEVELOPMENT 1 BY REGION Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 96.3 (5.7) 41.3 103.7 (26.0) 96.3 96.1 (9.7) 41.3 100.0 (30.0) 97.6 97.4 (7.2) 42.1 102.9 (26.0) 101.0 103.5 (8.2) 42.6 104.6 (19.0) 103.1 113.3 (5.1) 42.3 108.4 (18.0) 100.3 1 Quarter-end figures. 2 Source: Conference Board. 3 Source: European Commission. 4 Source: Economic and Social Research Institute, Government of Japan. 5 Source: China National Bureau of Statistics. 6 Source: Russia Federal Service of State Statistics. 7 Source: Brazil National Confederation of Industry. perspective, athletic footwear sales posted a strong performance in 05 EXCHANGE RATE DEVELOPMENT 1 € 1 EQUALS 2016. In particular, the casual athletic category continued to enjoy strong momentum throughout the year, fuelled by retro running and tennis silhouettes. In addition, running footwear recorded further improvements in 2016, supported by fashion and retro silhouettes. Basketball footwear remained challenged, reflecting the shift in fashion away from the basketball styles. Furthermore, the athletic apparel category delivered solid gains throughout the year, mainly benefiting from stronger demand in activewear apparel, as USD GBP JPY RUB CNY Average rate 2015 1.1101 0.7259 134.42 67.682 6.9721 Q1 2016 Q2 2016 Q3 2016 Q4 2016 1.1385 0.7916 127.90 76.971 7.3561 1.1102 0.8265 114.05 71.339 7.3620 1.1161 0.8610 113.09 70.491 7.4531 1.0541 0.8562 123.40 63.938 7.3123 Average rate 2016 1.1069 0.8188 120.40 74.278 7.3515 consumers continued to shift their preferences from more traditional 1 Spot rates at quarter-end. and technical apparel to activewear. Despite the ongoing challenging equipment business environment, the category managed to post sales growth especially in the US market. 06 2016 OIL PRICE DEVELOPMENT 1 IN US $ PER BARREL | Jan. 1, 2016 Dec. 31, 2016 | 2 Sources: NPD Market Research and Deutsche Bank Market Research. 50 40 30 1 West Texas Intermediate Cushing crude oil. Source: Bloomberg. 91 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Income Statement 3 INCOME STATEMENT ADIDAS DELIVERS STRONG FINANCIAL PERFORMANCE IN 2016 ADIDAS BRAND REVENUES GROW AT STRONG DOUBLE-DIGIT RATE Currency-neutral revenues for the adidas brand increased 22%, driven by double-digit sales increases in the training and running In 2016, revenues increased 18% on a currency-neutral basis. In euro categories as well as at adidas Originals and adidas neo. In addition, terms, revenues grew 14% to € 19.291 billion from € 16.915 billion high-single-digit sales increases in the football category as well as in 2015. see Diagram 07 mid-single-digit growth in the outdoor category also contributed to this development. Currency-neutral Reebok brand sales were up From a market segment perspective the combined currency-neutral 6% versus the prior year, reflecting double-digit sales increases in sales of the adidas and Reebok brands grew at double-digit rates in Classics as well as mid-single-digit growth in the training and running nearly all regions in 2016. Revenues in Western Europe increased categories. Revenues at TaylorMade-adidas Golf were down 1% on 20% on a currency-neutral basis, driven by double-digit sales growth a currency-neutral basis, as growth at TaylorMade and adidas Golf in all major countries. Currency-neutral sales in North America and was more than offset by sales declines at Ashworth and Adams Golf. Greater China increased 24% and 28%, respectively. Revenues in Russia/CIS grew 3% on a currency-neutral basis. In Latin America, revenues grew 16% on a currency-neutral basis, as all major countries grew at double-digit rates with the exception of Brazil, where sales increased at a low-single-digit rate. In Japan, sales were SALES GROW AT DOUBLE-DIGIT RATES IN FOOTWEAR AND APPAREL Currency-neutral footwear sales grew 26% in 2016, driven by double- up 16% on a currency-neutral basis. Revenues in MEAA grew 16% on a digit increases in all major categories. Apparel revenues grew 11% on currency-neutral basis, reflecting broad-based strength and double- a currency-neutral basis, due to double-digit increases in the training digit growth in almost all of the region’s countries. and running categories as well as at adidas Originals and adidas Revenues in Other Businesses were up 1% on a currency-neutral contributed to this development. Currency-neutral hardware sales basis. Strong increases in Other centrally managed businesses and were up 9%, driven by high-single-digit growth in the football and Runtastic were only partly offset by sales declines at CCM Hockey training categories. see Diagram 09 neo. In addition, mid-single-digit growth in the football category also and TaylorMade-adidas Golf. 07 NET SALES 1 € IN MILLIONS 09 NET SALES BY PRODUCT CATEGORY € IN MILLIONS 2016 2015 2014 2013 2012 19,291 16,915 14,534 14,203 14,883 Footwear Apparel Hardware Total 2016 2015 Change Change (currency- neutral) 10,135 7,476 1,681 8,360 6,970 1,585 19,291 16,915 21% 7% 6% 14% 26% 11% 9% 18% 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 08 NET SALES BY REGION 1 IN % OF NET SALES 10 NET SALES BY PRODUCT CATEGORY IN % OF NET SALES 6 9 4 14 30 16 21 30% Western Europe 21% North America 16% Greater China 4% Russia/CIS 9% Latin America 6% Japan 14% MEAA 1 Figures reflect all operating activities of the operating segments, including Other Businesses. 9 39 53 53% Footwear 39% Apparel 9% Hardware 92 93 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Income Statement GROUP SALES DEVELOPMENT SUPPORTED BY DOUBLE-DIGIT GROWTH IN RETAIL In 2016, retail revenues increased 23% on a currency-neutral basis, mainly as a result of strong double-digit sales growth at the adidas brand. Reebok brand revenues increased at a mid-single-digit rate. In euro terms, retail sales grew 19% to € 5.003 billion from € 4.221 billion in the prior year. From a store format perspective, sales from concept stores and factory outlets both grew at double- digit rates, while revenues from concession corners were up at a low-single-digit rate. The company ended 2016 with a total of 2,811 adidas and Reebok brand stores compared to the prior year-end 12 GROSS PROFIT 1 € IN MILLIONS 2016 2015 2014 2013 2012 9,379 8,168 6,924 7,001 7,103 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. level of 2,722. see Table 11 Currency-neutral comparable store sales 13 GROSS MARGIN 1 IN % increased 12% versus the prior year, with double-digit sales growth in all market segments except Russia/CIS, where comparable store sales increased at a high-single-digit rate. eCommerce revenues grew 59% on a currency-neutral basis. COST OF SALES INCREASES Cost of sales is defined as the amount we pay to third parties for expenses associated with producing and delivering our products. In addition, own-production expenses are also included in the cost of sales. However, these expenses represent only a very small portion of total cost of sales. In 2016, cost of sales was € 9.912 billion, representing an increase of 13% compared to the prior year level of 2016 2015 2014 2013 2012 48.6 48.3 47.6 49.3 47.7 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. GROSS MARGIN IMPROVES 0.3 PERCENTAGE POINTS DESPITE SEVERE CURRENCY HEADWINDS € 8.748 billion. This development reflects the strong growth of our In 2016, despite severe headwinds from negative currency effects, the business. gross profit increased 15% to € 9.379 billion from € 8.168 billion in 2015, representing a gross margin increase of 0.3 percentage points to 48.6% (2015: 48.3%). see Diagram 12 see Diagram 13 This development 11 RETAIL NUMBER OF STORES DEVELOPMENT was due to the positive effects from a significantly better pricing, Total Concept stores Factory outlets Concession corners product and channel mix as well as lower input costs. December 31, 2015 2,722 1,698 872 152 Opened Closed Opened (net) 337 248 89 235 176 59 85 55 30 17 17 – December 31, 2016 2,811 1,757 902 152 ROYALTY AND COMMISSION INCOME DECLINES Royalty and commission income for the company decreased 8% both on a currency-neutral basis and in euro terms to € 109 million (2015: € 119 million). OTHER OPERATING INCOME INCREASES STRONGLY In 2016, other operating income rose 175% to € 266 million from € 96 million in 2015. This development mainly reflects two non-recurring gains during the second quarter of 2016, which were related to the early termination of the Chelsea F.C. contract as well as the divestiture of the Mitchell & Ness business. 93 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Income Statement 3 OTHER OPERATING EXPENSES AS A PERCENTAGE OF SALES DOWN 0.3 PERCENTAGE POINTS for the adidas brand. Expenditure for point-of-sale and marketing investments for the Reebok brand was down 1% to € 265 million Other operating expenses, including depreciation and amortisation, from € 267 million in the prior year. As a percentage of sales, the consist of expenditure for point-of-sale and marketing investments as company’s expenditure for point-of-sale and marketing investments well as operating overhead costs. In 2016, other operating expenses declined 0.8 percentage points to 13.1% from 13.9% in 2015, reflecting were up 13% to € 8.263 billion (2015: € 7.289 billion), reflecting an the company’s strong top-line improvement. see Diagram 17 increase in expenditure for point-of-sale and marketing investments as well as higher operating overhead expenditure. see Diagram 14 As a percentage of sales, other operating expenses decreased 0.3 percentage points to 42.8% from 43.1% in 2015. see Diagram 15 EXPENDITURE FOR POINT-OF-SALE AND MARKETING INVESTMENTS AS A PERCENTAGE OF SALES DECREASES 0.8 PERCENTAGE POINTS OPERATING OVERHEAD EXPENSES AS A PERCENTAGE OF SALES GROW 0.6 PERCENTAGE POINTS Operating overheads include overhead costs related to marketing, logistics, sales and R&D as well as central administration. In 2016, operating overhead expenses grew 16% to € 5.742 billion versus € 4.941 billion in 2015, and, as a percentage of sales, increased 0.6 percentage points to 29.8% (2015: 29.2%). This development Expenditure for point-of-sale and marketing investments p. 218 relates to the company’s initiatives to strengthen the desirability of our brands and products. While expenditure for point-of-sale see Glossary, was primarily a result of an increase in costs related to central administration and sales expenditure, which primarily includes further investments to spur the strategic business plan ‘Creating investments mainly consists of expenses to support the company’s the New’, accruals for bonus payments for employees due to the full-price sell-through development at the point of sale, expenditure company’s strong operational performance as well as restructuring for marketing investments consists of items such as expenses for costs at Reebok and TaylorMade. promotion partnerships, advertising, public relations and other communication activities. In absolute terms, expenditure for point- of-sale and marketing investments amounted to € 2.521 billion in 16 OTHER OPERATING EXPENSES BY AREA € IN MILLIONS 2016 compared to € 2.348 billion in the prior year, which represents an increase of 7%. By brand, expenditure for point-of-sale and marketing investments increased 11% to € 2.102 billion (2015: € 1.897 billion) 14 OTHER OPERATING EXPENSES 1 € IN MILLIONS 2016 2015 2014 2013 2012 Point-of-sale investments Marketing investments Marketing overhead Sales force Logistics Research & development Central administration Total ■ 2016 ■ 2015 8,263 7,289 6,203 6,013 6,150 2016 2015 540 1,981 684 2,237 967 164 462 1,886 554 2,040 859 139 1,690 1,350 8,263 7,289 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 15 OTHER OPERATING EXPENSES 1 IN % OF NET SALES 17 POINT-OF-SALE AND MARKETING INVESTMENTS 1 IN % OF NET SALES 2016 2015 2014 2013 2012 42.8 43.1 42.7 42.3 41.3 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 2016 2015 2014 2013 2012 2.8 2.7 2.6 2.4 2.0 10.3 11.2 10.6 10.2 10.1 Total 13.1 13.9 13.2 12.6 12.1 ■ Point-of-sale investments ■ Marketing investments 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 94 95 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Income Statement EBITDA INCREASES 28% 18 EBITDA 1 € IN MILLIONS Earnings before interest, taxes, depreciation and amortisation as well as impairment losses/reversal of impairment losses on property, plant and equipment and intangible assets (EBITDA) increased 28% to € 1.883 billion in 2016 versus € 1.475 billion in 2015. see Diagram 18 Depreciation and amortisation expense for tangible and intangible assets (excluding impairment losses/reversal of impairment losses) increased 10% to € 373 million in 2016 (2015: € 338 million). This development is mainly due to an increase in property, plant and equipment. In accordance with IFRS, intangible assets with indefinite useful lives (goodwill and trademarks) are tested annually and 2016 2015 2014 2013 2012 1,883 1,475 1,283 1,496 1,445 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. additionally when there are indications of potential impairment. In 19 OPERATING PROFIT 1, 2, 3, 4, 5 € IN MILLIONS this connection, no impairment of intangible assets with unlimited useful lives was incurred in 2016. NO GOODWILL IMPAIRMENT LOSSES IN 2016 No goodwill impairment losses occurred in 2016. In the prior year period, the company recorded goodwill impairment losses in an amount of € 34 million, mainly related to the company’s Russia/CIS and Latin America cash-generating units. 2016 2015 2014 2013 2012 1,491 1,094 961 1,233 1,185 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 2 2015 excluding goodwill impairment of € 34 million. 3 2014 excluding goodwill impairment of € 78 million. 4 2013 excluding goodwill impairment of € 52 million. 5 2012 excluding goodwill impairment of € 265 million. OPERATING MARGIN EXCLUDING GOODWILL IMPAIRMENT INCREASES 1.3 PERCENTAGE POINTS Excluding the goodwill impairment losses in the prior year, operating 20 OPERATING MARGIN 1, 2, 3, 4, 5 IN % profit grew 36% to € 1.491 billion in 2016 versus € 1.094 billion in 2015. see Diagram 19 This represents an operating margin increase of 1.3 percentage points to 7.7% compared to the prior year level of 6.5%. see Diagram 20 This development was due to the gross margin increase, the positive effects from lower other operating expenses as a percentage of sales as well as the non-recurring gain related to the early termination of the Chelsea F.C. contract. 2016 2015 2014 2013 2012 NET FINANCIAL EXPENSES INCREASE STRONGLY Financial income decreased 40% to € 28 million in 2016 (2015: € 46 million), mainly due to the non-recurrence of positive exchange rate effects. Financial expenses were up 11% to € 74 million 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 2 2015 excluding goodwill impairment of € 34 million. 3 2014 excluding goodwill impairment of € 78 million. 4 2013 excluding goodwill impairment of € 52 million. 5 2012 excluding goodwill impairment of € 265 million. compared to € 67 million in 2015, reflecting an increase in interest 21 NET FINANCIAL EXPENSES € IN MILLIONS expenses. As a result, the company recorded net financial expenses of € 46 million. This represents a significant increase compared to net financial expenses of € 21 million in the prior year. see Diagram 21 NET INCOME FROM CONTINUING OPERATIONS EXCLUDING GOODWILL IMPAIRMENT INCREASES 41% Excluding the goodwill impairment losses in the prior year, the 2016 tax rate reached a level of 29.5%, representing a decline of 3.4 percentage points compared to the prior year level of 32.9%. Net income from continuing operations was up 41% to € 1.019 billion versus € 720 million in 2015. Basic EPS from continuing operations increased 43% from € 3.54 in 2015 to € 5.08 in 2016. Diluted EPS from continuing operations was up 41% to € 4.99 in 2016 (2015: € 3.54). 2016 2015 2014 2013 2012 95 7.7 6.5 6.6 8.7 8.0 46 21 48 68 69 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Statement of Financial Position and Statement of Cash Flows The company’s net income attributable to shareholders, which in addition to net income from continuing operations includes the result from discontinued operations, grew 52% to € 1.017 billion STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS (2015: € 668 million). see Diagram 22 Basic EPS from continuing and DIVESTITURE OF ROCKPORT AND MITCHELL & NESS discontinued operations increased 53% to € 5.08 versus € 3.32 in As of July 31, 2015, the Rockport operating segment was divested. In 2015. Diluted EPS from continuing and discontinued operations grew addition, the Mitchell & Ness business was divested as of June 30, 51% to € 4.99 (2015: € 3.32). see Diagram 23 The weighted average 2016. As a result, all relevant assets and liabilities were derecognised number of shares used in the calculation of basic earnings per share from the consolidated statement of financial position as of these was 200,188,276 (2015: 201,536,418). dates. see Note 11, p. 161 NET INCOME FROM CONTINUING OPERATIONS INCLUDING GOODWILL IMPAIRMENT UP 49% 24 STRUCTURE OF STATEMENT OF FINANCIAL POSITION 1 IN % OF TOTAL ASSETS 2016 2015 15,176 13,343 9.9 14.5 24.8 35.4 15.4 10.2 15.4 23.3 37.4 13.7 Including the goodwill impairment losses in the prior year, operating profit grew 41% to € 1.491 billion in 2016 (2015: € 1.059 billion), representing an operating margin increase of 1.5 percentage points Assets (€ in millions) versus the prior year to 7.7% (2015: 6.3%). The company’s tax rate decreased 4.5 percentage points to 29.5% from 34.0% in 2015. Net income from continuing operations was up 49% to € 1.019 billion (2015: € 686 million). Basic EPS from continuing operations increased 50% from € 3.37 in 2015 to € 5.08 in 2016. Diluted EPS from continuing operations was up 48% to € 4.99 in 2016 (2015: € 3.37). Net income attributable to shareholders grew 60% to € 1.017 billion versus € 634 million in 2015. Basic EPS from continuing and discontinued operations increased 62% to € 5.08 (2015: € 3.15) and diluted EPS from continuing and discontinued operations was up 59% to € 4.99 compared to € 3.15 in 2015. Cash and cash equivalents Accounts receivable Inventories Fixed assets Other assets ■ 2016 ■ 2015 1 For absolute figures see adidas AG Consolidated Statement of Financial Position, p. 138. 25 STRUCTURE OF STATEMENT OF FINANCIAL POSITION 1 IN % OF TOTAL LIABILITIES AND EQUITY 22 NET INCOME ATTRIBUTABLE TO SHAREHOLDERS 1, 2, 3, 4, 5 € IN MILLIONS 2016 2015 Liabilities and equity (€ in millions) 15,176 13,343 Short-term borrowings Accounts payable Long-term borrowings Other liabilities Total equity ■ 2016 ■ 2015 4.2 16.4 6.5 30.4 42.5 2.7 15.2 11.0 28.8 42.3 1 For absolute figures see adidas AG Consolidated Statement of Financial Position, p. 139. 2016 2015 2014 2013 2012 1 Includes continuing and discontinued operations. 2 2015 excluding goodwill impairment of € 34 million. 3 2014 excluding goodwill impairment of € 78 million. 4 2013 excluding goodwill impairment of € 52 million. 5 2012 excluding goodwill impairment of € 265 million. 23 DILUTED EARNINGS PER SHARE 1, 2, 3, 4, 5 IN € 2016 2015 2014 2013 2012 1 Includes continuing and discontinued operations. 2 2015 excluding goodwill impairment of € 34 million. 3 2014 excluding goodwill impairment of € 78 million. 4 2013 excluding goodwill impairment of € 52 million. 5 2012 excluding goodwill impairment of € 265 million. 1,017 668 568 839 791 4.99 3.32 2.72 4.01 3.78 96 3 97 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Statement of Financial Position and Statement of Cash Flows ASSETS 26 TOTAL ASSETS € IN MILLIONS At the end of December 2016, total assets were up 14% to € 15.176 billion versus € 13.343 billion in the prior year, as a result of an increase in both current assets as well as non-current assets. see Diagram 26 Total current assets increased 19% to € 8.886 billion at the end of December 2016 compared to € 7.497 billion in 2015. Cash and cash equivalents were up 11% to € 1.510 billion at the end of December 2016 from € 1.365 billion in the prior year, as net cash generated 2016 2015 2014 2013 2012 from operating activities was only partly offset by net cash used in 27 INVENTORIES € IN MILLIONS investing and financing activities. Currency effects had a negative impact on cash and cash equivalents in an amount of € 35 million. Inventories increased 21% to € 3.763 billion at the end of December 2016 from € 3.113 billion in 2015. see Note 09, p. 160 see Diagram 27 On a currency-neutral basis, inventories grew 19%, reflecting higher stock levels to support the company’s top-line momentum. Accounts receivable increased 7% to € 2.200 billion at the end of December 2016 (2015: € 2.049 billion). see Note 07, p. 159 see Diagram 28 On a currency-neutral basis, receivables were also up 7%, and thus well 2016 2015 2014 2013 2012 below the company’s top-line development during the year, reflecting 28 ACCOUNTS RECEIVABLE € IN MILLIONS our strict discipline in trade terms management and concerted collection efforts. Other current financial assets almost doubled to € 729 million at the end of December 2016 from € 367 million in 2015. see Note 08, p. 160 This development was driven by an increase in the fair value of financial instruments as well as an increase in other financial assets, which was mainly related to the early termination of the Chelsea F.C. contract. Other current assets were up 19% to € 580 million at the end of December 2016 (2015: € 489 million), mainly due to an increase in prepaid promotion contracts as well as 2016 2015 2014 2013 2012 higher other prepaid expenses. see Note 10, p. 160 29 ACCOUNTS PAYABLE € IN MILLIONS 2016 2015 2014 2013 2012 Total non-current assets grew 8% to € 6.290 billion at the end of December 2016 from € 5.846 billion in 2015. Fixed assets increased 8% to € 5.367 billion at the end of December 2016 versus € 4.986 billion in 2015. Additions of € 708 million were primarily related to own-retail activities, investments into the company’s logistics and IT infrastructure as well as the further development of the company’s headquarters in Herzogenaurach. Currency translation effects of € 103 million also contributed to the increase in fixed assets. Additions and positive currency translation effects were partly offset by depreciation and amortisation of € 395 million as well as disposals and transfers to assets held for sale in a total amount of € 36 million. Other non-current financial assets decreased 3% to € 96 million from € 99 million at the end of 2015. see Note 16, p. 165 This development was mainly due to the reclassification of fixed promissory notes related to the divestiture of the Rockport business to current financial assets, partly offset by an increase in the fair value of financial instruments and security deposits. 97 15,176 13,343 12,417 11,599 11,651 3,763 3,113 2,526 2,634 2,486 2,200 2,049 1,946 1,809 1,688 2,496 2,024 1,652 1,825 1,790 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Statement of Financial Position and Statement of Cash Flows 3 LIABILITIES AND EQUITY Total non-current liabilities decreased 16% to € 1.957 billion at Total current liabilities increased 26% to € 6.765 billion at the the end of December 2016 from € 2.332 billion in the prior year. end of December 2016 from € 5.364 billion in 2015. Short-term Long-term borrowings were down 33% to € 982 million at the end of borrowings grew 74% to € 636 million at the end of December 2016 December 2016 from € 1.463 billion in the prior year, reflecting the (2015: € 366 million), reflecting the reclassification of the company’s reclassification of the company’s convertible bond outstanding to convertible bond outstanding to short-term borrowings as well as short-term borrowings. see Note 18, p. 166 Other non-current financial an increase in bank loans. These effects were partly offset by first liabilities were up 24% to € 22 million at the end of December 2016 conversions of convertible bonds into adidas AG shares during the from € 18 million in 2015, mainly due to the earn-out components year as well as a decrease in private placements. Accounts payable for Runtastic. see Note 25, p. 173 were up 23% to € 2.496 billion at the end of December 2016 versus € 2.024 billion in 2015. see Diagram 29 On a currency-neutral basis, Shareholders’ equity increased 14% to € 6.472 billion at the end of accounts payable grew 23%, as a result of higher inventories December 2016 versus € 5.666 billion in 2015. see Diagram 30 The compared to the prior year. Other current financial liabilities were net income generated during the last twelve months, the reissuance up 41% to € 201 million from € 143 million in 2015, mainly due to of treasury shares (due to the conversion of convertible bonds) of an increase in the negative fair value of financial instruments. see € 240 million as well as positive currency effects of € 71 million were Note 19, p. 167 Other current provisions increased 26% to € 573 million partly offset by the dividend of € 320 million paid to shareholders for at the end of December 2016 versus € 456 million in 2015, driven by an increase in operational provisions. Current accrued liabilities the 2015 financial year and the repurchase of treasury shares in the amount of € 229 million. The company’s equity ratio increased slightly grew 20% to € 2.023 billion at the end of December 2016 from to 42.6% compared to 42.5% in the prior year. see Note 26, p. 173 € 1.684 billion in 2015, mainly as a result of an increase in accruals for personnel, invoices not yet received and customer discounts. Other current liabilities were up 31% to € 434 million at the end of OPERATING WORKING CAPITAL December 2016 from € 331 million in 2015, mainly due to an increase in customers with credit balances as well as higher miscellaneous Operating working capital € 3.468 billion at the end of December 2016 compared to € 3.138 billion see Glossary, p. 218 increased 11% to taxes payable. see Note 22, p. 168 in 2015. Average operating working capital as a percentage of sales from continuing operations decreased 0.3 percentage points to 20.2% (2015: 20.5%), reflecting the strong top-line development during the last twelve months as well as the company’s continued focus on tight working capital management. see Diagram 31 30 SHAREHOLDERS’ EQUITY € IN MILLIONS 31 AVERAGE OPERATING WORKING CAPITAL 1 IN % OF NET SALES 2016 2015 2014 2013 2012 6,472 5,666 5,624 5,489 5,304 2016 2015 2014 2013 2012 20.2 20.5 22.4 21.3 20.0 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 98 9 9 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Statement of Financial Position and Statement of Cash Flows INVESTMENT ANALYSIS LIQUIDITY ANALYSIS Capital expenditure is defined as the total cash expenditure for the In 2016, net cash generated from operating activities increased to purchase of tangible and intangible assets (excluding acquisitions). Capital expenditure increased 27% to € 651 million in 2016 (2015: € 1.348 billion (2015: € 1.090 billion), driven by an increase in income before taxes which was partly offset by higher operating working € 513 million). Capital expenditure for property, plant and equipment capital requirements as well as an increase in income taxes paid. was up 26% to € 586 million compared to € 464 million in the Net cash used in investing activities increased to € 614 million (2015: prior year. The company invested € 65 million in intangible assets, 591 million). The majority of investing activities in 2016 related to representing a 33% increase compared to the prior year (2015: spending for property, plant and equipment, such as investments in € 49 million). Depreciation and amortisation excluding impairment the furnishing and fitting of our own-retail stores and investments in losses/reversal of impairment losses of tangible and intangible assets IT systems. Net cash used in financing activities totalled € 553 million increased 10% to € 373 million in 2016 (2015: € 338 million). (2015: € 691 million). This development was mainly related to the The majority of the company’s capital expenditure was related to shares. Exchange rate effects negatively impacted the company’s cash our controlled space initiatives. Investments in new or remodelled position by € 35 million. As a result of all these developments, cash own-retail and franchise stores as well as in shop-in-shop and cash equivalents increased by € 145 million to € 1.510 billion at presentations of our brands and products in our customers’ the end of December 2016 compared to € 1.365 billion at the end of dividend paid to our shareholders and the repurchase of adidas AG stores accounted for 55% of total capital expenditure (2015: 45%). Expenditure for IT and logistics represented 10% and 8%, December 2015. see Diagram 34 respectively (2015: 11% and 21%, respectively). In addition, expenditure for administration represented 9% (2015: 6%), while 18% Net borrowings € 103 million, compared to net borrowings of € 460 million in 2015, see Glossary, p. 217 at December 31, 2016 amounted to of total capital expenditure was recorded for other initiatives (2015: representing a decrease of € 357 million compared to the prior year. 16%). see Diagram 32 From a regional perspective, the majority of the This development is mainly a result of first conversions of convertible capital expenditure was recorded at the company’s headquarters bonds into adidas AG shares as well as an increase in cash generated in Herzogenaurach, Germany, accounting for 32% (2015: 45%). In from operating activities partly offset by the utilisation of cash for the addition, capital expenditure in Greater China accounted for 15% purchase of fixed assets, the dividend payment and the continued (2015: 15%) of the total capital expenditure, followed by North repurchase of adidas AG shares. see Treasury, p. 101 The company’s America with 13% (2015: 6%), Western Europe with 12% (2015: 12%), ratio of net borrowings over EBITDA amounted to 0.1 at the end of MEAA with 9% (2015: 7%), Russia/CIS and Latin America with 7% December 2016 (2015: 0.3), which is below the company’s mid-term each (2015: 3% and 6%, respectively), and Japan with 2% (2015: 2%). target corridor of below two times. see Diagram 34 Expenditure for Other Businesses accounted for 2% of total capital expenditure (2015: 4%). see Diagram 33 32 CAPITAL EXPENDITURE BY TYPE IN % OF TOTAL CAPEX 33 CAPITAL EXPENDITURE BY REGION IN % OF TOTAL CAPEX 8 9 10 18 55 55% Controlled space 18% Other 10% IT 9% Administration 8% Logistics 32 2 9 12 13 15 2 77 12% Western Europe 13% North America 15% Greater China 7% Russia/CIS 7% Latin America 2% Japan 9% MEAA 2% Other Businesses 32% HQ/Consolidation 99 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Statement of Financial Position and Statement of Cash Flows 3 Operating cash flow, as described in the Internal Management 34 NET BORROWINGS/EBITDA 1 € IN MILLIONS 2016 2015 2014 2013 2012 0.1 0.3 0.1 (0.2) (0.3) 1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. System, increased 45% to € 901 million in 2016 from € 620 million in 2015, mainly due to a higher operating profit. see Internal Management System, p. 86 OFF-BALANCE SHEET ITEMS The company’s most significant off-balance sheet items are commitments for promotion and advertising as well as operating leases, which are related to own-retail stores, offices, warehouses and equipment. The company has entered into various operating leases as opposed to property acquisitions in order to reduce exposure to property value fluctuations. Minimum future lease payments for operating leases were € 2.501 billion at December 31, 2016, compared to € 2.199 billion at the end of December 2015, representing an increase of 14%. see Note 29, p. 179 At the end of December 2016, financial commitments for promotion and advertising decreased 2% to € 5.643 billion in 2016 (2015: € 5.779 billion). see Note 39, p. 199 35 CHANGE IN CASH AND CASH EQUIVALENTS € IN MILLIONS Cash and cash equivalents at the end of 2015 Net cash generated from operating activities Net cash used in investing activities Net cash used in financing activities Effect of exchange rates Cash and cash equivalents at the end of 2016 1,348 (614) 1,365 (553) (35) 1,510 10 0 1 01 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Treasury TREASURY CORPORATE FINANCING POLICY the organisation. The company’s debt is generally unsecured and may include standard covenants, which are reviewed on a quarterly basis. We maintain good relations with numerous partner banks, thereby In order to be able to meet the company’s payment commitments avoiding a high dependency on any single financial institution. Banking at all times, the major goal of our financing policy is to ensure partners of the company and our subsidiaries are required to have at sufficient liquidity reserves, while at the same time minimising our least a BBB+ long-term investment grade rating by Standard & Poor’s financial expenses. The operating activities of our segments and or an equivalent rating by another leading rating agency. see Risk the resulting cash inflows represent the company’s main source and Opportunity Report, p. 118 Only in exceptional cases are our companies of liquidity. Liquidity is planned on a rolling monthly basis under a authorised to work with banks with a lower rating. To ensure optimal multi-year financial and liquidity plan. This comprises all consolidated allocation of the company’s liquid financial resources, subsidiaries companies. Our in-house bank concept takes advantage of any surplus transfer excess cash to our headquarters in all instances where it is funds of individual companies to cover the financial requirements legally and economically feasible. In this regard, the standardisation of others, thus reducing external financing needs and optimising our net interest expenses. By settling intercompany transactions via intercompany financial accounts, we are able to reduce external bank and consolidation of our global cash management and payment processes, including automated domestic and cross-border cash pools see Glossary, p. 216, is a key priority for our Treasury department. account transactions and thus bank charges. Effective management of our currency exposure and interest rate risks are additional goals and responsibilities of our centrally managed Treasury department. FINANCIAL FLEXIBILITY TREASURY POLICY AND RESPONSIBILITIES The company’s financial flexibility is ensured by the availability of unutilised credit facilities of € 2.024 billion at the end of 2016 (2015: € 1.906 billion), consisting of committed and uncommitted bilateral Our Treasury Policy governs all treasury-related issues, including credit lines at different banks with a remaining time to maturity of up banking policy and approval of bank relationships, financing to five years. At the end of 2016, committed and uncommitted bilateral arrangements and liquidity/asset management, currency and interest credit lines grew 13% to € 2.403 billion compared to € 2.134 billion risk management as well as the management of intercompany cash in the prior year. Committed and uncommitted credit lines represent flows. Responsibilities are arranged in a three-tiered approach: — The Treasury Committee consists of members of the Executive Board and other senior executives who decide on the Treasury approximately 43% and 57% of total short-term bilateral credit lines, respectively (2015: 47% and 53%, respectively). see Diagram 38 In addition, we have an unused multi-currency commercial paper Policy and provide strategic guidance for managing treasury- programme in the amount of € 2.0 billion available (2015: € 2.0 billion). related topics. Major changes to our Treasury Policy are subject We monitor the ongoing need for available credit lines based on the to the prior approval of the Treasury Committee. current level of debt as well as future financing requirements. — The Treasury department is responsible for specific centralised treasury transactions and for the global implementation of our Treasury Policy. 36 TOTAL CREDIT FACILITIES € IN MILLIONS — On a subsidiary level, where applicable and economically reasonable, local managing directors and finance directors are responsible for managing treasury matters in their respective subsidiaries. Controlling functions on a corporate level ensure that the transactions of the individual business units are in compliance with our Treasury Policy. CENTRALISED TREASURY FUNCTION Bilateral credit lines Private placements Eurobonds Convertible bond Total In accordance with our Treasury Policy, all worldwide credit lines are ■ 2016 ■ 2015 directly or indirectly managed by the Treasury department. Portions of those lines are allocated to our subsidiaries and backed by adidas AG guarantees. As a result of this centralised liquidity management, the company is well positioned to allocate resources efficiently throughout 2016 2015 2,403 2,134 – 982 257 138 981 483 3,642 3,736 101 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Treasury 3 37 REMAINING TIME TO MATURITY OF AVAILABLE FACILITIES € IN MILLIONS STANDARD COVENANTS In the case of our committed credit facilities, we have entered into various legal covenants. These legal covenants may include limits on the disposal of fixed assets, the amount of debt secured by liens, cross default provisions and change of control. Our financial arrangements no longer contain any financial covenants. If we failed to meet any covenant and were unable to obtain a waiver from a majority of partner banks, borrowings would become due and payable immediately. As at December 31, 2016, we were in full compliance with all of our covenants. We are fully confident we will continue to be compliant with these covenants going forward. We believe that cash generated < 1 year 1 to 3 years 3 to 5 years > 5 years Total from operating activities, together with access to external sources ■ 2016 ■ 2015 of funds, will be sufficient to meet our future operating and capital needs. see Subsequent Events and Outlook, p. 115 38 BILATERAL CREDIT LINES € IN MILLIONS EUROBONDS WITH AN OVERALL VOLUME OF € 1.0 BILLION OUTSTANDING In 2014, we issued two Eurobonds with an overall volume of € 1.0 billion, thereby taking the opportunity of a low interest rate environment in the Eurobond market to further strengthen the company’s financing mix while increasing the overall duration. The Committed Uncommitted Total seven-year Eurobond of € 600 million matures on October 8, 2021 and ■ 2016 ■ 2015 has a coupon of 1.25%. The twelve-year Eurobond of € 400 million matures on October 8, 2026 and has a coupon of 2.25%. see Table 39 see Note 18, p. 166 2016 2015 2,160 2,272 150 945 387 483 – 981 3,642 3,736 2016 2015 1,041 1,362 1,008 1,126 2,403 2,134 39 ISSUED BONDS AT A GLANCE € IN MILLIONS Convertible bond Eurobond Eurobond Volume Coupon Maturity EUR 500 EUR 600 EUR 400 fixed fixed fixed 2019 2021 2026 GROSS BORROWINGS DECREASE Gross borrowings decreased 12% to € 1.618 billion at the end of 2016 from € 1.830 billion in the prior year. see Diagram 40 This development was mainly due to the conversion of convertible bonds in the amount of € 240 million and the repayment of a US private placement of US $ 150 million, partly offset by an increase in short-term borrowings. Bank borrowings amounted to € 379 million compared to € 229 million in the prior year. At the end of 2016 there was no commercial paper outstanding (2015: no commercial paper outstanding). Convertible bonds outstanding decreased 47% to € 257 million from € 483 million in the prior year. see Table 41 This was mainly a result of first conversions into adidas AG shares that occurred in the course of 2016, partly offset by an increase in the convertible bond’s debt component. see Our Share, p. 41 The conversions were done on a non-cash basis using treasury shares. At issuance in 2012, the convertible bond was split – after deducting the issuance costs – into the equity component amounting to € 55 million and the debt component amounting to € 441 million. The debt component is accrued to its nominal value amounting to € 260 million until 2017 by use of the effective interest method. The total amount of bonds outstanding at the end of 2016 was € 1.239 billion (2015: € 1.463 billion). 102 1 03 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Treasury 40 REMAINING TIME TO MATURITY OF GROSS BORROWINGS € IN MILLIONS < 1 year 1 to 3 years 3 to 5 years > 5 years Total ■ 2016 ■ 2015 EURO DOMINATES CURRENCY MIX The vast majority of our gross borrowings are denominated in euros and US dollars. At the end of 2016, gross borrowings denominated in euros accounted for 77% of total gross borrowings (2015: 80%). The share of gross borrowings held in US dollars decreased to 10% (2015: 15%). see Diagram 42 STABLE DEBT MATURITY PROFILE 2016 2015 636 – 595 387 366 483 – 981 1,618 1,830 Over the course of 2016, the company’s financing maturity profile remained stable, excluding the anticipated conversion of convertible bonds. In 2017, assuming unchanged maturities, debt instruments of € 636 million will mature of which € 257 million consist of the anticipated conversions. This compares to € 366 million which 41 FINANCING STRUCTURE € IN MILLIONS matured during the course of 2016. see Diagram 40 Cash and short-term financial assets 1,515 1,370 2016 2015 Bank borrowings Private placements Eurobonds Convertible bond Gross total borrowings Net borrowings 379 – 982 257 229 138 981 483 1,618 1,830 103 460 42 CURRENCY SPLIT OF GROSS BORROWINGS € IN MILLIONS NET BORROWINGS POSITION OF € 103 MILLION Net borrowings at December 31, 2016 amounted to € 103 million, compared to net borrowings of € 460 million in 2015, representing a decrease of € 357 million versus the prior year. see Diagram 43 This development was mainly a result of first conversions of convertible bonds into adidas AG shares as well as an increase in cash generated from operating activities partly offset by the utilisation of cash for the purchase of fixed assets, the dividend payment and the continued repurchase of adidas AG shares. EUR USD All others Total ■ 2016 ■ 2015 43 NET CASH/(NET BORROWINGS) € IN MILLIONS 2016 2015 2014 2013 2012 2016 2015 1,242 1,463 157 219 282 85 1,618 1,830 (103) (460) (185) 295 448 103 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Financial Statements and Management Report of adidas AG 3 INTEREST RATE DECREASES The weighted average interest rate on the company’s gross see Diagram 44 borrowings decreased to 2.3% in 2016 (2015: 2.4%). FINANCIAL STATEMENTS AND MANAGEMENT REPORT OF ADIDAS AG This development was mainly due to the repayment of a US private adidas AG is the parent company of the adidas Group. It includes placement of US $ 150 million, which carried a higher coupon. operating business functions, primarily for the German market, as Fixed-rate financing represented 77% of total gross borrowings at well as corporate headquarter functions such as Marketing, Treasury, the end of 2016 (2015: 87%). Variable-rate financing accounted for Taxes, Legal and Finance. adidas AG also administers the company’s 23% of total gross borrowings at the end of the year (2015: 13%). shareholdings. EFFECTIVE CURRENCY MANAGEMENT A KEY PRIORITY As a globally operating company, adidas is exposed to currency OPERATING ACTIVITIES AND CAPITAL STRUCTURE OF ADIDAS AG risks. Therefore, effective currency management is a key focus of our The majority of the operating business of adidas AG consists of the Treasury department, with the aim of reducing the impact of currency sale of merchandise to retailers and own-retail activities. fluctuations on non-euro-denominated net future cash flows. In this regard, hedging US dollars is a central part of our programme. This In addition to its own trading activities, the results of adidas AG are is a direct result of our Asian-dominated sourcing, which is largely see Global Operations, p. 62 In 2016, Treasury denominated in US dollars. managed a net deficit of around US $ 6.5 billion related to operational significantly influenced by its holding function for the company as a whole. This is reflected primarily in currency effects, transfer of costs for services provided, interest result and income from investments activities (2015: US $ 6.2 billion). Thereof, around US $ 3.5 billion in related companies. was against the euro (2015: US $ 3.6 billion). As governed by our Treasury Policy, we have established a hedging system on a rolling The opportunities and risks as well as the future development of basis up to 24 months in advance, under which the vast majority of adidas AG largely reflect those of the company as a whole. see the anticipated seasonal hedging volume is secured approximately Subsequent Events and Outlook, p. 115 see Risk and Opportunity Report, p. 118 six months prior to the start of a season. As a result, we had largely covered our anticipated hedging needs for 2017 as of year-end 2016 The asset and capital structure of adidas AG is significantly impacted and have already started hedging our exposure for 2018. In 2017, we by its holding and financing function for the company. For example, expect a negative effect from less favourable conversion rates, mainly 53% of total assets as at December 31, 2016 related to financial as a result of the continued strengthening of the US dollar. The use assets (2015: 56%), which primarily consist of shares in affiliated or combination of different hedging instruments, such as forward companies. Intercompany accounts, through which transactions exchange contracts, currency options and swaps, protects us against between affiliated companies are settled, represent another 35% of unfavourable currency movements. see Risk and Opportunity Report, p. 118 total assets (2015: 27%) and 45% of total equity and liabilities as at December 31, 2016 (2015: 44%). 44 INTEREST RATE DEVELOPMENT 1 IN % 2016 2015 2014 2013 2012 1 Weighted average interest rate of gross borrowings. PREPARATION OF ACCOUNTS 2.3 2.4 3.1 3.8 4.4 Unlike the consolidated financial statements, which are in conformity with the International Financial Reporting Standards (IFRS), as adopted by the European Union as at December 31, 2016, the following financial statements of adidas AG have been prepared in accordance with the rules set out in the German Commercial Code (Handelsgesetzbuch – HGB). 10 4 1 05 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Financial Statements and Management Report of adidas AG In the financial statements as at December 31, 2016, the 46 ADIDAS AG NET SALES € IN MILLIONS requirements of the German Accounting Directive Implementation Act (Bilanzrichtlinie-Umsetzungsgesetz – BilRUG), as adopted by the Bundestag on June 18, 2015, have been implemented for the 2016 2015 New Version 2015 Old Version first time. In particular, the new definition of revenues pursuant to Royalty and commission income 1,580 1,373 1,371 § 277 section 1 HGB (new version) and the related adjustment of cost of materials have impacted the financial statements. This resulted in reclassifications from other operating income to sales and from other operating expenses to cost of materials. Detailed explanations as well as the presentation of the effects from the restatement are contained in the financial statements of adidas AG in the section ‘Notes to the annual financial statements of adidas AG for the year adidas Germany Foreign subsidiaries Y-3 Other revenues Total 939 137 89 544 821 137 63 439 821 139 63 22 3,289 2,833 2,416 ended December 31, 2016’. http://adidas-group.com/s/financial-report-2016 NET SALES INCREASE 16% Furthermore, for the sake of better comparability, adidas AG has opted to present a three-column income statement. This contains Sales of adidas AG comprise external revenues generated by adidas Germany with products of the adidas and Reebok brands, the prior year income statement pursuant to § 277 section 1 HGB, external revenues from Y-3 products as well as revenues from the prior year income statement prepared in accordance with the provisions of the new version of § 277 section 1 HGB and the income foreign subsidiaries. Reported revenues also include royalty and commission income, mainly from affiliated companies, and other statement for the year under review. revenues. In 2016, adidas AG net sales grew 16% to € 3.289 billion (2015: € 2.833 billion). This growth was mainly due to an increase in All references to prior year figures hereinafter refer to the prior year royalty income from affiliated companies as well as higher sales at figures after application of the new version of § 277 section 1 HGB. adidas Germany. see Table 46 INCOME STATEMENT OTHER OPERATING INCOME DOWN 59% 45 STATEMENT OF INCOME IN ACCORDANCE WITH € 439 million (2015: € 1.060 billion). This was primarily attributable In 2016, other operating income of adidas AG decreased 59% to HGB (CONDENSED) € IN MILLIONS Net sales Total output Other operating income Cost of materials Personnel expenses Depreciation and amortisation 2016 2015 New Version 2015 Old Version 3,289 3,289 439 (1,127) (588) (100) 2,833 2,833 1,060 (947) (488) (96) 2,416 2,416 1,478 (663) (488) (96) to a decline in income from currency translation as well as in income from the disposal of fixed assets. OTHER OPERATING EXPENSES DECLINE 12% Other operating expenses of adidas AG decreased 12% in 2016 to € 1.803 billion (2015: € 2.039 billion). see Table 45 This was largely due to a decline in losses from currency translation, which was partly offset by an increase in intercompany cost transfers as well as legal Other operating expenses (1,803) (2,039) (2,324) and consultancy expenses. Operating profit Financial result Taxes Net income Retained earnings brought forward Allocation to other revenue reserves Utilisation for the repurchase of treasury shares Retained earnings 110 600 (93) 617 322 (300) (11) 629 323 394 (78) 639 4 0 0 323 394 (78) 639 4 0 0 DEPRECIATION AND AMORTISATION INCREASES 4% Depreciation and amortisation for adidas AG rose 4% to € 100 million in 2016 (2015: € 96 million), mainly as a result of an increase in depreciation and amortisation of operating and office equipment. 643 643 OPERATING PROFIT DECLINES 66% Operating profit decreased 66% to € 110 million (2015: € 323 million), primarily due to the decline in other operating income. see Table 45 105 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Financial Statements and Management Report of adidas AG 3 FINANCIAL RESULT IMPROVES STRONGLY SHAREHOLDERS’ EQUITY UP 15% The financial result of adidas AG improved 52% to € 600 million in Shareholders’ equity rose 15% to € 2.395 billion at the end of 2016 (2015: € 394 million). The increase was attributable to higher December 2016 (2015: € 2.087 billion). see Table 47 The equity ratio income from investments. rose slightly to 29.9% (2015: 27.8%). NET INCOME DECLINES SLIGHTLY PROVISIONS INCREASE 18% Net income, after taxes of € 93 million (2015: € 78 million), amounted Provisions were up 18% to € 525 million at the end of 2016 (2015: to € 617 million in 2016 and was thus 3% below the prior year level € 446 million). see Table 47 The increase primarily resulted from (2015: € 639 million). see Table 45 higher pension provisions and other provisions for personnel. BALANCE SHEET LIABILITIES AND OTHER ITEMS UP 2% 47 BALANCE SHEET IN ACCORDANCE WITH HGB (CONDENSED) € IN MILLIONS At the end of December 2016, liabilities and other items increased 2% to € 5.083 billion compared to the prior year level of € 4.985 billion. see Table 47 This increase was mainly a result of higher payables to Dec. 31, 2016 Dec. 31, 2015 affiliated companies. Assets Intangible assets Property, plant and equipment Financial assets Fixed assets Inventories Receivables and other assets Cash and cash equivalents, securities Current assets Prepaid expenses Active difference from asset allocation 112 493 4,205 4,810 50 2,968 28 3,046 143 4 118 449 4,216 4,783 48 2,157 447 2,652 82 1 Total assets 8,003 7,518 Equity and liabilities Shareholders' equity Provisions Liabilities and other items Total equity and liabilities 2,395 525 5,083 8,003 2,087 446 4,985 7,518 CASH OUTFLOW FROM FINANCING ACTIVITIES REFLECTS CHANGE IN CASH AND CASH EQUIVALENTS adidas AG generated a positive cash flow from operating activities of € 263 million (2015: € 1.076 billion). The change versus the prior year was mainly a result of higher receivables from affiliated companies. Net cash outflow from investment activities was € 133 million (2015: € 830 million). This was primarily attributable to capital expenditure for tangible fixed assets of € 143 million, partly offset by disposals from financial assets of € 13 million. Financing activities resulted in a net cash outflow of € 549 million (2015: € 733 million). The net cash outflow from financing activities mainly relates to the dividend payment in an amount of € 320 million and the share buyback programme in an amount of € 229 million. As a result of all these developments, cash and cash equivalents of adidas AG decreased to € 28 million compared to € 447 million at the end of the prior year. adidas AG has bilateral credit lines of € 1.7 billion. In addition, the company has a multi-currency commercial paper programme in an amount of € 2.0 billion. see Treasury, p. 101 TOTAL ASSETS ABOVE PRIOR YEAR At the end of December 2016, total assets rose 6% versus the prior adidas AG is able to meet its financial commitments at all times. year to € 8.003 billion (2015: € 7.518 billion), as an increase in receivables and other assets was only partly offset by a decrease in cash and cash equivalents. see Table 47 10 6 1 07 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Disclosures pursuant to § 315 Section 4 and § 289 Section 4 of the German Commercial Code DISCLOSURES PURSUANT TO § 315 SECTION 4 AND § 289 SECTION 4 OF THE GERMAN COMMERCIAL CODE COMPOSITION OF SUBSCRIBED CAPITAL The shares that were issued in the context of the Stock Purchase Plan to employees of adidas AG and employees of subsidiaries participating in the Stock Purchase Plan are not subject to any lock-up periods, unless such a waiting period is stipulated in locally applicable regulations. Employees who hold the shares which they purchased The nominal capital of adidas AG amounts to € 209,216,186 (as at themselves (investment shares) for at least one year will subsequently December 31, 2016) and is divided into the same number of registered receive one share for every six investment shares without having to no-par-value shares with a pro-rata amount in the nominal capital pay for such share (so-called matching share) if they are still adidas of € 1 each (‘shares’). Pursuant to § 4 section 10 of the Articles of employees at that point in time. If employees transfer, pledge or Association, shareholders’ claims to the issuance of individual share hypothecate investment shares in any way during the one-year vesting certificates are, in principle, excluded. Each share grants one vote period, the right to receive matching shares shall cease. at the Annual General Meeting. All shares carry the same rights and obligations. As at December 31, 2016, adidas AG held 7,726,876 treasury shares, which however do not confer any rights to the company in accordance with § 71b German Stock Corporation Act (Aktiengesetz – AktG). see Note 26, p. 173 In the USA, we have issued American Depositary Receipts (ADRs). ADRs are deposit certificates of non-US shares that are traded instead of the original shares on US stock exchanges. Two ADRs equal one share. see Our Share, p. 41 RESTRICTIONS ON VOTING RIGHTS OR TRANSFER OF SHARES We are not aware of any contractual agreements with adidas AG or other agreements restricting voting rights or the transfer of shares. Based on the Code of Conduct in conjunction with an internal SHAREHOLDINGS IN SHARE CAPITAL EXCEEDING 10% OF VOTING RIGHTS We have not been notified of, and are not aware of, any direct or indirect shareholdings in the share capital of adidas AG exceeding 10% of the voting rights. SHARES WITH SPECIAL RIGHTS There are no shares bearing special rights. In particular, there are no shares with rights conferring powers of control. VOTING RIGHT CONTROL IF EMPLOYEES HAVE A SHARE IN THE CAPITAL Like all other shareholders, employees who hold adidas AG shares guideline of adidas AG and based on Article 19 section 11 of the exercise their control rights directly in accordance with statutory Market Abuse Regulation, however, particular lock-up periods do provisions and the Articles of Association. The shares which exist for members of the Executive Board with regard to the purchase employees acquire in the context of the Stock Purchase Plan are held and sale of adidas AG shares. These lock-up periods are connected, in trust centrally by a service provider on behalf of the participating in particular, with the (time of) publication of quarterly and full year employees. As long as the shares are held in trust, the trustee shall results. Lock-up periods stipulated in the Code of Conduct and the take reasonable measures to allow participating employees to directly internal guideline also exist for employees who have access to yet or indirectly exercise their voting rights in respect of the shares held unpublished financial results. in trust. In addition, restrictions of voting rights may exist pursuant, inter alia, to § 136 AktG or for treasury shares pursuant to § 71b AktG as well as due to capital market regulations, in particular pursuant to §§ 21 et seq. EXECUTIVE BOARD APPOINTMENT AND DISMISSAL Pursuant to § 6 of the Articles of Association and § 84 AktG, the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). Supervisory Board is responsible for determining the exact number of members of the Executive Board, for their appointment and dismissal as well as for the appointment of the Chief Executive Officer (CEO). The adidas AG Executive Board, which, as a basic principle, comprises at least two members, currently consists of the CEO as well as four further members. Executive Board members may be appointed for a 107 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Disclosures pursuant to § 315 Section 4 and § 289 Section 4 of the German Commercial Code 3 maximum period of five years. Such appointments may be renewed and the terms of office may be extended, provided that no term exceeds five years. see Executive Board, p. 16 AUTHORISATIONS OF THE EXECUTIVE BOARD The authorisations of the Executive Board are regulated by §§ 76 et seq. AktG in conjunction with §§ 7 and 8 of the Articles of The Supervisory Board may revoke the appointment of an individual managing the company and represents the company judicially and Association. The Executive Board is responsible, in particular, for as member of the Executive Board or CEO for good cause, such as extra-judicially. gross negligence of duties or a vote of no confidence by the Annual General Meeting. As adidas AG is subject to the regulations of the German Co-Determination Act (Mitbestimmungsgesetz – MitbestG), the AUTHORISATION OF THE EXECUTIVE BOARD TO ISSUE SHARES The authorisation of the Executive Board to issue shares is regulated appointment of Executive Board members and also their dismissal by § 4 of the Articles of Association and by statutory provisions: requires a majority of at least two thirds of the Supervisory Board members (§ 31 MitbestG). If such a majority is not established in the first vote by the Supervisory Board, the Mediation Committee has to present a proposal which, however, does not exclude other proposals. Authorised Capital — Until June 2, 2018, the Executive Board is authorised to increase the nominal capital, subject to Supervisory Board approval, by The appointment or dismissal is then made in a second vote with a simple majority of the votes cast by the Supervisory Board members. issuing new shares against contributions in kind once or several times by no more than € 25,000,000 altogether (Authorised Should the required majority not be established in this case either, a Capital 2015). third vote, again requiring a simple majority, must be held in which, however, the Chairman of the Supervisory Board has two votes. — Until June 30, 2018, the Executive Board is authorised to increase the nominal capital, subject to Supervisory Board approval, by issuing new shares against contributions in cash once or several If the Executive Board does not have the required number of times by no more than € 50,000,000 altogether (Authorised members, the competent court shall, in urgent cases, make the Capital 2013/I). necessary appointment upon application by any party involved (§ 85 section 1 AktG). — Until June 30, 2018, the Executive Board is authorised to increase the nominal capital, subject to Supervisory Board approval, by issuing new shares against contributions in cash once or several times by no more than € 20,000,000 altogether (Authorised AMENDMENTS TO THE ARTICLES OF ASSOCIATION Pursuant to § 179 section 1 sentence 1 AktG, the Articles of Association of adidas AG can, in principle, only be amended by a Capital 2013/III). — Until June 14, 2021, the Executive Board is authorised to increase the nominal capital, subject to Supervisory Board approval, by resolution passed by the Annual General Meeting. Pursuant to issuing new shares against contributions in cash once or several § 21 section 3 of the Articles of Association in conjunction with times by no more than € 4,000,000 altogether (Authorised Capital § 179 section 2 sentence 2 AktG, the Annual General Meeting of 2016). adidas AG principally resolves upon amendments to the Articles of Association with a simple majority of the votes cast and with a Subject to Supervisory Board approval, shareholders’ subscription simple majority of the nominal capital represented when passing rights are partially excluded or may be excluded in certain cases for the resolution. However, if mandatory legal provisions stipulate a the above-mentioned, cumulative authorisations. see Note 26, p. 173 larger majority of voting rights or capital, this is applicable. When it comes to amendments solely relating to the wording, the Supervisory Board is authorised to make these modifications in accordance with § 179 section 1 sentence 2 AktG in conjunction with § 10 section 1 Contingent Capital — The nominal capital of the company is conditionally increased by up to € 36,000,000 (Contingent Capital 2010). The Contingent sentence 2 of the Articles of Association. Capital serves the purpose of granting holders or creditors of bonds that were issued up to May 5, 2015 based on the resolution of the Annual General Meeting on May 6, 2010 subscription or conversion rights relating to no more than a total of 36,000,000 shares in compliance with the corresponding conditions of the bonds. 10 8 1 09 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Disclosures pursuant to § 315 Section 4 and § 289 Section 4 of the German Commercial Code On March 14, 2012, following the approval of the Supervisory Board, the Executive Board resolved to make partial use of the authorisation granted by the Annual General Meeting on May 6, 2010 and issued a convertible bond, excluding shareholders’ subscription rights, on March 21, 2012. However, the shares will only be issued insofar as bondholders make use of their conversion rights. The total number of shares to be issued to bondholders in case of full conversion amounted to up to 6,097,243 shares as at December 31, 2015. Due to The Executive Board has so far not utilised the authorisation to issue bonds with warrants and/or convertible bonds granted by the Annual General Meeting on May 8, 2014. AUTHORISATION OF THE EXECUTIVE BOARD TO REPURCHASE SHARES The authorisations of the Executive Board to repurchase adidas AG the fact that conversion rights were exercised, which were all serviced shares arise from §§ 71 et seq. AktG and, as at the balance sheet with treasury shares of the company, the remaining number of shares date, from the authorisation granted by the Annual General Meeting to be issued to bondholders in case of full conversion amounted to on May 12, 2016. up to 3,182,525 shares as at December 31, 2016. Moreover, the authorisation to issue bonds with warrants and/or — Until May 11, 2021, the Executive Board is authorised to repur- chase adidas AG shares in an amount totalling up to 10% of the convertible bonds granted on May 6, 2010 was cancelled by resolution nominal capital at the date of the resolution (or, as the case may of the Annual General Meeting on May 8, 2014. be, a lower amount of nominal capital at the date of utilisation — Furthermore, the nominal capital of the company is conditionally increased by up to € 12,500,000 (Contingent Capital 2014). The of the authorisation) for any lawful purpose and within the legal framework. The authorisation may be used by the company but also by its subordinated Group companies or by third parties on Contingent Capital serves the purpose of granting holders or account of the company or its subordinated Group companies or creditors of bonds that were issued based on the resolution third parties assigned by the company or one of its subordinated of the Annual General Meeting on May 8, 2014 subscription or Group companies. conversion rights relating to no more than a total of 12,500,000 shares in compliance with the corresponding conditions of the The repurchase can be carried out via the stock exchange, bonds. Based on the authorisation granted by the Annual General through a public invitation to submit sale offers, through a Meeting on May 8, 2014, the Executive Board is authorised, public repurchase offer, or through granting tender rights to subject to Supervisory Board approval, to issue bonds with shareholders. Furthermore, the authorisation sets out the lowest warrants and/or convertible bonds in an aggregate nominal value and highest nominal value that may be granted in each case. of up to € 1,000,000,000 with or without a limited term, against contributions in cash once or several times until May 7, 2019, and The purposes for which adidas AG shares repurchased based to guarantee bonds issued by subordinated Group companies. on this authorisation may be used are set out in the resolution The Executive Board is also authorised, subject to Supervisory on Item 9 of the Agenda for the Annual General Meeting held on Board approval, to exclude shareholders’ subscription rights for May 12, 2016. The shares may in particular be used as follows: fractional amounts and to exclude shareholders’ subscription rights insofar as this is necessary for granting subscription rights to which holders or creditors of previously issued bonds — They may be sold via the stock exchange, through a public share purchase offer made to all shareholders or sold are entitled. Furthermore, the Executive Board is authorised, otherwise against cash (limited to 10% of the nominal capital subject to Supervisory Board approval, to also exclude share- taking into account certain offsets) at a price not signifi- holders’ subscription rights if the issue price of the bonds is not cantly below the stock market price of shares with the same significantly below the hypothetical market value of these bonds features. and the number of shares to be issued does not exceed 10% of the nominal capital. The issuance of new shares or the use of — They may be offered and assigned as consideration for the direct or indirect acquisition of companies, parts of treasury shares must be taken into account when calculating the companies, participations in companies or other economic limit of 10% in certain other specific cases. assets or within the scope of company mergers. — They may be offered and sold as consideration for the acqui- sition of industrial property rights or intangible property 10 9 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance – Disclosures pursuant to § 315 Section 4 and § 289 Section 4 of the German Commercial Code GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Business Performance by Segment 3 3 rights or for the acquisition of licences relating to such rights, are limited to a maximum value of 5% of the nominal capital also through subordinated Group companies. existing at the date on which the resolution was adopted by the — They may be used for purposes of meeting the subscription or conversion rights or obligations or the company’s right to Annual General Meeting (or, as the case may be, a lower amount of nominal capital at the date of utilisation of the authorisation). delivery of shares arising from bonds with warrants and/or The term of the options may not exceed 18 months and must convertible bonds issued by the company or its subordinated furthermore be chosen in such a way that the shares are acquired Group companies. — In connection with employee share purchase plans, up to 4,000,000 shares may be issued in favour of (current or former) employees of the company and its affiliated companies as upon the exercise of the options no later than May 11, 2021. The authorisation furthermore sets out the lowest and highest nominal value that may be granted in each case. well as in favour of (current and former) management bodies For excluding subscription rights as well as for the use and of the company’s affiliated companies. cancellation of shares purchased using equity derivatives, the general — They may be cancelled without the cancellation, or the execution thereof, requiring an additional resolution of the Annual General Meeting. provisions adopted by the Annual General Meeting (set out above) are applicable accordingly. Furthermore, the shares may be assigned to members of the Executive Board as compensation by way of a stock bonus subject CHANGE OF CONTROL/COMPENSATION AGREEMENTS Material agreements entered into by adidas AG containing a change- to the provision that resale by the Executive Board members shall of-control clause relate to financing agreements. In the case of a only be permitted following a retention period of at least three years change of control, these agreements, in accordance with common from the date of assignment. Responsibility in this case lies with the practice, entitle the creditor to termination and early calling-in of Supervisory Board. any outstanding amounts. In case of utilisation of shares for the above-mentioned purposes, No compensation agreements exist between adidas AG and except for the cancellation of shares, shareholders’ subscription members of the Executive Board or employees relating to the event rights are excluded. of a takeover bid. The Supervisory Board may determine that transactions based on this authorisation may only be carried out subject to the approval of the Supervisory Board or one of its committees. In the year under review, the Executive Board partly utilised the authorisation to repurchase treasury shares. In the period from November 8, 2016 up to and including December 31, 2016, and moreover until January 31, 2017, adidas AG bought back 2,128,200 treasury shares via the stock exchange. see Note 26, p. 173 — In the scope of the authorisation resolved by the Annual General Meeting on May 12, 2016, the Executive Board is furthermore authorised to conduct the share buyback also by using equity derivatives which are arranged with a credit institution or financial services institution in close conformity with market conditions. adidas AG may acquire call options issued for physical delivery and/or sell put options or use a combination of call and put options see Glossary, p. 216 or other equity derivatives if the option conditions ensure that these shares are only delivered if they were purchased in compliance with the equality principle. All share purchases using the aforementioned equity derivatives 11 0 1 11 1 11 3 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance by Segment BUSINESS PERFORMANCE BY SEGMENT adidas has divided its operating activities into the following operating segments: Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan, Middle East, South Korea, Southeast Asia/Pacific, TaylorMade-adidas Golf, CCM Hockey, Runtastic and Other centrally managed businesses. While the business segments Western Europe, North America, Greater China, Russia/CIS, Latin America and Japan are reported separately, the markets Middle East, South Korea and Southeast Asia/Pacific are combined to the segment MEAA (’Middle East, Africa and other Asian markets’). Each market comprises all business activities in the wholesale and retail distribution channels of the adidas and Reebok brands. The segmental results of TaylorMade-adidas Golf, CCM Hockey, Runtastic and Other centrally managed businesses, including brands such as Y-3 and Five Ten, are aggregated under Other Businesses. Segmental operating expenses primarily relate to expenditure for point-of-sale and marketing investments as well as expenditure for sales force, logistics and administration. 01 NET SALES BY SEGMENT € IN MILLIONS adidas Originals and adidas neo. In addition, high-single-digit sales 2016 2015 Change Change (currency- neutral) 5,291 3,412 3,010 679 1,731 1,007 2,685 1,475 4,539 2,753 2,469 739 1,783 776 2,388 1,467 19,291 16,915 17% 24% 22% (8%) (3%) 30% 12% 1% 14% 20% 24% 28% 3% 16% 16% 16% 1% 18% increases in the football and training categories also contributed to this development. Reebok brand revenues in Western Europe increased 18% on a currency-neutral basis, mainly due to double- digit sales growth in the training category as well as in Classics. From a country perspective, the main contributors to the increase in the combined revenues of the adidas and Reebok brands were the UK, Germany, Italy, France, Poland and Spain, where revenues grew at double-digit rates each. see Table 02 Gross margin in Western Europe decreased 3.1 percentage points to 44.4% from 47.5% in 2015. The significant positive effects from a more favourable pricing, product and channel mix as well as lower Western Europe North America Greater China Russia/CIS Latin America Japan MEAA Other Businesses 1 Total 1 Figures reflect continuing operations as a result of the divestiture of the Rockport business. input costs were more than offset by the severe negative impact from WESTERN EUROPE unfavourable currency developments. Operating expenses were up 12% to € 1.398 billion versus € 1.248 billion in 2015. This development mainly reflects an increase in expenditure for point-of-sale and In 2016, sales in Western Europe increased 20% on a currency- marketing investments as well as higher logistic costs. Operating neutral basis. In euro terms, sales in Western Europe grew 17% to expenses as a percentage of sales were down 1.1 percentage points € 5.291 billion from € 4.539 billion in 2015. adidas brand revenues to 26.4% (2015: 27.5%). The operating margin declined 2.1 percentage grew 20% on a currency-neutral basis, driven by double-digit points to 18.0% (2015: 20.0%), as the positive effect of lower operating sales growth in the running and outdoor categories as well as at expenses as a percentage of sales was more than offset by the gross 02 WESTERN EUROPE AT A GLANCE € IN MILLIONS 2016 2015 Change Change (currency- neutral) Net sales adidas brand Reebok brand Gross profit Gross margin Segmental operating profit 5,291 4,889 402 2,350 44.4% 951 4,539 4,193 347 2,157 47.5% 909 17% 17% 16% 9% (3.1pp) 5% Segmental operating margin 18.0% 20.0% (2.1pp) 20% 20% 18% – – – – margin decrease. Operating profit in Western Europe increased 5% to € 951 million versus € 909 million in the prior year. see Table 02 NORTH AMERICA North America revenues increased 24% both on a currency-neutral basis and in euro terms to € 3.412 billion from € 2.753 billion in 2015. adidas brand sales increased 30% on a currency-neutral basis, driven by double-digit sales growth in the running, training and US sports categories as well as at adidas Originals and adidas neo. In addition, mid-single-digit increases in the football category also contributed to this development. Revenues of the Reebok brand in North America decreased 1% on a currency-neutral basis as double-digit sales growth in Classics as well as low-single-digit increases in the running category were more than offset by sales declines in other categories, including the training category. see Table 03 11 1 11 1 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance by Segment 3 3 03 NORTH AMERICA AT A GLANCE € IN MILLIONS Gross margin in Greater China increased 0.4 percentage points to Net sales adidas brand Reebok brand Gross profit Gross margin Segmental operating profit Segmental operating margin 2016 2015 Change Change (currency- neutral) 3,412 2,897 514 1,286 37.7% 214 6.3% 2,753 2,231 523 1,008 36.6% 69 2.5% 24% 30% (2%) 28% 1.1pp 209% 3.8pp 24% 30% (1%) – – – – 57.5% (2015: 57.1%), reflecting lower input costs as well as a more favourable channel, product and pricing mix, partly offset by negative currency effects. Operating expenses were up 23% to € 671 million versus € 545 million in 2015. This development reflects a significant increase in sales expenditure as well as higher expenditure for point-of-sale and marketing investments. Operating expenses as a percentage of sales increased 0.2 percentage points to 22.3% (2015: 22.1%). As a result of the gross margin improvement, which was partly offset by the negative effect of higher operating expenses as a percentage of sales, the operating margin grew 0.1 percentage points to 35.2% versus 35.1% in 2015. Operating profit in Greater China increased 22% to € 1.060 billion from € 866 million in 2015. Gross margin in North America increased 1.1 percentage points to see Table 04 37.7% (2015: 36.6%) driven by a more favourable product and pricing mix as well as lower input costs, partly offset by negative currency effects. Operating expenses were up 15% to € 1.124 billion versus € 977 million in 2015, reflecting higher sales expenditure as well as RUSSIA/CIS Sales in Russia/CIS increased 3% on a currency-neutral basis. In higher expenditure for point-of-sale investments. Operating expenses euro terms, sales in Russia/CIS decreased 8% to € 679 million as a percentage of sales decreased 2.5 percentage points to 32.9% from € 739 million in 2015. adidas brand revenues were up 1% on a (2015: 35.5%). As a result of the strong top-line development, the currency-neutral basis, supported by double-digit sales increases in gross margin increase as well as the positive effect of lower operating the running category as well as at adidas neo. In addition, mid-single- expenses as a percentage of sales, the operating margin improved digit sales growth in the football category also contributed to this 3.8 percentage points to 6.3% from 2.5% in 2015. Operating profit in development. Revenues of the Reebok brand in Russia/CIS increased North America increased 209% to € 214 million versus € 69 million 9% on a currency-neutral basis, due to double-digit sales growth in in 2015. see Table 03 the training and running categories. see Table 05 GREATER CHINA Gross margin in Russia/CIS increased 2.1 percentage points to 58.1% from 56.0% in 2015, reflecting a significantly better pricing mix which Sales in Greater China grew 28% on a currency-neutral basis. In more than compensated severe negative currency effects. Operating euro terms, sales in Greater China were up 22% to € 3.010 billion expenses were down 12% to € 290 million (2015: € 329 million), from € 2.469 billion in 2015. Revenues of brand adidas grew 28% on reflecting a significant decline in sales expenditure as well as lower a currency-neutral basis. This development was due to strong double- expenditure for point-of-sale and marketing investments. Operating digit sales growth in the training, running and football categories expenses as a percentage of sales were down 1.8 percentage points to as well as at adidas Originals and adidas neo. Reebok brand sales 42.7% versus 44.6% in the prior year. As a result of the gross margin in Greater China grew 17% on a currency-neutral basis, driven by increase as well as the positive effect of lower operating expenses as double-digit sales increases in the training and running categories a percentage of sales, the operating margin improved 4.0 percentage as well as in Classics. see Table 04 points to 15.4% from 11.4% in 2015. Operating profit in Russia/CIS increased 24% to € 105 million versus € 85 million in 2015. see Table 05 04 GREATER CHINA AT A GLANCE € IN MILLIONS 05 RUSSIA/CIS AT A GLANCE € IN MILLIONS Net sales adidas brand Reebok brand Gross profit Gross margin Segmental operating profit Segmental operating margin 2016 2015 Change Change (currency- neutral) 3,010 2,944 67 1,731 57.5% 1,060 35.2% 2,469 2,411 58 1,411 57.1% 866 35.1% 22% 22% 15% 23% 0.4pp 22% 0.1pp 28% 28% 17% – – – – 2016 2015 Change Change (currency- neutral) Net sales adidas brand Reebok brand Gross profit Gross margin 679 514 166 395 739 570 170 414 58.1% 56.0% Segmental operating profit 105 85 Segmental operating margin 15.4% 11.4% (8%) (10%) (2%) (5%) 2.1pp 24% 4.0pp 3% 1% 9% – – – – 11 2 1 13 1 13 3 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance by Segment LATIN AMERICA Revenues in Latin America were up 16% on a currency-neutral basis. In euro terms, sales in Latin America were down 3% to € 1.731 billion by high-single-digit sales increases in Classics as well as low-single- digit growth in the training category. see Table 07 from € 1.783 billion in 2015. Revenues of brand adidas increased 19% Gross margin in Japan increased 2.3 percentage points to 49.4% on a currency-neutral basis. This development was driven by double- versus 47.1% in 2015, driven by a better pricing, product and channel digit sales growth in the football, running and training categories as mix, which more than offset the significant impact from negative well as at adidas Originals and adidas neo. Reebok brand sales in currency effects. Operating expenses were up 31% to € 304 million Latin America grew 1% on a currency-neutral basis, as double-digit from € 231 million in 2015, reflecting higher sales expenditure as growth in the training category as well as in Classics was partly offset well as an increase in expenditure for point-of-sale and marketing by sales declines in the running category. From a country perspective, investments. Operating expenses as a percentage of sales increased the combined revenues of the adidas and Reebok brands grew in 0.4 percentage points to 30.2% (2015: 29.8%). The operating margin all major markets at double-digit rates with the exception of Brazil, grew 1.6 percentage points to 20.6% versus 19.0% in 2015, reflecting where sales increased at a low-single-digit rate. see Table 06 the gross margin increase, which was only partly offset by the negative effect of higher operating expenses as a percentage of Gross margin in Latin America remained stable at 42.4% (2015: sales. Operating profit in Japan increased 41% to € 207 million from 42.4%), as the positive effects from a more favourable pricing, channel € 147 million in 2015. see Table 07 and product mix were offset by negative currency effects. Operating expenses were down 3% to € 507 million from € 521 million in 2015, reflecting lower expenditure for marketing investments as well as a MEAA decline in sales expenditure. Operating expenses as a percentage of Revenues in MEAA were up 16% on a currency-neutral basis. In euro sales grew 0.1 percentage points to 29.3% (2015: 29.2%). As a result terms, sales in MEAA grew 12% to € 2.685 billion from € 2.388 billion of higher operating expenses as a percentage of sales, the operating in 2015. Sales of the adidas brand increased 18% on a currency- margin declined 0.1 percentage points to 13.1% from 13.2% in 2015. Operating profit in Latin America decreased 3% to € 227 million neutral basis, due to double-digit sales growth in the training and running categories as well as at adidas Originals and adidas neo. versus € 235 million in 2015. see Table 06 Reebok brand revenues in MEAA were up 3% on a currency-neutral JAPAN basis, driven by double-digit increases in the running category as well as low-single-digit growth in the training category, partly offset by declines in Classics. From a country perspective, the increase in Sales in Japan increased 16% on a currency-neutral basis. In the combined revenues of the adidas and Reebok brands was driven euro terms, revenues in Japan increased 30% to € 1.007 billion by double-digit growth in almost all of the countries in the region. from 776 million in 2015. adidas brand revenues grew 17% on a see Table 08 currency-neutral basis, driven by double-digit sales increases at adidas Originals as well as high-single-digit growth at adidas neo. Gross margin in MEAA decreased 1.4 percentage points to 50.0% In addition, mid-single-digit increases in the training and running (2015: 51.4%), as the positive effects from an improved pricing and categories also contributed to this development. Sales of the Reebok product mix as well as lower input costs were more than offset brand in Japan were up 12% on a currency-neutral basis, supported by significant negative currency effects. Operating expenses were 06 LATIN AMERICA AT A GLANCE € IN MILLIONS 07 JAPAN AT A GLANCE € IN MILLIONS 2016 2015 Change Change (currency- neutral) 2016 2015 Change Change (currency- neutral) Net sales adidas brand Reebok brand Gross profit Gross margin 1,731 1,515 216 734 1,783 1,516 266 756 (3%) (0%) (19%) (3%) 42.4% 42.4% (0.0pp) Segmental operating profit 227 235 (3%) Segmental operating margin 13.1% 13.2% (0.1pp) 16% 19% 1% – – – – Net sales adidas brand Reebok brand Gross profit Gross margin 1,007 907 100 497 776 696 80 365 49.4% 47.1% Segmental operating profit 207 147 Segmental operating margin 20.6% 19.0% 30% 30% 25% 36% 2.3pp 41% 1.6pp 16% 17% 12% – – – – 11 3 11 3 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Business Performance by Segment 3 3 08 MEAA AT A GLANCE € IN MILLIONS 2016 2015 Change Change (currency- neutral) Net sales adidas brand Reebok brand Gross profit Gross margin Segmental operating profit 2,685 2,385 301 1,344 50.0% 722 2,388 2,091 298 1,228 51.4% 664 12% 14% 1% 9% (1.4pp) 9% Segmental operating margin 26.9% 27.8% (0.9pp) 16% 18% 3% – – – – Gross margin was up 3.6 percentage points to 37.5% (2015: 33.9%), driven by significantly higher product margins at TaylorMade- adidas Golf. Operating expenses decreased 3% to € 576 million from € 596 million in 2015, reflecting a decline in expenditure for point-of-sale and marketing investments. As a percentage of sales, operating expenses were down 1.6 percentage points to 39.0% versus 40.6% in 2015. While Other Businesses recorded a negative operating margin of 0.9%, this represents an improvement of 5.1 percentage points compared to the prior year (2015: negative operating margin of 6.1%). Other Businesses recorded an operating loss of € 14 million, an improvement of 84% compared to the prior year (2015: operating loss of € 89 million). see Table 09 up 10% to € 624 million versus € 565 million in 2015, mainly due to higher sales expenditure. As a percentage of sales, operating 10 OTHER BUSINESSES NET SALES BY REGION 1 € IN MILLIONS Western Europe North America Greater China Russia/CIS Latin America Japan MEAA Total 2016 2015 Change Change (currency- neutral) 438 719 18 1 10 180 110 383 783 22 3 11 156 109 1,475 1,467 14% (8%) (19%) (79%) (12%) 15% 1% 1% 18% (8%) (16%) (77%) 12% 3% 4% 1% 1 Figures reflect continuing operations as a result of the divestiture of the Rockport business. expenses declined 0.4 percentage points to 23.2% from 23.7% in 2015. The operating margin was down 0.9 percentage points to 26.9% (2015: 27.8%), as the positive effect of lower operating expenses as a percentage of sales was more than offset by the gross margin decline. Operating profit in MEAA increased 9% to € 722 million versus € 664 million in 2015. see Table 08 OTHER BUSINESSES Revenues in Other Businesses grew 1% both on a currency-neutral basis and in euro terms to € 1.475 billion from € 1.467 billion in 2015. Revenues at TaylorMade-adidas Golf decreased 1% on a currency- neutral basis, as growth at TaylorMade and adidas Golf was more than offset by sales declines at Ashworth and Adams Golf. Currency- neutral CCM Hockey sales were down 13%, mainly due to sales decreases in the licensed apparel business as well as in the sticks and skates categories. Other centrally managed businesses revenues increased 19% on a currency-neutral basis, mainly as a result of strong double-digit sales growth at Y-3. see Table 09 09 OTHER BUSINESSES AT A GLANCE 1 € IN MILLIONS 2016 2015 Change Change (currency- neutral) Net sales 1,475 1,467 TaylorMade-adidas Golf CCM Hockey Other centrally managed businesses Gross profit Gross margin Segmental operating profit 892 271 289 553 902 317 242 497 37.5% 33.9% (14) (89) Segmental operating margin (0.9%) (6.1%) 1% (1%) 1% (1%) (14%) (13%) 19% 11% 3.6pp 84% 5.1pp 19% – – – – 1 Figures reflect continuing operations as a result of the divestiture of the Rockport business. 11 4 1 15 1 15 3 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Subsequent Events and Outlook SUBSEQUENT EVENTS AND OUTLOOK In 2017, despite continuing uncertainties regarding the economic outlook for both advanced and emerging economies, we expect the global economy and consumer spending to grow, providing a positive backdrop for moderate growth and expansion of the sporting goods industry. Through our extensive pipeline of new and innovative products, increased brand-building activities, the tight control of inventory levels and stringent cost management, we project strong top- and bottom-line improvements in 2017. We forecast sales to increase at a rate between 11% and 13% on a currency-neutral basis. Gross margin is projected to grow up to 0.5 percentage points to a level of up to 49.1%. Operating margin is expected to increase between 0.6 and 0.8 percentage points to a level between 8.3% and 8.5%, reflecting the gross margin expansion as well as the positive effect of lower other operating expenses as a percentage of sales. As a result, we project net income from continuing operations to increase at a rate between 18% and 20% to a level between € 1.200 billion and € 1.225 billion. SUBSEQUENT EVENTS NO SUBSEQUENT EVENTS a major contributor to the global economic expansion in 2017. At 4.2%, their growth rate is projected to accelerate compared to 2016. More specifically, developing economies are expected to benefit from Since the end of 2016, there have been no significant organisational, the gradual recovery of commodity prices, resulting in improving management, economic, socio-political, legal or financial changes domestic demand and less divergent growth outlooks for commodity- which we expect to influence our business materially going forward. importing and commodity-exporting countries. However, a risk to OUTLOOK FORWARD-LOOKING STATEMENTS growth is forecasted to persist throughout the year, reflecting weak global trade, lacklustre investment and policy uncertainty in developed economies. GDP in developed economies is expected to grow at a level of 1.8% in 2017. This development will be mainly supported by accommodative monetary and fiscal policies, firm export growth as well as improvements in consumer confidence and This Management Report contains forward-looking statements labour markets. Despite these improvements, political tensions as that reflect Management’s current view with respect to the future well as the economic uncertainties arising from the Brexit vote and development of our company. The outlook is based on estimates that the outcome of the US elections will continue to pose a threat to the we have made on the basis of all the information available to us at this economic outlook. point in time. In addition, such forward-looking statements are subject to uncertainties which are beyond the control of the company. see Risk and Opportunity Report, p. 118 In case the underlying assumptions turn out to be incorrect or described risks or opportunities materialise, actual results and developments may materially deviate (negatively SPORTING GOODS INDUSTRY EXPANSION TO CONTINUE IN 2017 2 In the absence of any major economic shocks, we expect the global or positively) from those expressed by such statements. adidas does sporting goods industry to grow at a mid-single-digit rate in 2017, in not assume any obligation to update any forward-looking statements spite of the non-recurrence of major sporting events that took place in made in this Management Report beyond statutory disclosure 2016, such as the 2016 Olympic Games in Brazil as well as the UEFA obligations. EURO 2016 in France. Consumer spending on sporting goods in the developing economies is expected to grow faster than in the more developed markets. Strong wage growth and domestic consumption GLOBAL ECONOMY TO GROW IN 2017 1 Global GDP is projected to increase moderately by 2.7% in 2017. in many developing economies are predicted to propel industry growth throughout the year. In developed economies, the sporting goods This development will be supported by a further stabilisation in industry is forecasted to improve moderately, as wage increases will commodity prices as well as continuous accommodative fiscal and support consumer spending on sporting goods and fuel the industry’s monetary policies. Nevertheless, subdued prospects for developed growth. In addition, rising sports participation and health awareness economies, heightened policy uncertainty, weak productivity growth as well as demographic pressures are expected to weigh on the economic recovery. Developing economies are forecasted to remain globally is projected to continue to boost sportswear demand. The athleisure dominant structural growth driver for the industry as a whole, see Glossary, p. 216 trend is forecasted to remain a 1 Sources: World Bank Global Economic Prospects and HSBC Global Research. 2 Source: NPD Market Research. 11 5 11 5 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Subsequent Events and Outlook GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Subsequent Events and Outlook 3 fuelling the demand for athletic casual and activewear products. Furthermore, innovation in the supply chain and breakthroughs in new manufacturing techniques are projected to improve the speed- CURRENCY-NEUTRAL COMBINED SALES OF THE ADIDAS AND REEBOK BRANDS EXPECTED TO INCREASE IN ALL MARKET SEGMENTS to-market capabilities of sports brands, getting products more quickly In 2017, we expect currency-neutral combined revenues of the and more sustainably to the marketplace. E-commerce, which is adidas and Reebok brands to increase in all our market segments. already a significant growth driver for the industry, is anticipated While currency-neutral sales are expected to grow at double-digit to expand further and investments in digital transformation are rates in Western Europe, North America, Greater China and Russia/ projected to rise across the sporting goods industry. CIS, currency-neutral sales in Latin America, Japan and MEAA are CURRENCY-NEUTRAL SALES TO INCREASE AT A RATE BETWEEN 11% AND 13% IN 2017 forecasted to improve at a high-single-digit rate each. Currency- neutral revenues of Other Businesses are expected to be below the prior year level, due to currency-neutral sales decreases at CCM Hockey. Currency-neutral sales at TaylorMade-adidas Golf are We expect sales to increase at a rate between 11% and 13% on a expected to grow at a mid-single-digit rate. currency-neutral basis in 2017. see Table 01 Despite continued uncertainties regarding the global economic outlook, the company’s sales development will be favourably impacted by rising consumer spending, the ongoing robust athleisure trend as well as increased health awareness and sports participation in most geographical GROSS MARGIN EXPECTED TO INCREASE TO A LEVEL OF UP TO 49.1% In 2017, the gross margin is forecasted to increase up to areas. In addition, the further expansion and improvement of our 0.5 percentage points to a level of up to 49.1% (2016: 48.6%). see controlled space initiatives, in particular through our own eCommerce Table 01 Gross margin will benefit from the positive effects of a more channel, as well as major product launches will more than offset the favourable pricing, product, channel and regional mix. Higher non-recurrence of sales related to the UEFA EURO 2016 and the Copa product margins at TaylorMade-adidas Golf compared to the prior América. see Table 02 01 2017 OUTLOOK Currency-neutral sales development (in %): adidas Western Europe 1 North America 1 Greater China 1 Russia/CIS 1 Latin America 1 Japan 1 MEAA 1 Other Businesses TaylorMade-adidas Golf CCM Hockey Gross margin year are also expected to positively impact the company’s gross margin development. These improvements will be partly offset by the projected increase in costs for our Asian-dominated sourcing as a result of less favourable US dollar hedging rates, rising labour expenditures as well as higher commodity prices. to increase at a rate between 11% and 13% double-digit rate increase double-digit rate increase double-digit rate increase double-digit rate increase high-single-digit rate increase high-single-digit rate increase high-single-digit rate increase below prior year level mid-single-digit rate increase below prior year level to increase up to 0.5 percentage points to a level of up to 49.1% Other operating expenses in % of sales below prior year level Operating profit Operating margin to increase at a rate between 18% and 20% to increase between 0.6 and 0.8 percentage points to a level between 8.3% and 8.5% Net income from continuing operations to increase at a rate between 18% and 20% to a level between € 1.200 billion and € 1.225 billion Basic earnings per share from continuing operations to increase at a rate between 18% and 20% Average operating working capital in % of sales Capital expenditure modest increase around € 1.1 billion 1 Combined sales of the adidas and Reebok brands. 11 6 1 17 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Subsequent Events and Outlook OPERATING MARGIN TO GROW TO A LEVEL BETWEEN 8.3% AND 8.5% IMPACT OF PLANNED DIVESTITURES ON 2017 OUTLOOK In 2017, other operating expenses as a percentage of sales are As part of the company’s ‘Creating the New’ acceleration plan, it is expected to be below the prior year level of 42.8%. This, together our ambition to focus even more on the adidas and Reebok brands with the strong top-line growth and the projected gross margin going forward. In this context, we announced our intention to divest improvement, is expected to drive an increase in operating profit of the TaylorMade business with the brands TaylorMade, Adams Golf between 18% and 20%. Consequently, we expect the operating margin and Ashworth as well as the CCM Hockey business. see Corporate to increase between 0.6 and 0.8 percentage points to a level between Strategy, p. 48 These divestitures are likely to occur in 2017. In this 8.3% and 8.5% compared to the prior year level of 7.7%. see Table 01 case, the company’s outlook for 2017 will be impacted to the extent NET INCOME FROM CONTINUING OPERATIONS TO INCREASE AT A RATE BETWEEN 18% AND 20% that both 2016 and 2017 will be reported excluding the respective businesses expected to be divested in the financial year. In the event that the planned divestitures occur, we project currency-neutral sales in 2017 to increase between 12% and 14% (2016 adjusted net Net income from continuing operations is projected to increase at sales: € 18.5 billion). In addition, the gross margin would increase a rate between 18% and 20% to a level between € 1.200 billion and by up to 0.3 percentage points to a level of up to 49.5%. This together € 1.225 billion compared to € 1.019 billion in 2016. Basic earnings per with lower other operating expenses as a percentage of sales will share from continuing operations are also expected to increase at a rate between 18% and 20% compared to the prior year level of € 5.08. see Table 01 Net financial expenses are forecasted to increase slightly result in an increase in the company’s operating margin of between 0.2 and 0.4 percentage points to a level between 8.6% and 8.8%. Net income from continuing operations is forecasted to increase at a rate in 2017, mainly as a result of an increase in interest expenses. The between 13% and 15% to a level between € 1.200 billion and € 1.225 tax rate is projected to be around the prior level of 29.5%. billion in 2017. see Management Assessment of Performance, Risks and Opportunities, and Outlook, p. 133 AVERAGE OPERATING WORKING CAPITAL AS A PERCENTAGE OF SALES TO INCREASE MODESTLY 02 MAJOR 2017 PRODUCT LAUNCHES In 2017, average operating working capital as a percentage of sales is projected to increase modestly compared to the prior year level Product (2016: 20.2%). CAPITAL EXPENDITURE TO INCREASE TO A LEVEL AROUND € 1.1 BILLION Ace 17 football boot COPA 17 football boot Glitch 17 football boot UltraBOOST Cleat football boot adidas x Paul Pogba collection In 2017, capital expenditure is expected to be around € 1.1 billion UltraBOOST X running shoe and thus significantly above the prior year level (2016: € 651 million). Investments will mainly focus on controlled space initiatives of the adidas and Reebok brands, the company’s logistics infrastructure as well as the further development of the corporate headquarters in Herzogenaurach, Germany. PureBOOST running shoe CMMTTD training apparel Z.N.E. 90/10 training apparel adidas x Wanderlust collection Superstar BOOST Originals shoe EQT Support ADV Originals shoe EQT Support Ultra Originals shoe MANAGEMENT TO PROPOSE DIVIDEND OF € 2.00 Originals by Kanye West Yeezy Season 5 collection neo cloudfoam QT Racer shoe As a result of the strong operational and financial performance in 2016, Club C 85 Classics shoe our strong financial position as well as Management’s confidence in Nano 7.0 training shoe our short- and long-term growth aspirations, the adidas AG Executive and Supervisory Boards will recommend paying a dividend of € 2.00 per dividend-entitled share for 2016 to shareholders at the Annual General Meeting (AGM) on May 11, 2017 (2015: € 1.60), representing an increase of 25% compared to the prior year. see Our Share. p. 41 Pump Supreme training shoe Floatride running shoe All-Terrain Super 3.0 running shoe Spider Tour putter Powerband Boa BOOST golf shoe Crossknit BOOST golf shoe Brand adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas adidas Reebok Reebok Reebok Reebok Reebok TaylorMade adidas Golf adidas Golf 11 7 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Risk and Opportunity Report 3 RISK AND OPPORTUNITY REPORT In order to remain competitive and ensure sustainable success, adidas consciously takes certain risks and continously explores and develops opportunities. Our risk and opportunity management principles and system provide the framework for our company to conduct business in a well-controlled environment. RISK AND OPPORTUNITY MANAGEMENT PRINCIPLES management system. These duties are undertaken by the Supervisory We define risk as the potential occurrence of an external or internal event (or series of events) that may negatively impact our ability Board’s Audit Committee. In addition, the Internal Audit department includes an assessment of the effectiveness of risk management to achieve the company’s business objectives or financial goals. processes and compliance with the company’s Risk Management Opportunity is defined as the potential occurrence of an external Policy as part of its regular auditing activities with selected adidas or internal event (or series of events) that can positively impact subsidiaries or functions each year. the company’s ability to achieve its business objectives or financial goals. We have summarised risks in four main categories: Strategic, Operational, Legal & Compliance and Financial. Opportunities are classified in two main categories: Strategic & Operational and Financial. RISK AND OPPORTUNITY MANAGEMENT SYSTEM To facilitate effective risk and opportunity management, we implemented an integrated risk and opportunity management system, which is based on the integrated frameworks for enterprise risk management and internal controls developed and published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Additionally, it has been adapted to more appropriately reflect the structure as well as the corporate and The adidas AG Executive Board has overall responsibility for operating management culture of the company. This system focuses on the an effective risk and opportunity management system that ensures identification, evaluation, handling, monitoring and systematic comprehensive and consistent management of all material risks reporting of risks and opportunities. The key objective of the and opportunities. see Diagram 01 The Risk Management department risk and opportunity management system is to support business coordinates the execution and further development of the company’s success and protect the company as a going concern through an risk and opportunity management system and is the owner of the opportunity-focused but risk-aware decision-making framework. centrally managed risk and opportunity management process on Our Risk Management Policy outlines the principles, processes, behalf of the adidas AG Executive Board. The adidas AG Supervisory tools, risk areas, key responsibilities, reporting requirements and Board is responsible for monitoring the effectiveness of the risk communication timelines within our company. 01 ADIDAS RISK AND OPPORTUNITY MANAGEMENT SYSTEM utilises critical day-to-day management insight from both global and Risk and opportunity management is a company-wide activity which local business units and functions. Supervisory and Executive Boards Our risk and opportunity management process comprises the following steps: Risk Management Risk Management Policy & Methodology/Support — Risk and opportunity identification: adidas continuously monitors the macroeconomic environment and developments in the sporting goods industry, as well as internal processes, to identify risks and Monitoring & Reporting Risk Owners Identification opportunities as early as possible. Our company-wide network of Risk Owners (generally all direct reports to the adidas AG Executive Board, including the Managing Directors of our markets) ensures effective identification of risks and opportunities. The Risk Management Handling Evaluation department has defined a catalogue of potential risk areas (Risk Universe) to assist Risk Owners in identifying and categorising risks and opportunities. 11 8 1 19 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report 02 RISK EVALUATION CATEGORIES Almost certain > 85% Material risks Very likely 50% – 85% d o o h i l e k L i Likely Possible Unlikely 30% – 50% 15% – 30% < 15% Very low Low Medium High Very high Financial equivalent 1 ≤ € 1 million € 1 million – € 10 million € 10 million – € 50 million € 50 million – € 100 million ≥ € 100 million Qualitative equivalent Almost no media coverage Limited local media coverage Local and limited national media coverage National and limited international media coverage Extensive international media coverage Almost no senior management attention Less than 5% additional senior management attention 5% – 10% additional senior management attention 10% – 20% additional senior management attention Over 20% additional senior management attention Potential impact Risk classification: ■ Marginal ■ Minor ■ Moderate ■ Significant ■ Major 1 Based on operating profit, financial result or tax expenses. The Risk Owners use various instruments in the risk and opportunity According to our methodology, risks and opportunities are evaluated identification process, such as primary qualitative and quantitative by looking at two dimensions: the potential impact and the likelihood research including trend scouting and consumer surveys as well that this impact materialises. Based on this evaluation, we classify as feedback from our business partners and controlled space risks and opportunities into five categories: marginal, minor, network. These efforts are supported by global market research moderate, significant and major. and competitor analysis. Through this process, we seek to identify the markets, categories, consumer target groups and product styles The potential impact is evaluated using five categories: very low, low, which show most potential for future growth at a local and global medium, high and very high. see Diagram 02 These categories represent level. Equally, our analysis focuses on those areas that are at risk of quantitative or equivalent qualitative measurements. The quantitative saturation or exposed to increased competition or changing consumer measurements are based on the potential financial effect on the tastes. However, our risk and opportunity identification process is not relevant income statement metrics (operating profit, financial result only limited to external risk factors or opportunities; it also includes or tax expenses). Qualitative measurements used are, for example, an internal perspective that considers processes, projects, human the degree of media exposure or additional senior management resources and compliance aspects. — Risk and opportunity evaluation: We evaluate identified risks and opportunities individually according to a systematic evalu- attention needed. Likelihood represents the possibility that a given risk or opportunity may materialise with the specific impact. The likelihood of individual risks and opportunities is evaluated on a percentage scale divided into five categories: unlikely, possible, likely, ation methodology, which allows adequate prioritisation as well as very likely and almost certain. allocation of resources. Risk and opportunity evaluation is also part of the Risk Owners’ responsibility. The Risk Management department When evaluating risks and opportunities, we also consider the supports and guides the Risk Owners in the evaluation process. earliest time period when the company’s target achievement may be impacted, in order to provide a broad perspective and ensure early identification and mitigation. Short-term risks and opportunities may affect the achievement of the company’s objectives already in the current financial year, mid-term risks and opportunities would impact the company’s target achievement in the next financial year, while long-term risks and opportunities might only have an effect on the achievement of the company’s objectives after the next financial year. 11 9 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Risk and Opportunity Report 3 We consider both gross and net risks in our risk assessments. While Regular risk reporting consists of a two-step reporting stream that is the gross risk reflects the inherent (‘worst-case’) risk before any mitigating action, the net risk reflects the residual (‘expected’) risk supported and facilitated by a globally used company-wide IT solution. Firstly, on a quarterly basis, Risk Owners are required to report to Risk after all mitigating action. On the one hand, this approach allows Management risks that have a possible gross impact rating of at least for a good understanding of the impact of mitigating action taken; medium or a net impact rating of at least low, both regardless of the on the other hand, it provides the basis for scenario analysis. Our likelihood of materialising. Risk Owners are also required to report assessment of risks presented in this report only reflects the net risk all opportunities that have an impact rating of at least low. Secondly, perspective. We measure the actual financial impact of high-level Risk Management aggregates the reported risks and opportunities risks that materialised against the original assessment on a yearly and, also on a quarterly basis, provides a consolidated company-wide basis. In this way, we ensure continuous monitoring of the accuracy of report based on the Risk Owners’ input, which specifically highlights risk evaluations across the company, which enables us to continuously substantial individual risks and opportunities as well as, on an improve evaluation methodology based on our findings. aggregated level, key areas of risk and opportunity. In assessing the potential effect from opportunities, each opportunity Material changes in previously reported risks and/or newly identified is appraised with respect to viability, commerciality and potential risks with a potential net impact of at least medium, and any issues risks. This approach is applied to longer-term strategic prospects identified which, due to their material nature, require immediate but also to shorter-term tactical and opportunistic initiatives at the corporate level as well as at the market and brand level. In contrast to the risk evaluation, only the net perspective exists for assessing opportunities. reporting to the Executive Board, are also reported outside the regular quarterly reporting stream on an ad hoc basis. — Risk and opportunity handling: Risks and opportunities are treated in accordance with the company’s risk and opportunity COMPLIANCE MANAGEMENT SYSTEM (ADIDAS FAIR PLAY COMPLIANCE FRAMEWORK) We consider compliance with the law as well as with external and management principles as described in the Risk Management Policy. internal regulations to be imperative. Every employee is required to Risk Owners are in charge of developing and implementing appro- act ethically and in compliance with the law as well as with external priate risk-mitigating action and exploiting opportunities within and internal regulations while executing the company’s business. their area of responsibility. In addition, the Risk Owners need to Violations must be avoided under all circumstances. As a company determine a general risk-handling strategy for the identified risks, with worldwide operations and more than 60,000 employees, however, which is either risk avoidance, risk reduction with the objective to we realise that it will never be possible to exclude compliance minimise impact and/or likelihood, risk transfer to a third party or violations with absolute certainty. risk acceptance. The decision on the implementation of the respective risk-handling strategy also takes into account the costs in relation to The adidas Fair Play Compliance Framework and our risk and the effectiveness of any planned mitigating action if applicable. The opportunity management system are closely aligned and both are Risk Management department works closely with the Risk Owners overseen by the company’s Chief Compliance Officer who reports to monitor the continuous progress of planned mitigating action and directly to the company’s Chief Executive Officer. We see compliance assess the viability of already implemented mitigating action. as all-encompassing, spanning all business functions throughout the — Risk and opportunity monitoring and reporting: Our integrated risk and opportunity management system aims to increase the trans- entire value chain, from supply chain through to the end consumer. Consequently, the identification, analysis and evaluation of potential compliance risks is an essential part of our risk and opportunity parency of risks and opportunities. As both risks and opportunities management process. The Risk Management department works are subject to constant change, Risk Owners not only monitor devel- closely with the Risk Owners and responsible Compliance Officers opments but also the adequacy and effectiveness of the current risk- to conduct a systematic assessment of key compliance risks on a handling strategy on an ongoing basis. quarterly basis. In addition, the Compliance department regularly conducts detailed compliance risk assessments within selected entities. 12 0 1 21 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report The company’s compliance management system is based on the 03 REPORTING OF POTENTIAL COMPLIANCE OECD Principles of Corporate Governance. It refers to the OECD Guidelines for Multinational Enterprises and is designed to: — Support the achievement of qualitative and sustainable growth through good corporate governance. — Reduce and mitigate the risk of financial losses or damage caused by non-compliant conduct. — Protect and further enhance the value and reputation of the company and its brands through compliant conduct. — Preserve diversity by fighting harassment and discrimination. Our Fair Play Code of Conduct, which is applicable globally and for all business areas, stipulates guidelines for behaviour in everyday VIOLATIONS IN % 30 37 33 37% Anonymous call to hotline 33% Named call to hotline 30% Compliance Officer work, which all employees are obliged to comply with. The Code of To ensure timely detection of potential infringements of statutory Conduct is accessible on our website, on our intranet and as an app for regulations or internal guidelines, we have implemented smartphones. www.adidas-group.com/s/code-of-conduct The Code of Conduct is whistleblowing procedures which allow employees to either report the cornerstone of our compliance management programme which is founded on three pillars: prevention, detection and response. concerns over wrongdoing/potential compliance violations internally (e.g. directly to their supervisor, to the Chief Compliance Officer or Prevention includes, for example, policies such as the company’s Council) or externally via an independent, confidential reporting Code of Conduct, the anti-bribery and corruption policy or the hotline or email service. The hotline (named ‘Fair Play hotline’) is privacy policy, training of employees or targeted compliance-related available at all times worldwide. In case of reported or suspected communication by management or the Compliance department. In compliance violations, the Chief Compliance Officer or the Compliance 2016, more than 4,700 employees participated in our web-based department undertake the required investigations. other Compliance Officers, the relevant HR manager or the Works Code of Conduct training, which is a major component of employee onboarding, while around 2,700 employees completed our web-based anti-bribery and corruption training. In addition, 12,200 employees completed the Securing Information and Protecting Privacy training. Furthermore, 80 senior executives were selected and trained in dedicated three-hour compliance workshops. 04 POTENTIAL COMPLIANCE VIOLATIONS Financial, including theft Malfeasance, including conflicts of interest and corruption Competition Behavioural Other 1 180 150 120 90 60 30 0 89 26 2 1 Includes payroll issues, intellectual property and leaks of confidential information, inter alia. 157 57 121 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report 3 3 Appropriate and timely response to compliance violations is essential. We regard the internal control and risk management system as a Therefore, we have established a global network of local Compliance Officers reporting directly to the adidas Chief Compliance Officer as process based on the principle of segregation of duties, encompassing various sub-processes in the areas of Accounting, Controlling, contact persons to whom complaints and information concerning Taxes, Treasury, Planning, Reporting and Legal, focusing on the compliance violations can be reported. We track, monitor and report identification, assessment, treatment, monitoring and reporting of potential incidents of non-compliance worldwide using a web-based financial reporting risks. Clearly defined responsibilities are assigned reporting solution. In 2016, we recorded 331 potential compliance to each distinct sub-process. In a first step, the internal control and violations, representing a slight increase compared to the prior year risk management system serves to identify and assess as well as to when 314 potential violations were recorded. see Diagram 03 see limit and control risks identified in the consolidated financial reporting Diagram 04 This increase is attributable to ongoing senior management process which might result in our consolidated financial statements communication, training and workshops, which have led to improved not being in conformity with internal and external regulations. employee awareness with respect to ethical conduct. Internal Control over Financial Reporting (ICoFR) serves to provide Appropriate sanction mechanisms (ranging from warnings through to reasonable assurance regarding the reliability of reporting and termination of employment) are used to react promptly to confirmed compliance with applicable laws and regulations despite identified compliance violations. Insights gained from the investigation of financial reporting risks. To monitor the effectiveness of ICoFR, past violations are used to continuously improve the compliance management system. the Policies & Internal Controls department and the Internal Audit department regularly review accounting-related processes. Monthly key performance indicators (KPIs), including those for selects and examines internal controls, including IT controls, to participation in training and for compliance violations, are reported assess their effectiveness. The Audit Committee of the adidas AG to the Executive Board by the Compliance department. The Chief Supervisory Board also monitors the effectiveness of ICoFR. However, Compliance Officer regularly reports to the Chief Executive Officer due to the limitations of ICoFR, even with appropriate and functional on the further development of the compliance programme and systems absolute certainty about the effectiveness of ICoFR cannot Additionally, as part of the year-end audit, the external auditor on major compliance cases, which are also reported to the Audit be guaranteed. Committee. Further, he reports to the Audit Committee at one of its meetings at least once a year concerning the contents and the further All Group companies are required to comply with the consolidated development of the compliance programme. financial reporting policies (Finance Manual), which are available to DESCRIPTION OF THE MAIN FEATURES OF THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM RELATING TO THE CONSOLIDATED FINANCIAL REPORTING PROCESS PURSUANT TO § 315 SECTION 2 NO. 5 GERMAN COMMERCIAL CODE (HANDELSGESETZBUCH – HGB) all employees involved in the financial reporting process through the company-wide intranet. We update the Finance Manual on a regular basis, dependent on regulatory changes and internal developments. Changes to the Finance Manual are promptly communicated to all Group companies. Clear policies serve to limit employees’ scope of discretion with regard to recognition and valuation of assets and liabilities, thus reducing the risk of inconsistent accounting practices within the company. We aim to ensure compliance with The internal control and risk management system relating to the the Finance Manual through continuous adherence to the four-eyes consolidated financial reporting process of the company represents principle in accounting-related processes. In addition, each quarter, a process embedded within the company-wide corporate governance the local manager responsible for the accounting process within system. It aims to provide reasonable assurance regarding the the respective company and the respective local Managing Director reliability of the company’s external financial reporting by ensuring confirm adherence to the Finance Manual and to IFRS in a signed company-wide compliance with statutory accounting regulations, in representation letter to the Accounting department. particular the International Financial Reporting Standards (IFRS) and internal consolidated financial reporting policies (Finance Manual). 12 2 1 23 1 23 3 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks The accounting for Group companies is conducted either locally or by an adidas Shared Service Centre. Most of the IT Enterprise Resource Planning (ERP) systems used are based on a company-wide ILLUSTRATION OF MATERIAL RISKS This report includes an explanation of what we perceive as material standardised SAP system. Some Group companies use Navision- risks to the achievement of the company’s objectives in 2017. Besides based ERP software. As part of an initiative aimed at harmonising our these material risks, we also report risks we deem to be relevant in system infrastructure (One ERP), we will also introduce an SAP-based 2017 as well as credit risks, interest rate risks, and financing and ERP system within these Group companies in the medium term. liquidity risks. The risk overview table shows the assessment of all Following approval by the Finance Director of the respective Group risks described below. see Table 05 company, the local financial statements are transferred to a central consolidation system based on SAP SEM-BCS. At the corporate level, the regularity and reliability of the financial statements prepared by STRATEGIC RISKS Group companies are reviewed by the Accounting and Controlling departments. These reviews include automated validations in the Risks related to organisational structure and change Operating in a dynamic and fast-moving competitive environment, system as well as the creation of reports and analyses to ensure the company needs to cope with constantly changing requirements data integrity and adherence to the reporting logic. In addition, in respect of the workforce (e.g. adaptability, learning, skillsets, differences between current year and prior year financial data as mobility, diversity) and workplace (e.g. flexibility and space well as budget figures are analysed on a market level. If necessary, the company seeks the opinion of independent experts to review management). Therefore, organisational flexibility and the ability to adapt quickly to new competitive circumstances are critical to remain business transactions that occur infrequently and on a non-routine successful. A complex organisational structure and unclear roles and basis. After ensuring data plausibility, the centrally coordinated and responsibilities can lead to delayed or sub-optimal decision-making, monitored consolidation process begins, running automatically on as well as inefficient and ineffective processes. Improper planning SAP SEM-BCS. Controls within the individual consolidation steps, and execution of reorganisation and transformation initiatives may such as those relating to the consolidation of debt or of income reduce employee engagement and cause business disruption and and expenses, are conducted both manually and system-based, inefficiencies. Frequent organisational changes could cause fatigue using automatically created consolidation logs. Any inadequacies among the workforce and lead to reduced efficiency and productivity. are remedied manually by systematically processing the individual The HR function therefore plays a key role in driving effective change errors as well as differences and are reported back to the Group management. companies. After finalisation of all consolidation steps, all items in the consolidated income statement and in the consolidated statement of We mitigate these risks through continuous, open and transparent financial position are analysed with respect to trends and variances. communication with our employees. Our Executive Board members Unless already otherwise clarified, the Group companies are asked as well as the senior management team across the company regularly to explain any identified material deviations. update employees on organisational changes and openly explain the reasons for change. To adequately manage change and to ensure All financial systems used are protected against malpractice by clarity about roles and responsibilities throughout the organisation, means of appropriate authorisation concepts, approval concepts we also utilise internal and external experts in project management, and access restrictions. Access authorisations are reviewed on a change management and communication, who actively educate and regular basis and updated if required. The risk of data loss or outage engage the workforce to embrace and support new organisational of accounting-related IT systems is minimised through central control structures and processes. To increase flexibility and adaptability in and monitoring of virtually all IT systems, centralised management the workforce and workplace and thereby reduce risks related to of change processes and regular data backups. organisational change, we implement various mitigating measures such as strategic workforce planning, tailored on-the-job learning programmes and development plans for our employees, as well as the future workplace concept. see Our People, p. 72 In this context, the company continues to roll out its ‘MyArena’ concept, aimed at creating a flexible and attractive work environment that stimulates innovation, collaboration and creativity. 123 123 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks 3 05 RISK OVERVIEW Strategic risks Risks related to organisational structure and change Risks related to distribution strategy Competition risks Risks related to media and stakeholder activities Macroeconomic, sociopolitical and regulatory risks Operational risks Personnel risks Business partner risks IT risks Inventory risks Legal & Compliance risks Risks related to customs and tax regulations Financial risks Currency risks Risks related to impairment of goodwill/other intangible assets Credit risks Interest rate risks Financing and liquidity risks Potential impact Change (2015 rating) Likelihood Change (2015 rating) (Possible) (Possible) Very high Medium Medium Medium Very high High High High High High Very high Very high High Low Very low (High) (High) (High) (Very high) Unlikely Likely Possible Possible Unlikely Possible Possible Possible Unlikely Likely Likely Likely (Very high) Unlikely Likely Likely Risks related to distribution strategy The inability to appropriately influence the channels in which the Competition risks Strategic alliances amongst competitors and/or retailers, the increase company’s products are sold constitutes a continuous risk. Grey of retailers’ own private label businesses and intense competition for market activity or parallel imports could negatively affect our own consumers and promotion partnerships between well-established sales performance and the image of our brands. Furthermore, industry peers and new market entrants (e.g. new brands, vertical changes to segmentation and channel strategies could lead to retailers) pose a substantial risk to adidas. This could lead to harmful inadequate utilisation of our multiple distribution channels as well competitive behaviour, such as price wars in the marketplace or as strong retaliation from our customers. An unbalanced portfolio bidding wars for promotion partnerships. Sustained pricing pressure of own-retail stores (e.g. overexposure to certain markets or store in key markets could threaten the company’s financial performance formats) or inappropriate store locations may result in worse-than- and the competitiveness of our brands. Aggressive competitive expected sales development and lower profitability. practices could also drive increases in marketing costs and market share losses, thus hurting the company’s profitability and market To mitigate these risks, adidas has developed and implemented clearly position. World leaders in digital technologies could threaten adidas’ defined distribution policies and procedures to avoid over-distribution success in markets for sport, health and fitness apps. of products in a particular channel and limit the exposure to grey markets. We continuously monitor our own-retail store portfolio, To mitigate competition risks, we continuously monitor and analyse which helps us identify imbalances and quickly take appropriate information on our competitors and markets in order to be able to action such as store closure or remodelling. New store openings are anticipate unfavourable changes in the competitive environment managed according to a standardised company-wide business plan rather than reacting to such changes. This enables us to proactively model, taking into account our many years of own-retail experience adjust our marketing and sales activities when needed. Continuous and best practices from around the world. In addition, we conduct investment in research and development ensures that we remain specific training for our sales force to appropriately manage product innovative and distinct from competitors. see Research and Development, distribution and ensure that the right product is sold at the right point p. 67 We also pursue a strategy of entering into long-term agreements of sale to the right consumer at an appropriate price. with key promotion partners such as FC Bayern Munich or Lionel Messi, as well as adding new partners to refresh and diversify 124 1 25 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks our portfolio, e.g. Paul Pogba, Kristaps Porzingis or Gigi Hadid. In To mitigate these macroeconomic, sociopolitical and regulatory risks, addition, our product and communication initiatives are designed to adidas strives to balance sales across key regions and also between increase brand desire, drive market share growth and strengthen developed and emerging markets. We also continuously monitor our brands’ market position. the macroeconomic, political and regulatory landscape in all our key markets to anticipate potential problem areas, so that we are Risks related to media and stakeholder activities The company faces considerable risk if we are unable to uphold high able to quickly adjust our business activities accordingly upon any change in conditions. Potential adjustments may be a reallocation levels of consumer awareness, affiliation and purchase intent for of investments to alternative, more attractive markets, changes our brands. Adverse or inaccurate media coverage of our products in product prices, closure of own-retail stores, more conservative or business practices as well as negative social media discussion product purchasing, tight working capital management and an may significantly harm the company’s reputation and brand image, increased focus on cost control. In addition, by building on our leading lead to public misperception of our business performance and position within the sporting goods industry, we actively engage in eventually result in a sales slowdown. Similarly, certain activities on supporting policymakers and regulators in their efforts to liberalise the part of key stakeholders (e.g. non-governmental organisations, global trade and curtail trade barriers and also in order to proactively governmental institutions) could cause reputational damage, distract adapt to significant changes in the regulatory environment. management and disrupt business activities. To mitigate these risks, we pursue proactive, open communication and engagement with key stakeholders (e.g. consumers, media, non-governmental organisations, the financial community) on OPERATIONAL RISKS Personnel risks Achieving the company’s strategic and financial objectives is highly a continuous basis. In addition, we have established clear crisis dependent on our employees and their talents. In that respect, strong communication processes to ensure a quick and effective response leadership and a performance-enhancing culture are critical to the to adverse developments. We have also strengthened social media company’s success. Therefore, inconsistent or ineffective leadership capabilities and created various digital newsrooms worldwide that as well as the failure to instil and maintain a performance-oriented enable continuous monitoring of social media content related to the culture and ensure strong employee engagement amongst our company’s products and activities and allow early management of workforce could also substantially impede our ability to achieve our potentially damaging social media discussion. On a case-by-case goals. In addition, global competition for highly qualified personnel basis, we seek external advice from experts in communication and remains fierce. As a result, the loss of key personnel in strategic stakeholder management. Macroeconomic, sociopolitical and regulatory risks Growth in the sporting goods industry is highly dependent on positions and the inability to identify, recruit and retain sufficient numbers of highly qualified and skilled people who best meet the specific needs of our company pose substantial risks to our business performance. Unattractive or non-competitive management and consumer spending and consumer confidence. Economic downturns employee remuneration may exacerbate these risks. In addition, a and sociopolitical factors such as military conflicts, changes lack of sufficient training measures and inadequate documentation of government, civil unrest, nationalisation or expropriation, in of critical know-how might dilute or lead to a loss of key capabilities. particular in regions where the company is strongly represented, therefore pose a significant risk to the company’s business activities Our People Strategy, aimed at fostering a corporate culture of and top- and bottom-line performance. In addition, substantial confidence, creativity and collaboration that is needed to be successful, changes in the regulatory environment (e.g. trade restrictions, tax is an essential part of our strategic business plan ‘Creating the legislation, economic and political sanctions) could lead to potential New’ and is designed to reduce these risks. see Our People, p. 72 We sales shortfalls or cost increases. Recent developments, such as the continuously invest in improving employer branding activities to be result of the referendum in the United Kingdom in favour of leaving the ‘employer of choice’ in our industry and as a result attract and the European Union (‘Brexit’), increase the level of uncertainty and retain the right talent. We have also established a global recruiting thereby related potential risks. organisation to enhance our internal and external recruiting services and capabilities. In addition, we strengthen employee retention by providing employees with development and career opportunities (e.g. via our Talent Carousel programme) and we focus on promoting from within the organisation rather than recruiting externally. We also have attractive reward and incentive schemes in place, designed to further support long-term employee commitment. 125 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks 3 Business partner risks adidas interacts and enters into partnerships with various third parties such as promotion partners, retail partners or suppliers. As company’s top executives and second-line management. We also utilise a broad distribution strategy which includes further expansion of our controlled space activities to reduce the risk of over-reliance on a result, the company is exposed to a multitude of business partner particular key customers. Specifically, no single customer accounted risks. for more than 5% of the company’s sales in 2016. To reduce the risk of business interruption in the supply chain, we work with suppliers Injuries to individual athletes or poor on-field performance on the part who demonstrate reliability, quality and innovation. Furthermore, of sponsored teams or athletes could reduce their consumer appeal in order to minimise any potential negative consequences such and eventually result in lower sales and diminished attractiveness of as a violation of our Workplace Standards by our suppliers, we our brands. Failure to cement and maintain strong relationships with enforce strict control and inspection procedures at our suppliers retailers could have substantial negative effects on our wholesale and also demand adherence to social and environmental standards activities and thus the company’s business performance. Losing throughout our supply chain. see Sustainability, p. 78 In addition, we important customers in key markets due to sub-par relationship have selectively bought insurance coverage for the risk of business management would result in significant sales shortfalls. In a few interruptions caused by physical damage to suppliers’ premises. To individual markets, we work with distributors or strategic partners reduce dependency on any particular supplier, the company follows whose approach might differ from our own distribution practices a strategy of diversification. In this context, adidas works with a broad and standards, which could also negatively impact the company’s business performance. Similarly, failure to maintain strong network of suppliers and, for the vast majority of its products, does not have a single-sourcing model see Glossary, p. 218. relationships with suppliers or service providers could negatively impact the company’s sales and profitability. Risks may also arise from a dependence on particular suppliers, customers or service IT risks Theft or leakage of confidential and sensitive information or data providers. Over-reliance on a supplier for a substantial portion of (e.g. product data, employee data, consumer data) could lead to the company’s product volume, or over-dependence on a particular reputational damage, penalties and higher costs. Data leakage customer, increases the company’s vulnerability to delivery and sales could trigger in-depth forensic investigation resulting in temporary shortfalls and could lead to significant margin pressure. Business unavailability of key systems and business interruption. Key business partner default (including insolvency) or other disruptive events such processes, including product marketing, order management, as strikes may negatively affect the company’s business activities and warehouse management, invoice processing, customer support and result in additional costs and liabilities as well as lower sales for the financial reporting, are all dependent on IT systems. A significant company. Unethical business practices or improper behaviour on systems outage or application failure could therefore result in the part of business partners could have a negative spill-over effect considerable disruptions to our business. Virus or malware attacks on the company’s reputation, lead to higher costs or liabilities and could also lead to systems disruption and may result in the loss of disrupt business activities. business-critical and/or confidential information. To mitigate business partner risks, adidas has implemented various To mitigate these risks, our IT organisation proactively engages in measures. For example, we generally include clauses in contractual system preventive maintenance, service continuity planning and agreements with athletes, clubs and federations or other promotion adherence to applicable IT policies. Data security is managed by partners that allow us to suspend or even terminate our partnership restricting user access based on job description and adhering to in case of improper or unethical conduct. In addition, we work with a data protection regulations. We conduct security reviews of key broad portfolio of promotion partners, including individual athletes, systems and applications on a regular basis and have established club teams and federations or associations in numerous sports monitoring and alert systems to detect and properly tackle IT security in order to reduce the dependence on the success and popularity incidents. Additional security measures such as anti-virus software of a few individual partners. To ensure strong relationships with and firewalls are designed to further protect our systems and critical retailers, adidas is committed to delivering outstanding customer information. We perform multiple backups at alternating data centre service and providing our retail partners with the support and tools locations for the company’s core ERP system on a daily basis. In required to establish and maintain a mutually successful business addition, for the ERP system, our contingency solution allows us relationship. Customer relationship management is not only a key to quickly switch to a remote site if necessary – without any loss of activity for our sales force but also of utmost importance to our data. System security, controls and reliability are regularly reviewed and tested by the Internal Audit department. To increase awareness amongst employees with regard to information security and data privacy, we conduct various training programmes and regular information campaigns. 126 1 27 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks Inventory risks As we place initial production orders up to nine months in advance of delivery, adidas is exposed to inventory risks relating to misjudging LEGAL & COMPLIANCE RISKS Risks related to customs and tax regulations Numerous laws and regulations regarding customs and taxes affect consumer demand at the time of production planning. Overestimating the company’s business practices worldwide. Non-compliance with demand could result in inappropriate capacity utilisation at our regulations concerning product imports (including calculation of suppliers’ factories, lead to over-production and cause excess customs values), intercompany transactions or income taxes could inventory for the company as well as in the marketplace. This can have lead to substantial financial penalties and additional costs as well negative implications for our financial performance, including product as negative media coverage and therefore reputational damage, for returns, inventory obsolescence and higher levels of clearance example in case of understatements or underpayments of corporate activity as well as reduced liquidity due to higher operating working income taxes or customs duties. capital requirements. Similarly, underestimating demand can lead to product shortfalls at the point of sale. In this situation, adidas To proactively manage such risks, we constantly seek expert faces the risk of missed sales opportunities and/or customer and advice from specialised law and tax advisory firms. We closely consumer disappointment, which could lead to a reduction in brand monitor changes in legislation in order to properly adopt regulatory loyalty and hurt our reputation as an On-Time In-Full supplier. see requirements regarding customs and taxes. In addition, our Global Operations, p. 62 In addition, the company faces potential profitability internal legal, customs or tax departments advise our operational impacts from additional costs such as airfreight in efforts to speed up replenishment. management teams to ensure appropriate and compliant business practices. Furthermore, we work closely with customs authorities and governments worldwide to make sure we adhere to customs In order to mitigate these risks, we actively manage inventory and import regulations and obtain the required clearance of products levels, for example by continuous monitoring of stock levels as to fulfil sales demand. In order to reduce the financial risk, we also well as centralising stock holding and clearance activities. We create provisions in our financial statements in accordance with the also continuously strive to improve our forecasting and material relevant accounting regulations to account for potential disputes with planning processes. Our integrated business planning process customs or tax authorities. ensures alignment of demand and supply planning on a monthly basis and thus facilitates inventory and order book management. see Internal Management System, p. 86 In addition, our Global Operations FINANCIAL RISKS function is continuously improving the agility and flexibility of our planning environment in order to shorten order-to-delivery times Currency risks Currency risks for adidas are a direct result of multi-currency cash and ensure availability of products while trying to avoid excess flows within the company. Furthermore, translation impacts from inventories. In this context, the company’s strategic priority ‘Speed’ the conversion of non-euro-denominated results into the company’s is an important driver, leveraging market and sell-through data in functional currency, the euro, might lead to a material negative impact new ways. This, in turn, enables us to respond quickly to consumer on our company’s financial performance. The biggest single driver demand and to deliver concepts that are fresh and desirable and behind this risk results from the mismatch of the currencies required made available when and where they are wanted by the consumer. for sourcing our products versus the denominations of our sales. The see Corporate Strategy, p. 48 vast majority of our sourcing expenses are in US dollars, while sales are denominated in other currencies to a large extent – most notably the euro. Exposures are presented in the respective table. see Table 06 The exposure from firm commitments and forecasted transactions was calculated on a one-year basis. 127 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks 3 In line with IFRS 7 requirements, we have calculated the impact on However, many other financial and operational variables that could net income and shareholders’ equity based on changes in our most potentially reduce the effect of currency fluctuations are excluded important currency exchange rates. The calculated impacts mainly result from changes in the fair value of our hedging instruments. from the analysis. For instance: — Interest rates, commodity prices and all other exchange rates The analysis does not include effects that arise from the translation are assumed constant. of our foreign entities’ financial statements into the company’s reporting currency, the euro. The sensitivity analysis is based on the — Exchange rates are assumed at a year-end value instead of the more relevant sales-weighted average figure, which we utilise net balance sheet exposure, including intercompany balances from internally to better reflect both the seasonality of our business monetary assets and liabilities denominated in foreign currencies. and intra-year currency fluctuations. Moreover, all outstanding currency derivatives were re-evaluated using hypothetical foreign exchange rates to determine the effects — The underlying forecasted cash flow exposure (which the hedge instrument mainly relates to) is not required to be revalued in on net income and equity. The analysis was performed on the same this analysis. basis for both 2015 and 2016. — Operational issues, such as potential discounts for key accounts, which have high transparency regarding the impacts of currency Based on this analysis, a 10% increase in the euro versus the US on our sourcing activities (due to their own private label sourcing dollar at December 31, 2016 would have led to a € 7 million increase efforts), are also excluded from this analysis. in net income. see Table 07 The more negative market values of the US dollar hedges would have decreased shareholders’ equity by € 277 million. A 10% weaker euro at December 31, 2016 would have Utilising a centralised currency risk management system, we hedge currency needs for projected sourcing requirements on a rolling basis led to a € 8 million decrease in net income. Shareholders’ equity up to 24 months in advance. In rare instances, hedges are contracted would have increased by € 355 million. The impacts of fluctuations of beyond the 24-month horizon. see Treasury, p. 101 Our goal is to have the US dollar against the Russian rouble and of the euro against the the vast majority of our hedging volume secured six months prior to British pound and the Japanese yen on net income and shareholders’ the start of a given season. The company also largely hedges balance equity are also included in accordance with IFRS requirements. sheet risks. Due to our strong global position, we are able to partly minimise currency risk by utilising natural hedges. 06 EXPOSURE TO FOREIGN EXCHANGE RISK BASED ON NOTIONAL AMOUNTS, € IN MILLIONS USD GBP JPY RUB As at December 31, 2016 Exposure from firm commitments and forecasted transactions Balance sheet exposure including intercompany exposure Total gross exposure Hedged with other cash flows Hedged with currency options Hedged with forward contracts Net exposure As at December 31, 2015 Exposure from firm commitments and forecasted transactions Balance sheet exposure including intercompany exposure Total gross exposure Hedged with other cash flows Hedged with currency options Hedged with forward contracts Net exposure (6,763) (478) (7,241) 114 405 5,253 (1,469) (5,849) (429) (6,278) 110 4,135 (2,033) 985 (11) 974 (985) (11) 834 (47) 787 (59) (549) 179 615 (6) 609 (54) (578) (23) 483 7 490 (414) 76 252 28 280 (53) 227 299 10 309 (47) 262 128 1 29 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks 07 SENSITIVITY ANALYSIS OF FOREIGN EXCHANGE RATE CHANGES € IN MILLIONS As at December 31, 2016 Equity Net income Equity Net income As at December 31, 2015 Equity Net income Equity Net income USD GBP JPY RUB EUR +10% EUR +10% EUR +10% USD +10% (277) 7 85 1 53 1 – 5 EUR – 10% EUR – 10% EUR – 10% USD – 10% 355 (8) (104) (1) (66) (1) – (5) EUR +10% EUR +10% EUR +10% USD +10% (225) 7 61 4 40 (1) – 4 EUR – 10% EUR – 10% EUR – 10% USD – 10% 238 (9) (61) (5) (41) 1 – (4) Our gross US dollar cash flow exposure after natural hedges calculated for 2017 was around € 7.2 billion at year-end 2016, which we hedged Credit risks A credit risk arises if a customer or other counterparty to a financial using forward exchange contracts, currency options and currency instrument fails to meet its contractual obligations. see Note 30, p. 181 swaps. see Table 06 Our Treasury Policy allows us to utilise hedging adidas is exposed to credit risks from its operating activities and instruments, such as currency options or option combinations, which from certain financing activities. Credit risks arise principally from provide protection from negative exchange rate fluctuations while accounts receivable and, to a lesser extent, from other third-party – at the same time – retaining the potential to benefit from future contractual financial obligations such as other financial assets, favourable exchange rate developments in the financial markets. short-term bank deposits and derivative financial instruments. Without taking into account any collateral, the carrying amount of As 2017 hedging has almost been completed, it is foreseeable that the financial assets and accounts receivable represents the maximum EUR/USD conversion rate will be less favourable compared to 2016. exposure to credit risk. Volume forecast variances and currency volatility in countries such as Argentina or Russia will expose the company to currency effects At the end of 2016, there was no relevant concentration of credit in 2017. see Subsequent Events and Outlook, p. 115 risk by type of customer or geography. Our credit risk exposure is mainly influenced by individual customer characteristics. Under Risks related to impairment of goodwill/other the company’s credit policy, new customers are analysed for intangible assets As a result of various acquisitions in the past, our balance sheet creditworthiness before standard payment and delivery terms and conditions are offered. Tolerance limits for accounts receivable carries book values of approximately € 1.4 billion in goodwill and are also established for each customer. Both creditworthiness € 1.8 billion in other intangible assets (including trademarks). and accounts receivable limits are monitored on an ongoing basis. see Note 13, p. 162 see Note 14, p. 163 Deterioration in the business Customers that fail to meet the company’s minimum creditworthiness performance, and particularly in future business prospects, as well are, in general, allowed to purchase products only on a prepayment as significant exchange rate fluctuations could require corrections basis. of these book values by incurring impairment charges. In addition, increases in market interest rates could trigger increases in discount Other activities to mitigate credit risks include retention of title rates used in our impairment test for goodwill/trademarks and clauses as well as, on a selective basis, credit insurances, the sale require impairment charges. An impairment charge would be a of accounts receivable without recourse, and bank guarantees. purely accounting, non-cash effect impacting the company’s operating result. Objective evidence that financial assets are impaired includes, for instance, significant financial difficulty of the issuer or debtor, indications of the potential bankruptcy of the borrower and the disappearance of an active market for a financial asset because of financial difficulties. The company utilises allowance accounts for impairments that represent our estimate of incurred credit losses with respect to accounts receivable. 12 9 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Material Risks 3 Allowance accounts are used as long as the company is satisfied 08 SET-OFF POSSIBILITIES OF DERIVATIVE FINANCIAL that recovery of the amount due is possible. Once this is no longer the case, the amounts are considered irrecoverable and are directly written off against the financial asset. The allowance consists of two components: — firstly, an allowance established for all receivables dependent on the ageing structure of receivables past due date and — secondly, a specific allowance that relates to individually assessed risks for each specific customer – irrespective of ageing. At the end of 2016, no customer accounted for more than 10% of accounts receivable. ASSETS AND LIABILITIES € IN MILLIONS 2016 2015 Assets Gross amounts of recognised financial assets 383 228 Financial instruments which qualify for set-off in the statement of financial position Net amounts of financial assets presented in the statement of financial position Set-off possible due to master agreeements Total net amount of financial assets 0 383 (96) 287 0 228 (57) 171 Liabilities The Treasury department arranges currency, commodity and interest Gross amounts of recognised financial liabilities (112) (61) rate hedges, and invests cash, with major banks of a high credit standing throughout the world. Group companies are authorised to work with banks rated BBB+ or higher. Only in exceptional cases are Financial instruments which qualify for set-off in the statement of financial position Net amounts of financial liabilities presented in the statement of financial position subsidiaries authorised to work with banks rated lower than BBB+. see Treasury, p. 101 To limit risk in these cases, restrictions are clearly Set-off possible due to master agreeements Total net amount of financial liabilities 0 0 (112) 96 (16) (61) 57 (4) stipulated, such as maximum cash deposit levels. In addition, the credit default swap premiums of our partner banks are monitored on a monthly basis. In the event that the defined threshold is exceeded, credit balances are shifted to banks compliant with the limit. Interest rate risks Changes in global market interest rates affect future interest payments for variable-interest liabilities. As the company does not We believe our risk concentration is limited due to the broad have material variable-interest liabilities, even a significant increase distribution of our investment business with more than 20 globally in interest rates should have only slight adverse effects on the operating banks. At December 31, 2016, no bank accounted for more company’s profitability, liquidity and financial position. than 10% of our investments. Including subsidiaries’ short-term deposits in local banks, the average concentration was 1%. This leads In 2016, the company did not use interest-rate derivatives to mitigate to a maximum exposure of € 96 million in the event of default of any interest rate risks. single bank. We have further diversified our investment exposure by investing into AAA-rated money market funds. To reduce interest rate risks and maintain financial flexibility, a core tenet of our company’s financial strategy is to continue to use surplus In addition, in 2016, we held derivatives with a positive fair market cash flow from operations to reduce gross borrowings. Beyond that, value in the amount of € 406 million. The maximum exposure to any we may consider adequate hedging strategies through interest rate single bank resulting from these assets amounted to € 92 million and derivatives in order to mitigate interest rate risks. see Treasury, p. 101 the average concentration was 3%. In accordance with IFRS 7, the following table includes further levels. Given the central banks’ current interest rate policies and information about set-off possibilities of derivative financial assets macroeconomic uncertainty, we do not expect any major interest and liabilities. see Table 08 The majority of agreements between rate increases in Europe in 2017. Due to the positive macroeconomic financial institutions and adidas include a mutual right to set off. development in the USA, however, we believe an increase in US However, these agreements do not meet the criteria for offsetting interest rates is likely. At December 31, 2016, 77% of the company’s in the statement of financial position, because the right to set off is financing was denominated in euros. In 2016, interest rates in Europe and North America remained at low enforceable only in the event of counterparty defaults. The carrying amounts of recognised derivative financial instruments, Financing and liquidity risks Liquidity risks arise from not having the necessary resources which are subject to the mentioned agreements, are also presented available to meet maturing liabilities with regard to timing, in the following table. see Table 08 volume and currency structure. In addition, the company faces the risk of having to accept unfavourable financing terms due to 13 0 1 31 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Opportunities 09 FUTURE CASH OUTFLOWS € IN MILLIONS Up to 1 year Up to 2 years Up to 3 years Up to 4 years Up to 5 years More than 5 years Total As at December 31, 2016 Bank borrowings Private placements 1 Eurobond 1 Convertible bond 2 Accounts payable Other financial liabilities Accrued liabilities 3 Derivative financial liabilities Total As at December 31, 2015 Bank borrowings Private placements 1 Eurobond 1 Convertible bond Accounts payable Other financial liabilities Accrued liabilities 3 Derivative financial liabilities Total 379 16 2,496 90 704 110 3,795 229 142 16 1 2,024 58 596 60 3,126 16 16 9 3 44 16 502 18 0 536 16 17 616 435 1,116 379 0 16 0 17 0 616 0 435 16 16 16 1,053 2,496 107 713 113 4,924 229 142 1,133 503 2,024 76 596 60 0 16 0 16 0 16 0 1,053 4,763 1 Including interest payments. 2 We do not expect cash outflow but conversions into adidas AG shares. 3 Accrued interest excluded. liquidity restraints. Our Treasury department uses an efficient cash management system to manage liquidity risk. At December 31, 2016, ILLUSTRATION OF OPPORTUNITIES cash and cash equivalents together with marketable securities In this report, we focus on opportunities we deem to be relevant amounted to € 1.515 billion (2015: € 1.370 billion). Moreover, our for adidas in 2017. The assessment is shown in the opportunities company maintains € 2.403 billion (2015: € 2.134 billion) in bilateral overview table. see Table 10 credit lines, which are designed to ensure sufficient liquidity at all times. Of these, € 700 million consist of core committed lines. see Treasury, p. 101 Future cash outflows arising from financial liabilities that are recognised in the consolidated statement of financial position are STRATEGIC AND OPERATIONAL OPPORTUNITIES Organic growth opportunities Controlled space: The sporting goods retail environment is changing constantly. We therefore continue to adapt our distribution strategy to presented in the table above. see Table 09 This includes payments the constantly changing sporting goods retail environment and have to settle obligations from borrowings as well as cash outflows from made controlled space initiatives a strategic priority. see Corporate cash-settled derivatives with negative market values. Financial Strategy, p. 48 This includes retail space management with key retail liabilities that may be settled in advance without penalty are included partners, the further expansion of our e-commerce activities as well on the basis of the earliest date of potential repayment. Cash flows as the introduction of new own-retail store formats. We also continue for variable-interest liabilities are determined with reference to the to expand our direct-to-consumer activities in emerging markets conditions at the balance sheet date. such as South East Asia, the Middle East and North Africa. Successful results from these initiatives could enable us to accelerate top- and We ended the year 2016 with net borrowings of € 103 million (2015: bottom-line growth. € 460 million). Thus, the ratio of net borrowings over EBITDA was 0.1 times at year-end, which is below the company’s mid-term target corridor of below two times. 131 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Risk and Opportunity Report – Illustration of Opportunities GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Management Assessment of Performance, Risks and Opportunities, and Outlook 3 3 10 CORPORATE OPPORTUNITIES OVERVIEW Potential impact Change (2015 rating) Likelihood Change (2015 rating) Strategic and operational opportunities Organic growth opportunities Opportunities related to organisational and process improvements Financial opportunities Favourable financial market changes High Medium Very High (Medium) Possible Possible Possible Marketing activation/promotion partnerships: Well-executed campaigns and marketing initiatives could increase brand desire In addition to the above-mentioned opportunities, we have identified various other strategic and operational opportunities which are and consumer appeal, which may drive full-price sell-through not considered to be relevant in 2017, however are considered to and result in higher-than-expected sales and profit. In addition, have a potential mid- to long-term positive impact on our top- and outstanding competitive performance of promotion partners, e.g. individual athletes, club teams or national teams, may further bottom-line performance. These opportunities include, amongst others: increase their popularity amongst consumers. As a result, adidas may generate higher sales of signature footwear or licensed apparel and accessories. Partnerships: adidas is constantly evolving its partnership network within sport and culture, such as with academic organisations and companies from other industries in research and development. These Opportunities related to organisational and process partnerships have generated multiple new growth avenues for adidas, improvements Process optimisation: Continued optimisation of key business processes and strict cost control are vital to achieving high profitability as we have acquired product or process know-how and gained access to new distribution channels or markets. Partnerships, strategic alliances and collaborations may enable us to pursue further growth and return on invested capital. We are confident that there is still and efficiency opportunities. significant opportunity to improve process efficiency and effectiveness and further streamline cost structures throughout our company. For example, more consistent, effective and efficient in-store execution could lead to an increase in conversion sell-through. As a result, we may achieve higher-than-expected top- see Glossary, p. 216 and full-price and bottom-line growth. Personnel opportunities: The recruitment of highly qualified talent as well as the training and development of our employees, in particular for our own-retail segment, may help us increase productivity, efficiency and employee engagement and generate better-than- expected top- and bottom-line results. In addition, the successful development of talents across the company may increase employee engagement and performance and thus contribute positively to sales FINANCIAL OPPORTUNITIES and profitability improvements. Favourable financial market changes Favourable exchange and interest rate developments can potentially have a positive impact on the company’s financial results. Our Macroeconomic, sociopolitical and regulatory opportunities: Since we are a consumer goods company, consumer confidence and Treasury department closely monitors the financial markets to spending can impact our sales development. Therefore, better than identify and exploit opportunities. Translation effects from the initially forecasted macroeconomic developments, which support conversion of non-euro-denominated results into our company’s increased private consumption, can have a positive impact on our functional currency, the euro, might positively impact our company’s sales and profitability. In addition, legislative and regulatory changes, financial performance. see Treasury, p. 101 e.g. the elimination of trade barriers, can potentially open up new channels of distribution or create cost savings and, as a result, positively impact the company’s profitability. 132 1 33 1 33 3 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Management Assessment of Performance, Risks and Opportunities, and Outlook MANAGEMENT ASSESSMENT OF PERFORMANCE, RISKS AND OPPORTUNITIES, AND OUTLOOK ASSESSMENT OF PERFORMANCE VERSUS TARGETS In 2016, we saw an improvement in operating working capital. We communicate our financial targets on an annual basis. We also provide updates throughout the year as appropriate. In 2016, the While we had initially expected average operating working capital as a percentage of sales to be around the prior year level of 20.5%, company delivered a strong operational and financial performance. average operating working capital as a percentage of sales ended the Sales development was favourably impacted by rising consumer year 2016 at 20.2%, thus exceeding our initial expectations. Capital spending on sporting goods, supported by the ongoing robust expenditure (excluding acquisitions) amounted to € 651 million in athleisure trend as well as increased health awareness and sports 2016, below our initial guidance of around € 750 million, reflecting participation in most geographical areas. see Economic and Sector Development, p. 90 Major sporting events, such as the UEFA EURO 2016 fewer-than-expected net store openings throughout the year. Investments were mainly focused on controlled space initiatives of or the Copa América, also provided a positive stimulus to sales. In the adidas and Reebok brands, aimed at further strengthening our light of the accelerating brand momentum, driven by the successful own-retail activities, franchise store presence and shop-in-shop execution of the company’s strategic business plan ‘Creating the presentations. Other areas of investments included logistics New’, innovative and appealing product launches as well as inspiring infrastructure and IT systems as well as the further development marketing campaigns, we increased our top- and bottom-line of our corporate headquarters in Herzogenaurach, Germany. see guidance for the full year 2016 several times throughout the year, Statement of Financial Position and Statement of Cash Flows, p. 96 compared to our initial expectations. see Table 01 Beyond our financial performance, we also actively monitor In 2016, revenues increased 18% on a currency-neutral basis, driven non-financial KPIs. see Internal Management System, p. 86 In 2016, our by strong growth at both the adidas and the Reebok brand. Currency- Net Promoter Score (NPS) saw a strong improvement relative to neutral sales grew at double-digit rates in nearly all market segments. our major competitor, reflecting the strong enhancement in the As a result, revenues increased significantly above our initial guidance desirability of our brands and products throughout the year. We are of 10% to 12% currency-neutral sales growth. Gross margin increased confident that this positive trend will continue, as we project strong 0.3 percentage points to 48.6%, exceeding our initial forecast of 47.3% improvements in our NPS relative to our major competitor in 2017 to 47.8%. This development was due to the significantly larger-than- as well. Also from a market share perspective, we continue to be expected positive effects from a better pricing, product and channel very encouraged by our strong performance in key categories as mix as well as lower input costs, which more than offset the severe well as key markets, as defined in the company’s strategic business headwinds from negative currency effects. The operating margin plan ‘Creating the New’. In particular, Greater China, North America increased 1.3 percentage points excluding goodwill impairment and Western Europe were notable standouts, as we improved our losses in the prior year to 7.7%. This was above our initial guidance market share in these regions. In North America, we saw momentum of an at least stable operating margin of 6.5% excluding goodwill accelerate considerably in the year, following significant investments impairment losses and a direct consequence of the gross margin in the region’s organisational set-up, highly engaging consumer increase, the positive effects from lower operating expenses as a activation initiatives as well as innovative product launches. Our percentage of sales as well as the non-recurring gain related to diligence and discipline in sustainability matters continues to yield the early termination of the Chelsea F.C. contract. As a result, net strong recognition for our company. In 2016, adidas AG was again income from continuing operations was up 41% excluding goodwill represented in a variety of high-profile sustainability indices. For impairment losses in the prior year to € 1.019 billion and therefore the 17th consecutive time, adidas AG was selected to join the Dow well above our initial guidance of an improvement between 10% and Jones Sustainability Indices (DJSI). In the sector ‘Textiles, Apparel & 12% to around € 800 million. see Income Statement, p. 92 Luxury Goods’, adidas AG was rated industry best in the criteria Brand 133 133 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Management Assessment of Performance, Risks and Opportunities, and Outlook GROUP MANAGE ME NT RE PORT – FI NANC IAL RE VIEW Management Assessment of Performance, Risks and Opportunities, and Outlook 3 Management, Innovation Management, Risk & Crisis Management, an official rating by any of the leading rating agencies. see Treasury, Environmental Policy & Management Systems, Operational Eco-Efficiency, Corporate Citizenship & Philanthropy and Stakeholder p. 101 We remain confident that our earnings strength forms a solid basis for our future business development and provides the Engagement. Furthermore, in 2016, adidas was ranked fifth among resources necessary to pursue the opportunities available to the the Global 100 Most Sustainable Corporations in the World (Global company. Compared to the prior year, our assessment of certain risks 100 Index), making it to the Top Ten for the third consecutive year. has changed in terms of likelihood of occurrence and/or potential see Sustainability, p. 78 Finally, while we maintained a strong level of financial impact. The partial changes in risk evaluation have no on-time in-full (OTIF) deliveries to our customers and own-retail substantial impact on the overall adidas risk profile, which we believe stores in 2016, the overall performance was slightly below the prior has improved compared to the prior year. year level, reflecting the strong increase in volumes throughout the year. see Global Operations, p. 62 ASSESSMENT OF FINANCIAL OUTLOOK In March 2015, adidas unveiled its 2020 strategic business plan named ASSESSMENT OF OVERALL RISKS AND OPPORTUNITIES Creating the New, which defines strategies and objectives for the Our Risk Management team aggregates all risks and opportunities period up to 2020. The strategy aims at further accelerating growth reported by different business units and functions through the by significantly increasing brand desirability. This, in turn, is expected quarterly risk and opportunity assessment process. In addition, the Executive Board discusses and assesses risks and opportunities on a to spur top- and bottom-line growth for the company in the years to come. With 2016 marking the first full year of ‘Creating the New’, regular basis. see Risk and Opportunity Report, p. 118 Taking into account the our success in 2016 is the direct result of our strategic business plan potential financial impact as well as the likelihood of materialising introduced in 2015 and proof positive that our brands and products, as of the risks explained within this report, and considering the strong a result of the Brand Leadership approach, are resonating extremely balance sheet as well as the current business outlook, we do not well with the consumer. see adidas Brand Strategy, p. 55 Therefore, going foresee any material jeopardy to the viability of the company as a forward we will focus on further executing the strategy, while at the going concern. This assessment is also supported by the historical same time fine-tuning it wherever needed and whenever necessary. response to our financing demands. adidas therefore has not sought This will ensure we continue our momentum in 2017 and beyond, 01 COMPANY TARGETS VERSUS ACTUAL KEY METRICS Sales (year-over-year change, currency-neutral) Gross margin Other operating expenses (in % of net sales) Operating profit (€ in millions) Operating margin Net income from continuing operations (€ in millions) Basic earnings per share from continuing operations (in €) Average operating working capital (in % of net sales) 2015 Results 1 10% 48.3% 2016 Targets 1 2016 Results 2017 Outlook 2017 Outlook (in case of planned divestitures) 2 to increase at a rate between 10% and 12% 18% to increase at a rate between 11% and 13% to increase at a rate between 12% and 14% 3 47.3% to 47.8% 48.6% to increase up to 0.5pp to a level of up to 49.1% to increase up to 0.3pp to a level of up to 49.5% 43.1% below prior year level 42.8% below prior year level below prior year level 1,094 4 6.5% 4 720 4 3.54 4 n.a. 1,491 to increase at a rate between 18% and 20% to increase at a rate between 13% and 15% 5 remain at least stable versus prior year level to increase at a rate between 10% and 12% to around € 800 million 7.7% 1,019 to increase between 0.6pp and 0.8pp to a level between 8.3% and 8.5% to increase between 0.2pp and 0.4pp to a level between 8.6% and 8.8% to increase at a rate between 18% and 20% to a level between € 1.200 billion and € 1.225 billion to increase at a rate between 13% and 15% to a level between € 1.200 billion and € 1.225 billion n.a. 5.08 to increase at a rate between 18% and 20% to increase at a rate between 13% and 15% 6 20.5% around prior year level 20.2% modest increase modest increase Capital expenditure 7 (€ in millions) 513 around 750 651 around € 1.1 billion around € 1.1 billion 1 As published on March 3, 2016. The outlook was updated several times over the course of the year. 2 In case of the planned divestiture of the TaylorMade business with the brands TaylorMade, Adams Golf and Ashworth as well as the CCM Hockey business; 2016 and 2017 adjusted. 3 Based on adjusted 2016 net sales of € 18,483 million. 4 Excluding goodwill impairment of € 34 million. 5 Based on adjusted operating profit of € 1,552 million. 6 Based on adjusted basic earnings per share from continuing operations of € 5.30. 7 Excluding acquisitions and finance leases. 13 4 1 35 3 GROUP MANAGEMENT REPORT – FINANCIA L REVIEW Management Assessment of Performance, Risks and Opportunities, and Outlook resulting in strong top- and bottom-line improvements until 2020. We project currency-neutral revenues to increase at a rate of 10% to 12% on average per year until 2020 compared to the 2015 results. By outperforming the sporting goods industry, our brands will increase market share over the period. This, in combination with the expected gross margin improvement and our ability to generate operating leverage, will significantly increase our profitability. As a result, net income is expected to grow at a higher rate than the top line and is projected to expand by 20% to 22% on average per year during the five-year period. see Corporate Strategy, p. 48 For 2017, we also project strong revenue and profitability improvements which will be the result of our extensive pipeline of new and innovative products, increased brand-building activities, the tight control of inventory levels and stringent cost management. Our earnings position is expected to benefit from an expansion in gross margin as well as the positive effect of lower other operating see Subsequent Events and Outlook, p. 115 expenses as a percentage of sales. We believe that our outlook for 2017 is realistic within the scope of the current trading and economic environment. Assuming no significant deterioration in the global economy, we are confident that we will significantly grow our top and bottom line in 2017. However, ongoing uncertainties regarding the economic outlook and consumer sentiment in both developed and emerging economies as well as persisting high levels of currency volatility represent risks to the achievement of our stated financial goals and aspirations. see Economic and Sector Development, p. 90 No other material event between the end of 2016 and the publication of this report has altered our view. 135 CIAL D E AT OLID N A FIN S N O C S T A T E M E N T S 1 37 Consolidated Financial Statements 4 S T A T E M E N T S — CONSOLIDATED STATEMENT OF FINANCIAL POSITION — CONSOLIDATED INCOME STATEMENT — CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME — CONSOLIDATED STATEMENT OF CHANGES IN EQUITY — CONSOLIDATED STATEMENT OF CASH FLOWS — NOTES Notes to the Consolidated Statement of Financial Position Notes to the Consolidated Income Statement Additional Information — STATEMENT OF MOVEMENTS OF INTANGIBLE AND TANGIBLE ASSETS — SHAREHOLDINGS — RESPONSIBILITY STATEMENT — AUDITOR’S REPORT 138 140 141 142 143 144 159 188 194 202 204 208 209 137 4 CONSOLIDATED FINA NCIA L S TATEMENTS Consolidated Statement of Financial Position 4 CON SOL IDATE D FI NANCI AL S TAT EM E NTS Consolidated Statement of Financial Position CONSOLIDATED STATEMENT OF FINANCIAL POSITION ADIDAS AG CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IFRS) € IN MILLIONS Note Dec. 31, 2016 Dec. 31, 2015 Change in % Assets Cash and cash equivalents Short-term financial assets Accounts receivable Other current financial assets Inventories Income tax receivables Other current assets Assets classified as held for sale Total current assets Property, plant and equipment Goodwill Trademarks Other intangible assets Long-term financial assets Other non-current financial assets Deferred tax assets Other non-current assets Total non-current assets Total assets The accompanying notes are an integral part of these consolidated financial statements. 5 6 7 8 9 35 10 11 12 13 14 14 15 16 35 17 1,510 5 2,200 729 3,763 98 580 – 8,886 1,915 1,412 1,680 167 194 96 732 94 1,365 5 2,049 367 3,113 97 489 12 7,497 1,638 1,392 1,628 188 140 99 637 124 6,290 5,846 15,176 13,343 10.6 2.5 7.4 98.7 20.9 1.1 18.5 (100.0) 18.5 16.9 1.4 3.2 (11.5) 38.3 (2.6) 14.9 (23.9) 7.6 13.7 138 1 39 4 CONSOLIDATED FINA NCIA L S TATEMENTS Consolidated Statement of Financial Position ADIDAS AG CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IFRS) € IN MILLIONS Note Dec. 31, 2016 Dec. 31, 2015 Change in % Liabilities and equity Short-term borrowings Accounts payable Other current financial liabilities Income taxes Other current provisions Current accrued liabilities Other current liabilities Liabilities classified as held for sale Total current liabilities Long-term borrowings Other non-current financial liabilities Pensions and similar obligations Deferred tax liabilities Other non-current provisions Non-current accrued liabilities Other non-current liabilities Total non-current liabilities Share capital Reserves Retained earnings Shareholders’ equity Non-controlling interests Total equity 18 19 35 20 21 22 11 18 23 24 35 20 21 25 26 28 636 2,496 201 402 573 2,023 434 – 6,765 982 22 355 387 44 120 46 1,957 201 749 5,521 6,472 (17) 6,455 366 2,024 143 359 456 1,684 331 0 5,364 1,463 18 273 368 50 120 40 2,332 200 592 4,874 5,666 (18) 5,648 Total liabilities and equity 15,176 13,343 The accompanying notes are an integral part of these consolidated financial statements. 73.7 23.3 40.7 12.1 25.6 20.1 31.1 (100.0) 26.1 (32.9) 23.6 30.4 5.2 (11.1) (0.2) 14.2 (16.1) 0.6 26.5 13.3 14.2 4.0 14.3 13.7 139 4 CONSOLIDATED FINA NCIA L S TATEMENTS Consolidated Income Statement 4 CON SOL IDATE D FI NANCI AL S TAT EM E NTS Consolidated Statement of Comprehensive Income CONSOLIDATED INCOME STATEMENT ADIDAS AG CONSOLIDATED INCOME STATEMENT (IFRS) € IN MILLIONS Net sales Cost of sales Gross profit (% of net sales) Royalty and commission income Other operating income Other operating expenses (% of net sales) Goodwill impairment losses Operating profit (% of net sales) Financial income Financial expenses Income before taxes (% of net sales) Income taxes (% of income before taxes) Net income from continuing operations (% of net sales) Gains/(losses) from discontinued operations, net of tax Net income (% of net sales) Net income attributable to shareholders (% of net sales) Net income attributable to non-controlling interests Basic earnings per share from continuing operations (in €) Diluted earnings per share from continuing operations (in €) Basic earnings per share from continuing and discontinued operations (in €) Diluted earnings per share from continuing and discontinued operations (in €) The accompanying notes are an integral part of these consolidated financial statements. Note 37 31 12, 14, 32 13 34 34 35 3 36 36 36 36 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 19,291 9,912 9,379 48.6% 109 266 8,263 42.8% - 1,491 7.7% 28 74 1,444 7.5% 426 29.5% 1,019 5.3% 1 1,020 5.3% 1,017 5.3% 2 5.08 4.99 5.08 4.99 16,915 8,748 8,168 48.3% 119 96 7,289 43.1% 34 1,059 6.3% 46 67 1,039 6.1% 353 34.0% 686 4.1% (46) 640 3.8% 634 3.7% 6 3.37 3.37 3.15 3.15 Change 14.0% 13.3% 14.8% 0.3pp (8.0%) 175.2% 13.4% (0.3pp) (100.0%) 40.7% 1.5pp (40.1%) 11.3% 39.0% 1.3pp 20.6% (4.5pp) 48.5% 1.2pp n.a. 59.3% 1.5pp 60.5% 1.5pp (61.9%) 50.5% 47.9% 61.5% 58.7% 14 0 1 41 4 CONSOLIDATED FINA NCIA L S TATEMENTS Consolidated Statement of Comprehensive Income CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ADIDAS AG CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IFRS) € IN MILLIONS Net income after taxes 1,020 640 Note Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 Items of other comprehensive income that will not be reclassified subsequently to profit or loss Remeasurements of defined benefit plans (IAS 19), net of tax 1 Subtotal of items of other comprehensive income that are or will not be reclassified subsequently to profit or loss Items of other comprehensive income that are or will be reclassified to profit or loss when specific conditions are met Net gain/(loss) on cash flow hedges, net of tax Reclassification of foreign currency differences on loss of significant influence Currency translation differences Subtotal of items of other comprehensive income that will be reclassified to profit or loss when specific conditions are met 24 30 Other comprehensive income Total comprehensive income Attributable to shareholders of adidas AG Attributable to non-controlling interests 1 Includes actuarial gains or losses relating to defined benefit obligations, return on plan assets (excluding interest income) and the asset ceiling effect. The accompanying notes are an integral part of these consolidated financial statements. (60) (60) 87 (0) 71 158 97 1,117 1,115 2 8 8 (118) 5 129 16 24 664 659 5 141 4 CONSOLIDATED FINA NCIA L S TATEMENTS Consolidated Statement of Changes in Equity 4 CON SOL IDATE D FI NANCI AL S TAT EM E NTS Consolidated Statement of Cash Flows CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ADIDAS AG CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (IFRS) € IN MILLIONS Note Share capital Capital reserve Cumulative currency translation differences Hedging reserve Other reserves 1 Retained earnings Share- holders’ equity Non- controlling interests Total equity Balance at December 31, 2014 204 777 Net income recognised directly in equity Net income Total comprehensive income Repurchase of treasury shares Dividend payment Transactions with non-controlling interests Balance at December 31, 2015 Net income recognised directly in equity Net income Total comprehensive income Re-issuance of treasury shares due to the conversion of convertible bonds Repurchase of treasury shares Dividend payment Equity-settled share-based payment 26 26 26 26 26 26 27 (257) 134 176 (117) 134 (117) (4) 200 777 (123) 71 71 59 87 87 3 (2) 60 (117) 4,839 5,624 8 8 (13) (122) (60) (60) 634 634 (297) (303) 4,874 1,017 1,017 178 (228) (320) 1 25 634 659 (301) (303) (13) 5,666 97 1,017 1,115 240 (229) (320) 1 (7) (1) 6 5 (6) (10) (18) 0 2 2 (2) 5,618 24 640 664 (301) (309) (24) 5,648 97 1,020 1,117 240 (229) (322) 1 Balance at December 31, 2016 201 838 (52) 146 (182) 5,521 6,472 (17) 6,455 1 Reserves for remeasurements of defined benefit plans (IAS 19), option plans and acquisition of shares from non-controlling interest shareholders. The accompanying notes are an integral part of these consolidated financial statements. 142 1 43 4 CONSOLIDATED FINA NCIA L S TATEMENTS Consolidated Statement of Cash Flows CONSOLIDATED STATEMENT OF CASH FLOWS ADIDAS AG CONSOLIDATED STATEMENT OF CASH FLOWS (IFRS) € IN MILLIONS Operating activities: Income before taxes Adjustments for: Depreciation, amortisation and impairment losses Reversals of impairment losses Unrealised foreign exchange (gains)/losses, net Interest income Interest expense (Gains)/losses on sale of property, plant and equipment and intangible assets, net Other non-cash income Operating profit before working capital changes Increase in receivables and other assets Increase in inventories Increase in accounts payable and other liabilities Cash generated from operations before interest and taxes Interest paid Income taxes paid Net cash generated from operating activities – continuing operations Net cash (used in)/generated from operating activities – discontinued operations Net cash generated from operating activities Investing activities: Purchase of trademarks and other intangible assets Proceeds from sale of trademarks and other intangible assets Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale of assets held for sale Proceeds from sale of a disposal group Acquisition of subsidiaries and other business units net of cash acquired Proceeds from disposal of discontinued operations net of cash disposed Purchase of short-term financial assets Purchase of investments and other long-term assets Interest received Net cash used in investing activities – continuing operations Net cash used in investing activities – discontinued operations Net cash used in investing activities Financing activities: Repayments of long-term borrowings Repayments of finance lease obligations Dividend paid to shareholders of adidas AG Dividend paid to non-controlling interest shareholders Acquisition of non-controlling interests Repurchase of treasury shares Proceeds from short-term borrowings Repayments of short-term borrowings Net cash used in financing activities Effect of exchange rates on cash Increase/(decrease) of cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of period The accompanying notes are an integral part of these consolidated financial statements. 143 Note Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 1,444 1,039 12, 13, 14, 32, 34 31 34 34 31, 32 11 11 4 26 28 26 18 5 5 397 (2) (7) (21) 70 (21) (0) 1,859 (411) (621) 1,006 1,834 (46) (439) 1,348 (1) 1,348 (65) 0 (586) 5 14 29 – – (0) (33) 21 (614) – (614) – (3) (320) (2) (24) (218) 150 (138) (553) (35) 145 1,365 1,510 393 (1) 36 (20) 65 15 (1) 1,527 (183) (639) 823 1,527 (55) (386) 1,086 3 1,090 (49) 0 (464) 6 – – (214) 164 (0) (48) 20 (584) (6) (591) (10) (2) (303) (6) – (301) 35 (103) (691) (126) (318) 1,683 1,365 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes NOTES adidas AG is a listed German stock corporation and parent of the adidas Group located at Adi-Dassler-Str. 1, 91074 Herzogenaurach, Germany, and is entered into the commercial register at the Local Court of Fürth (HRB 3868). adidas AG and its subsidiaries (collectively ‘adidas’, ‘the Group’ or ‘the company’) design, develop, produce and market a broad range of athletic and sports lifestyle products. As at December 31, 2016, the operating activities of adidas are divided into 13 operating segments: Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan, Middle East, South Korea, Southeast Asia/Pacific, TaylorMade-adidas Golf, CCM Hockey, Runtastic and Other centrally managed businesses. Due to the divestiture of the Rockport operating segment on July 31, 2015, income and expenses of the Rockport operating segment were reported as discontinued operations as at December 31, 2015. see Note 03 Each market comprises all wholesale, retail and e-commerce business activities relating to the distribution and sale of products of the adidas and Reebok brands to retail customers and end consumers. adidas and Reebok branded products include footwear, apparel and hardware, such as bags and balls. The operating segment TaylorMade-adidas Golf includes the four brands TaylorMade, adidas Golf, Adams Golf and Ashworth. TaylorMade designs, develops and distributes primarily golf clubs, balls and accessories. adidas Golf branded products include footwear, apparel and accessories. Adams Golf designs and distributes mainly golf clubs as well as a small range of accessories. Ashworth designs and distributes men’s and women’s golf-inspired apparel and footwear. CCM Hockey designs, produces and distributes ice hockey equipment such as sticks, skates and protection gear. In addition, CCM Hockey designs, produces and distributes apparel mainly under the brand name CCM. Runtastic operates in the digital health and fitness space. The company provides a comprehensive ecosystem for tracking and managing health and fitness data. The operating segment Other centrally managed businesses primarily includes the business activities of the labels Y-3 and Porsche Design Sport by adidas as well as the business activities of the brand Five Ten in the outdoor action sports sector. Furthermore, the segment also comprises the own-retail activities of the adidas neo label as well as International Clearance Management. 01 — GENERAL The consolidated financial statements of adidas AG as at December 31, 2016 comprise adidas AG and its subsidiaries and are prepared in compliance with International Financial Reporting Standards (IFRS), as to be applied in the European Union (EU) as at December 31, 2016, and the additional requirements pursuant to § 315a section 1 German Commercial Code (Handelsgesetzbuch – HGB). The following new standards and interpretations and amendments to existing standards and interpretations are effective for financial years beginning on January 1, 2016 and have been applied for the first time to the consolidated financial statements: — IFRS 10, IFRS 12 and IAS 28 Amendment – Investment Entities: Applying the Consolidation Exception (EU effective date: January 1, 2016): This amendment addresses issues that arose in the context of applying the consolidation exception for investment entities. This amendment had no impact on the consolidated financial statements of adidas AG. — IFRS 11 Amendment – Accounting for Acquisitions of Interests in Joint Operations (EU effective date: January 1, 2016): This amendment provides guidance for the accounting of the acquisition of an interest in a joint operation that is a business. This amendment had no impact on the consolidated financial statements of adidas AG. — IAS 1 Amendment – Disclosure Initiative (EU effective date: January 1, 2016): This amendment clarifies guidance for disclosures regarding materiality, aggregation and disaggregation of line items of the consolidated statement of financial position and of the consolidated income statement, the presentation of subtotals, the structure of the financial statements, and the disclosure of accounting policies. This amendment had no material impact on the consolidated financial statements of adidas AG. — IAS 16 and IAS 38 Amendment – Clarification of Acceptable Methods of Depreciation and Amortisation (EU effective date: January 1, 2016): This amendment clarifies when a depreciation method or amortisation method based on revenue may be appropriate. This amendment had no impact on the consolidated financial statements of adidas AG. — IAS 16 and IAS 41 Amendment – Agriculture: Bearer Plants (EU effective date: January 1, 2016): This amendment distinguishes bearer plants from other biological assets, classifying and accounting for such plants as plant, property and equipment. This amendment had no impact on the consolidated financial statements of adidas AG. 14 4 1 45 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes — IAS 19 Amendment – Defined Benefit Plans: Employee Contributions (EU effective date: February 1, 2015): This amendment clarifies guidance relating to the method for attributing contributions from employees or third parties that are linked to service periods to the related periods of service. In addition, a practical expedient is introduced for contributions that are independent from the number of years of service. This amendment had no material impact on the consolidated financial statements of adidas AG. — IAS 27 Amendment – Equity Method in Separate Financial Statements (EU effective date: January 1, 2016): This amendment reinstates the option to account for investments in subsidiaries, joint ventures and associates according to the equity method in an entity’s separate financial statements. This amendment had no impact on the consolidated financial statements of adidas AG. — Improvements to IFRSs (2010-2012) (EU effective date: February 1, 2015): These improvements make clarifications to several standards along with changes to disclosure requirements. The improvements required additional disclosures in the consolidated financial statements of adidas AG. — Improvements to IFRSs (2012-2014) (EU effective date: January 1, 2016): The improvements make clarifications to several standards and interpretations. These improvements had no material impact on the consolidated financial statements of adidas AG. New standards and interpretations as well as amendments to existing standards and interpretations are usually not applied by adidas before the EU effective date. New standards and interpretations and amendments to existing standards and interpretations issued by the International Accounting Standards Board (IASB) and endorsed by the EU which will be effective for financial years beginning after January 1, 2016, and which have not been applied in preparing these consolidated financial statements are: — IFRS 9 Financial Instruments (EU effective date: January 1, 2018): The new standard prescribes rules for the accounting of financial instruments, replacing the current guidelines in IAS 39 Financial Instruments: Recognition and Measurement. In particular, IFRS 9 prescribes new classification methods for financial assets, which are likely to have an effect on the classification and subsequent presentation of the company’s financial assets. The new standard also introduces the ‘expected loss model’ for financial assets, which will require company-wide policy adjustments to the allowance for doubtful accounts relating to accounts receivable. According to the current status of the analysis, adidas expects to use the practical expedient to account for the allowance for doubtful accounts using lifetime expected credit losses. adidas also plans to make use of provision matrices in order to calculate lifetime expected credit losses of accounts receivable. This relates to historic information about default rates which, at the respective balance sheet date, are adjusted for current information and forecasts. Although the policy for allowances for doubtful accounts will change, due to the short-term nature of accounts receivable and the company’s current approach to the allowance for doubtful accounts, a material quantitative impact on the consolidated financial statements is therefore not expected. According to the new standard, an entity can choose to either account for hedge instruments according to IFRS 9 or continue accounting for hedge instruments according to IAS 39. If accounted for according to IFRS 9, the timing of the effectiveness date for hedge instruments would change. The ability to use this accounting policy choice depends on the abilities of technical systems and is still being evaluated by adidas. IFRS 9 will not have a significant effect on the company’s accounting for financial liabilities or on the derecognition of financial assets as the new guidelines are – to a large extent – adopted from IAS 39. The actual effects that IFRS 9 will have on the 2018 consolidated financial statements depends to a large extent on both the financial instruments which adidas holds and on the economic conditions at that point in time. Further analysis of the expected impact on the consolidated financial statements of adidas AG is ongoing. — IFRS 15 Revenue from Contracts with Customers including Amendments to IFRS 15: Effective Date of IFRS 15 (EU effective date: January 1, 2018): This new standard replaces the current guidance on recognising revenue in accordance with IFRS, in particular IAS 18 Revenue, IAS 11 Construction contracts and IFRIC 13 Customer Loyalty Programmes and provides a holistic framework for all aspects of revenue recognition. IFRS 15 creates a centralised, single five-step model for recognising revenue arising from contracts with customers. adidas offers its Wholesale customers various customer incentives such as volume rebates, cooperative advertising allowances and slotting fees. These might create additional performance obligations under IFRS 15 and require the inclusion of elements of variable consideration in the transaction price. Under the current approach, customer incentives which are contractually agreed upon in the trade term agreements are accounted for as sales discounts and are accrued over the financial year. Customer incentives which are not contractually agreed upon in the trade term agreements are accounted for as expenditure for marketing investments. Under IFRS 15, the amount and timing of revenue recognition with regard to customer incentives might be affected. Variable consideration will be included in the transaction price and the evaluation of variable consideration will require judgement in many cases. Revenue might be recognised before all contingencies are resolved, i.e. earlier than under current practice. 145 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes In accordance with IAS 18, adidas accrues revenue related to estimated returns based on past experience by means of a return provision which is recorded in the statement of financial position with a corresponding debit entry in the income statement in form of a reduction of gross sales. The current adidas policy requires that the provision is calculated on a net basis in the amount of the standard margin (i.e. the difference between gross sales and cost of sales) for the products sold which are expected to be returned. IFRS 15 requires a gross correction of expected returns by correcting gross sales and cost of sales in the full amounts. In addition, an asset for the right to recover products from customers upon settling the refund liability has to be recognised. The new approach is expected to result in a reduction in revenues and a decrease in the equity ratio due to the higher provision amount, in particular for the first set of adjusted financial statements where IFRS 15 is applied. Revenue for contracts where no reliable estimate of the amount of returns can be made is recognised before the return period ends in accordance with IFRS 15, i.e earlier than under the current practice. No significant changes are expected with regard to revenue from own-retail transactions and from the licensing-out of trademarks compared to the current practice in accordance with IAS 18. In addition, the new standard is expected to significantly increase the extent of disclosures relating to revenue, thus necessitating modifications to reporting methods and IT systems in order to collect necessary information. Additionally, methods for estimating amounts whose inclusion will not result in a significant reversal of revenue when uncertainty has been resolved need to be developed and implemented. adidas has not yet decided which of the available transition methods and practical expedients will be applied. Further analysis of the expected impact on the consolidated financial statements of adidas AG is in progress. The following new standards and interpretations as well as amendments to existing standards and interpretations were issued by the IASB. These are not yet effective in the EU and hence have not been applied in preparing these consolidated financial statements: — IFRS 2 Amendment – Classification and Measurement of Share-Based Payment Transactions (IASB effective date: January 1, 2018): The amendment clarifies the accounting treatment for cash-settled share-based payment transactions that include a performance condition and the classification of share-based payment transactions with net settlement features. adidas does not have any cash-settled share-based payment transactions. This amendment is not expected to have any material impact on the consolidated financial statements of adidas AG. — IFRS 4 Amendment – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (IASB effective date: January 1, 2018): The amendment addresses the temporary accounting consequences of the different effective dates of IFRS 9 Financial Instruments and IFRS 4 Insurance Contracts. adidas does not have any insurance contracts accounted for under IFRS 4. Therefore, the amendment is not expected to have any impact on the consolidated financial statements of adidas AG. — IFRS 10 and IAS 28 Amendment – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (IASB effective date: indefinitely postponed): The amendment addresses an inconsistency between IFRS 10 and IAS 28 regarding the sale or contribution of assets between an investor and its associate or joint venture. This amendment is not expected to have any material impact on the consolidated financial statements of adidas AG. — IFRS 15 Amendment – Clarifications to IFRS 15 (IASB effective date: January 1, 2018): The amendment provides some transition relief for modified and completed contracts and adds guidance for identifying performance obligations, principal vs. agent considerations, and licensing. If the amendment is endorsed in the EU, the company expects to use the transition relief available for the transition method chosen by the company. The transition relief would reduce the workload necessary to analyse contracts with customers. — IFRS 16 Leases (IASB effective date: January 1, 2019): The new standard replaces the guidance in IAS 17 Leases and the respective interpretations IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 eliminates the required classification of leases into operating and finance leases in accordance with IAS 17, replacing it with a single accounting model requiring lessees to recognise a right-of-use asset and a corresponding lease liability for leases with a lease term of more than twelve months. The new standard is expected to have a significant impact on the company’s consolidated statement of financial position and the consolidated income statement, in particular upon initial application. adidas has a significant number of operating leases worldwide – mainly pertaining to more than 2,800 rented own-retail stores and rented warehouses. see Note 29 Under IFRS 16, these have to be accounted for as right-of-use assets with corresponding lease liabilities in the consolidated statement of financial position. In addition, the nature of the expenses relating to lease obligations is going to change: depreciation expenses for the right-of-use assets and interest expenses for the lease obligations are to be reported in the consolidated income statement instead of rent expenses, which under IAS 17 were expensed to the consolidated income statement on a straight-line basis over the lease term. adidas expects changes to key performance indicators (KPIs), in particular: an extension of the statement of financial position, a decrease in the equity ratio as well as an increase in EBITDA, EBIT, cash used in financing activities and cash generated from operating activities. The company does not expect any significant effects on its finance lease arrangements. According to the current status of the analysis, adidas expects to choose the modified retrospective method with optional practical expedients as the transition method. Further analysis of the expected impact on the company’s consolidated financial statements is still in progress. 14 6 1 47 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes — IAS 7 Amendment – Disclosure Initiative (IASB effective date: January 1, 2017): This amendment introduces a new disclosure relating to changes in liabilities arising from financing activities. The amendment is not expected to have any material impact on the consolidated financial statements of adidas AG. — IAS 12 Amendment – Recognition of Deferred Tax Assets for Unrealised Losses (IASB effective date: January 1, 2017): This amendment clarifies existing guidance for recognising deferred tax assets. The amendment is not expected to have any material impact on the company’s consolidated financial statements. — IAS 40 Amendment – Transfers of Investment Property (IASB effective date: January 1, 2018): This amendment clarifies guidance for transfers of property to – or from – investment property. adidas does not have investment property and therefore this amendment will not have an effect on the company’s financial statements. — IFRIC 22 – Foreign Currency Transactions and Advance Consideration (IASB effective date: January 1, 2018): This new interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The interpretation states that the transaction date, for the purpose of determining the exchange rate for a non-monetary prepayment asset or deferred income liability, is the date of the initial recognition of the non-monetary prepayment asset or deferred income liability. adidas already translates non-monetary items, such as prepayments, at the exchange rate as of the initial recognition date. Therefore, this interpretation is not expected to have an effect on the consolidated financial statements of adidas AG. — Improvements to IFRSs (2014–2016) – Amendments to IFRS 1 and IAS 28 (IASB effective date: January 1, 2018): These improvements include amendments to IFRS 1 and IAS 28. The amendments to IFRS 1 eliminated the short-term transition exemptions and the amendments to IAS 28 made a clarification about the choice for qualifying entities (such as venture capital organisations) to apply either the equity method or fair value through profit and loss to the measurement of associates or joint ventures at initial recognition. These improvements are not expected to have a material effect on the consolidated financial statements of adidas AG. — Improvements to IFRSs (2014–2016) – Amendments to IFRS 12 (IASB effective date: January 1, 2017): These improvements include amendments to IFRS 12 which clarify the scope of the standard with regard to disclosure requirements. The improvement clarifies that the scope of the standard applies to an entity’s interests regardless of whether they are classified as held for sale, held for distribution or discontinued operations in accordance with IFRS 5. This amendment is not expected to have a material impact on the consolidated financial statements of adidas AG. The consolidated financial statements have in principle been prepared on the historical cost basis with the exception of certain items in the statement of financial position such as: financial instruments valued at fair value through profit or loss, available-for-sale financial assets, derivative financial instruments, plan assets and receivables, which are measured at fair value. The consolidated financial statements are presented in euros (€) and, unless otherwise stated, all values are presented in millions of euros (€ in millions). Due to rounding principles, numbers presented may not exactly sum up to totals provided. 147 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes 02 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are prepared in accordance with the consolidation, accounting and valuation principles described below. Principles of consolidation The consolidated financial statements include the financial statements of adidas AG and all its direct and indirect subsidiaries, which are prepared in accordance with uniform accounting principles. An entity is considered a subsidiary if it is controlled by adidas AG. Control exists when adidas is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The number of consolidated subsidiaries developed as follows for the years ending December 31, 2016 and December 31, 2015, respectively: NUMBER OF CONSOLIDATED SUBSIDIARIES January 1 First-time consolidated subsidiaries Thereof: newly founded Thereof: purchased Deconsolidated/divested subsidiaries Intercompany mergers December 31 2016 145 2 2 – (3) (1) 143 2015 154 2 – 2 (11) – 145 The subsidiaries are held either directly by adidas AG or indirectly via the two holding companies adidas Beteiligungsgesellschaft mbH in Germany or adidas International B.V. in the Netherlands. A schedule of the shareholdings of adidas AG is shown in Attachment II to the consolidated financial statements. see Shareholdings of adidas AG, Herzogenaurach, p. 204 This schedule comprises information about the name, domicile, currency and equity of all consolidated subsidiaries as well as the respective share held in the capital of these subsidiaries. Furthermore, the schedule of the shareholdings of adidas AG will be published on the electronic platform of the German Federal Gazette. Within the scope of the first-time consolidation, all acquired assets and liabilities are recognised in the statement of financial position at fair value at the acquisition date. A debit difference between the acquisition cost and the proportionate fair value of assets, liabilities and contingent liabilities is shown as goodwill. A credit difference is recorded in the income statement. Acquisitions of additional investments in subsidiaries which are already controlled are recorded as equity transactions. Therefore, neither fair value adjustments of assets and liabilities nor gains or losses are recognised. Any difference between the cost for such an additional investment and the carrying amount of the net assets at the acquisition date is recorded directly in shareholders’ equity. The financial effects of intercompany transactions as well as any unrealised gains and losses arising from intercompany business relations are eliminated in preparing the consolidated financial statements. 14 8 1 49 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes Principles of measurement The following table includes an overview of selected subsequent measurement principles used in the preparation of the consolidated financial statements. OVERVIEW OF SELECTED SUBSEQUENT MEASUREMENT PRINCIPLES Item Assets Cash and cash equivalents Short-term financial assets Accounts receivable Inventories Assets classified as held for sale Property, plant and equipment Goodwill Intangible assets (except goodwill): With definite useful life With indefinite useful life Subsequent measurement principle Nominal amount At fair value through profit or loss Amortised cost Lower of cost and net realisable value Lower of carrying amount and fair value less costs to sell Amortised cost Impairment-only approach Amortised cost Impairment-only approach Other financial assets (categories according to IAS 39): At fair value through profit or loss At fair value through profit or loss Held to maturity Loans and receivables Available-for-sale Liabilities Borrowings Accounts payable Other financial liabilities Provisions: Pensions Other provisions Accrued liabilities Amortised cost Amortised cost At fair value in other comprehensive income or at amortised cost Amortised cost Amortised cost Amortised cost Projected unit credit method Expected settlement amount Amortised cost Currency translation Transactions in foreign currencies are initially recorded in the respective functional currency by applying the spot exchange rate valid at the transaction date to the foreign currency amount. In the individual financial statements of subsidiaries, monetary items denominated in non-functional currencies of the subsidiaries are generally translated into the functional currency at closing exchange rates at the balance sheet date. The resulting currency gains and losses are recorded directly in the income statement. Assets and liabilities of the company’s non-euro functional currency subsidiaries are translated into the presentation currency, the euro, which is also the functional currency of adidas AG, using closing exchange rates at the balance sheet date. For practical reasons, revenues and expenses are translated at average rates for the period which approximate the exchange rates on the transaction dates. All cumulative differences from the translation of equity of foreign subsidiaries resulting from changes in exchange rates are included in a separate item within shareholders’ equity without affecting the income statement. 149 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes A summary of exchange rates to the euro for major currencies in which the Group operates is as follows: EXCHANGE RATES € 1 equals USD GBP JPY CNY RUB Average rates for the year ending Dec. 31, Spot rates at Dec. 31, 2016 2015 2016 2015 1.1069 0.8188 120.4031 7.3515 74.2778 1.1101 0.7259 134.4180 6.9721 67.6825 1.0541 0.8562 123.4000 7.3123 63.9384 1.0887 0.7340 131.0700 7.0696 79.3474 Discontinued operations A component of the company’s business is classified as a discontinued operation if the operations and cash flows of the component can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company and if the component either has been disposed of or is classified as held for sale, and: — represents a separate major line of business or geographic area of operations, — is part of a single coordinated plan to dispose of a separate major line of business or geographic area of operations or — is a subsidiary acquired exclusively with a view to resale. When an operation is classified as a discontinued operation, the comparative consolidated income statement and consolidated statement of cash flows are restated and presented as if the operation had been discontinued from the start of the comparative year. Derivative financial instruments adidas uses derivative financial instruments, such as currency options, forward exchange contracts, commodity futures as well as interest rate swaps and cross-currency interest rate swaps, to hedge its exposure to foreign exchange, commodity price and interest rate risks. In accordance with its Treasury Policy, adidas does not enter into transactions with derivative financial instruments for trading purposes. Derivative financial instruments are initially recognised in the statement of financial position at fair value, and subsequently also measured at their fair value. The method of recognising the resulting gains or losses is dependent on the nature of the hedge. On the date a derivative contract is entered into, adidas designates derivatives as either a hedge of a forecasted transaction (cash flow hedge) or a hedge of a net investment in a foreign operation. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges, and that are effective, as defined in IAS 39 ‘Financial instruments: recognition and measurement’, are recognised in equity. When the effectiveness is not 100%, the ineffective portion of the change in the fair value is recognised in the income statement. Accumulated gains and losses in equity are transferred to the income statement in the same periods during which the hedged forecasted transaction affects the income statement. Certain derivative transactions, while providing effective economic hedges under the company’s risk management policies, may not qualify for hedge accounting under the specific rules of IAS 39. Changes in the fair value of any derivative instruments that do not meet these rules are recognised immediately in the income statement. Hedges of net investments in foreign entities are accounted for in a similar way to cash flow hedges. If the hedging instrument is a deriv- ative (e.g. a forward exchange contract) or a foreign currency borrowing, effective currency gains and losses in the derivative and all gains and losses arising on the translation of the borrowing, respectively, are recognised in equity. adidas documents the relationship between hedging instruments and hedge objects at transaction inception, as well as the risk management objectives and strategies for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific firm commitments and forecasted transactions. adidas also documents its assessment of whether the derivatives that are used in hedging transactions are highly effective by using different methods of effectiveness testing, such as the ‘dollar offset method’ or the ‘hypothetical derivative method’. The fair values of currency options, forward exchange contracts and commodity futures are determined on the basis of market conditions on the reporting dates. The fair value of a currency option is determined using generally accepted models to calculate option prices. The fair value of an option is influenced not only by the remaining term of the option but also by additional factors, such as the actual foreign exchange rate and the volatility of the underlying foreign currency base. Fair values are determined taking into consideration the counterparty risk. adidas has exercised the option to calculate the amounts on counterparty level according to IFRS 13 ‘Fair Value Measurement’, paragraph 48. 15 0 1 51 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes Cash and cash equivalents Cash and cash equivalents represent cash at banks, cash on hand and short-term deposits with maturities of three months or less from the date of acquisition. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Receivables and other financial assets Receivables and other financial assets are recognised at fair value, which corresponds to the nominal value for current receivables and other financial assets. For non-current receivables and other financial assets, the fair value is estimated as the present value of future cash flows discounted at the market rate of interest at the balance sheet date. Subsequently, these are measured at amortised cost using the ‘effective interest method’. Required allowances, if necessary, are determined on the basis of individual risk assessments, and on the ageing structure of receivables past due. Inventories Merchandise and finished goods are valued at the lower of cost or net realisable value, which is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Costs are determined using a standard valuation method: the ‘average cost method’. Costs of finished goods include cost of raw materials, direct labour and the components of the manufacturing overheads which can be reasonably attributed to finished goods. The allocation of overheads is based on the planned average utilisation. The net realisable value allowances are computed consistently throughout the company based on the age and expected future sales of the items on hand. Assets/liabilities and disposal groups classified as held for sale Assets/liabilities and disposal groups classified as held for sale are primarily non-current assets and liabilities expected to be recovered principally through sale rather than through continuing use. These are measured at the lower of their carrying amount and fair value less costs to sell. Assets classified as held for sale are not depreciated on a straight-line basis. Property, plant and equipment Property, plant and equipment are measured at amortised cost. This comprises any costs directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the manner intended by Management less any accumulated depreciation and accumulated impairment losses. Depreciation is recognised for those assets, with the exception of land and construction in progress, over the estimated useful life utilising the ‘straight-line method’ and taking into account any potential residual value, except where the ‘declining- balance method’ is more appropriate in light of the actual utilisation pattern. Parts of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item are depreciated separately. Land leases are measured at the lower of the fair value or the present value of minimum lease payments and are depreciated on a straight- line basis over the contractually agreed lease term. Estimated useful lives are as follows: ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT Land Land leases Buildings and leasehold improvements Furniture and fixtures Technical equipment and machinery as well as other equipment 1 Or, if shorter, the lease term/useful life (see Note 29). Years indefinite 50 – 99 20 – 50 1 3 – 5 2 – 10 1 Expenditures for repairs and maintenance are expensed as incurred. Renewals and improvements are capitalised and depreciated separately, if the recognition criteria are met. 151 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes Impairment losses If facts and circumstances indicate that non-current assets (e.g. property, plant and equipment and intangible assets including goodwill) might be impaired, the recoverable amount is determined. It is measured at the higher of its fair value less costs of disposal and value in use. Non-financial items measured at the recoverable amount primarily relate to impaired property, plant and equipment being measured based on value in use or on fair value taking unobservable inputs (e.g. profit or cash flow planning) into account. The fair value is measured at Level 3 according to IFRS 13 ‘Fair Value Measurement’. An impairment loss is recognised in other operating expenses or reported in goodwill impairment losses if the carrying amount exceeds the recoverable amount. The impairment test for goodwill is performed based on groups of cash-generating units which represent the lowest level within the company at which goodwill is monitored for internal management purposes. If there is an impairment loss for a group of cash-generating units, first the carrying amount of any goodwill allocated to the group of cash-generating units is reduced. Subsequently, provided that the recoverable amount is lower than the carrying amount, the other non-current assets of the group of cash-generating units are reduced pro rata on the basis of the carrying amount of each asset in the group of cash-generating units. Irrespective of whether there is an impairment indication, intangible assets with an indefinite useful life (in particular trademarks) and goodwill acquired in business combinations are tested annually for impairment. An impairment loss recognised in goodwill is not reversible. With respect to all other impaired assets, an impairment loss recognised in prior periods is reversed affecting the income statement if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined (net of depreciation or amortisation) if no impairment loss had been recognised. Impairment losses for financial assets are recognised when, as a result of one or more events that occurred after the initial recognition of the financial asset, there is objective evidence that a financial asset is impaired. The amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate, or as the difference between amortised cost and the fair value considering previous impairment losses. Leases Under finance lease arrangements, the substantial risks and rewards associated with an asset are transferred to the lessee. At the beginning of the lease arrangement, the respective asset and a corresponding liability are recognised at the fair value of the asset or, if lower, the net present value of the minimum lease payments. For subsequent measurement, minimum lease payments are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic interest rate on the remaining balance of the liability. In addition, depreciation and any impairment losses for the associated assets are recognised. Depreciation is performed over the lease term or, if shorter, over the useful life of the asset. Under operating lease agreements, rent expenses are recognised on a straight-line basis over the term of the lease. Goodwill Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised. This results when the purchase cost exceeds the fair value of acquired identifiable assets, liabilities and contingent liabilities. Goodwill arising from the acquisition of a foreign entity and any fair value adjustments to the carrying amounts of assets, liabilities and contingent liabilities of that foreign entity are treated as assets, liabilities and contingent liabilities of the respective reporting entity, and are translated at exchange rates prevailing at the date of the initial consolidation. Goodwill is carried in the functional currency of the acquired foreign entity. Acquired goodwill is valued at cost and is tested for impairment on an annual basis and additionally when there are indications of potential impairment. 152 1 53 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes Intangible assets (except goodwill) Intangible assets are valued at amortised cost. Amortisation is calculated on a straight-line basis taking into account any potential residual value. Expenditures during the development phase of internally generated intangible assets are capitalised as incurred if they qualify for recog- nition under IAS 38 ‘Intangible Assets’. Estimated useful lives are as follows: ESTIMATED USEFUL LIVES OF INTANGIBLE ASSETS Trademarks Software Patents, trademarks and licences Websites Years indefinite 5 – 7 5 – 15 2 Research and development Research costs are expensed in full as incurred. Development costs are also expensed as incurred if they do not meet the recognition criteria of IAS 38 ‘Intangible Assets’. Financial assets All purchases and sales of financial assets are recognised on the trade date. Costs of purchases include transaction costs. Available-for-sale financial assets include non-derivative financial assets which are not allocable under another category of IAS 39. If their respective fair value can be measured reliably, they are subsequently carried at fair value. If this is not the case, these are measured at cost. Realised and unrealised gains and losses arising from changes in the fair value of financial assets are included in the income statement for the period in which they arise, except for available-for-sale financial assets where unrealised gains and losses are recognised in equity unless they are impaired. Borrowings and other liabilities Borrowings (e.g. Eurobonds) and other liabilities are recognised at fair value using the ‘effective interest method’, net of transaction costs incurred. In subsequent periods, long-term borrowings are stated at amortised cost using the ‘effective interest method’. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the term of the borrowing. Compound financial instruments (e.g. convertible bonds) are divided into a liability component shown under borrowings and into an equity component resulting from conversion rights. The equity component is included in the capital reserve. The fair value of the liability component is determined by discounting the interest and principal payments of a comparable liability without conversion rights, applying risk-adjusted interest rates. The liability component is subsequently measured at amortised cost using the ‘effective interest method’. The equity component is determined as the difference between the fair value of the total compound financial instrument and the fair value of the liability component and is reported within equity. There is no subsequent measurement of the equity component. At initial recognition, directly attributable trans- action costs are assigned to the equity and liability component pro rata on the basis of the respective carrying amounts. Other provisions and accrued liabilities Other provisions are recognised where a present obligation (legal or constructive) to third parties has been incurred as a result of a past event which can be estimated reliably and is likely to lead to an outflow of resources, and where the timing or amount is uncertain. Other non-current provisions are discounted if the effect of discounting is material. Accrued liabilities are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees. Here, however, the timing and amount of an outflow of resources is not uncertain. 153 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes Pensions and similar obligations Provisions and expenses for pensions and similar obligations relate to the company’s obligations for defined benefit and defined contribution plans. The obligations under defined benefit plans are determined separately for each plan by valuing the employee benefits accrued in return for their service during the current and prior periods. These benefit accruals are discounted to calculate their present value, and the fair value of any plan assets is deducted in order to determine the net liability. The discount rate is set on the basis of yields of high-quality corporate bonds at the balance sheet date provided there is a deep market for high-quality corporate bonds in a given currency. Otherwise, government bond yields are used as a reference. Calculations are performed by qualified actuaries using the ‘projected unit credit method’ in accordance with IAS 19 ‘Employee Benefits’. Obligations for contributions to defined contribution plans are recognised as an expense in the income statement as incurred. Contingent liabilities Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of adidas. Additionally, contingent liabilities may be present obligations that arise from past events but which are not recognised because it is not probable that an outflow of resources will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognised in the consolidated statement of financial position but are disclosed and explained in the Notes. see Note 39 Treasury shares When treasury shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. The nominal value of € 1 per treasury share is debited to share capital. Any premium or discount to the nominal value is shown as an adjustment to the retained earnings. If treasury shares are sold or re-issued, the nominal value of the shares will be credited to share capital and the amount exceeding the nominal value will be added to retained earnings. Revenue Revenue in terms of income derived from the sale of goods is recognised when the significant risks and rewards of ownership of the goods are transferred to the buyer and when adidas does not retain any continuing managerial involvement with the goods. The timing of the transfer of significant risks and rewards depends on the individual terms of the sales agreement (terms of delivery). In addition, revenue from the sale of goods is only recognised when the amount of revenue as well as associated costs can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the company. Revenue is measured at the fair value of the consideration received or receivable, net of returns, early payment discounts and rebates. Under certain conditions and in accordance with contractual agreements, customers of adidas have the right to return products and to either exchange them for similar or other products or to return the products against the issuance of a credit note. Revenue related to estimated returns is accrued based on past experience by means of a provision for returns, allowances and warranty. see Note 20 Provided that the customers meet certain pre-defined conditions, adidas grants its customers different types of globally aligned performance-based rebates. Examples are sales growth and loyalty as well as sell-out support, e.g. through retail space management/ franchise stores. When it is assumed that the customer fulfils the requirements for being granted the rebate, this amount is accrued by means of an accrued liability for marketing and sales. see Note 21 In addition, adidas generates revenue from the licensing-out of the right to use the adidas, Reebok and TaylorMade brands as well as various other trademarks to third parties. The related royalty and commission income is recognised based on the contract terms on an accrual basis. Advertising and promotional expenditures Production costs for media campaigns are included in prepaid expenses (other current and non-current assets) until the services are received, and upon receipt expensed in full. Significant costs for media campaigns are expensed over their intended duration. Promotional expenses including one-time up-front payments for promotion contracts are principally expensed on a straight-line basis over the term of the agreement. 15 4 1 55 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes Interest Interest is recognised as income or expense as incurred using the ‘effective interest method’ with the exception of interest that is directly attributable to the acquisition, construction or production of a qualifying asset. This interest is capitalised as part of the cost of the qualifying asset. Government grants adidas receives government grants related to income in the form of subsidies, subventions or premiums from local, national or international government authorities such as those of the Federal Republic of Germany, the European Union and the Free State of Bavaria. Government grants related to income are recognised if there is reasonable assurance that the grants will be received and that adidas will comply with the conditions attached. Grants related to income are reported in the consolidated income statement as a deduction from the related expenses. Income taxes Current income taxes are computed in accordance with the applicable taxation rules established in the countries in which adidas operates. adidas computes deferred taxes for all temporary differences between the carrying amount and the tax base of its assets and liabilities and tax loss carry-forwards. As it is not permitted to recognise a deferred tax liability for the initial recognition of goodwill, adidas does not compute any deferred taxes thereon. Deferred tax assets arising from deductible temporary differences and tax loss carry-forwards which exceed taxable temporary differences are only recognised to the extent that it is probable that the entity concerned will generate sufficient taxable income to realise the associated benefit. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Share-based payment The cost of equity-settled share-based payment transactions with employees is determined by the fair value at the grant date using an appropriate valuation model. see Note 27 That cost is recognised in personnel expenses, together with a corresponding increase in equity (retained earnings), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the company’s best estimate of the number of equity instruments that will ultimately vest. Service and non-market performance conditions are not taken into account when determining the fair value of awards at the grant date, but the likelihood of the conditions being met is assessed as part of the company’s best estimate of the number of equity instruments that will ultimately vest. If the estimate would be changed, even a credit in the income statement for the period can be possible as it reflects the movement in cumulative expenses from the beginning to the end of that period. No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Equity-settled share-based payment transactions with parties other than employees are generally measured at the fair value of the goods or services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. Estimation uncertainties and judgements The preparation of financial statements in conformity with IFRS requires the use of assumptions and estimates that affect reported amounts and related disclosures. Although such estimates are based on Management’s best knowledge of current events and actions, actual results may ultimately differ from these estimates. The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined in the respective Notes, in particular goodwill see Note 13, trademarks see Note 14, other provisions see Note 20, pensions see Note 24, deriva- tives see Note 30, deferred taxes see Note 35 as well as litigation and other legal risks see Note 39. Judgements have also been used in classifying leasing arrangements as well as in determining valuation methods for intangible assets. 155 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes CON SOL IDATE D FI NANCI AL S TAT EM E NTS 4 Notes 03 — DISCONTINUED OPERATIONS In July 2015, adidas completed the sale of the Rockport operating segment for a preliminary cash consideration of US $ 181 million plus fixed and contingent promissory notes. The net result of discontinued operations presented in the consolidated income statement mainly contains the fair value adjustment of the contingent consideration. The fair value of the contingent consideration was estimated by applying the discounted cash flow method. As at December 31, 2016, the fair value increased by US $ 2 million since December 31, 2015. The results of the former Rockport operating segment are shown as discontinued operations in the consolidated income statement: DISCONTINUED OPERATIONS € in millions Net sales Expenses (Loss) from operating activities Income taxes (Loss) from operating activities, net of tax Gain/(loss) from the sale of discontinued operations Income taxes Gain/(loss) from the sale of discontinued operations, net of tax Gain/(loss) from discontinued operations, net of tax Basic earnings per share from discontinued operations (€) Diluted earnings per share from discontinued operations (€) Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 – – – – – 1 – 1 1 0.01 0.01 159 (173) (14) 0 (13) (40) 7 (32) (46) (0.23) (0.23) The gain from discontinued operations in an amount of € 1 million (2015: loss of € 46 million) was entirely attributable to the shareholders of adidas AG. 04 — ACQUISITION/DISPOSAL OF SUBSIDIARIES AS WELL AS ASSETS AND LIABILITIES As of June 30, 2016 (closing date), the company formally completed the divestiture of the Mitchell & Ness business. The purchase price amounts to US $ 75 million in total. According to the purchase agreement, the first half of the total purchase price was received in cash and for the other half a note was issued by the buyer. All contractually agreed closing assets were transferred by adidas at the closing date. This is followed by a transition service period which is expected to end no later than June 30, 2017. adidas only has limited power to govern the core processes of the Mitchell & Ness business during the transition service period. Hence, adidas lost control over the Mitchell & Ness business at the closing date and has accounted for the sale. Consequently, all remaining assets and liabilities of the Mitchell & Ness business which are legally not yet transferred are not consolidated anymore and the subsidiary Refuel Limited is divested. A resulting gain from this transaction in an amount of € 39 million was accounted for as other operating income. Contrary to the initial plan at the time of sale, Refuel Limited was already sold again in 2016. see Notes 31 and 38 Effective August 5, 2015, adidas International B.V. completed the acquisition of runtastic GmbH (‘Runtastic’) and consequently owns 100% of the voting rights. Founded in 2009 and headquartered in Pasching near Linz/Austria, Runtastic is a health and fitness apps and related hardware company. Runtastic provides a comprehensive ecosystem for tracking and managing health and fitness data. With this acquisition, adidas intends to further expand its market position within the digital health and fitness space. Runtastic was acquired for a purchase price of € 213 million in cash plus earn-out components which are measured based on the discounted cash flow method. The earn-out compo- nents are dependent on retention of the Runtastic management as well as on the achievement of certain performance measures over the first three years after the acquisition. At the acquisition date, the amount recognised as earn-out components was equivalent to the fair value. Any changes in the fair value at December 31, 2016 relate to discounting effects. 156 1 57 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes At the acquisition date, the acquisition had the following effect on the Group’s assets and liabilities, based on a purchase price allocation: NET ASSETS OF RUNTASTIC GMBH AT THE ACQUISITION DATE € in millions Cash and cash equivalents Accounts receivable Inventories Other current assets Property, plant and equipment Trademarks Other intangible assets Deferred tax assets Accounts payable Income taxes Other current provisions Current accrued liabilities Other current liabilities Deferred tax liabilities Net assets Goodwill arising on acquisition Purchase price in consideration of contingent payments Less: contingent payments in subsequent years Purchase price settled in cash Less: cash and cash equivalents acquired Net cash outflow on acquisition Pre-acquisition carrying amounts Fair value adjustments Recognised values on acquisition 7 2 0 1 1 0 0 1 (1) (1) (1) (3) (2) – 3 – – – – – 31 21 – – – – – – (13) 39 7 2 0 1 1 31 21 1 (1) (1) (1) (3) (2) (13) 42 192 235 (21) 213 (7) 207 The fair value of intangible assets was measured by means of an independent valuation. The following valuation methods for the acquired assets were applied: — Trademarks: The ‘relief-from-royalty method’ was applied for the trademarks/brand names. The fair value was determined by discounting notional royalty savings after tax and adding a tax amortisation benefit, resulting from the amortisation of the acquired asset. — Other intangible assets: For the valuation of customer relationships, the ‘multi-period-excess-earnings method’ was used. The respective future excess cash flows were identified and adjusted in order to eliminate all elements not associated with these assets. Future cash flows were measured on the basis of the expected net sales by deducting variable and sales-related imputed costs for the use of contrib- utory assets. Subsequently, the outcome was discounted using the appropriate discount rate and adding a tax amortisation benefit. For the valuation of technology (internally generated software), the ‘depreciated-replacement-cost method’ was used. The replacement costs were determined by applying an index to the asset’s historical cost. The replacement costs were then adjusted for the loss in value caused by depreciation. The excess of the acquisition cost paid versus the net of the amounts of the fair values assigned to all assets acquired and liabilities assumed, taking into consideration the respective deferred taxes, was recognised as goodwill. It mainly arose from expected synergies. Any acquired asset that did not meet the identification and recognition criteria for an asset was included in the amount recognised as goodwill. The goodwill arising on this acquisition was allocated to the groups of cash-generating units of the regional markets which are respon- sible for the joint distribution of adidas and Reebok based on the expected operating/contribution margin synergy potential. The goodwill is not deductible for tax purposes and is denominated in euro as the local functional currency. The acquired subsidiary generated net sales in an amount of € 8 million as well as losses in an amount of € 0 million for the period from August 5 to December 31, 2015. If this acquisition had occurred on January 1, 2015, total adidas net sales would have been € 16.9 billion and net income attributable to shareholders would have been € 636 million for the year ending December 31, 2015. 157 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes 4 4 Effective January 2, 2015, Reebok International Limited completed the acquisition of Refuel (Brand Distribution) Limited (‘Refuel’) and consequently owns 100% of the voting rights. Based in London (UK), Refuel mainly markets and distributes apparel of Mitchell & Ness. With this acquisition, adidas took over all distribution rights of Mitchell & Ness outside of North America. The entire business of Refuel was acquired for a purchase price of GBP 11 million in cash. The acquisition had the following effect on the Group’s assets and liabilities, based on a purchase price allocation: NET ASSETS OF REFUEL (BRAND DISTRIBUTION) LIMITED AT THE ACQUISITION DATE € in millions Cash and cash equivalents Accounts receivable Inventories Property, plant and equipment Other intangible assets Accounts payable Income taxes Deferred tax liabilities Net assets Goodwill arising on acquisition Purchase price settled in cash Less: cash and cash equivalents acquired Net cash outflow on acquisition Pre-acquisition carrying amounts Fair value adjustments Recognised values on acquisition 6 2 1 0 – (1) (0) (0) 8 – – 0 – 7 – – (1) 6 6 2 2 0 7 (1) (0) (1) 14 – 14 (6) 7 The following valuation methods for the acquired assets were applied: — Inventories: The ‘pro rata basis valuation’ was applied for estimating the fair value of acquired inventories. Realised margins were added to the carrying amount of acquired inventories. Subsequently, the costs for completion for selling, advertising and general administration as well as a reasonable profit allowance were deducted. — Other intangible assets: For the valuation of customer relationships, the ‘multi-period-excess-earnings method’ was used. The respective future excess cash flows were identified and adjusted in order to eliminate all elements not associated with these assets. Future cash flows were measured on the basis of the expected net sales by deducting variable and sales-related imputed costs for the use of contributory assets. Subsequently, the outcome was discounted using the appropriate discount rate and adding a tax amortisation benefit. The acquired subsidiary generated net sales in an amount of € 11 million as well as profits in an amount of € 0 million for the period from January 2 to December 31, 2015. 158 1 59 1 59 4 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 05 — CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash at banks, cash on hand and short-term deposits. Short-term deposits are only shown as cash and cash equivalents if they are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. 06 — SHORT-TERM FINANCIAL ASSETS Short-term financial assets are classified ‘at fair value through profit or loss’. Changes in the fair value are recognised in the income statement as they occur. The majority of short-term financial assets are time deposits. 07 — ACCOUNTS RECEIVABLE Accounts receivable consist mainly of the currencies US dollar, euro, Chinese renminbi as well as Japanese yen and are as follows: ACCOUNTS RECEIVABLE € in millions Accounts receivable, gross Less: accumulated allowances for doubtful accounts Accounts receivable, net MOVEMENT IN ALLOWANCES FOR DOUBTFUL ACCOUNTS € in millions Allowances at January 1 Additions Reversals Write-offs charged against the allowance accounts Currency translation differences Other changes Allowances at December 31 Dec. 31, 2016 Dec. 31, 2015 2,377 (177) 2,200 2016 149 76 (41) (8) 0 0 177 2,198 (149) 2,049 2015 139 49 (33) (6) 0 (1) 149 ACCOUNTS RECEIVABLE PAST DUE BUT NOT IMPAIRED € in millions Dec. 31, 2016 Dec. 31, 2015 Past due 1 – 30 days Past due 31 – 60 days Past due 61 – 90 days Past due 91 – 180 days Past due > 180 days 164 189 63 70 11 9 5 5 6 3 With respect to accounts receivable as at the balance sheet date past due but not impaired, based on credit history and current credit ratings, there are no indications that customers will not be able to meet their obligations. Further, no indications of default are recognisable for accounts receivable that are neither past due nor impaired. For further information about credit risks see Risk and Opportunity Report, p. 118 159 159 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 08 — OTHER CURRENT FINANCIAL ASSETS Other current financial assets consist of the following: OTHER CURRENT FINANCIAL ASSETS € in millions Currency options Forward exchange contracts Security deposits Financial assets related to the early termination of promotion contracts Promissory notes Sundry Other current financial assets Dec. 31, 2016 Dec. 31, 2015 20 348 81 77 15 187 729 5 202 67 – – 93 367 The line item ‘Sundry’ mainly relates to credit cards and similar receivables. For further information about the early termination of promotion contracts see Note 31 For further information about currency options and forward exchange contracts see Note 30 09 — INVENTORIES Inventories by major classification are as follows: INVENTORIES € in millions Merchandise and finished goods on hand Goods in transit Raw materials Work in progress Inventories Dec. 31, 2016 Dec. 31, 2015 Gross value Allowance for obsolescence 2,748 1,151 35 1 3,935 (170) – (2) – (172) Net value 2,578 1,151 34 1 3,763 Gross value Allowance for obsolescence 2,269 936 35 1 3,241 (126) – (2) – (128) Net value 2,143 936 33 1 3,113 Goods in transit mainly relate to shipments of finished goods and merchandise from suppliers in Asia to subsidiaries in Europe, Asia, North America and Latin America. 10 — OTHER CURRENT ASSETS Other current assets consist of the following: OTHER CURRENT ASSETS € in millions Prepaid expenses Tax receivables other than income taxes Sundry Other current assets, gross Less: accumulated allowances Other current assets, net Prepaid expenses relate mainly to promotion and service contracts as well as rents. Dec. 31, 2016 Dec. 31, 2015 311 180 97 588 (8) 580 218 174 106 497 (8) 489 16 0 1 61 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 11 — ASSETS/LIABILITIES AND DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE The sale of land of adidas AG was completed in January 2016 due to the fulfilment of outstanding conditions arising from a signed contract of sale. Consequently, assets classified as held for sale at December 31, 2015 amounting to € 11 million are derecognised from the consolidated statement of financial position. 12 — PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: PROPERTY, PLANT AND EQUIPMENT € in millions Dec. 31, 2016 Dec. 31, 2015 Land, land leases, buildings and leasehold improvements Technical equipment and machinery Other equipment as well as furniture and fixtures Less: accumulated depreciation and impairment losses Construction in progress, net Property, plant and equipment, net 1,395 325 1,710 3,430 (1,733) 1,697 218 1,915 1,319 300 1,502 3,121 (1,583) 1,538 100 1,638 Depreciation expenses were € 303 million and € 279 million for the years ending December 31, 2016 and 2015, respectively. see Note 32 As a general principle, it is regularly assessed whether there are any indications that furniture and fixtures might be impaired. Irrespective of the existence of such indications, furniture and fixtures in own-retail stores are tested annually for impairment whereby the recoverable amount is calculated using the discounted cash flow method as part of determining the profitability of the respective own-retail stores. Impairment losses amounted to € 10 million and € 19 million for the years ending December 31, 2016 and 2015, respectively. see Note 32 These are related to other equipment, furniture and fixtures as well as buildings and leasehold improvements, mainly in the company’s own-retail activities, for which contrary to expectations there will be an insufficient flow of future economic benefits. In 2016, reversals of impairment losses were recorded in an amount of € 2 million (2015: € 1 million). The increase in the line item ‘Construction in progress, net’ mainly relates to investments in the company’s headquarters in Herzogen- aurach and to the expansion of the warehouse in Rieste, Germany. Additionally, borrowing costs in an amount of € 1 million (2015: € 0 million) related to the construction of qualifying assets at adidas AG were capitalised using a capitalisation rate of 1.3 % (2015: 1.3 %). For details see Attachment I to the consolidated financial statements. see Statement of Movements of Intangible and Tangible Assets, p. 202 161 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 13 — GOODWILL Goodwill primarily relates to the acquisitions of the Reebok, TaylorMade and Runtastic businesses as well as acquisitions of subsidiaries, primarily in the USA, Australia/New Zealand, the Netherlands, Denmark and Italy. GOODWILL € in millions Goodwill, gross Less: accumulated impairment losses Goodwill, net Dec. 31, 2016 Dec. 31, 2015 1,908 (496) 1,412 1,879 (487) 1,392 The majority of goodwill, which primarily relates to the acquisition of the Reebok business in 2006, is denominated in US dollars. A currency translation effect of positive € 20 million and positive € 65 million was recorded for the years ending December 31, 2016 and 2015, respectively. adidas determines whether goodwill impairment is necessary at least on an annual basis. The impairment test for goodwill is performed based on groups of cash-generating units which represent the lowest level within the company at which goodwill is monitored for internal management purposes. This requires an estimation of the recoverable amount of the groups of cash-generating units to which the goodwill is allocated. The recoverable amount of a group of cash-generating units is determined on the basis of value in use. Estimating the value in use requires adidas to make an estimate of the expected future cash flows from the groups of cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. This calculation uses cash flow projections based on the financial planning covering a four-year period in total. The planning is based on long-term expectations of the company and reflects in total for the groups of cash-generating units an average annual mid-single- to low-double- digit sales increase with varying forecasted growth prospects for the different groups of cash-generating units. Furthermore, adidas expects the operating margin to expand, primarily driven by an improvement in the gross margin as well as lower operating expenses as a percentage of sales. The planning for capital expenditure and working capital is primarily based on past experience. The planning for future tax payments is based on current statutory corporate tax rates of the individual groups of cash-generating units. Cash flows beyond this four-year period are extrapolated using steady growth rates of 1.7% (2015: 1.7%). According to the company’s expectations, these growth rates do not exceed the long-term average growth rate of the business sector in which each group of cash-generating units operates. Discount rates are based on a weighted average cost of capital calculation considering a five-year average market-weighted debt/equity structure and financing costs referencing major competitors for each group of cash-generating units. The discount rates used are after-tax rates and reflect the specific equity and country risk of the relevant group of cash-generating units. The groups of cash-generating units are defined as the regional markets which are responsible for the joint distribution of the adidas and Reebok brands as well as the other operating segments TaylorMade-adidas Golf, CCM Hockey and Runtastic. The regional markets are: Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan, Middle East, South Korea and Southeast Asia/Pacific. The number of groups of cash-generating units amounted to a total of twelve at the end of both 2016 and 2015. In the course of the annual impairment test, adidas assessed whether goodwill impairment was required. In this context, there was no need for goodwill impairment for the year ending December 31, 2016 (2015: € 34 million). 162 1 63 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position The carrying amounts of acquired goodwill allocated to the respective groups of cash-generating units and the respective discount rates applied to the cash flow projections are as follows: ALLOCATION OF GOODWILL Western Europe Greater China TaylorMade-adidas Golf Other Total Goodwill € in millions Discount rate after taxes Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2015 643 231 293 245 632 226 292 240 7.7% 7.5% 6.5% 7.7% 7.4% 6.8% 7.3 – 8.9% 6.7 – 10.5% 1,412 1,392 ‘Other’ comprises the groups of cash-generating units for which the respective carrying amount of allocated goodwill is not significant in comparison with the company’s total carrying amount of goodwill. A change in the discount rate by up to approximately 1.6 percentage points or a reduction of planned free cash inflows by up to approxi- mately 30% would not result in any additional impairment requirement. Future changes in expected cash flows and discount rates may lead to impairments of the reported goodwill in the future. For details see Attachment I to the consolidated financial statements. The reconciliation of goodwill is as follows: see Statement of Movements of Intangible and Tangible Assets, p. 202 RECONCILIATION OF GOODWILL, NET € in millions Western Europe Greater China TaylorMade- adidas Golf Other Total January 1, 2016 Currency translation differences Increase in companies consolidated Impairment losses December 31, 2016 632 11 – – 643 226 5 – – 231 292 1 – – 293 240 5 – – 245 1,392 20 – – 1,412 14 — TRADEMARKS AND OTHER INTANGIBLE ASSETS Trademarks and other intangible assets consist of the following: TRADEMARKS AND OTHER INTANGIBLE ASSETS € in millions Reebok CCM Hockey Runtastic Other Trademarks Software, patents and licences Less: accumulated amortisation and impairment losses Other intangible assets Trademarks and other intangible assets Dec. 31, 2016 Dec. 31, 2015 1,470 122 31 57 1,680 925 (758) 167 1,847 1,423 118 31 55 1,628 885 (697) 188 1,816 163 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 At December 31, 2016, trademarks, mainly related to the acquisition of Reebok International Ltd. (USA) in 2006 (trademarks Reebok and CCM Hockey) and runtastic GmbH in 2015, have indefinite useful lives. This is due to the expectation of permanent use of the acquired brand names. adidas tests at least on an annual basis whether trademarks with indefinite useful lives are impaired. This requires an estimation of the fair value less costs to sell of the trademarks. As part of this estimation, adidas is required to make an estimate of the expected future trademark-specific sales and appropriate arm’s length notional royalty rates and also to choose a suitable discount rate in order to calculate the present value of those cash flows. During the impairment test for trademarks, the recoverable amount is determined on the basis of fair value less costs to sell (costs to sell are calculated with 1% of the fair value). The fair value is determined by discounting notional royalty savings after tax and adding a tax amortisation benefit, resulting from the amortisation of the acquired asset (‘relief-from-royalty method’). These calculations use projec- tions of net sales related royalty savings, based on financial planning which covers a period of four years in total. The level of the applied royalty rate for the determination of the royalty savings is based on contractual agreements between adidas and external licensees as well as publicly available royalty rate agreements for similar assets. The royalty rates applied are in a range between 3% and 5% of the respective trademark-specific sales. Notional royalty savings beyond this period are extrapolated using steady growth rates of 1.7% (2015: 1.7%). The growth rates do not exceed the long-term average growth rate of the business to which the trademarks are allocated. The discount rate is based on a weighted average cost of capital calculation derived using a five-year average market-weighted debt/ equity structure and financing costs referencing the company’s major competitors. The discount rate used is an after-tax rate and reflects the specific equity and country risk. The applied discount rate depends on the respective intangible asset being valued and ranges between 6.5% and 9.0% (2015: between 6.8% and 8.4%). adidas determined that there was no impairment necessary for any of its trademarks with indefinite useful lives in the years ending December 31, 2016 and 2015. In addition, an increase in the discount rate of up to approximately 1.7 percentage points or a reduction of cash inflows of up to approximately 27% would not result in any impairment requirement. However, future changes in expected cash flows and discount rates may lead to impairments of the accounted trademarks in the future. All other trademarks are part of the respective groups of cash-generating units. As part of the goodwill impairment test, the Reebok and the Five Ten trademarks are allocated on a pro rata basis to the groups of cash- generating units. Thereof, the major shares relate to Western Europe (€ 364 million), North America (€ 344 million), Russia/CIS (€ 205 million) and Latin America (€ 171 million). Amortisation expenses for intangible assets with definite useful lives were € 70 million and € 60 million for the years ending December 31, 2016 and 2015, respectively. In 2016, impairment losses on other intangible assets amounted to € 10 million. see Note 32 For details see Attachment I to the consolidated financial statements. see Statement of Movements of Intangible and Tangible Assets, p. 202 16 4 1 65 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 15 — LONG-TERM FINANCIAL ASSETS Long-term financial assets primarily include an 8.33% investment in FC Bayern München AG (2015: 8.33%) of € 81 million (2015: € 81 million). This investment is classified as ‘fair value through profit or loss’ and recorded at fair value. This equity security does not have a quoted market price in an active market. Therefore, existing contractual arrangements were used in order to calculate the fair value as at December 31, 2016. The line item ‘Investments and loans’ comprises investments which are mainly invested in insurance products and are measured at fair value as well as other loans. The line item ‘Other financial assets’ includes the shares in Immobilieninvest und Betriebsgesellschaft Herzo-Base GmbH & Co. KG as well as other minority shareholdings amounting to € 50 million (2015: € 22 million) which are classified as ‘ available-for-sale’ and measured at amortised cost as a reliable determination of the fair value is impossible without having concrete negotiations regarding a sale. These shares are unlisted and do not have an active market. There is no intention to sell these shares. LONG-TERM FINANCIAL ASSETS € in millions Investment in FC Bayern München AG Investments and loans Other financial assets Long-term financial assets Other financial assets mainly include unquoted equity instruments. 16 — OTHER NON-CURRENT FINANCIAL ASSETS Other non-current financial assets consist of the following: OTHER NON-CURRENT FINANCIAL ASSETS € in millions Currency options Forward exchange contracts Security deposits Promissory notes Sundry Other non-current financial assets Dec. 31, 2016 Dec. 31, 2015 81 49 64 194 81 38 22 140 Dec. 31, 2016 Dec. 31, 2015 18 13 34 30 0 96 20 2 26 42 10 99 For further information about currency options and forward exchange contracts see Note 30 For information about promissory notes see Note 03 17 — OTHER NON-CURRENT ASSETS Other non-current assets consist of the following: OTHER NON-CURRENT ASSETS € in millions Prepaid expenses Sundry Other non-current assets Dec. 31, 2016 Dec. 31, 2015 94 0 94 122 2 124 Prepaid expenses mainly include prepayments for long-term promotion contracts and rents. see Notes 39 and 29 165 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 18 — BORROWINGS AND CREDIT LINES Borrowings are denominated in a variety of currencies in which adidas conducts its business. The largest portions of effective gross borrowings (before liquidity swaps for cash management purposes) as at December 31, 2016 are denominated in euros (2016: 77%; 2015: 80%) and US dollars (2016: 10%; 2015: 15%). The weighted average interest rate on the Group’s gross borrowings decreased to 2.3% in 2016 (2015: 2.4%). As at December 31, 2016, adidas had cash credit lines and other long-term financing arrangements totalling € 3.6 billion (2015: € 3.7 billion); thereof unused credit lines accounted for € 2.0 billion (2015: € 1.9 billion). In addition, as at December 31, 2016, adidas had separate lines for the issuance of letters of credit and guarantees in an amount of approximately € 0.2 billion (2015: € 0.2 billion). The Group’s outstanding financings are unsecured and may include standard financial covenants, which are reviewed on a quarterly basis. These legal covenants may include limits on the disposal of fixed assets, the maximum amount of debt secured by liens, cross default provi- sions and change of control. As at December 31, 2016, and December 31, 2015, shareholders’ equity and the equity ratio were well above the agreed minimum values. Likewise, the relevant amount of net income clearly exceeded net loss covenants. The amounts disclosed as gross borrowings represent outstanding borrowings under the following arrangements with aggregated expiration dates as follows: GROSS BORROWINGS AS AT DECEMBER 31, 2016 € in millions Bank borrowings incl. commercial paper Eurobond Convertible bond Total Up to 1 year 379 – 257 636 Between 1 and 3 years Between 3 and 5 years More than 5 years – – – – – 595 – 595 – 387 – 387 Total 379 982 257 1,618 The above table includes two Eurobonds amounting to € 1 billion in total issued on October 1, 2014. The seven-year Eurobond of € 600 million matures on October 8, 2021 and has a coupon of 1.25%. The twelve-year Eurobond of € 400 million matures on October 8, 2026 and has a coupon of 2.25%. The Eurobonds have denominations of € 1,000 each and were priced with a spread of 68 basis points and 100 basis points, respectively, above the corresponding euro mid-swap rate. The issue price was fixed at 99.145% and 99.357%, respectively. In addition, gross borrowings include the outstanding portion of the convertible bond for an aggregate nominal amount of € 260 million (2015: € 500 million) divided into denominations of € 200,000 which was issued on March 21, 2012. The bond has a maximum maturity (including prolongation options) until June 14, 2019. The coupon of the bond amounts to 0.25% and is payable annually, commencing on June 14, 2013. The bond is, at the option of the respective holder, convertible at any time from and including May 21, 2012, up to and including June 5, 2019, into up to 3.2 million new or existing adidas AG shares. In 2016, the bondholders converted an aggregate nominal amount of € 240 million of the convertible bond into 2,947,127 adidas AG shares. see Note 26 The convertible bond initially had a conversion premium of 40% above the reference price of € 59.61, which resulted in an initial conversion price of € 83.46 per share. As a consequence of contractual provisions relating to dividend protection, the conversion price was adjusted from € 82.00 to € 81.57 (2015: € 82.56 to € 82.00) per share. This adjustment became effective on May 13, 2016. On June 14, 2017, the bondholders have the right to call the bond from adidas AG at nominal value plus interest accrued on the nominal amount. adidas AG is entitled to redeem the remaining bonds in whole if, at any time, the aggregate principal amount of bonds outstanding falls below 15% of the aggregate principal amount of the bonds that were initially issued. Furthermore, as of July 14, 2017, adidas AG is entitled to redeem the bonds in whole if on 20 of 30 consecutive trading days, the share price of adidas AG exceeds the current conversion price of € 81.57 by at least 30%. According to IAS 32 ‘Financial Instruments: Presentation’, the conversion right represented in the convertible bond constitutes a financial instrument which is covered in the capital reserve in an amount of € 55 million after deduction of the issuance cost. The initial liability component amounted to € 441 million after deduction of the issuance cost and is shown within short-term borrowings. The initial difference of € 59 million compared to the nominal amount of € 500 million is accrued as interest expense of the financial liability over the expected maturity of the convertible bond using the ‘effective interest method’. As at December 31, 2016, the financial liability amounted to € 257 million (2015: € 483 million). 16 6 1 67 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position GROSS BORROWINGS AS AT DECEMBER 31, 2015 € in millions Bank borrowings incl. commercial paper Private placements Eurobond Convertible bond Total Up to 1 year 229 138 – – 366 Between 1 and 3 years Between 3 and 5 years More than 5 years – – – 483 483 – – – – – – – 981 – 981 Total 229 138 981 483 1,830 For further details on future cash outflows see Risk and Opportunity Report, p. 118 19 — OTHER CURRENT FINANCIAL LIABILITIES Other current financial liabilities consist of the following: OTHER CURRENT FINANCIAL LIABILITIES € in millions Currency options Forward exchange contracts Finance lease obligations Sundry Other current financial liabilities Dec. 31, 2016 Dec. 31, 2015 1 109 3 88 201 2 59 3 79 143 The line item ‘Sundry’ mainly relates to payables due to customs duties. In 2015, it also includes purchase price obligations for non-controlling interests. For further information about currency options, forward exchange contracts and commodity futures see Note 30 For further information about finance lease obligations see Note 29 20 — OTHER PROVISIONS Other provisions consist of the following: OTHER PROVISIONS € in millions Jan. 1, 2016 Marketing Personnel Returns, allowances and warranty Taxes, other than income taxes Sundry Other provisions 21 59 189 29 207 506 Currency translation differences 0 1 1 (1) 1 2 Usage Reversals Additions Transfers Dec. 31, 2016 Thereof non-current (19) (39) (158) (7) (118) (340) (2) (4) (3) (1) (18) (28) 26 81 201 15 162 485 – 1 – 1 (11) (8) 28 99 230 36 224 617 – 3 – 0 41 44 Marketing provisions mainly consist of provisions for promotion contracts. Provisions for personnel mainly consist of provisions for short- and long-term variable compensation components as well as of provisions for social plans relating to restructuring measures. Provisions for returns, allowances and warranty primarily arise due to bonus agreements with customers and the obligation of fulfilling customer claims with regard to the return of products sold by adidas. The amount of the provision follows the historical development of returns, allowances and warranty as well as current agreements. Provisions for taxes other than income taxes mainly relate to value added tax, real estate tax and motor vehicle tax. 167 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 Sundry provisions mainly include provisions for customs risks as well as for dismantling costs. The reversal of sundry provisions in 2016 is mainly related to the completion of customs audits. Management follows past experience from similar transactions when assessing the recognition and the measurement of other provisions; in particular external legal opinions are considered for provisions for customs risks and for litigation and other legal risks. All evidence from events until the preparation of the consolidated financial statements is taken into account. 21 — ACCRUED LIABILITIES Accrued liabilities consist of the following: ACCRUED LIABILITIES € in millions Jan. 1, 2016 Currency translation differences Usage Reversals Additions Transfers Dec. 31, 2016 Thereof non-current Goods and services not yet invoiced Marketing and sales Personnel Sundry Accrued liabilities 604 688 470 42 1,805 1 (11) 7 0 (3) (492) (429) (369) (25) (1,314) (15) (25) (12) (0) (52) 610 523 538 37 1,708 – – (1) – (1) 708 748 633 54 2,143 9 2 102 7 120 Marketing accrued liabilities mainly consist of accruals for distribution, such as discounts, rebates and sales commissions. Accrued liabilities for personnel mainly consist of accruals for outstanding salary payments, such as bonuses and overtime, as well as outstanding vacation. Sundry accrued liabilities mainly include accruals for promotion contracts as well as accruals for interest. 22 — OTHER CURRENT LIABILITIES Other current liabilities consist of the following: OTHER CURRENT LIABILITIES € in millions Tax liabilities other than income taxes Liabilities due to personnel Liabilities due to social security Deferred income Customers with credit balances Sundry Other current liabilities Dec. 31, 2016 Dec. 31, 2015 131 65 24 43 85 86 434 111 57 21 33 54 55 331 The line item ‘Sundry’ mainly consists of liabilities relating to franchise store openings and advance payments from customers. 16 8 1 69 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 23 — OTHER NON-CURRENT FINANCIAL LIABILITIES Other non-current financial liabilities consist of the following: OTHER NON-CURRENT FINANCIAL LIABILITIES € in millions Currency options Forward exchange contracts Finance lease obligations Sundry Other non-current financial liabilities Dec. 31, 2016 Dec. 31, 2015 1 2 4 16 22 0 0 6 12 18 For further information about currency options and forward exchange contracts see Note 30 For information about finance lease obligations see Note 29 For further further information about earn-out components see Note 04 24 — PENSIONS AND SIMILAR OBLIGATIONS adidas has recognised post-employment benefit obligations arising from defined benefit plans. The benefits are provided pursuant to the legal, fiscal and economic conditions in each respective country and mainly depend on the employees’ years of service and remuneration. PENSIONS AND SIMILAR OBLIGATIONS € in millions Dec. 31, 2016 Dec. 31, 2015 Liability arising from defined benefit pension plans Similar obligations Pensions and similar obligations 338 17 355 246 26 273 Defined contribution pension plans The total expense for defined contribution plans amounted to € 66 million in 2016 (2015: € 59 million). Defined benefit pension plans Given the diverse Group structure, different defined benefit pension plans exist, comprising a variety of post-employment benefit arrangements. The Group’s major defined benefit pension plans relate to adidas AG and its subsidiaries in the UK and South Korea. The defined benefit pension plans generally provide payments in case of death, disability or retirement to former employees and their survivors. The obligations arising from defined benefit pension plans are partly covered by plan assets. In Germany, adidas AG grants its employees contribution-based and final salary defined benefit pension schemes, which provide employees with entitlements in the event of retirement, disability and death. In general, German pension plans operate under the legal framework of the German Company Pensions Act (‘Betriebsrentengesetz’) and under the German Labour Act. A large proportion of the pension plans are closed to new entrants. New employees are entitled to benefits in accordance with the adidas Pension Plan or the adidas Management Pension Plan. The adidas Pension Plan is a matching contribution plan; the contributions to this pension plan are partly paid by the employee and partly paid by the employer. The contributions are transferred into benefit building blocks. The benefits are paid out in the form of a pension, a lump sum or instalments. The pension plans in Germany are financed using book reserves, a contractual trust arrangement (CTA) and a pension fund (‘Pensionsfonds’) in combination with a reinsured provident fund (‘Unterstützungskasse’) for certain current and former members of the Executive Board of adidas AG. Further details about the pension entitlements of members of the Executive Board of adidas AG are contained in the Compensation Report. see Compensation Report, p. 32 169 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 The final salary defined benefit pension scheme in the UK is closed to new entrants and to future accrual. The benefits are mainly paid out in the form of pensions. The scheme operates under UK trust law as well as under the jurisdiction of the UK Pensions Regulator and therefore is subject to a minimum funding requirement. The Trustee Board is responsible for setting the scheme’s funding objective, agreeing the contributions with the company and determining the investment strategy of the scheme. The subsidiaries in South Korea grant a final pay pension plan to certain employees. This plan is closed to new entrants. The benefits are paid out in the form of a lump sum. The pension plan operates under the Employee Retirement Benefit Security Act (ERSA). This regulation requires a minimum funding amounting to 80% of the present value of the vested benefit obligation. Both subsidiaries annually contribute at least the minimum amount in order to meet the funding requirements. BREAKDOWN OF THE PRESENT VALUE OF THE OBLIGATION ARISING FROM DEFINED BENEFIT PENSION PLANS IN THE MAJOR COUNTRIES € in millions Dec. 31, 2016 Active members Former employees with vested rights Pensioners Total Germany 211 76 86 375 UK – 69 4 73 South Korea Germany 17 – – 17 177 52 73 302 Dec. 31, 2015 South Korea 14 – – 14 UK – 52 4 56 The Group’s pension plans are subject to risks from changes in actuarial assumptions, such as the discount rate, salary and pension increase rates, and risks from changes in longevity. A lower discount rate results in a higher defined benefit obligation and/or in higher contributions to the pension funds. Lower than expected performance of the plan assets could lead to an increase in required contributions or to a decline of the funded status. The following tables analyse the defined benefit plans, plan assets, present values of the defined benefit pension plans, expenses recog- nised in the consolidated income statement, actuarial assumptions and further information. AMOUNTS FOR DEFINED BENEFIT PENSION PLANS RECOGNISED IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION € in millions Dec. 31, 2016 Dec. 31, 2015 Present value of funded obligation from defined benefit pension plans Fair value of plan assets Funded status Present value of unfunded obligation from defined benefit pension plans Asset ceiling effect Net defined benefit liability Thereof: liability Thereof: adidas AG Thereof: asset Thereof: adidas AG 485 (178) 307 31 0 338 338 275 (0) – 394 (173) 221 25 0 246 247 206 (0) – The determination of assets and liabilities for defined benefit plans is based upon statistical and actuarial valuations. In particular, the present value of the defined benefit obligation is driven by financial variables (such as the discount rates or future increases in salaries) and demographic variables (such as mortality and employee turnover). The actuarial assumptions may differ significantly from the actual circumstances and could lead to different cash flows. 170 1 71 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS in % Discount rate Expected rate of salary increases Expected pension increases Dec. 31, 2016 Dec. 31, 2015 2.1 3.1 1.7 2.8 3.1 1.7 The weighted average actuarial assumptions as at the balance sheet date are used to determine the defined benefit liability at that date and the pension expense for the upcoming financial year. The actuarial assumptions for withdrawal and mortality rates are based on statistical information available in the various countries. In Germany, the Heubeck 2005 G mortality tables are used. In the UK, assumptions are based on the S1NA base table with modified improvement of the life expectancy mortality tables. In South Korea, the KIDI 2015 tables from the Korean Insurance Development Institute are used. As in the previous year, the calculation of the pension liabilities in Germany is based on a discount rate determined using the ‘Mercer Yield Curve (MYC)’ approach. Remeasurements, such as gains or losses arising from changes in the actuarial assumptions for defined benefit pension plans during the financial year or a return on the plan assets exceeding the interest income, are immediately recognised outside the income statement as a change in other reserves in the consolidated statement of comprehensive income. PENSION EXPENSES FOR DEFINED BENEFIT PENSION PLANS € in millions Current service cost Net interest expense Thereof: interest cost Thereof: interest income Past service (credit)/cost Gain on plan settlements Expenses for defined benefit pension plans (recognised in the consolidated income statement) Actuarial losses/(gains) Thereof: due to changes in financial assumptions Thereof: due to changes in demographic assumptions Thereof: due to experience adjustments Return on plan assets (not included in net interest income) Asset ceiling effect Remeasurements for defined benefit pension plans (recognised as decrease/(increase) in other reserves in the consolidated statement of comprehensive income) Total Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 17 6 11 (5) (0) (1) 23 89 70 (1) 21 (6) (0) 84 106 15 6 10 (4) 0 (4) 17 (12) (23) (1) 12 (1) (0) (13) 4 Of the total pension expenses recorded in the consolidated income statement, an amount of € 16 million (2015: € 14 million) relates to employees of adidas AG, € 0.2 million (2015: € 0.5 million) relates to employees in the UK and € 3 million (2015: € 3 million) relates to employees in South Korea. The gain on plan settlements in 2015 in an amount of € 4 million derives from the closure of the defined benefit plan in Japan effective as of March 31, 2015 and the relating introduction of a new defined contribution plan. The pension expense is mainly recorded within other operating expenses. The production-related part of the pension expenses is recognised within cost of sales. 17 1 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 PRESENT VALUE OF THE DEFINED BENEFIT OBLIGATION € in millions Present value of the obligation from defined benefit pension plans as at January 1 Currency translation differences Current service cost Interest cost Contribution by plan participants Pensions paid Payments for plan settlements Actuarial losses/(gains) Thereof: due to changes in financial assumptions Thereof: due to changes in demographic assumptions Thereof: due to experience adjustments Past service (credit)/cost Gain on plan settlements Business combinations/transfers/divestitures Present value of the obligation from defined benefit pension plans as at December 31 2016 419 (8) 17 11 0 (11) (2) 89 70 (1) 21 (0) (1) 1 516 2015 427 8 15 10 0 (14) (12) (12) (23) (1) 12 0 (4) 0 419 The payments for plan settlements in 2015 in an amount of € 12 million result from the changes in the pension plans in Japan as described above. In the following table, the effects of reasonably conceivable changes in the actuarial assumptions on the present value of the obligation from defined benefit pension plans are analysed. In addition, for Germany, the UK and South Korea the average duration of the obligation is shown. SENSITIVITY ANALYSIS OF THE OBLIGATION FROM DEFINED BENEFIT PENSION PLANS € in millions Dec. 31, 2016 Dec. 31, 2015 Germany UK South Korea Germany UK South Korea Present value of the obligation from defined benefit pension plans Increase in the discount rate by 0.5% Reduction in the discount rate by 0.5% Average duration of the obligations (in years) 375 344 412 18 73 63 85 30 17 16 18 8 302 277 330 18 56 49 65 28 14 14 15 8 Since many pension plans are closed to future accrual or are not dependent on the salary, the salary trend plays a minor role in determining pension obligations. Due to the fact that about half of the benefits of the German pension plans are paid as lump sums or instalment payments, the pension increase rate and the mortality assumption have significantly less impact than the discount rate when calculating the pension obligations. FAIR VALUE OF PLAN ASSETS € in millions Fair value of plan assets at January 1 Currency translation differences Pensions paid Contributions by the employer Contributions paid by plan participants Interest income from plan assets Return on plan assets (not included in net interest income) Settlement payments Fair value of plan assets at December 31 2016 173 (7) (3) 6 0 5 6 (1) 178 2015 157 4 (4) 11 0 4 1 – 173 172 1 73 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position Approximately 92% (2015: 92%) of the total plan assets are allocated to plan assets in the UK (2016: 28%, 2015: 30%), Germany (2016: 57%, 2015: 56%) and South Korea (2016: 8%, 2015: 6%). Part of the plan assets in Germany is held by a trustee under a Contractual Trust Arrangement (CTA) for the purpose of funding the pension obligations of adidas AG and insolvency insurance with regard to part of the pension obligations of adidas AG. The trustee is the registered association adidas Pension Trust e.V. The investment committee of the adidas Pension Trust determines the investment strategy with the goal to match the pension liabilities as far as possible and to generate a sustainable return. In August 2014, an amount of € 65 million in cash was transferred to the trustee. The plan assets in the registered association are mainly invested in equity index funds, hybrid bonds, fixed and variable interest rate bonds and money market funds. Another part of the plan assets in Germany is invested in insurance contracts via pension funds or provident funds. For this portion, an insurance entity is responsible for the determination and the implementation of the investment strategy. In the UK, the plan assets are held under trust within the pension fund. The investment strategy is aligned with the structure of the pension obligations in these countries. In the rest of the world, the plan assets consist predominantly of insurance contracts. The expected payments for the 2017 financial year amount to € 48 million. Thereof, € 8 million relates to benefits directly paid to pensioners by the subsidiaries and € 39 million to employer contributions paid into the plan assets. In 2016, the actual return on plan assets was € 10 million (2015: € 5 million). COMPOSITION OF PLAN ASSETS € in millions Cash and cash equivalents Equity instruments Bonds Real estate Pension plan reinsurance Insurance policies Other assets Fair value of plan assets Dec. 31, 2016 Dec. 31, 2015 28 59 34 13 44 0 0 178 45 57 29 0 29 13 1 173 All equities and bonds are traded freely and have a quoted market price in an active market. At each balance sheet date, the company analyses the over- or underfunding and, where appropriate, adjusts the composition of plan assets. 25 — OTHER NON-CURRENT LIABILITIES Other non-current liabilities consist of the following: OTHER NON-CURRENT LIABILITIES € in millions Liabilities due to personnel Deferred income Sundry Other non-current liabilities Dec. 31, 2016 Dec. 31, 2015 5 41 0 46 6 34 1 40 26 — SHAREHOLDERS’ EQUITY The nominal capital of adidas AG has remained unchanged since December 31, 2015. As at the balance sheet date, and in the period beyond, up to and including February 17, 2017, it amounted to € 209,216,186 divided into 209,216,186 registered no-par-value shares and is fully paid in. Each share grants one vote and is entitled to dividends starting from the beginning of the year it was issued. Treasury shares held directly or indirectly are not entitled to dividend payment in accordance with § 71b German Stock Corporation Act (Aktiengesetz – AktG). As at the balance sheet date, adidas AG held 7,726,876 treasury shares, corresponding to a notional amount of € 7,726,876 in the nominal capital and consequently 3.69% of the nominal capital. As at February 17, 2017, adidas AG holds 8,072,349 treasury shares, corresponding to a notional amount of € 8,072,349 in the nominal capital and consequently 3.86% of the nominal capital. 173 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 Authorised Capital The Executive Board of adidas AG did not utilise the existing amount of authorised capital of up to € 99 million in the 2016 financial year or in the period beyond the balance sheet date up to and including February 17, 2017. The authorised capital of adidas AG, which is set out in § 4 sections 2, 3, 4 and 5 of the Articles of Association as at the balance sheet date, entitles the Executive Board, subject to Supervisory Board approval, to increase the nominal capital until June 30, 2018 — by issuing new shares against contributions in cash once or several times by no more than € 50 million and, subject to Supervisory Board approval, to exclude residual amounts from shareholders’ subscription rights (Authorised Capital 2013/I); until June 2, 2018 — by issuing new shares against contributions in kind once or several times by no more than € 25 million and, subject to Supervisory Board approval, to exclude shareholders’ subscription rights (Authorised Capital 2015); until June 30, 2018 — by issuing new shares against contributions in cash once or several times by no more than € 20 million and, subject to Supervisory Board approval, to exclude residual amounts from shareholders’ subscription rights and to exclude shareholders’ subscription rights when issuing the new shares at a value not essentially below the stock market price of shares with the same features; this exclusion of subscription rights can also be associated with the listing of the entity’s shares on a foreign stock exchange (Authorised Capital 2013/III). The authorisation to exclude subscription rights pursuant to the previous sentence may, however, only be used to the extent that the pro rata amount of the new shares in the nominal capital together with the pro rata amount in the nominal capital of other shares which have been issued by the entity since May 8, 2013, subject to the exclusion of subscription rights pursuant to or in accordance with § 186 section 3 sentence 4 AktG on the basis of an authorised capital or following a repurchase, or for which conversion or subscription rights or conversion or subscription obligations were granted after May 8, 2013, through the issuance of convertible bonds and/or bonds with warrants, with subscription rights excluded in accordance with § 186 section 3 sentence 4 AktG, does not exceed 10% of the nominal capital existing on the date of the entry of this authorisation into the commercial register or – if this amount is lower – as of the respective date on which the authorisation is used; until June 14, 2021 — by issuing up to 4,000,000 new shares against contributions in cash once or several times by no more than € 4 million and, subject to Super- visory Board approval, to determine the further content of the rights embodied in the shares and the terms and conditions of the share issuance. Shareholders’ subscription rights shall be excluded (Authorised Capital 2016). Any repurchased treasury shares of the entity which are used by the entity for employee stock purchase plans during the term of this authorisation shall be attributed to the maximum number of 4,000,000 shares. The new shares may only be issued to (current or former) employees of the entity and its affiliated companies as well as to (current and former) members of management bodies of the entity’s affiliated companies. Contingent Capital The following description of the Contingent Capital is based on § 4 sections 6 and 7 of the Articles of Association of adidas AG as well as on the underlying resolutions of the Annual General Meeting held on May 6, 2010 and May 8, 2014. Additional contingent capital does not exist. Contingent Capital 2010 and Convertible Bond The nominal capital of adidas AG is conditionally increased by up to € 36 million (Contingent Capital 2010). The Contingent Capital serves the purpose of granting holders or creditors of bonds that were issued up to May 5, 2015 based on the resolution of the Annual General Meeting on May 6, 2010 subscription or conversion rights relating to no more than a total of 36,000,000 shares in compliance with the corresponding conditions of the bonds. The new shares shall be issued at the respective option or conversion price to be established in accordance with the aforementioned authorisation resolution. The new shares shall carry dividend rights from the commencement of the financial year in which the shares are issued. On March 14, 2012, the Executive Board, with the approval of the Supervisory Board, made partial use of the authorisation of the Annual General Meeting from May 6, 2010, and on March 21, 2012 issued a convertible bond due on June 14, 2019 (including a prolongation option) in a nominal value of € 500 million via an offer to institutional investors outside the USA excluding shareholders’ subscription rights. In principle, the conversion rights are exercisable at any time between May 21, 2012 and June 5, 2019, subject to lapsed conversion rights as set out under § 6 section 3 or to the excluded periods as defined by § 6 section 4 of the bond terms and conditions, and (subject to an adjustment to the conversion rights resulting from the dilution adjustment regulations set out under § 10 or a change of control in accordance with § 13 of the bond terms and conditions) based on a conversion price of € 81.57 per share are convertible into 6,129,671 shares of adidas AG. The conversion price currently amounts to € 81.57 per share. The convertible bond bears an interest rate of 0.25% per annum. Bondholders are entitled to demand early redemption of the bonds as of June 14, 2017. As of July 14, 2017, adidas AG may conduct an early redemption of the 174 1 75 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position bond, if, on 20 of 30 consecutive trading days, the share price of adidas AG exceeds the current conversion price of € 81.57 by at least 30%. The bonds are listed on the Open Market segment of the Frankfurt Stock Exchange. For details regarding the servicing of the convertible bond with treasury shares see Repurchase and use of treasury shares, p. 175 Moreover, the authorisation to issue bonds with warrants and/or convertible bonds granted on May 6, 2010 was cancelled by resolution of the Annual General Meeting on May 8, 2014. The Executive Board of adidas AG did not issue shares from the Contingent Capital 2010 in the period up to the balance sheet date and in the period beyond the balance sheet date up to and including February 17, 2017. Contingent Capital 2014 At the balance sheet date, the nominal capital is conditionally increased by up to € 12.5 million divided into not more than 12,500,000 shares (Contingent Capital 2014). The contingent capital increase will be implemented only to the extent that holders or creditors of option or conversion rights or the persons obligated to exercise option or conversion duties based on bonds issued by the entity or a subordinated Group company, pursuant to the authorisation of the Executive Board granted by the resolution adopted by the Annual General Meeting on May 8, 2014 (Agenda Item 7), up to May 7, 2019 and guaranteed by the entity, exercise their option or conversion rights or, if they are obliged to exercise the option or conversion duties, meet their obligations to exercise the warrant or convert the bond, or to the extent that the entity exercises its rights to choose to deliver shares in the entity for the total amount or a part amount instead of payment of the amount due and insofar as no cash settlement, treasury shares or shares of another publicly listed company are used to serve these rights. The new shares will be issued at the respective option or conversion price to be established in accordance with the aforementioned authorisation resolution. The new shares will carry dividend rights from the commencement of the financial year in which the shares are issued. The Executive Board is authorised, subject to Supervisory Board approval, to stipulate any additional details concerning the implementation of the contingent capital increase. The Executive Board of adidas AG did not issue shares from the Contingent Capital 2014 in the 2016 financial year or in the period beyond the balance sheet date up to and including February 17, 2017. Repurchase and use of treasury shares Against the background of the introduction of an employee stock purchase plan, the Annual General Meeting of May 12, 2016 cancelled the authorisation of the Executive Board to repurchase treasury shares granted on May 8, 2014, which was used in 2014 and 2015. At the same time, the Annual General Meeting granted the Executive Board a new authorisation to repurchase treasury shares up to an amount totalling 10% of the nominal capital until May 11, 2021. The authorisation may be used by adidas AG but also by its subordinated Group companies or by third parties on account of adidas AG or its subordinated Group companies or third parties assigned by adidas AG or one of its subordinated Group companies. Based on the authorisation to repurchase treasury shares granted by the Annual General Meeting on May 8, 2014, the adidas AG Executive Board commenced a share buyback programme on November 7, 2014. Under the granted authorisation, adidas AG repurchased a total of 4,889,142 shares for a total price of € 299,999,987 (excluding incidental purchasing costs), i.e. for an average price of € 61.36 per share, in a first tranche between November 7, 2014 and December 12, 2014 inclusive. This corresponded to a notional amount of € 4,889,142 in the nominal capital and consequently to 2.34% of the nominal capital. The shares were repurchased for cancellation (capital reduction) or otherwise used to meet obligations arising from the potential conversion of adidas AG’s € 500 million convertible bond. Under the granted authorisation, adidas AG repurchased a total of 4,129,627 shares for a total price of € 299,999,992 (excluding incidental purchasing costs), i.e. for an average price of € 72.65 per share, in a second tranche between March 6, 2015 and June 15, 2015 inclusive. This corresponded to a notional amount of € 4,129,627 in the nominal capital and consequently to 1.97% of the nominal capital. The shares were repurchased for cancellation (capital reduction) or otherwise used to meet obligations arising from the potential conversion of adidas AG’s € 500 million convertible bond. Based on the authorisation granted by the Annual General Meeting on May 12, 2016, the share buyback programme was continued in a third tranche between November 8, 2016 and January 31, 2017 inclusive. The repurchased shares may either be cancelled, thus reducing the nominal capital, or may be used to meet obligations arising from the potential conversion of adidas AG’s € 500 million convertible bond and other admissible purposes under the authorisation granted by the Annual General Meeting on May 12, 2016. In November 2016, 1,143,103 shares were repurchased for an average price of € 136.47, corresponding to a notional amount of € 1,143,103 in the nominal capital and consequently to 0.55% of the nominal capital. In December 2016, 512,131 shares were repurchased for an average price of € 143.31, corresponding to a notional amount of € 512,131 in the nominal capital and consequently to 0.24% of the nominal capital. In January 2017, 472,966 shares were repurchased for an average price of € 149.29, corresponding to a notional amount of € 472,966 in the nominal capital and consequently to 0.23% of the nominal capital. On January 31, 2017, the third tranche of the share buyback programme was concluded. Under the granted authorisation, adidas AG repurchased a total of 2,128,200 shares for a total price of € 299,999,851 (excluding incidental purchasing costs), i.e. for an average price of € 140.96 per share, in a third tranche between November 8, 2016 and January 31, 2017 inclusive. This corresponded to a notional amount of € 2,128,200 in the nominal capital and consequently to 1.02% of the 175 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 nominal capital. adidas AG reserves the right to continue with or to resume the share buyback programme in the future in alignment with the published parameters. For details see Disclosures Pursuant to § 315 Section 4 and § 289 Section 4 HGB, p. 107 In the 2016 financial year, a total of 2,947,127 treasury shares were used to meet obligations arising from the conversion of adidas AG’s convertible bond. In the 2017 financial year up to and including February 17, 2017, a total of 127,493 treasury shares were used to meet obliga- tions arising from the conversion of adidas AG’s convertible bond. Up to the balance sheet date and in the period beyond the balance sheet date up to and including February 17, 2017, adidas AG used a total of 3,074,620 treasury shares. Employee stock purchase plan In the 2016 financial year, adidas introduced an employee stock purchase plan in favour of employees. For details on the employee stock purchase plan see Disclosures Pursuant to § 315 Section 4 and § 289 Section 4 HGB, p. 107 and see Notes 02 and 27 Changes in the percentage of voting rights Pursuant to § 160 section 1 no. 8 AktG, existing shareholdings which have been notified to adidas AG in accordance with § 21 section 1 or section 1a German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) need to be disclosed. The following table reflects reportable shareholdings in adidas AG, Herzogenaurach, as at the balance sheet date and up to and including February 17, 2017 which have each been notified to adidas AG in written form. The respective details are taken from the most recent voting rights notification received by adidas AG. All voting rights notifications disclosed by adidas AG in the year under review and up to and including www.adidas-group.com/s/voting-rights-notifications The details on the percentage of shareholdings February 17, 2017 are available on the adidas website. and voting rights may no longer be up to date. NOTIFIED REPORTABLE SHAREHOLDINGS AS AT FEBRUARY 17, 2017 Notifying party Date of reaching, exceeding or falling below Reporting threshold Attributions in accordance with WpHG Shareholdings in % Number of voting rights Elian Corporate Trustee (Cayman) Limited, Grand Cayman, Cayman Islands 1 December 16, 2016 Exceeding 5% §§ 22, 25 sec. 1 no. 2 BlackRock, Inc., Wilmington, DE, USA 2 November 25, 2016 Exceeding 5% §§ 22, 25 sec. 1 no. 1 and § 25 sec.1 no. 2 Fidelity Mt. Vernon Street Trust, Boston, MA, USA 3 FMR LLC, Wilmington, DE, USA 4 O. Mason Hawkins, USA 5 Albert Frère / Desmarais Family Trust, Montréal, Canada 6 Capital Research and Management Company, Los Angeles, CA, USA 7 The Capital Group Companies, Inc., Los Angeles, CA, USA 8 October 31, 2016 Exceeding 3% May 12, 2016 April 27, 2016 Exceeding 5% Falling below 3% January 14, 2016 Exceeding 5% § 21 § 22 § 22 § 22 July 22, 2015 Exceeding 3% § 22 sec. 1 sent. 1 no. 6 July 22, 2015 Exceeding 3% § 22 sec. 1 sent. 1 no. 6 in conjunction with § 22 sec. 1 sent. 2 and 3 5.71 5.29 3.01 5.31 2.94 5.0001 3.02 3.02 11,950,482 11,069,462 6,291,822 11,117,704 6,160,627 10,461,000 6,325,110 6,325,110 adidas AG, Herzogenaurach, Germany 9 April 9, 2015 Exceeding 3% 3.002 6,281,429 1 See adidas AG’s disclosure dated December 22, 2016. 2 See adidas AG’s disclosure dated December 2, 2016. 3 See adidas AG’s disclosure dated November 4, 2016. 4 See adidas AG’s disclosure dated May 19, 2016. 5 See adidas AG’s disclosure dated May 2, 2016. 6 See adidas AG’s disclosure dated January 22, 2016. 7 See adidas AG’s disclosure dated July 29, 2015. 8 See adidas AG’s disclosure dated July 28, 2015. 9 See adidas AG’s disclosure dated April 10, 2015. Capital management The company’s policy is to maintain a strong capital base so as to uphold investor, creditor and market confidence and to sustain future development of the business. adidas seeks to maintain a balance between a higher return on equity that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. The company further aims to maintain net debt below two times EBITDA over the long term. 176 1 77 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position Financial leverage amounts to 1.6% (2015: 8.1%) and is defined as the ratio between net borrowings (short- and long-term borrowings less cash and cash equivalents as well as short-term financial assets) in an amount of € 103 million (2015: € 460 million) and shareholders’ equity in an amount of € 6.472 billion (2015: € 5.666 billion). EBITDA (continuing operations) amounted to € 1.883 billion for the financial year ending December 31, 2016 (2015: € 1.475 billion). The ratio between net borrowings and EBITDA (continuing operations) amounted to 0.1 for the financial year ending December 31, 2016 (2015: 0.3). Reserves Reserves within shareholders’ equity are as follows: — Capital reserve: primarily comprises the paid premium for the issuance of share capital as well as the equity component of the issued convertible bond. — Cumulative currency translation differences: comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. — Hedging reserve: comprises the effective portion of the cumulative net change in the fair value of cash flow hedges related to hedged transactions that have not yet occurred as well as of hedges of net investments in foreign subsidiaries. — Other reserves: comprises the remeasurements of defined benefit plans consisting of the cumulative net change of actuarial gains or losses relating to the defined benefit obligations, the return on plan assets (excluding interest income) and the asset ceiling effect as well as expenses recognised for share option plans and effects from the acquisition of non-controlling interests. — Retained earnings: comprises both amounts which are required by the Articles of Association and voluntary amounts that have been set aside by adidas. The reserve includes the unappropriated accumulated profits less dividends paid and consideration paid for the repur- chase of treasury shares exceeding the nominal value. In addition, the item includes the effects of the employee stock purchase plan. Distributable profits and dividends Profits distributable to shareholders are determined by reference to the retained earnings of adidas AG and calculated under German Commercial Law. Based on the resolution of the 2016 Annual General Meeting, the dividend for 2015 was € 1.60 per share (total amount: € 320 million). The Executive Board of adidas AG will propose to use retained earnings of adidas AG in an amount of € 629 million as reported in the 2016 financial statements of adidas AG for a dividend payment of € 2.00 per dividend-entitled share and to allocate € 200 million to other revenue reserves. The subsequent remaining amount will be carried forward. As at December 31, 2016, 201,489,310 dividend-entitled shares exist, resulting in a dividend payment of € 403 million. 27 — SHARE-BASED PAYMENT In 2016, adidas announced the introduction of an open-ended employee stock purchase plan (the ‘plan’). The plan will be operated on a quarterly basis, with each calendar quarter referred to as an ‘investment quarter’. The first investment quarter went from October 1 to December 31, 2016. The plan enables employees to purchase adidas AG shares with a 15% discount (‘investment shares’) and to benefit from free matching shares. Currently, eligible employees of adidas AG and ten other subsidiaries can participate in the plan. Up to two weeks before the start of an investment quarter each eligible employee can enrol for the plan. The company accepts enrolment requests on the first day of the relevant investment quarter. This is the grant date for the investment and matching shares. The fair value at the vesting date is equivalent to the fair value of the granted equity instruments at this date. The employees invest an amount up to 10% of their gross base salary per quarter in the plan. A few days after the end of the investment quarter the shares are purchased on the market at fair market value and transferred to the employees. Thereby the amount invested during the quarter plus the step-up from adidas is used. These shares can be sold at any time by the employee. If the shares are held for a period of one year after the last day of an investment quarter, employees will receive one-time free matching shares (one matching share for every six adidas AG shares acquired). This plan currently constitutes an equity-settled share-based payment for both elements. For the specific period of service of the matching shares an appropriate discount is taken into account.The effects for 2016 are presented in the following table: 177 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 STOCK PURCHASE PLAN Grant date Share price at grant date (in €) Share price as at December 31, 2016 (in €) Number of granted investment shares based on the share price as at December 31, 2016 Outstanding granted matching shares based on the share price as at December 31, 2016 Expenses recognised relating to investment shares (€ in millions) Expenses recognised relating to vesting of matching shares (€ in millions) Average remaining vesting period in months as at December 31 Dec. 31, 2016 October 1, 2016 157.40 150.15 24,665 4,110 0.6 0.1 12 As at December 31, 2016, a total amount of € 3 million was invested by the participants in the stock purchase plan and has been included in ‘Other current financial liabilities’. see Note 19 28 — NON-CONTROLLING INTERESTS This line item within equity comprises the non-controlling interests in several subsidiaries which are not directly or indirectly attributable to adidas AG. Non-controlling interests are assigned to two and six subsidiaries as at December 31, 2016 and 2015, respectively. see Attachment II to the Consolidated Financial Statements (see Shareholdings of adidas AG, Herzogenaurach, p. 204) These subsidiaries were partly acquired in connection with the acquisition of Reebok and partly through purchases or foundations in the last years. With respect to the consolidated financial statements of adidas AG, on a single basis, no subsidiary has a material non-controlling interest. As at December 31, 2015, signed purchase agreements which became effective as of January 2016 existed for the non-controlling interests of Life Sport Ltd. and adidas Levant Limited. adidas acquired 34% of Life Sport Ltd. and 45% of adidas Levant Limited. In accordance with the requirements of IAS 32, financial liabilities were recognised in the amount of the purchase prices. The difference between the purchase prices and the non-controlling interests was directly recognised in shareholders’ equity as at December 31, 2015. The purchase price was actually paid in 2016 and as a result included in the consolidated statement of cash flows. For the following subsidiaries with non-controlling interests the main financial information is presented combined. SUBSIDIARIES WITH NON-CONTROLLING INTERESTS Legal entity name Principle place of business adidas Levant Limited adidas Levant Limited – Jordan Life Sport Ltd. Reebok India Company Lebanon Jordan Israel India Ownership interests held by non-controlling interests (in %) Dec. 31, 2016 Dec. 31, 2015 0% 0% 15% 6.85% 45% 45% 49% 6.85% 178 1 79 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position The following table presents the main financial information on subsidiaries with non-controlling interests. FINANCIAL INFORMATION ON SUBSIDIARIES WITH NON-CONTROLLING INTERESTS € in millions Net sales (third parties) Net income Net income/(loss) attributable to non-controlling interests Other comprehensive income Total comprehensive income Total comprehensive income attributable to non-controlling interests Current assets Non-current assets Current liabilities Non-current liabilities Net assets Net assets attributable to non-controlling interests Reclassification of non-controlling interests in accordance with IAS 32 Net assets attributable to non-controlling interests according to the consolidated statement of financial position Net cash generated from/(used in) operating activities Net cash used in investing activities Net cash generated from financing activities Net increase of cash and cash equivalents Dividends paid to non-controlling interests during the year 1 1 Included in net cash generated from financing activities. Non-controlling interests Dec. 31, 2016 Dec. 31, 2015 168 15 2 (1) 15 2 85 16 (55) (1) 44 (17) – (17) 18 (8) 0 10 2 173 10 6 (20) (10) 5 98 17 (76) (1) 38 (8) (10) (18) 7 (4) 1 4 6 29 — LEASING AND SERVICE ARRANGEMENTS Operating leases adidas leases primarily retail stores as well as offices, warehouses and equipment. The contracts regarding these leases with expiration dates of between 1 and 21 years partly include renewal options and escalation clauses. Rent expenses (continuing operations), which partly depend on net sales, amounted to € 729 million and € 680 million for the years ending December 31, 2016 and 2015, respectively. Future minimum lease payments for minimum lease durations on a nominal basis are as follows: MINIMUM LEASE PAYMENTS FOR OPERATING LEASES € in millions Within 1 year Between 1 and 5 years After 5 years Total Dec. 31, 2016 Dec. 31, 2015 688 1,289 523 2,501 516 1,143 540 2,199 179 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 Finance leases adidas also leases various premises for administration and warehousing which are classified as finance leases. The net carrying amount of these assets of € 6 million and € 8 million was included in property, plant and equipment as at December 31, 2016 and 2015, respectively. For the year ending December 31, 2016, interest expenses (continuing operations) were € 0 million (2015: € 0 million) and depreciation expenses (continuing operations) were € 4 million (2015: € 4 million). Minimum lease payments for finance leases in 2016 include land leases with a remaining lease term of 96 years. The minimum lease payments under these contracts amount to € 12 million. The estimated amount representing interest is € 10 million and the present value amounts to € 2 million. The net present values and the minimum lease payments under these contracts over their remaining terms up to 2019 and the land leases with a remaining lease term of 96 years are as follows: MINIMUM LEASE PAYMENTS FOR FINANCE LEASES € in millions Lease payments falling due: Within 1 year Between 1 and 5 years After 5 years Total minimum lease payments Less: estimated amount representing interest Present value of minimum lease payments Thereof falling due: Within 1 year Between 1 and 5 years After 5 years Dec. 31, 2016 Dec. 31, 2015 3 1 12 16 (10) 6 3 1 2 3 3 12 18 (9) 9 3 3 3 Service arrangements adidas has outsourced certain logistics and information technology functions, for which it has entered into long-term contracts. Financial commitments under these contracts mature as follows: FINANCIAL COMMITMENTS FOR SERVICE ARRANGEMENTS € in millions Within 1 year Between 1 and 5 years After 5 years Total Dec. 31, 2016 Dec. 31, 2015 134 233 0 366 97 253 0 349 18 0 1 81 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 30 — FINANCIAL INSTRUMENTS Additional disclosures on financial instruments CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS AS AT DECEMBER 31, 2016, ACCORDING TO CATEGORIES OF IAS 39 AND THEIR FAIR VALUES Category according to IAS 39 Carrying amount Dec. 31, 2016 Amortised cost Measurement according to IAS 39 Fair value recognised in equity Fair value recognised in net income Measurement according to IAS 17 Fair value Dec. 31, 2016 € in millions Financial assets Cash and cash equivalents Short-term financial assets Accounts receivable Other current financial assets Derivatives being part of a hedge Derivatives not being part of a hedge Promissory notes Other financial assets Long-term financial assets Other equity investments Available-for-sale financial assets Loans Other non-current financial assets Derivatives being part of a hedge Derivatives not being part of a hedge Promissory notes Other financial assets Assets classified as held for sale Financial liabilities Short-term borrowings Bank borrowings Private placements Eurobond Convertible bond Accounts payable Current accrued liabilities Other current financial liabilities Derivatives being part of a hedge Derivatives not being part of a hedge Earn-out components Other financial liabilities Finance lease obligations Long-term borrowings Bank borrowings Private placements Eurobond Convertible bond Non-current accrued liabilities Other non-current financial liabilities Derivatives being part of a hedge Derivatives not being part of a hedge Earn-out components Other financial liabilities Finance lease obligations Liabilities classified as held for sale Thereof: aggregated by category according to IAS 39 Financial assets at fair value through profit or loss Thereof: designated as such upon initial recognition (Fair Value Option – FVO) Thereof: Held for Trading (FAHfT) Loans and Receivables (LaR) Available-for-Sale Financial Assets (AfS) Financial Liabilities Measured at Amortised Cost (FLAC) Financial Liabilities at fair value through profit or loss Held for Trading (FLHfT) n.a. FAHfT LaR n.a. FAHfT AfS LaR FAHfT AfS LaR n.a. FAHfT AfS LaR LaR FLAC FLAC FLAC FLAC FLAC FLAC n.a. FLHfT n.a. FLAC n.a. FLAC FLAC FLAC FLAC FLAC n.a. FLHfT n.a. FLAC n.a. FLAC 5 44 15 81 17 30 24 7 1 15 1,510 5 2,200 325 44 15 345 81 102 10 15 17 30 34 – 379 – – 476 2,496 704 87 24 7 81 3 – – 1,048 – 9 2 1 15 0 4 – 3 4 1,510 5 2,200 1,510 2,200 325 39 15 87 2 345 64 10 34 – 379 – – 257 2,496 704 81 – – 982 – 9 0 – 325 44 15 345 81 102 10 15 17 30 34 – 379 – – 257 2,496 704 87 24 7 81 3 – – 982 – 9 2 1 15 0 4 – 148 − 148 2,590 148 4,909 24 181 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS AS AT DECEMBER 31, 2015, ACCORDING TO CATEGORIES OF IAS 39 AND THEIR FAIR VALUES Category according to IAS 39 Carrying amount Dec. 31, 2015 Amortised cost Measurement according to IAS 39 Fair value recognised in equity Fair value recognised in net income Measurement according to IAS 17 Fair value Dec. 31, 2015 € in millions Financial assets Cash and cash equivalents Short-term financial assets Accounts receivable Other current financial assets Derivatives being part of a hedge Derivatives not being part of a hedge Other financial assets Long-term financial assets Other equity investments Available-for-sale financial assets Loans Other non-current financial assets Derivatives being part of a hedge Derivatives not being part of a hedge Promissory notes Other financial assets Assets classified as held for sale Financial liabilities Short-term borrowings Bank borrowings Private placements Eurobond Convertible bond Accounts payable Current accrued liabilities Other current financial liabilities Derivatives being part of a hedge Derivatives not being part of a hedge Other financial liabilities Finance lease obligations Long-term borrowings Bank borrowings Private placements Eurobond Convertible bond Non-current accrued liabilities Other non-current financial liabilities Derivatives being part of a hedge Derivatives not being part of a hedge Finance lease obligations Earn-out components thereof: other financial liabilities Liabilities classified as held for sale Thereof: aggregated by category according to IAS 39 Financial assets at fair value through profit or loss Thereof: designated as such upon initial recognition (Fair Value Option – FVO) Thereof: Held for Trading (FAHfT) Loans and Receivables (LaR) Available-for-Sale Financial Assets (AfS) Financial Liabilities Measured at Amortised Cost (FLAC) Financial Liabilities at fair value through profit or loss Held for Trading (FLHfT) n.a. FAHfT LaR n.a. FAHfT LaR FAHfT AfS LaR n.a. FAHfT AfS LaR LaR FLAC FLAC FLAC FLAC FLAC FLAC n.a. FLHfT FLAC n.a. FLAC FLAC FLAC FLAC FLAC n.a. FLHfT n.a. n.a. n.a. FLAC 179 36 2 36 1,365 2,049 160 22 1 36 0 229 138 – – 2,024 596 79 – – 981 483 14 0 5 28 81 20 42 25 0 21 12 1,365 5 2,049 179 28 160 81 58 1 2 20 42 36 0 229 138 – – 2,024 596 36 25 79 3 – – 997 629 14 – 0 6 21 12 0 3 6 1,365 5 2,049 179 28 160 81 58 1 2 20 42 36 0 229 138 – – 2,024 596 36 25 79 3 – – 981 483 14 – 0 6 21 12 0 133 − 133 2,246 100 4,543 26 182 4 1 83 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS ACCORDING TO IFRS 13 AS AT DECEMBER 31, 2016 € in millions Short-term financial assets Derivative financial instruments Derivatives being part of a hedge Derivatives not being part of a hedge Long-term financial assets Promissory notes Financial assets Short-term borrowings Derivative financial instruments Derivatives being part of a hedge Derivatives not being part of a hedge Long-term borrowings Earn-out components Financial liabilities Fair value Dec. 31, 2016 Level 1 Level 2 Level 3 5 339 62 184 45 636 855 89 24 1,048 22 2,039 1,048 1,048 5 339 62 39 445 855 89 24 969 145 45 190 22 22 Level 1 is based on quoted prices in active markets for identical assets or liabilities. Level 2 is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 is based on inputs for the asset or liability that are not based on observable market data (unobservable inputs). FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS ACCORDING TO IFRS 13 AS AT DECEMBER 31, 2015 € in millions Short-term financial assets Derivative financial instruments Derivatives being part of a hedge Derivatives not being part of a hedge Long-term financial assets Promissory notes Financial assets Short-term borrowings Derivative financial instruments Derivatives being part of a hedge Derivatives not being part of a hedge Long-term borrowings Earn-out components Financial liabilities Fair value Dec. 31, 2015 Level 1 Level 2 Level 3 5 181 47 139 42 414 366 36 26 1,626 21 2,075 1,626 1,626 5 181 47 36 269 366 36 26 428 102 42 145 21 21 Level 1 is based on quoted prices in active markets for identical assets or liabilities. Level 2 is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 is based on inputs for the asset or liability that are not based on observable market data (unobservable inputs). 183 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 RECONCILIATION OF FAIR VALUE HIERARCHY LEVEL 3 IN 2016 € in millions Long-term financial assets Promissory notes Investments in other equity instruments Earn-out components This category relates to an 8.33% investment in FC Bayern München AG of € 81 million. Dividends are distributed by FC Bayern München AG instead of regular interest payments. These dividends are recognised in other financial income. On January 23, 2015, adidas signed a definitive agreement to sell the Rockport operating segment which was divested on July 31, 2015. The transaction included contingent promissory notes. The discounted cash flow method is applied. The fair value adjustment is recognised in discontinued operations. The change in fair value refers to recognised impairment losses resulting due to one or more events where objective evidence of an impairment was identified, considering expectations regarding future business development. The impairment is recognised in other financial result. The acquisition of Runtastic includes earn-out compo- nents which are measured based on the discounted cash flow method. The earn-out components are dependent on retention of the Runtastic management as well as on the achievement of certain performance measures over the first three years after the acquisition. The fair value adjustment refers to accretion and is recognised in interest result. RECONCILIATION OF FAIR VALUE HIERARCHY LEVEL 3 IN 2015 Fair value Jan. 1, 2016 Additions Disposals Gains Losses Currency translation Fair value Dec. 31, 2016 81 42 – – – – 22 47 – 1 2 – – – (5) – 81 1 – 45 64 21 – – – 1 – 22 € in millions Fair value Jan. 1, 2015 Additions Disposals Gains Losses Fair value Dec. 31, 2015 Long-term financial assets This category relates to an 8.33% investment in FC Bayern München AG of € 81 million. Dividends are distributed by FC Bayern München AG instead of regular interest payments. These dividends are recognised in other financial income. Promissory notes On January 23, 2015, adidas signed a definitive agreement to sell the Rockport operating segment which was divested on July 31, 2015. The transaction included contingent promissory notes. The discounted cash flow method is applied. The fair value adjustment is recognised in discon- tinued operations. Investments in other equity instruments The change in fair value refers to recognised impairment losses resulting due to one or more events where objective evidence of an impairment was identified, considering expectations regarding future business devel- opment. The impairment is recognised in other financial result. Earn-out components The acquisition of Runtastic includes earn-out components which are measured based on the discounted cash flow method. The earn-out components are dependent on retention of the Runtastic management as well as on the achievement of certain performance measures over the first three years after the acquisition. The fair value adjustment refers to accretion and is recognised in interest result. 80 – – – 42 23 – – – 1 – – – – (1) 81 42 22 – 21 – – – 21 Due to the short-term maturities of cash and cash equivalents, short-term financial assets, accounts receivable and payable as well as other current financial receivables and payables, their respective fair values equal their carrying amount. The fair values of non-current financial assets and liabilities are estimated by discounting expected future cash flows using current interest rates for debt of similar terms and remaining maturities and adjusted by a company-specific credit risk premium. Fair values of long-term financial assets classified as ‘Available-for-sale’ are based on quoted market prices in an active market or are calculated as present values of expected future cash flows. The fair values of currency options, forward exchange contracts and commodity futures are determined on the basis of market conditions at the balance sheet date. The fair value of a currency option is determined using generally accepted models to calculate option prices. The fair market value of an option is influenced not only by the remaining term of the option, but also by other determining factors such as the actual foreign exchange rate and the volatility of the underlying foreign currency base. In accordance with IFRS 13, the following tables show the valuation methods used in measuring Level 1, Level 2 and Level 3 fair values, as well as the significant unobservable inputs used. 18 4 1 85 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position FINANCIAL INSTRUMENTS LEVEL 1 NOT MEASURED AT FAIR VALUE Type Valuation method Significant unobservable inputs Category Convertible bond The fair value is based on the market price of the convertible bond as at December 31, 2016. Not applicable Eurobond The fair value is based on the market price of the Eurobond as at December 31, 2016. Not applicable FLAC FLAC FINANCIAL INSTRUMENTS LEVEL 2 MEASURED AT FAIR VALUE Type Valuation method Significant unobservable inputs Category Short-term financial assets The discounted cash flow method is applied, which considers the present value of expected payments, discounted using a risk-adjusted discount rate. Due to their short-term matur- ities, it is assumed that their respective fair value is equal to the notional amount. Not applicable FAHfT The fair value is based on the market price of the assets as at December 31, 2016. Not applicable AfS Available-for-sale financial assets Forward exchange contracts For EUR/USD, EUR/CNH, USD/CNH, EUR/GBP, GBP/USD, EUR/JPY and USD/JPY adidas applies the par method, which uses actively traded forward rates. For the other currency pairs, the zero coupon method is applied. The zero method is a model for the determination of forward rates based on deposit and swap interest rates. Currency options adidas applies the Garman-Kohlhagen model, which is an extended version of the Black- Scholes model. Commodity futures The fair value is determined based on commodity forward curves, discounted by deposit and swap interest rates. Not applicable Not applicable Not applicable n.a. respec- tively FAHfT n.a. respec- tively FAHfT n.a. respec- tively FAHfT FINANCIAL INSTRUMENTS LEVEL 2 NOT MEASURED AT FAIR VALUE Type Valuation method Significant unobservable inputs Category Private placements The discounted cash flow method is applied, which considers the present value of expected payments, discounted using a risk-adjusted discount rate. Not applicable FLAC FINANCIAL INSTRUMENTS LEVEL 3 MEASURED AT FAIR VALUE Type Valuation method Significant unobservable inputs Inter-relationship between significant unobservable inputs and fair value measurement Category Investment in FC Bayern München AG Promissory notes Investments in other equity instruments This equity security does not have a quoted market price in an active market. Existing contractual arrangements (based on the externally observable dividend policy of FC Bayern München AG) are used in order to calculate the fair value as at December 31, 2016. The discounted cash flow method is applied, which considers the present value of expected payments, discounted using a risk-adjusted discount rate. The expected payments are determined by considering the possible scenarios of forecasted dividends, the amount to be paid under each scenario and the probability of each scenario. These equity instruments do not have a quoted market price in an active market. Existing contractual arrange- ments are used in order to calculate the fair value as at December 31, 2016. Earn-out components The discounted cash flow method is applied, which considers the present value of expected payments, discounted using a risk-adjusted discount rate. See column ‘Valuation method’ Risk-adjusted discount rate See column ‘Valuation method’ Risk-adjusted discount rate FAHfT AfS AfS n.a. The estimated fair value would increase (decrease) if the dividends were higher (lower) or the risk-adjusted discount rate was lower (higher). The estimated fair value would increase (decrease) if EBITDA were higher (lower) or the risk-adjusted discount rate were lower (higher). 185 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position 4 NET GAINS/(LOSSES) ON FINANCIAL INSTRUMENTS RECOGNISED IN THE CONSOLIDATED INCOME STATEMENT € in millions Financial assets or financial liabilities at fair value through profit or loss Thereof: designated as such upon initial recognition Thereof: classified as held for trading Loans and receivables Available-for-sale financial assets Financial liabilities measured at amortised cost Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 1 – 1 (35) (3) 15 1 – 1 (16) (1) 10 Net gains or losses on financial assets or financial liabilities held for trading include the effects from fair value measurements of the derivatives that are not part of a hedging relationship, and changes in the fair value of other financial instruments as well as interest payments. Net gains or losses on loans and receivables comprise mainly impairment losses and reversals. Net gains or losses on financial liabilities measured at amortised cost include effects from early settlement and reversals of accrued liabilities. The disclosures required by IFRS 7 ‘Financial Instruments: Disclosures’, paragraphs 13A to 13F (‘Offsetting financial assets and financial Note 07 and the Group liabilities’) as well as 31 to 42 (‘Nature and Extent of Risks arising from Financial Instruments’) can be found in Management Report. see Risk and Opportunity Report, p. 118 Financial instruments for the hedging of foreign exchange risk adidas uses natural hedges and arranges forward exchange contracts, currency options and currency swaps to protect against foreign exchange risk. As at December 31, 2016, adidas had outstanding currency options with premiums paid totalling an amount of € 15 million (2015: € 0 million). The effective part of the currency hedges is directly recognised in hedging reserves and as part of the acquisition costs of inventories, respectively, and posted into the income statement at the same time as the underlying secured transaction is recorded. An amount of positive € 9 million after taxes (2015: negative € 1 million) for currency options and an amount of positive € 226 million after taxes (2015: positive € 112 million) for forward exchange contracts were recorded in hedging reserves. Currency option premiums impacted net income in the amount of € 2 million in 2016 (2015: € 1 million). The total time value of the currency options not being part of a hedge in an amount of positive € 7 million (2015: positive € 0 million) was recorded in the income statement in 2016. In 2016, due to a change in the exposure, some of the currency hedges were terminated and conse- quently an amount of negative € 1 million was reclassified from hedging reserves to the income statement. In the years ending December 31, 2016 and 2015, hedging instruments related to product sourcing were bought to hedge a total net amount of US $ 6.5 billion and US $ 6.2 billion, respectively. The notional amounts of all outstanding currency hedging instruments, which are mainly related to cash flow hedges, are summarised in the following table: NOTIONAL AMOUNTS OF ALL OUTSTANDING CURRENCY HEDGING INSTRUMENTS € in millions Forward exchange contracts Currency options Total Dec. 31, 2016 Dec. 31, 2015 11,750 459 12,209 8,926 59 8,985 The comparatively high amount of forward exchange contracts is primarily due to currency swaps for liquidity management purposes and hedging transactions. 18 6 1 87 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Statement of Financial Position Of the total amount of outstanding hedges, the following contracts related to the US dollar (i.e. the biggest single exposure of product sourcing): NOTIONAL AMOUNTS OF OUTSTANDING US DOLLAR HEDGING INSTRUMENTS € in millions Forward exchange contracts Currency options Total Dec. 31, 2016 Dec. 31, 2015 6,156 405 6,561 4,286 0 4,286 The fair value of all outstanding currency hedging instruments is as follows: FAIR VALUES € in millions Forward exchange contracts Currency options Total Dec. 31, 2016 Dec. 31, 2015 Positive fair value Negative fair value Positive fair value Negative fair value 362 19 381 (112) (1) (113) 204 0 204 (59) (1) (60) A total net fair value of positive € 240 million (2015: positive € 146 million) for forward exchange contracts related to hedging instruments falling under hedge accounting as per definition of IAS 39 ‘Financial Instruments: Recognition and Measurement’ was recorded in the hedging reserve. The remaining net fair value of positive € 18 million (2015: negative € 2 million), mainly related to currency swaps for liquidity management purposes and to forward exchange contracts hedging intercompany dividend receivables, was recorded in the income statement. The total fair value of positive € 18 million (2015: negative € 1 million) for outstanding currency options related to cash flow hedges. This consists of a positive time value of € 9 million (2015: positive € 1 million) and of a negative time value of € 1 million (2015: negative € 0 million) and furthermore includes an intrinsic value of the options in an amount of € 10 million. The fair value adjustments of outstanding cash flow hedges for forecasted sales are reported in the income statement when the forecasted sales transactions are recorded. The vast majority of these transactions are forecasted to occur in 2017. At the balance sheet date, inventories were adjusted without affecting the consolidated income statement by positive € 12 million (2015: positive € 26 million) which will be recog- nised in the consolidated income statement at the expected realisation of the hedged item in 2017. In the hedging reserve, a negative amount of € 92 million (2015: negative € 56 million) is included for hedging the currency risk of net invest- ments in foreign entities, mainly for the subsidiaries LLC “adidas, Ltd.” and adidas Sports (China) Co. Ltd. This reserve will remain until the investment in the foreign entity has been sold. As at December 31, 2016, no ineffective part of the hedges was recorded in the income statement. In order to determine the fair values of its derivatives that are not publicly traded, adidas uses generally accepted quantitative financial models based on market conditions prevailing at the balance sheet date. In 2016, the fair values of the most material currency pairs (EUR/USD, EUR/CNH, USD/CNH, EUR/GBP, GBP/USD, EUR/JPY and USD/JPY) were determined applying the ‘par method’, which uses actively traded forward rates. For the other currency pairs the zero coupon method is applied. 187 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Income Statement 4 NOTES TO THE CONSOLIDATED INCOME STATEMENT All figures related to the 2016 and 2015 financial years in the ‘Notes to the consolidated income statement’ refer to the company’s continuing operations unless otherwise stated. 31 — OTHER OPERATING INCOME Other operating income consists of the following: OTHER OPERATING INCOME € in millions Income from release of accrued liabilities and other provisions Income from accounts receivable previously written off Gains from disposal of fixed assets Reversals of impairment losses for intangible and tangible assets Income from the early termination of promotion and advertising contracts Income from the divestiture of the Mitchell & Ness business Sundry income Other operating income Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 55 3 4 2 69 39 94 266 50 4 1 1 – – 42 96 For further information about the line item ‘Income from the divestiture of the Mitchell & Ness business’ see Note 04 Sundry income mainly relates to income from cost reimbursements. 32 — OTHER OPERATING EXPENSES Other operating expenses include expenses for sales, marketing, research and development, as well as for logistics and central administration less any income from government grants, if applicable. In addition, other operating expenses include impairment losses as well as depreciation of tangible assets and amortisation of intangible assets (except goodwill impairment losses), with the exception of depreciation and amortisation which is included in the cost of sales. Expenditure for marketing investments is a material component of other operating expenses. The expenditure for marketing investments consists of promotion and communication spending such as promotion contracts, advertising, events and other communication activities. However, it does not include marketing overhead expenses, which are presented in marketing overheads. In 2016, expenditure for marketing investments accounted for 24% (2015: 26%) of the total other operating expenses. Expenses for central administration include the functions IT, Finance, Legal, Human Resources, Facilities & Services as well as General Management. Depreciation and amortisation expense for tangible and intangible assets (except goodwill impairment losses) and impairment losses were € 392 million and € 357 million for the years ending December 31, 2016 and 2015, respectively. Thereof, € 4 million and € 3 million were recorded within the cost of sales as they are directly assigned to the production costs. 18 8 1 89 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Income Statement Income from government grants is reported as a deduction from the related expenses and amounted to € 23 million in 2016 (2015: € 5 million). OTHER OPERATING EXPENSES € in millions Expenditure for marketing investments Expenditure for point-of-sale investments Marketing overhead 1 Sales force 1 Logistics 1 Research and development 1 Central administration 1 Other operating expenses Thereof: depreciation, amortisation and impairment losses 1 Including personnel and administration expenses. Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 1,981 540 684 2,237 967 164 1,690 8,263 388 1,886 462 554 2,040 859 139 1,350 7,289 354 33 — COST BY NATURE Expenses are presented by function according to the ‘cost of sales method’ in the income statement. Supplementary information on the expenses by nature is detailed below. Cost of materials The total cost of materials relating to the amount of inventories recognised as an expense during the period was € 9.776 billion and € 8.602 billion for the years ending December 31, 2016 and 2015, respectively. Personnel expenses Personnel expenses were as follows: PERSONNEL EXPENSES € in millions Wages and salaries Social security contributions Pension expenses Personnel expenses Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 2,238 206 89 2,532 1,921 187 76 2,184 Personnel expenses are primarily included within other operating expenses. Personnel expenses which are directly attributable to the production costs of goods are included within the cost of sales. 189 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Income Statement 4 34 — FINANCIAL INCOME/FINANCIAL EXPENSES Financial result consists of the following: FINANCIAL INCOME € in millions Interest income from financial instruments measured at amortised cost Interest income from financial instruments at fair value through profit or loss Interest income from non-financial assets Net foreign exchange gains Other Financial income FINANCIAL EXPENSES € in millions Interest expense on financial instruments measured at amortised cost Interest expense on financial instruments at fair value through profit or loss Interest expense on other provisions and non-financial liabilities Other Financial expenses Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 21 0 0 5 1 28 19 1 0 25 1 46 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 70 0 0 4 74 65 0 0 1 67 Interest income from financial instruments, measured at amortised cost, mainly consists of interest income from bank deposits and loans. Interest income/expense from financial instruments at fair value through profit or loss mainly includes interest payments from investment funds as well as net interest payments from interest derivatives not being part of a hedging relationship. Unrealised gains/losses from fair value measurement of such financial assets are shown in other financial income or expenses. Interest expense on financial instruments measured at amortised cost mainly includes interest on borrowings and effects from using the ‘effective interest method’. Interest expense on other provisions and non-financial liabilities particularly includes effects from measurement of other provisions at present value and interest on non-financial liabilities such as tax payables. Other financial expenses include impairment losses on other financial assets amounting to € 4 million for the year ending December 31, 2016 (2015: € 1 million). Information regarding the Group’s available-for-sale investments, borrowings and financial instruments is also included in these Notes. see Notes 06, 15, 18 and 30 35 — INCOME TAXES adidas AG and its German subsidiaries are subject to German corporate and trade taxes. For the years ending December 31, 2016 and 2015, the statutory corporate income tax rate of 15% plus a surcharge of 5.5% thereon is applied to earnings. The municipal trade tax is approximately 11.4% of taxable income. For non-German subsidiaries, deferred taxes are calculated based on tax rates that have been enacted or substantively enacted by the closing date. 19 0 1 91 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Income Statement Deferred tax assets and liabilities Deferred tax assets and liabilities are offset if they relate to the same fiscal authority. The following deferred tax assets and liabilities, determined after appropriate offsetting, are presented in the consolidated statement of financial position: DEFERRED TAX ASSETS/LIABILITIES € in millions Deferred tax assets Deferred tax liabilities Deferred tax assets, net The movement of deferred taxes is as follows: MOVEMENT OF DEFERRED TAXES € in millions Deferred tax assets, net as at January 1 Deferred tax income Change in consolidated companies 1 Change in deferred taxes on assets classified as held for sale 2 Change in deferred taxes attributable to remeasurements of defined benefit plans recorded in other comprehensive income 3 Change in deferred taxes attributable to the change in the effective portion of the fair value of qualifying hedging instruments recorded in other comprehensive income 4 Currency translation differences Deferred tax assets, net as at December 31 1 See Note 04. 2 See Notes 03 and 11. 3 See Note 24. 4 See Note 30. Dec. 31, 2016 Dec. 31, 2015 732 (387) 345 2016 269 56 1 0 21 (2) 0 345 637 (368) 269 2015 186 86 (14) 7 (3) 30 (23) 269 Gross company deferred tax assets and liabilities after valuation allowances, but before appropriate offsettings, are attributable to the items detailed in the table below: DEFERRED TAXES € in millions Non-current assets Current assets Accrued liabilities and provisions Accumulated tax loss carry-forwards Deferred tax assets Non-current assets Current assets Accrued liabilities and provisions Deferred tax liabilities Deferred tax assets, net Dec. 31, 2016 Dec. 31, 2015 202 193 334 76 805 346 68 46 460 345 216 183 276 56 731 348 80 34 462 269 Deferred tax assets are recognised only to the extent that the realisation of the related benefit is probable. For the assessment of probability, in addition to past performance and the respective prospects for the foreseeable future, appropriate tax structuring measures are also taken into consideration. 191 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Income Statement 4 Deferred tax assets for which the realisation of the related tax benefits is not probable increased from € 653 million to € 731 million for the year ending December 31, 2016. These amounts mainly relate to tax losses carried forward and unused foreign tax credits of the US tax group, which begin to expire in 2026. The remaining unrecognised deferred tax assets relate to subsidiaries operating in markets where the realisation of the related tax benefit is not considered probable. adidas does not recognise deferred tax liabilities for unremitted earnings of non-German subsidiaries to the extent that they are expected to be permanently invested in international operations. These earnings, the amount of which cannot be practicably computed, could become subject to additional tax if they were remitted as dividends or if the company were to sell its shareholdings in the subsidiaries. Tax expenses Tax expenses are split as follows: INCOME TAX EXPENSES € in millions Current tax expenses Deferred tax income Income tax expenses Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 482 (56) 426 439 (86) 353 The deferred tax income includes tax income of € 29 million in total (2015: € 111 million) related to the origination and reversal of temporary differences. The company’s effective tax rate differs from an assumed tax rate of 30% for the year ending December 31, 2016 as follows: TAX RATE RECONCILIATION Expected income tax expenses Tax rate differentials Non-deductible expenses Goodwill impairment losses Losses for which benefits were not recognisable and changes in valuation allowances Changes in tax rates Other, net Withholding tax expenses Income tax expenses Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 € in millions in % € in millions 434 (160) 48 0 51 (8) 0 365 61 426 30.0 (11.0) 3.3 0.0 3.5 (0.5) 0.0 25.3 4.2 29.5 312 (139) 35 10 95 (21) 2 294 59 353 in % 30.0 (13.4) 3.4 1.0 9.2 (2.0) 0.1 28.3 5.7 34.0 For 2016 the effective tax rate is 29.5%. For 2015, the effective tax rate was affected by non-tax-deductible goodwill impairment losses. Excluding the goodwill impairment losses, the effective tax rate in 2015 was 32.9%. For 2016, the line item ‘Losses for which benefits were not recognisable and changes in valuation allowances’ mainly relates to changes in valuation allowances for Brazil. For 2015, this line item mainly related to changes in valuation allowances of the US tax group. For 2016 and 2015, the line item ‘Changes in tax rates’ mainly reflects a UK tax rate reduction effective in 2016 and 2015, respectively. 192 1 93 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Notes to the Consolidated Income Statement 36 — EARNINGS PER SHARE Basic earnings per share are calculated by dividing the net income from continuing operations attributable to shareholders by the weighted average number of shares outstanding during the year, excluding ordinary shares purchased by adidas and held as treasury shares. It is necessary to include 6.0 million potential dilutive shares arising from the convertible bond issuance in March 2012 in the calculation of diluted earnings per share in 2016 as due to the potential dilutive shares a dilutive effect resulted as at the balance sheet date. see Note 18 The average share price reached € 124.57 per share during 2016 and thus exceeded the conversion price of € 81.57 per share. As a conse- quence of contractual provisions relating to dividend protection, the conversion price was adjusted from € 82.00 to € 81.57 per share. This adjustment became effective on May 13, 2016. EARNINGS PER SHARE Net income from continuing operations (€ in millions) Net income attributable to non-controlling interests (€ in millions) Net income attributable to shareholders (€ in millions) Weighted average number of shares Basic earnings per share (in €) Net income attributable to shareholders (€ in millions) Interest expense on convertible bond, net of taxes (€ in millions) Net income used to determine diluted earnings per share (€ in millions) Continuing operations Discontinued operations Total Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 1,019 2 1,016 686 6 680 – – 1 – – – – – – (46) 1,017 634 200,188,276 201,536,418 200,188,276 201,536,418 200,188,276 201,536,418 5.08 3.37 0.01 (0.23) 5.08 3.15 1,016 12 1,028 680 – 680 1 – 1 (46) – (46) 1,017 12 1,029 634 – 634 Weighted average number of shares 200,188,276 201,536,418 200,188,276 201,536,418 200,188,276 201,536,418 Weighted assumed conversion of the convertible bond Weighted average number of shares for diluted earnings per share 5,958,632 – 5,958,632 – 5,958,632 - 206,146,908 201,536,418 206,146,908 201,536,418 206,146,908 201,536,418 Diluted earnings per share (in €) 4.99 3.37 0.01 (0.23) 4.99 3.15 For further information on basic and diluted earnings per share from discontinued operations see Note 03 193 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information 4 ADDITIONAL INFORMATION 37 — SEGMENTAL INFORMATION adidas operates predominantly in one industry segment – the design, distribution and marketing of athletic and sports lifestyle products. As at December 31, 2016, following the company’s internal management reporting by markets and in accordance with the definition of IFRS 8 ‘Operating Segments’, 13 operating segments were identified: Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan, Middle East, South Korea, Southeast Asia/Pacific, TaylorMade-adidas Golf, CCM Hockey, Runtastic and Other centrally managed businesses. Due to the divestiture of the Rockport operating segment on July 31, 2015, income and expenses of the Rockport operating segment were reported as discontinued operations as at December 31, 2015. see Note 03 The markets Middle East, South Korea and Southeast Asia/Pacific were aggregated to the segment MEAA (’Middle East, Africa and other Asian markets’). According to the criteria of IFRS 8 for reportable segments, the business segments Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan and MEAA are reported separately. The remaining operating segments are aggregated under Other Businesses due to their only subor- dinate materiality. Historic and estimated future economic indicators that have been assessed in determining that the aggregated operating segments share similar characteristics were profitability characteristics on net margin and contribution level, Gross Domestic Product (GDP) growth rates as well as consumer price inflation. Each market comprises all wholesale, retail and e-commerce business activities relating to the distribution and sale of products of the adidas and Reebok brands to retail customers and end consumers. The operating segment TaylorMade-adidas Golf comprises the brands TaylorMade, adidas Golf, Adams Golf and Ashworth. CCM Hockey designs, produces and distributes ice hockey equipment such as sticks, skates and protection gear. In addition, CCM Hockey designs, produces and distributes apparel mainly under the brand name CCM. Runtastic operates in the digital health and fitness space. The company provides a comprehensive ecosystem for tracking and managing health and fitness data. Other centrally managed businesses primarily includes the business activities of the labels Y-3 and Porsche Design Sport by adidas as well as the business activities of the brand Five Ten in the outdoor action sports sector. Furthermore, the segment also comprises Inter- national Clearance Management. Certain centralised Group functions do not meet the definition of IFRS 8 for an operating segment. This includes functions such as Global Brands and Global Sales (central brand and distribution management for the brands adidas and Reebok), central treasury, global sourcing as well as other headquarter functions. Assets, liabilities, income and expenses relating to these corporate functions are presented together with other non-allocable items and intersegment eliminations in the reconciliations. The chief operating decision maker for adidas has been defined as the entire Executive Board of adidas AG. There are no intersegment sales between the reportable segments. Accounting and valuation policies applied for reporting segmental information are the same as those used for the adidas Group. see Note 02 The results of the operating segments are reported in the line item ‘Segmental operating profit’. This is defined as gross profit minus other operating expenses plus royalty and commission income and other operating income attributable to the segment or group of segments, however without considering headquarter costs and central expenditure for marketing investments. Segmental assets include accounts receivable as well as inventories. Only these items are reported to the chief operating decision maker on a regular basis. Depreciation, amortisation, impairment losses (except for goodwill) and reversals of impairment losses as well as capital expenditures for tangible and intangible assets are part of the segmental reporting, even though segmental assets do not contain tangible and intangible assets. Depreciation and amortisation as well as impairment losses and reversals of impairment losses not directly attrib- utable to a segment or a group of segments are presented under HQ/Consolidation in the reconciliations. Segmental liabilities only contain accounts payable from operating activities as there are no other liability items reported regularly to the chief operating decision maker. Interest income and interest expenses as well as income taxes are not allocated to the reportable segments and are not reported separately to the chief operating decision maker. 194 1 95 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information SEGMENTAL INFORMATION I € in millions Net sales (third parties) 1 Segmental operating profit 1 Segmental assets 2 Segmental liabilities 2 2016 2015 2016 2015 2016 2015 2016 2015 5,291 3,412 3,010 679 1,731 1,007 2,685 1,475 – 1,475 4,539 2,753 2,469 739 1,783 776 2,388 1,467 159 1,627 951 214 1,060 105 227 207 722 (14) – (14) 19,291 17,075 3,471 909 69 866 85 235 147 664 (89) (18) (107) 2,869 1,595 1,273 507 284 757 218 751 594 – 594 1,327 891 465 204 619 233 633 684 0 684 5,978 5,056 200 117 167 6 73 38 90 143 – 143 834 145 96 146 6 63 34 77 117 0 117 683 Western Europe North America Greater China Russia/CIS Latin America Japan MEAA Other Businesses (continuing operations) Other Businesses (discontinued operations) Other Businesses (total) Total 1 Year ending December 31. 2 At December 31. SEGMENTAL INFORMATION II € in millions Capital expenditure 1 Depreciation and amortisation 1 Impairment losses and reversals of impairment losses 1 Western Europe North America Greater China Russia/CIS Latin America Japan MEAA Other Businesses (continuing operations) Other Businesses (discontinued operations) Other Businesses (total) Total 1 Year ending December 31. 2016 2015 2016 2015 2016 2015 76 87 97 47 48 14 60 12 – 12 63 32 76 16 30 13 35 18 4 22 40 21 52 21 22 13 31 26 – 26 33 21 43 24 22 10 27 20 4 24 442 287 225 204 1 2 2 0 0 1 1 1 – 1 8 4 7 1 2 2 0 1 1 (0) 1 18 Reconciliations The following tables include reconciliations of segmental information to the aggregate numbers of the consolidated financial statements, taking into account items which are not directly attributable to a segment or a group of segments. NET SALES (THIRD PARTIES) € in millions Reportable segments Other Businesses Reclassification to discontinued operations Total Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 17,816 1,475 – 19,291 15,448 1,627 (159) 16,915 195 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information 4 OPERATING PROFIT € in millions Operating profit for reportable segments Operating profit for Other Businesses Segmental operating profit HQ/Consolidation Central expenditure for marketing investments Goodwill impairment losses Reclassification to discontinued operations Operating profit Financial income Financial expenses Income before taxes Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 3,485 (14) 3,471 (1,278) (703) – – 1,491 28 (74) 1,444 2,975 (107) 2,869 (1,172) (621) (34) 18 1,059 46 (67) 1,039 Operating profit of centralised functions which do not represent a segment, such as Global Brands and Global Sales (central brand and distribution management for the brands adidas and Reebok), central treasury and global sourcing as well as other headquarter departments, is shown under HQ/Consolidation. CAPITAL EXPENDITURE € in millions Reportable segments Other Businesses Reclassification to discontinued operations HQ/Consolidation Total DEPRECIATION AND AMORTISATION € in millions Reportable segments Other Businesses Reclassification to discontinued operations HQ/Consolidation Total IMPAIRMENT LOSSES AND REVERSALS OF IMPAIRMENT LOSSES € in millions Reportable segments Other Businesses Reclassification to discontinued operations HQ/Consolidation Total Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 430 12 – 209 651 265 22 (4) 230 513 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 199 26 – 147 373 181 24 (4) 138 338 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 7 1 – 9 18 16 1 0 35 52 196 1 97 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information ASSETS € in millions Accounts receivable and inventories of reportable segments Accounts receivable and inventories of Other Businesses Segmental assets Non-segmental accounts receivable and inventories Current financial assets Other current assets Non-current assets Reclassification to assets classified as held for sale Total LIABILITIES € in millions Accounts payable of reportable segments Accounts payable of Other Businesses Segmental liabilities Non-segmental accounts payable Current financial liabilities Other current liabilities Non-current liabilities Reclassification to liabilities classified as held for sale Total Product information NET SALES (THIRD PARTIES) € in millions Footwear Apparel Hardware Reclassification to discontinued operations Total Dec. 31, 2016 Dec. 31, 2015 5,385 594 5,978 (15) 2,245 678 6,290 – 4,372 684 5,056 106 1,737 598 5,846 (0) 15,176 13,343 Dec. 31, 2016 Dec. 31, 2015 691 143 834 1,662 837 3,432 1,957 – 8,721 566 117 683 1,342 509 2,831 2,332 0 7,696 Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 10,135 7,476 1,681 – 19,291 8,519 6,970 1,585 (159) 16,915 197 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information 4 Geographical information Net sales (third parties) are shown in the geographic market in which the net sales are realised. Non-current assets are allocated to the geographic market based on the domicile of the respective subsidiary independent of the segmental structure and consist of tangible assets, goodwill, trademarks, other intangible assets and other non-current assets. GEOGRAPHICAL INFORMATION € in millions Net sales (third parties) Non-current assets Western Europe North America Greater China Russia/CIS Latin America Japan MEAA HQ/Consolidation Reclassification to discontinued operations Total Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2015 5,728 4,131 3,028 680 1,741 1,187 2,795 – – 4,937 3,620 2,491 757 1,797 947 2,525 – (159) 2,056 1,197 515 369 288 280 563 – – 1,960 1,177 462 363 282 193 533 – – 19,291 16,915 5,268 4,970 With regard to Germany, Western Europe contains net sales (third parties) (continuing operations) amounting to € 1,093 million and € 936 million as well as non-current assets amounting to € 1,015 million and € 846 million for the years 2016 and 2015, respectively. With regard to the USA, North America contains net sales (third parties) (continuing operations) amounting to € 3,654 million and € 3,091 million as well as non-current assets amounting to € 1,062 million and € 967 million for the years 2016 and 2015, respectively. 38 — ADDITIONAL CASH FLOW INFORMATION In 2016, the increase in cash generated from operating activities compared to the prior year was primarily due to an increase in income before taxes which was partly offset by higher operating working capital requirements as well as by an increase in income taxes paid. Net cash outflow from investing activities in 2016 mainly related to spending for property, plant and equipment such as investments in the furnishing and fitting of own-retail stores, in new office buildings and IT systems. Cash outflows from financing activities mainly related to the dividend paid to shareholders of adidas AG and to the repurchase of treasury shares. As of July 31, 2015, the Rockport operating segment was divested. The following assets and liabilities were consequently derecognised from the consolidated statement of financial position as of July 31, 2015: IMPACT OF DIVESTITURE ON ITEMS IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION € in millions Cash and cash equivalents Current assets Non-current assets Liabilities Net assets Consideration received in cash Less: cash and cash equivalents disposed of Net cash inflow July 31, 2015 (1) (138) (123) 62 (201) 165 (1) 164 198 1 99 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information NET CASH (USED IN)/GENERATED FROM DISCONTINUED OPERATIONS € in millions Net cash (used in)/generated from operating activities Net cash (used in) investing activities Net cash (used in)/generated from financing activities Net cash (used in) discontinued operations Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 (1) – – (1) 3 (6) – (3) As of June 30, 2016, the company formally completed the divestiture of the Mitchell & Ness business see Note 04 The following assets and liabilities were consequently derecognised from the consolidated statement of financial position as of June 30, 2016: IMPACT OF DIVESTITURE ON ITEMS IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION € in millions Cash and cash equivalents Current assets Non-current assets Liabilities Net assets Consideration received in cash Less: cash and cash equivalents disposed of Net cash inflow June 30, 2016 (2) (22) (8) 7 (25) 31 (2) 29 39 — COMMITMENTS AND CONTINGENCIES Other financial commitments adidas has other financial commitments (continuing operations) for promotion and advertising contracts, which mature as follows: FINANCIAL COMMITMENTS FOR PROMOTION AND ADVERTISING € in millions Within 1 year Between 1 and 5 years After 5 years Total Dec. 31, 2016 Dec. 31, 2015 988 2,585 2,070 5,643 982 2,593 2,204 5,779 Commitments with respect to promotion and advertising contracts maturing after five years have remaining terms of up to 14 years from December 31, 2016. Compared to December 31, 2015, commitments for promotion and advertising contracts decreased mainly due to the early termination of the existing partnership with Chelsea F.C. Information regarding commitments under lease and service contracts is also included in these Notes. see Note 29 Litigation and other legal risks The company is currently engaged in various lawsuits resulting from the normal course of business, mainly in connection with distribution agreements as well as intellectual property rights. The risks regarding these lawsuits are covered by provisions when a reliable estimate of the amount of the obligation can be made. see Note 20 In the opinion of Management, the ultimate liabilities resulting from such claims will not materially affect the assets, liabilities, financial position and profit or loss of the Group. In connection with the financial irregularities at Reebok India Company in 2012, various legal uncertainties were identified. The risks cannot be assessed conclusively. However, based on legal opinions and internal assessments, Management assumes that the effects will not have any material influence on the assets, liabilities, financial position and profit or loss of the company. 19 9 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information 4 40 — RELATED PARTY DISCLOSURES According to the definitions of IAS 24 ‘Related Party Disclosures’, the Supervisory Board and the Executive Board of adidas AG have been identified as related parties who solely receive remuneration in connection with their function as key management personnel. For information about the remuneration of the Supervisory Board and the Executive Board of adidas AG see Note 41 and see Compensation Report, p. 32 In addition, adidas Pension Trust e.V., a registered association, is regarded as a related party. Based on a Contractual Trust Arrangement, adidas Pension Trust e.V. manages the plan assets in the form of an administrative trust to fund and protect part of the pension obligations of adidas AG. see Note 24 Employees, senior executives and members of the Executive Board of adidas AG can be members of the regis- tered association. adidas AG has the right to claim a refund of pension payments from adidas Pension Trust e.V. under specific contractually agreed conditions. 41 — OTHER INFORMATION Employees The average numbers of employees (continuing operations) are as follows: EMPLOYEES Own retail Sales Logistics Marketing Central administration Production Research and development Information technology Total Year ending Dec. 31, 2016 Year ending Dec. 31, 2015 33,478 32,249 4,243 6,225 5,179 5,068 1,441 1,073 1,169 3,955 6,023 4,536 4,660 1,366 984 1,147 57,876 54,921 Accountant service fees for the auditor of the financial statements The expenses for the audit fees comprise the expenses of adidas AG, Herzogenaurach, as well as all German subsidiaries of adidas AG. In 2016, the expenses for the professional audit service fees for the auditor KPMG AG amounted to € 1.3 million (2015: € 1.3 million). Expenses for tax consultancy services provided by the auditor, for other confirmation services provided by the auditor and for other services provided by the auditor amounted to € 0.1 million (2015: € 0.0 million), € 0.0 million (2015: € 0.5 million) and € 0.1 million (2015: € 0.1 million), respectively. Remuneration of the Supervisory Board and the Executive Board of adidas AG Supervisory Board Pursuant to the Articles of Association, the Supervisory Board members’ fixed annual payment amounted to € 1.3 million (2015: € 1.2 million). Members of the Supervisory Board were not granted any loans in 2016. Executive Board In 2016, the overall expenditure-based compensation of the members of the Executive Board totalled € 21.2 million (2015: € 12.0 million), € 11.3 million thereof relates to short-term benefits (2015: € 7.4 million) and € 9.9 million to long-term benefits (2015: € 4.6 million). Post-employment benefits (costs for accrued pension entitlements for members of the Executive Board as well as a follow-up bonus for 2016 for a resigned member of the Executive Board) totalled € 4.8 million (2015: € 1.8 million). In 2016, former members of the Executive Board and their survivors received pension payments totalling € 3.6 million (2015: € 3.5 million). Pension obligations relating to former members of the Executive Board and their survivors amount in total to € 75.3 million (2015: € 55.4 million). The benefits confirmed to a former member of the Executive Board in 2016 due to the termination of the Executive Board mandate were recognised in the consolidated income statement and amounted to € 2.6 million. Members of the Executive Board were not granted any loans in 2016. Further information on disclosures according to § 314 section 1 no. 6a HGB is provided in the Compensation Report. see Compensation Report, p. 32 2 00 201 4 CONSOLIDATED FINA NCIA L S TATEMENTS Notes – Additional Information 42 — INFORMATION RELATING TO THE GERMAN CORPORATE GOVERNANCE CODE Information pursuant to § 161 German Stock Corporation Act (Aktiengesetz – AktG) On March 3, 2016, the Executive Board and Supervisory Board of adidas AG made an intra-year change to the Declaration of Compliance in accordance with § 161 AktG issued on February 15, 2016 and made it permanently available to the shareholders. On February 13, 2017, the Executive Board and Supervisory Board issued the annually updated Declaration of Compliance in accordance with § 161 AktG and made it permanently available to the shareholders. The full text of the Declaration of Compliance is available on the company’s corporate website. 43 — EVENTS AFTER THE BALANCE SHEET DATE Company-specific subsequent events No company-specific subsequent events are known which might have a material influence on the assets, liabilities, financial position and profit or loss of the company. Date of preparation The Executive Board of adidas AG prepared and approved the consolidated financial statements for submission to the Supervisory Board on February 17, 2017. It is the Supervisory Board’s task to examine the consolidated financial statements and give their approval and authorisation for issue. Herzogenaurach, February 17, 2017 The Executive Board of adidas AG 2 01 4 CONSOLIDATED FINA NCIA L S TATEMENTS Statement of Movements of Intangible and Tangible Assets 4 CON SOL IDATE D FI NANCI AL S TAT EM E NTS Statement of Movements of Intangible and Tangible Assets STATEMENT OF MOVEMENTS OF INTANGIBLE AND TANGIBLE ASSETS STATEMENT OF MOVEMENTS OF INTANGIBLE AND TANGIBLE ASSETS € IN MILLIONS Attachment I Goodwill Trademarks Software, patents and concessions Internally generated Total intangible Land, land leases, Technical equipment Other equipment, software assets buildings and leasehold and machinery furniture and fixtures Construction in progress Total tangible assets Acquisition cost January 1, 2015 Currency effect Additions Increase in companies consolidated Transfers Disposals December 31, 2015/January 1, 2016 Currency effect Additions Transfers to assets held for sale Transfers Disposals December 31, 2016 Accumulated depreciation, amortisation and impairment January 1, 2015 Currency effect Additions Impairment losses Reversals of impairment losses Transfers Disposals December 31, 2015/January 1, 2016 Currency effect Additions Impairment losses Reversals of impairment losses Transfers to assets held for sale Transfers Disposals December 31, 2016 Net carrying amount January 1, 2015 December 31, 2015 December 31, 2016 1,588 99 – 192 – – 1,879 29 – – – (0) 1,908 419 34 – 34 – – – 487 9 – – – – – (0) 496 1,169 1,392 1,412 1,432 164 – 31 – (0) 1,628 53 – – 0 – 1,681 0 0 0 – – (0) – 0 0 0 – – – – – 1 1,432 1,628 1,680 730 36 49 16 37 (2) 865 12 65 (6) (2) (29) 904 592 29 56 0 (0) 16 (2) 691 13 64 10 (0) (1) (4) (25) 748 138 173 157 improvements 3,792 1,074 299 49 252 4 (3) 93 65 (6) (2) 4,392 (29) 4,513 1,029 1,184 63 60 34 (0) 0 (2) 22 70 10 (0) (1) (4) (25) 1,255 2,763 3,208 3,259 53 156 – 47 (11) 1,319 28 87 (0) (8) (31) 1,395 320 19 51 8 (0) – (9) 389 56 6 2 (1) (0) (1) (26) 425 753 930 970 41 – – 12 (33) (0) 20 20 17 (15) (0) – – – – – – 4 – – 5 – 5 – – – – – 10 24 15 10 268 5 31 0 4 (7) 300 10 27 (0) 13 (25) 325 122 3 35 0 – 0 0 – (5) 155 8 35 (0) 6 (23) 180 145 145 145 1,323 (113) 1,502 13 237 1 41 33 272 (1) 79 (175) 1,710 (100) 1,039 926 10 193 11 (0) 0 28 213 8 (1) (0) 0 397 463 582 (158) 1,128 159 (0) 41 – (96) (3) 100 201 1 – (82) (2) 218 0 (0) (0) – – – – – 0 – – – – – – 0 159 100 218 2,823 (134) 3,221 71 464 1 (4) 73 586 (1) 2 (233) 3,648 1,369 (114) 1,583 31 279 19 (1) 0 42 303 10 (2) (0) 4 (207) 1,733 1,454 1,638 1,915 2 02 203 4 CONSOLIDATED FINA NCIA L S TATEMENTS Statement of Movements of Intangible and Tangible Assets STATEMENT OF MOVEMENTS OF INTANGIBLE AND TANGIBLE ASSETS € IN MILLIONS Attachment I Goodwill Trademarks Software, patents and concessions Internally generated software Total intangible assets Land, land leases, buildings and leasehold improvements Technical equipment and machinery Other equipment, furniture and fixtures Construction in progress Total tangible assets Accumulated depreciation, amortisation and impairment Acquisition cost January 1, 2015 Currency effect Additions Transfers Disposals Currency effect Additions Increase in companies consolidated December 31, 2015/January 1, 2016 Transfers to assets held for sale Transfers Disposals December 31, 2016 January 1, 2015 Currency effect Additions Impairment losses Transfers Disposals Currency effect Additions Impairment losses Reversals of impairment losses December 31, 2015/January 1, 2016 Reversals of impairment losses Transfers to assets held for sale Transfers Disposals December 31, 2016 Net carrying amount January 1, 2015 December 31, 2015 December 31, 2016 1,588 99 – 192 1,879 29 (0) 1,908 419 34 – 34 487 – – – – – – – – 9 – – – – – (0) 496 1,169 1,392 1,412 1,432 164 – 31 – (0) 1,628 53 1,681 – – 0 – 0 0 0 – – – 0 0 0 – – – – – 1 (0) 1,432 1,628 1,680 730 36 49 16 37 (2) 12 65 (6) (2) 865 (29) 904 592 691 29 56 0 (0) 16 (2) 13 64 10 (0) (1) (4) (25) 748 138 173 157 1,323 13 237 1 41 (113) 1,502 33 272 (1) 79 (175) 1,710 926 10 193 11 (0) 0 (100) 1,039 28 213 8 (1) (0) 0 (158) 1,128 397 463 582 159 (0) 41 – (96) (3) 100 1 201 – (82) (2) 218 0 (0) – – – – – 0 (0) – – – – – – 0 159 100 218 2,823 71 464 1 (4) (134) 3,221 73 586 (1) 2 (233) 3,648 1,369 31 279 19 (1) 0 (114) 1,583 42 303 10 (2) (0) 4 (207) 1,733 1,454 1,638 1,915 41 – – 12 (33) (0) 20 – – – – – 20 17 – 4 – – (15) (0) 5 – 5 – – – – – 10 24 15 10 3,792 1,074 299 49 252 4 (3) 4,392 93 65 (6) (2) (29) 4,513 1,029 63 60 34 (0) 0 (2) 1,184 22 70 10 (0) (1) (4) (25) 1,255 2,763 3,208 3,259 53 156 – 47 (11) 1,319 28 87 (0) (8) (31) 1,395 320 19 51 8 (0) – (9) 389 6 56 2 (1) (0) (1) (26) 425 753 930 970 268 5 31 0 4 (7) 300 10 27 (0) 13 (25) 325 122 3 35 0 – 0 (5) 155 8 35 0 – (0) 6 (23) 180 145 145 145 2 03 4 CONSOLIDATED FINA NCIA L S TATEMENTS Shareholdings 4 CON SOL IDATE D FI NANCI AL S TAT EM E NTS Shareholdings SHAREHOLDINGS SHAREHOLDINGS OF ADIDAS AG, HERZOGENAURACH AT DECEMBER 31, 2016 Attachment II Company and Domicile Currency Equity (currency units in thousands) Share in capital held by 1 in % Germany adidas Insurance & Risk Consultants GmbH 2 adidas Beteiligungsgesellschaft mbH 2 adidas CDC Immobilieninvest GmbH adidas Verwaltungsgesellschaft mbH 3 adidas anticipation GmbH 2 Europe (incl. Middle East and Africa) adidas sport gmbh adidas Austria GmbH runtastic GmbH adidas France S.a.r.l. 1 2 3 4 5 6 7 8 9 10 adidas International B.V. 11 12 13 14 15 16 adidas International Trading B.V. adidas International Marketing B.V. adidas International Finance B.V. adidas International Property Holding B.V. adidas Infrastructure Holding B.V. adidas Benelux B.V. 17 Hydra Ventures B.V. adidas (UK) Limited Refuel (Brand Distribution) Limited 4 Reebok International Limited 8 Trafford Park DC Limited RBK Holdings Limited 3, 8 Reebok Pensions Management Limited 3, 8 Reebok Europe Holdings Luta Limited 3, 8 Taylor Made Golf Limited 10 Ashworth U.K. Ltd. 3, 10 adidas (Ireland) Limited adidas International Re DAC Reebok Ireland Limited 3 Five Ten Europe NV 3 adidas España S.A.U. adidas Finance Spain S.A.U. Global Merchandising, S.L. adidas Italy S.p.A. adidas Portugal - Artigos de Desporto, S.A. 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Herzogenaurach (Germany) Herzogenaurach (Germany) Herzogenaurach (Germany) Herzogenaurach (Germany) Herzogenaurach (Germany) Cham (Switzerland) Klagenfurt (Austria) Pasching (Austria) Landersheim (France) Amsterdam (Netherlands) Amsterdam (Netherlands) Amsterdam (Netherlands) Amsterdam (Netherlands) Amsterdam (Netherlands) Amsterdam (Netherlands) Amsterdam (Netherlands) Amsterdam (Netherlands) Stockport (Great Britain) Aylesbury (Great Britain) London (Great Britain) London (Great Britain) London (Great Britain) London (Great Britain) London (Great Britain) London (Great Britain) Basingstoke (Great Britain) Bristol (Great Britain) Dublin (Ireland) Dublin (Ireland) Dublin (Ireland) Lasne (Belgium) Zaragoza (Spain) Zaragoza (Spain) Madrid (Spain) Monza (Italy) Lisbon (Portugal) EUR EUR EUR EUR EUR CHF EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR GBP GBP EUR GBP GBP GBP GBP GBP GBP GBP EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR NOK NOK 26 681,990 11,541 4,328 directly directly 14 89 25 directly 6,249 6,955 5,055 188,185 6,992,628 823,032 51,759 54,597 48,200 (23) 6,272 (10,108) 43,356 – 372,916 786 – – 26,248 – (9,064) – 2,793 19,649 56 (163) 38,229 36,226 4,261 51,328 5,344 1,412 27,999 6,998 directly directly 6 10 directly directly 9 10 10 10 100 10 directly 10 10 20 87 15 87 81 20 20 20 10 26 10 10 28 90 2 87 10 10 10 10 directly directly 38 100 100 100 100 100 100 95.89 4.11 100 100 93.97 6.03 100 100 100 100 100 100 100 100 100 100 100 89 11 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98 2 100 100 adidas Business Services Lda. Morea de Maia (Portugal) adidas Norge AS Reebok-CCM Hockey AS Lillestrøm (Norway) Lillestrøm (Norway) 1 The number refers to the number of the company. 2 Profit and loss transfer agreement 3 Company with no active business 4 Legal owner of the shares with loss of control effective July 1, 2016 5 Sub-group Taylor Made Golf Co., Inc. 6 Sub-group Sports Licensed Division of the adidas Group, LLC 7 Sub-group Reebok-CCM Hockey U.S., Inc. 8 Sub-group Reebok International Limited 9 Sub-group Reebok International Ltd. 10 Sub-group Taylor Made Golf Limited 2 04 205 4 CONSOLIDATED FINA NCIA L S TATEMENTS Shareholdings SHAREHOLDINGS OF ADIDAS AG, HERZOGENAURACH AT DECEMBER 31, 2016 Attachment II Company and Domicile adidas Sverige AB adidas Finance Sverige AB Reebok-CCM Hockey AB adidas Suomi Oy Reebok-CCM Hockey Oy adidas Danmark A/S adidas CR s.r.o. adidas Budapest Kft. adidas Bulgaria EAD LLC ‘adidas, Ltd.’ adidas Poland Sp.z o.o. adidas Finance Poland S.A. adidas Romania S.R.L. adidas Baltics SIA adidas Slovakia s.r.o. adidas Trgovina d.o.o. SC ‘adidas-Ukraine’ adidas LLP adidas Serbia d.o.o. adidas Croatia d.o.o. adidas Hellas A.E. adidas (Cyprus) Limited adidas Spor Malzemeleri Satis ve Pazarlama A.S. Solna (Sweden) Solna (Sweden) Solna (Sweden) Helsinki (Finland) Espoo (Finland) Copenhagen (Denmark) Prague (Czech Republic) Budapest (Hungary) Sofia (Bulgaria) Moscow (Russia) Warsaw (Poland) Warsaw (Poland) Bucharest (Romania) Riga (Latvia) Bratislava (Slovak Republic) Ljubljana (Slovenia) Kiev (Ukraine) Almaty (Republic of Kazakhstan) Belgrade (Serbia) Zagreb (Croatia) Athens (Greece) Nicosia (Cyprus) Istanbul (Turkey) adidas Emerging Markets L.L.C Dubai (United Arab Emirates) adidas Emerging Markets FZE adidas Levant Limited adidas Levant Limited – Jordan adidas Imports & Exports Ltd. adidas Sporting Goods Ltd. adidas Egypt Ltd. 3 Reebok Israel Ltd. Life Sport Ltd. adidas Morocco LLC adidas (South Africa) (Pty) Ltd. North America adidas North America, Inc. adidas America, Inc. adidas International, Inc. adidas Team, Inc. 3 Taylor Made Golf Co., Inc. 5 Ashworth, LLC 3, 5 Dubai (United Arab Emirates) Dubai (United Arab Emirates) Amman (Jordan) Cairo (Egypt) Cairo (Egypt) Cairo (Egypt) Holon (Israel) Holon (Israel) Casablanca (Morocco) Cape Town (South Africa) Portland, Oregon (USA) Portland, Oregon (USA) Portland, Oregon (USA) Portland, Oregon (USA) Carlsbad, California (USA) Carlsbad, California (USA) The Reebok Worldwide Trading Company, LLC Wilmington, Delaware (USA) Reebok Securities Holdings LLC 9 Textronics, Inc. Wilmington, Delaware (USA) Wilmington, Delaware (USA) 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 Currency Equity (currency units in thousands) Share in capital held by 1 in % SEK SEK SEK EUR EUR DKK CZK HUF BGN RUB PLN PLN RON EUR EUR EUR UAH KZT RSD HRK EUR EUR TRY USD USD JOD JOD EGP EGP USD ILS ILS MAD ZAR USD USD USD USD USD USD USD USD USD 78,678 271,486 60,434 1,397 3,068 21,905 130,979 525,592 13,401 27,380,926 53,362 97,876 26,157 2,399 1,018 514 825,945 4,481,584 409,384 34,915 16,894 601 316,031 18,470 92,103 2,955 881 (14,573) 181,815 (1,831) 15,030 106,880 15,157 251,160 5,168,243 155,451 75,824 (1,013) 345,859 – 17,075 – 11,987 directly 89 40 10 10 10 directly directly directly 7 directly 87 10 10 directly directly directly directly 10 10 directly directly 10 indirectly 9 10 64 65 68 10 11 directly directly 10 directly directly 10 74 74 74 74 78 87 87 76 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 49 100 100 100 100 90 10 100 100 85 100 100 100 100 100 100 100 100 100 100 100 1 The number refers to the number of the company. 2 Profit and loss transfer agreement 3 Company with no active business 4 Legal owner of the shares with loss of control effective July 1, 2016 5 Sub-group Taylor Made Golf Co., Inc. 6 Sub-group Sports Licensed Division of the adidas Group, LLC 7 Sub-group Reebok-CCM Hockey U.S., Inc. 8 Sub-group Reebok International Limited 9 Sub-group Reebok International Ltd. 10 Sub-group Taylor Made Golf Limited 2 05 4 CONSOLIDATED FINA NCIA L S TATEMENTS Shareholdings 4 CON SOL IDATE D FI NANCI AL S TAT EM E NTS Shareholdings SHAREHOLDINGS OF ADIDAS AG, HERZOGENAURACH AT DECEMBER 31, 2016 Attachment II Company and Domicile Ashworth Acquisition Corp. 3, 5 Putter, LLC 3, 5 Onfield Apparel Group, LLC 3, 6 Reebok Onfield, LLC 3, 6 Reebok International Ltd. 9 Wilmington, Delaware (USA) Montgomery, Alabama (USA) Dover, Delaware (USA) Dover, Delaware (USA) Canton, Massachusetts (USA) Sports Licensed Division of the adidas Group, LLC 6 Boston, Massachusetts (USA) 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Reebok-CCM Hockey U.S., Inc. 7 Stone Age Equipment, Inc. Spartanburg DC, Inc. adidas Canada Ltd. Sport Maska Inc. Asia adidas Sourcing Limited adidas Services Limited adidas Hong Kong Limited Smedley Industries (Hong Kong) Limited 3, 7 Reebok Trading (Far East) Limited adidas (Suzhou) Co. Ltd. 100 adidas Sports (China) Co. Ltd. 101 adidas (China) Ltd. 102 Zhuhai adidas Technical Services Limited 103 adidas Logistics (Tianjin) Co., Ltd. 104 adidas Business Services (Dalian) Limited 105 adidas Japan K.K. 106 Taylor Made Golf Co., Ltd. 107 adidas Korea Ltd. 108 Taylor Made Korea Ltd. 109 adidas Korea Technical Services Limited Montpelier, Vermont (USA) Redlands, California (USA) Spartanburg, South Carolina (USA) Woodbridge, Ontario (Canada) New Brunswick (Canada) Hong Kong (China) Hong Kong (China) Hong Kong (China) Hong Kong (China) Hong Kong (China) Suzhou (China) Suzhou (China) Shanghai (China) Zhuhai (China) Tianjin (China) Dalian (China) Tokyo (Japan) Tokyo (Japan) Seoul (Korea) Seoul (Korea) Pusan (Korea) 110 adidas India Private Limited New Delhi (India) 111 adidas India Marketing Private Limited New Delhi (India) 112 adidas Technical Services Private Limited 113 Reebok India Company 114 PT adidas Indonesia New Delhi (India) New Delhi (India) Jakarta (Indonesia) 115 adidas (Malaysia) Sdn. Bhd. Petaling Jaya (Malaysia) 116 adidas Philippines Inc. 117 adidas Singapore Pte. Ltd. 118 adidas Taiwan Limited 119 adidas (Thailand) Co., Ltd. 120 adidas Australia Pty Limited 121 adidas New Zealand Limited Pasig City (Philippines) Singapore (Singapore) Taipei (Taiwan) Bangkok (Thailand) Mulgrave (Australia) Auckland (New Zealand) Currency Equity (currency units in thousands) Share in capital held by 1 in % USD USD USD USD USD USD USD USD USD CAD CAD USD USD HKD HKD USD CNY CNY CNY CNY CNY CNY JPY JPY KRW KRW KRW INR INR USD INR IDR MYR PHP SGD TWD THB AUD NZD – – – – (1,071,318) 76,481 46,654 11,006 11,367 117,830 180,861 490,123 12,062 362,938 – 31,176 227,446 11,988,206 750,510 47,334 141,095 8,789 12,863,253 4,094,743 207,148,674 436,747 4,158,769 4,630,379 4,778,682 3,346 (22,152,801) 222,914,721 52,260 653,787 12,472 1,493,263 1,185,847 75,074 10,075 79 83 87 86 87 74 87 81 87 75 75 10 10 11 10 2 89 87 2 2 10 94 15 10 10 10 directly directly 94 directly 10 110 10 94 123 10 directly directly 10 directly directly 10 directly 10 directly 100 100 99 1 100 100 99 1 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 10.68 89.32 98.99 1.01 100 93.15 99 1 60 40 100 100 100 100 100 100 1 The number refers to the number of the company. 2 Profit and loss transfer agreement 3 Company with no active business 4 Legal owner of the shares with loss of control effective July 1, 2016 5 Sub-group Taylor Made Golf Co., Inc. 6 Sub-group Sports Licensed Division of the adidas Group, LLC 7 Sub-group Reebok-CCM Hockey U.S., Inc. 8 Sub-group Reebok International Limited 9 Sub-group Reebok International Ltd. 10 Sub-group Taylor Made Golf Limited 2 06 207 4 CONSOLIDATED FINA NCIA L S TATEMENTS Shareholdings SHAREHOLDINGS OF ADIDAS AG, HERZOGENAURACH AT DECEMBER 31, 2016 Attachment II Company and Domicile Currency Equity (currency units in thousands) Share in capital held by 1 122 adidas Vietnam Company Limited 123 Reebok (Mauritius) Company Limited Ho Chi Minh City (Vietnam) Port Louis (Mauritius) Latin America 124 adidas Argentina S.A. Buenos Aires (Argentina) 125 Reebok Argentina S.A. Buenos Aires (Argentina) 126 ASPA do Brasil Ltda. 3 127 adidas do Brasil Ltda. 128 adidas Franchise Brasil Servicos Ltda. 129 Reebok Produtos Esportivos Brasil Ltda. São Paulo (Brazil) São Paulo (Brazil) São Paulo (Brazil) Jundiaí (Brazil) 130 adidas Chile Limitada Santiago de Chile (Chile) 131 adidas Colombia Ltda. 132 adidas Perú S.A.C. 133 adidas de Mexico, S.A. de C.V. 134 adidas Industrial, S.A. de C.V. 135 Reebok de Mexico, S.A. de C.V. 3 136 adidas Latin America, S.A. 137 Concept Sport, S.A. 138 adidas Market LAM, S.A. 3 139 3 Stripes S.A. (adidas Uruguay) 3 140 Tafibal S.A. 141 Raelit S.A. Bogotá (Colombia) Lima (Peru) Mexico City (Mexico) Mexico City (Mexico) Mexico City (Mexico) Panama City (Panama) Panama City (Panama) Panama City (Panama) Montevideo (Uruguay) Montevideo (Uruguay) Montevideo (Uruguay) 142 Reebok Central America S.A. 9 San Pedro Sula (Honduras) 143 adidas Corporation de Venezuela, S.A. 3 144 adisport Corporation Caracas (Venezuela) San Juan (Puerto Rico) VND USD ARS ARS BRL BRL BRL BRL CLP COP PEN MXN MXN MXN USD USD USD UYU UYU UYU HNL VEF USD 92,441,962 2,194 1,137,171 179,998 75 (25,513) 19,966 9,368 10 87 80 10 2 11 10 94 2 127 10 102,653,569 directly (42,585,326) 90,607 286,931 167,406 (537,589) (80,139) 1,622 – (436) 22,570 40,629 – (17) (2,851) 1 directly directly 130 directly directly directly directly 10 10 directly directly directly 87 80 directly 10 1 The number refers to the number of the company. 2 Profit and loss transfer agreement 3 Company with no active business 4 Legal owner of the shares with loss of control effective July 1, 2016 5 Sub-group Taylor Made Golf Co., Inc. 6 Sub-group Sports Licensed Division of the adidas Group, LLC 7 Sub-group Reebok-CCM Hockey U.S., Inc. 8 Sub-group Reebok International Limited 9 Sub-group Reebok International Ltd. 10 Sub-group Taylor Made Golf Limited in % 100 99 1 51.73 48.27 96.25 3.75 100 100 100 100 99 1 100 99.21 0.79 100 100 100 100 100 100 100 100 100 99.6 0.4 100 100 2 07 4 RESP ONSIBILITY S TATEMENT 4 AUD I TO R’S RE PORT RESPONSIBILITY STATEMENT To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group Management Report, which has been combined with the Management Report of adidas AG, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group. Herzogenaurach, February 17, 2017 KASPER RORSTED CEO ROLAND AUSCHEL GLENN BENNETT Global Sales Global Operations ERIC LIEDTKE Global Brands ROBIN J. STALKER CFO 2 08 209 4 AUDITOR’S REPORT AUDITOR’S REPORT We have audited the consolidated financial statements prepared by adidas AG, Herzogenaurach, comprising the statement of financial position, income statement, statement of comprehensive income, statement of changes in equity, statement of cash flows and the notes, together with the management report of the Company and the Group for the business year from January 1 to December 31, 2016. The preparation of the consolidated financial statements and the Group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a (1) HGB (Handelsgesetzbuch – ‘German Commercial Code’) is the responsibility of the Company’s Executive Board. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and profit or loss in the consolidated financial statements in accordance with the applicable financial reporting framework and in the Group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the Group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and Group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a (1) HGB and give a true and fair view of the net assets, financial position and profit or loss of the Group in accordance with these requirements. The Group management report is consistent with the consolidated financial statements, complies with the German statutory requirements, and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development. Munich, February 17, 2017 KPMG AG Wirtschaftsprüfungsgesellschaft (Original German version signed by:) Braun Wolper Wirtschaftsprüfer (German Public Auditor) Wirtschaftsprüfer (German Public Auditor) 2 09 N AL R ATIO FO N DITIO IN M D A 21 1 N ATIO M Additional Information 5 — TEN-YEAR OVERVIEW — GLOSSARY — DECLARATION OF SUPPORT — FINANCIAL CALENDAR 212 216 219 220 21 1 5 ADDITIONAL INFORMATION Ten-Year Overview 5 AD DI T IO NAL INFO RM AT IO N Ten-Year Overview TEN-YEAR OVERVIEW TEN-YEAR OVERVIEW Income Statement Data (€ in millions) Net sales 2 Gross profit 2 Royalty and commission income 2 Other operating income 2 Other operating expenses 2 EBITDA 2 Operating profit 2, 3, 4, 5, 6 Net financial result Income before taxes 2, 3, 4, 5, 6 Income taxes 2 Net income attributable to non-controlling interests Net income attributable to shareholders 3, 4, 5, 6, 7 Income Statement Ratios Gross margin 2 Operating margin 2, 3, 4, 5, 6 Interest coverage 2 Effective tax rate 2, 3, 4, 5, 6 Net income attributable to shareholders in % of net sales 3, 4, 5, 6, 7 Net Sales by Brand (€ in millions) adidas brand Reebok brand TaylorMade-adidas Golf CCM Hockey Net Sales by Product Category (€ in millions) Footwear 2 Apparel 2 Hardware 2 Balance Sheet Data (€ in millions) Total assets Inventories Receivables and other current assets Working capital Net cash/(net borrowings) Shareholders’ equity 1 2011 restated according to IAS 8 in the 2012 consolidated financial statements. 2 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 3 2015 excluding goodwill impairment of € 34 million. 4 2014 excluding goodwill impairment of € 78 million. 5 2013 excluding goodwill impairment of € 52 million. 6 2012 excluding goodwill impairment of € 265 million. 7 Includes continuing and discontinued operations. 8 Figures adjusted for 1:4 share split conducted on June 6, 2006. 9 Subject to Annual General Meeting approval. 2016 2015 2014 2013 2012 2011 1 2010 2009 2008 2007 19,291 9,379 109 266 8,263 1,883 1,491 (46) 1,444 426 2 1,017 48.6% 7.7% 30.8 29.5% 5.3% 16,334 1,770 892 271 10,135 7,476 1,681 15,176 3,763 3,607 2,121 (103) 6,472 16,915 8,168 119 96 7,289 1,475 1,094 (21) 1,073 353 6 668 48.3% 6.5% 23.8 32.9% 4.0% 13,939 1,751 902 317 8,360 6,970 1,585 13,343 3,113 3,003 2,133 (460) 5,666 14,534 6,924 102 138 6,203 1,283 961 (48) 913 271 6 568 47.6% 6.6% 19.3 29.7% 3.9% 11,774 1,578 913 269 6,658 6,279 1,597 12,417 2,526 2,861 2,970 (185) 5,624 14,203 7,001 103 142 6,013 1,496 1,233 (68) 1,165 340 3 839 49.3% 8.7% 24.0 29.2% 5.9% 11,059 1,599 1,285 260 6,587 5,811 1,806 11,599 2,634 2,583 2,125 295 5,489 14,883 7,103 105 127 6,150 1,445 1,185 (69) 1,116 327 (2) 791 47.7% 8.0% 14.6 29.3% 5.3% 11,344 1,667 1,344 243 6,922 6,290 1,671 11,651 2,486 2,444 2,504 448 5,304 13,322 6,329 93 98 5,567 1,199 953 (84) 869 261 (5) 613 47.5% 7.2% 12.2 30.0% 4.6% 9,867 1,940 1,044 210 6,242 5,733 1,347 11,237 2,502 2,431 1,990 90 5,137 11,990 5,730 100 110 5,046 1,159 894 (88) 806 238 (1) 567 47.8% 7.5% 10.1 29.5% 4.7% 8,714 1,913 909 200 5,389 5,380 1,221 10,618 2,119 2,324 1,972 (221) 4,616 10,381 4,712 86 100 4,390 780 508 (150) 358 113 0 245 45.4% 4.9% 3.9 31.5% 2.4% 7,520 1,603 831 177 4,642 4,663 1,076 8,875 1,471 2,038 1,649 (917) 3,771 10,799 5,256 89 103 4,378 1,280 1,070 (166) 904 260 (2) 642 48.7% 9.9% 7.4 28.8% 5.9% 7,821 1,717 812 188 4,919 4,775 1,105 9,533 1,995 2,523 1,290 (2,189) 3,386 10,299 4,882 102 80 4,115 1,165 949 (135) 815 260 (4) 551 47.4% 9.2% 6.8 31.8% 5.4% 7,113 1,831 804 210 4,751 4,426 1,121 8,325 1,629 2,048 1,522 (1,766) 3,023 21 2 21 3 TEN-YEAR OVERVIEW Income Statement Data (€ in millions) Net sales 2 Gross profit 2 Royalty and commission income 2 Other operating income 2 Other operating expenses 2 EBITDA 2 Operating profit 2, 3, 4, 5, 6 Net financial result Income before taxes 2, 3, 4, 5, 6 Income taxes 2 Net income attributable to non-controlling interests Net income attributable to shareholders 3, 4, 5, 6, 7 Income Statement Ratios Gross margin 2 Operating margin 2, 3, 4, 5, 6 Interest coverage 2 Effective tax rate 2, 3, 4, 5, 6 Net Sales by Brand (€ in millions) adidas brand Reebok brand TaylorMade-adidas Golf CCM Hockey Footwear 2 Apparel 2 Hardware 2 Total assets Inventories Balance Sheet Data (€ in millions) Receivables and other current assets Working capital Net cash/(net borrowings) Shareholders’ equity Net Sales by Product Category (€ in millions) Net income attributable to shareholders in % of net sales 3, 4, 5, 6, 7 19,291 9,379 109 266 8,263 1,883 1,491 (46) 1,444 426 2 1,017 48.6% 7.7% 30.8 29.5% 5.3% 16,334 1,770 892 271 10,135 7,476 1,681 15,176 3,763 3,607 2,121 (103) 6,472 16,915 8,168 119 96 7,289 1,475 1,094 (21) 1,073 353 6 668 48.3% 6.5% 23.8 32.9% 4.0% 13,939 1,751 902 317 8,360 6,970 1,585 13,343 3,113 3,003 2,133 (460) 5,666 14,534 6,924 102 138 6,203 1,283 961 (48) 913 271 6 568 47.6% 6.6% 19.3 29.7% 3.9% 11,774 1,578 913 269 6,658 6,279 1,597 12,417 2,526 2,861 2,970 (185) 5,624 5 ADDITIONAL INFORMATION Ten-Year Overview 2016 2015 2014 2013 2012 2011 1 2010 2009 2008 2007 10,381 4,712 86 100 4,390 780 508 (150) 358 113 0 245 45.4% 4.9% 3.9 31.5% 2.4% 7,520 1,603 831 177 4,642 4,663 1,076 8,875 1,471 2,038 1,649 (917) 3,771 10,799 5,256 89 103 4,378 1,280 1,070 (166) 904 260 (2) 642 48.7% 9.9% 7.4 28.8% 5.9% 7,821 1,717 812 188 4,919 4,775 1,105 9,533 1,995 2,523 1,290 (2,189) 3,386 10,299 4,882 102 80 4,115 1,165 949 (135) 815 260 (4) 551 47.4% 9.2% 6.8 31.8% 5.4% 7,113 1,831 804 210 4,751 4,426 1,121 8,325 1,629 2,048 1,522 (1,766) 3,023 14,203 7,001 103 142 6,013 1,496 1,233 (68) 1,165 340 3 839 49.3% 8.7% 24.0 29.2% 5.9% 11,059 1,599 1,285 260 6,587 5,811 1,806 11,599 2,634 2,583 2,125 295 5,489 14,883 7,103 105 127 6,150 1,445 1,185 (69) 1,116 327 (2) 791 47.7% 8.0% 14.6 29.3% 5.3% 11,344 1,667 1,344 243 6,922 6,290 1,671 11,651 2,486 2,444 2,504 448 5,304 13,322 6,329 93 98 5,567 1,199 953 (84) 869 261 (5) 613 47.5% 7.2% 12.2 30.0% 4.6% 9,867 1,940 1,044 210 6,242 5,733 1,347 11,237 2,502 2,431 1,990 90 5,137 11,990 5,730 100 110 5,046 1,159 894 (88) 806 238 (1) 567 47.8% 7.5% 10.1 29.5% 4.7% 8,714 1,913 909 200 5,389 5,380 1,221 10,618 2,119 2,324 1,972 (221) 4,616 21 3 5 ADDITIONAL INFORMATION Ten-Year Overview 5 AD DI T IO NAL INFO RM AT IO N Ten-Year Overview TEN-YEAR OVERVIEW CONTINUED Balance Sheet Ratios Net borrowings/EBITDA 2 Average operating working capital in % of net sales 2 Financial leverage Equity ratio Equity-to-fixed-assets ratio Asset coverage I Asset coverage II Fixed asset intensity of investments Current asset intensity of investments Liquidity I Liquidity II Liquidity III Working capital turnover 2 Return on equity 7 Return on capital employed 7 Data Per Share 8 Share price at year-end (in €) Basic earnings 3, 4, 5, 6, 7 (in €) Diluted earnings 3, 4, 5, 6, 7 (in €) Price/earnings ratio at year-end 3, 4, 5, 6, 7 Market capitalisation at year-end (€ in millions) Net cash generated from operating activities 7 (in €) Dividend (in €) Dividend payout ratio 3, 4, 5, 6, 7 (in %) Number of shares outstanding at year-end (in thousands) Employees Number of employees at year-end 2 Personnel expenses 2 (€ in millions) 1 2011 restated according to IAS 8 in the 2012 consolidated financial statements. 2 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business. 3 2015 excluding goodwill impairment of € 34 million. 4 2014 excluding goodwill impairment of € 78 million. 5 2013 excluding goodwill impairment of € 52 million. 6 2012 excluding goodwill impairment of € 265 million. 7 Includes continuing and discontinued operations. 8 Figures adjusted for 1:4 share split conducted on June 6, 2006. 9 Subject to Annual General Meeting approval. 2016 2015 2014 2013 2012 2011 1 2010 2009 2008 2007 0.1 20.2% 1.6% 42.6% 102.9% 134.0% 83.8% 41.4% 58.6% 22.4% 54.9% 110.6% 9.1 15.7% 24.2% 150.15 5.08 4.99 30.1 30,254 6.73 2.00 9 39.6 201,489 60,617 2,532 0.3 20.5% 8.1% 42.5% 96.9% 136.8% 89.3% 43.8% 56.2% 25.5% 63.7% 121.8% 7.9 11.2% 16.5% 89.91 3.32 3.32 27.1 18,000 5.41 1.60 47.9 0.1 22.4% 3.3% 45.3% 110.9% 158.7% 105.9% 40.8% 59.2% 38.6% 83.0% 140.7% 4.9 8.7% 13.8% 57.62 2.72 2.72 21.2 11,773 3.36 1.50 53.9 200,197 204,327 209,216 209,216 209,216 209,216 209,216 193,516 203,629 55,555 2,184 53,731 1,842 39,596 1,352 38,982 1,283 (0.2) 21.3% (5.4%) 47.3% 115.8% 145.0% 93.2% 40.9% 59.1% 34.4% 72.6% 128.3% 6.7 14.3% 23.6% 92.64 4.01 4.01 23.1 19,382 3.03 1.50 37.4 49,808 1,833 (0.3) 20.0% (8.5%) 45.5% 111.1% 152.7% 100.4% 41.0% 59.0% 44.3% 82.9% 139.7% 5.9 9.9% 19.3% 67.33 3.78 3.78 17.8 14,087 4.50 1.35 35.7 46,306 1,872 (0.1) 20.4% (1.8%) 45.7% 104.6% 140.7% 93.2% 43.7% 56.3% 31.6% 68.3% 126.0% 6.7 11.9% 19.9% 50.26 2.93 2.93 17.1 10,515 3.86 1.00 34.1 46,824 1,646 0.2 20.8% 4.8% 43.5% 97.4% 141.5% 97.7% 44.6% 55.4% 35.5% 78.2% 132.4% 6.1 12.3% 20.2% 48.89 2.71 2.71 18.0 10,229 4.28 0.80 29.5 42,541 1,521 1.2 24.3% 24.3% 42.5% 85.9% 137.4% 102.9% 49.5% 50.5% 30.0% 80.4% 132.2% 6.3 6.5% 11.3% 37.77 1.25 1.22 31.0 7,902 6.11 0.35 29.8 1.7 24.5% 64.6% 35.5% 73.6% 127.7% 89.1% 48.2% 51.8% 10.5% 55.1% 109.8% 8.4 18.9% 19.8% 27.14 3.25 3.07 8.8 5,252 2.52 0.50 15.1 1.5 25.2% 58.4% 36.3% 72.2% 136.1% 98.0% 50.3% 49.7% 14.5% 70.3% 132.6% 6.8 18.2% 20.2% 51.26 2.71 2.57 19.9 10,438 3.83 0.50 18.0 31,344 1,186 21 4 21 5 5 ADDITIONAL INFORMATION Ten-Year Overview 2016 2015 2014 2013 2012 2011 1 2010 2009 2008 2007 (0.2) 21.3% (5.4%) 47.3% 115.8% 145.0% 93.2% 40.9% 59.1% 34.4% 72.6% 128.3% 6.7 14.3% 23.6% 92.64 4.01 4.01 23.1 19,382 3.03 1.50 37.4 (0.3) 20.0% (8.5%) 45.5% 111.1% 152.7% 100.4% 41.0% 59.0% 44.3% 82.9% 139.7% 5.9 9.9% 19.3% 67.33 3.78 3.78 17.8 14,087 4.50 1.35 35.7 (0.1) 20.4% (1.8%) 45.7% 104.6% 140.7% 93.2% 43.7% 56.3% 31.6% 68.3% 126.0% 6.7 11.9% 19.9% 50.26 2.93 2.93 17.1 10,515 3.86 1.00 34.1 0.2 20.8% 4.8% 43.5% 97.4% 141.5% 97.7% 44.6% 55.4% 35.5% 78.2% 132.4% 6.1 12.3% 20.2% 48.89 2.71 2.71 18.0 10,229 4.28 0.80 29.5 1.2 24.3% 24.3% 42.5% 85.9% 137.4% 102.9% 49.5% 50.5% 30.0% 80.4% 132.2% 6.3 6.5% 11.3% 37.77 1.25 1.22 31.0 7,902 6.11 0.35 29.8 1.7 24.5% 64.6% 35.5% 73.6% 127.7% 89.1% 48.2% 51.8% 10.5% 55.1% 109.8% 8.4 18.9% 19.8% 27.14 3.25 3.07 8.8 5,252 2.52 0.50 15.1 1.5 25.2% 58.4% 36.3% 72.2% 136.1% 98.0% 50.3% 49.7% 14.5% 70.3% 132.6% 6.8 18.2% 20.2% 51.26 2.71 2.57 19.9 10,438 3.83 0.50 18.0 Number of shares outstanding at year-end (in thousands) 200,197 204,327 209,216 209,216 209,216 209,216 209,216 193,516 203,629 49,808 1,833 46,306 1,872 46,824 1,646 42,541 1,521 39,596 1,352 38,982 1,283 31,344 1,186 TEN-YEAR OVERVIEW CONTINUED Average operating working capital in % of net sales 2 Fixed asset intensity of investments Current asset intensity of investments Balance Sheet Ratios Net borrowings/EBITDA 2 Financial leverage Equity ratio Equity-to-fixed-assets ratio Asset coverage I Asset coverage II Liquidity I Liquidity II Liquidity III Working capital turnover 2 Return on equity 7 Return on capital employed 7 Data Per Share 8 Share price at year-end (in €) Basic earnings 3, 4, 5, 6, 7 (in €) Diluted earnings 3, 4, 5, 6, 7 (in €) Price/earnings ratio at year-end 3, 4, 5, 6, 7 Market capitalisation at year-end (€ in millions) Net cash generated from operating activities 7 (in €) Dividend (in €) Dividend payout ratio 3, 4, 5, 6, 7 (in %) Employees Number of employees at year-end 2 Personnel expenses 2 (€ in millions) 0.1 20.2% 1.6% 42.6% 102.9% 134.0% 83.8% 41.4% 58.6% 22.4% 54.9% 110.6% 9.1 15.7% 24.2% 150.15 5.08 4.99 30.1 30,254 6.73 2.00 9 39.6 201,489 60,617 2,532 0.3 20.5% 8.1% 42.5% 96.9% 136.8% 89.3% 43.8% 56.2% 25.5% 63.7% 121.8% 7.9 11.2% 16.5% 89.91 3.32 3.32 27.1 18,000 5.41 1.60 47.9 55,555 2,184 0.1 22.4% 3.3% 45.3% 110.9% 158.7% 105.9% 40.8% 59.2% 38.6% 83.0% 140.7% 4.9 8.7% 13.8% 57.62 2.72 2.72 21.2 11,773 3.36 1.50 53.9 53,731 1,842 21 5 5 ADDITIONAL INFORMATION Glossary AD DI T IO NAL INFO RM AT IO N 5 Glossary GLOSSARY / A ATHLEISURE The term is composed of the words athletic and leisure. It describes CONCESSION CORNERS Retail space that is fully operated by one of the company’s brands and a fashion trend of sportswear no longer being just meant for training is part of a larger sales area operated by a retail partner. but increasingly shaping everyday clothing. / B CONTROLLED SPACE Includes own-retail business, mono-branded franchise stores, shop-in-shops, joint ventures with retail partners and co-branded BACKLOGS Also called order backlogs. The value of orders received for future stores. Controlled space offers a high level of brand control and ensures optimal product offering and presentation according to brand delivery. Most retailers’ orders are received six to nine months in requirements. advance. / C CALL AND PUT OPTIONS A call (put) option is a contractual agreement that gives the owner the right, not the obligation, to buy (sell) an underlying financial asset at a specified price within a specific period of time. CONVERSION RATE A key ratio in retail business describing the number of buying customers compared to those who entered the store without buying something; i.e. a 25% conversion rate means that 100 persons entered a store with 25 of them buying something. / D CAPITAL EXPENDITURE Total cash expenditure used for the purchase of tangible and intangible DROP RATE Share of articles that are dropped because they do not meet the assets, excluding acquisitions and finance leases. demand or strategic direction for a given season, despite being CASH POOLING A cash management technique for physical concentration of cash. created initially. These articles are excluded from the range, do not go into serial production and are not sold to customers. Cash pooling allows adidas to combine credit and debit positions from various accounts and several subsidiaries into one central / F account. This technique supports our in-house bank concept where advantage is taken of any surplus funds of subsidiaries to cover cash FINANCIAL LEVERAGE Ratio reflecting the role of borrowings within the financing structure requirements of other subsidiaries, thus reducing external financing of a company. needs and optimising our net interest expenses. COMPARABLE (COMP) STORE SALES Sales generated in stores which have been open for the entire prior Financial leverage = net borrowings shareholders’ equity × 100 financial year and are currently operating. Remodelled stores are included if the store format and store size have remained unchanged. FRANCHISE Type of licence that is acquired by one party (the franchisee) to Comparable store sales therefore show the organic growth of the have access rights to another party’s (the franchisor’s) intellectual retail business and do not include sales generated from new store property, processes and trademarks in order to allow the franchisee openings. to sell a product or provide a service under the franchisor’s name. 21 6 21 7 5 ADDITIONAL INFORMATION Glossary / G GENDERDAX An industry- and science-based gender and diversity project, LIQUIDITY I, II, III The liquidity ratio indicates how quickly a company can liquidate its including a ranking of German companies which are committed to assets to pay for current liabilities. actively supporting highly qualified and career-oriented women within their human resource and diversity management. Liquidity I = Cash + short-term financial assets current liabilities GERMAN CO-DETERMINATION ACT (MITBESTIMMUNGSGESETZ – MITBESTG) An act that governs the form of co-determination of employees in corporations employing more than 2,000 employees. It stipulates, Liquidity II = among other things, that such a corporation’s Supervisory Board Liquidity III = must be composed of an equal number of employee and shareholder representatives. Cash + short-term financial assets + accounts receivable current liabilities Cash + short-term financial assets + accounts receivable + inventories current liabilities × 100 × 100 × 100 GOODWILL Intangible asset that quantifies the price that a buyer of a company has paid for the reputation, know-how and market position of the / M MARKETING INVESTMENTS Promotion and communication spending including sponsorship acquired company. Goodwill is the excess of the amount paid over contracts with teams and individual athletes, as well as advertising, the fair value of the net assets acquired at the purchase date. It is events and other communication activities, but excluding marketing stated at cost and tested for impairment annually or on such other overhead expenses. occasions that events or changes in circumstances indicate that it might be impaired. / H HARDWARE A product category which comprises equipment that is used rather / N NET CASH/NET BORROWINGS Net cash is when the sum of cash and short-term financial assets exceeds gross borrowings. Net borrowings is the portion of gross borrowings not covered by the sum of cash and short-term financial than worn by the consumer, such as bags, balls, fitness equipment, assets. golf clubs and hockey sticks. / L Net cash/net borrowings = cash and cash equivalents + short-term financial assets – short-term borrowings – long-term borrowings LICENSED APPAREL Apparel products which are produced and marketed under a licence NET PROMOTER SCORE (NPS) A survey-based measure of how likely people are to recommend a agreement. adidas has licence agreements with several associations brand. The survey is based on one single question to consumers: ‘How (e.g. FIFA, UEFA), leagues (e.g. NBA, NHL), teams (e.g. Bayern Munich, likely are you to recommend this brand to your friends?’, which can Manchester United, Real Madrid) and universities (e.g. Arizona State be answered within a scale from 0 to 10. Promoters are consumers University, University of Miami). LICENSEES Companies that have the authorisation to use the name of a brand giving the brand a 9 or 10 rating, while detractors are those between a 0 and 6 rating. The NPS is the difference between promoters and detractors measured in percentage points. or business for the production and sale of products. For example, for the adidas brand, licensed products include cosmetics, watches and NON-CONTROLLING INTERESTS Part of net income or equity which is not attributable to the eyewear, for Reebok, fitness equipment. shareholders of the reporting company as it relates to outside ownership interests in subsidiaries that are consolidated with the parent company for financial reporting purposes. 21 7 5 ADDITIONAL INFORMATION Glossary 5 AD DI T IO NAL INFO RM AT IO N Declaration of Support / O / R OMNI-CHANNEL SALES APPROACH Describes the ambition to achieve a globally consistent product ROLLING FORECAST A projection about the future that is updated at regular intervals, offer, brand communication, availability and service across all keeping the forecasting period constant (e.g. twelve months). sales channels (wholesale, retail and e-commerce) and consumer touchpoints. / S OPERATING CASH FLOW Comprises operating profit, change in operating working capital and SEGMENT Also called business segment. adidas is currently divided into 13 net investments. Operating cash flow operating profit +/– change in operating working capital +/– net investments = (capital expenditure less depreciation and amortisation) business segments: Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan, Middle East, South Korea, Southeast Asia/Pacific, TaylorMade-adidas Golf, CCM Hockey, Runtastic and Other centrally managed businesses. OPERATING OVERHEAD EXPENSES Expenses which are not directly attributable to the products or SHARE TURNOVER The total value of all shares traded in the share price currency over a specific period of time (normally daily). It is calculated by multiplying services sold, such as costs for distribution, marketing overhead the number of shares traded by the respective price. costs, logistics, research and development, as well as general and administrative costs, but not including costs for promotion, advertising and communication. OPERATING WORKING CAPITAL A company’s short-term disposable capital which is used to finance its day-to-day business. In comparison to working capital, operating working capital does not include non-operational items such as financial assets and taxes. Operating working capital = accounts receivable + inventories – accounts payable / P PERFORMANCE BUSINESS In the sporting goods industry, performance business relates to technical footwear and apparel used primarily in doing sports. SINGLE-SOURCING MODEL Supply chain activities limited to one specific supplier. Due to the dependency on only one supplier, a company can face disadvantages during the sourcing process. SPEEDFACTORY Robotic technology is used in a smart, decentralised and flexible manufacturing process to bring production to where the consumer is. / T TOP AND BOTTOM LINE A company’s bottom line is its net income attributable to shareholders. More specifically, the bottom line is a company’s income after all expenses have been deducted from revenues. The top line refers to a company’s sales or revenues. POINT-OF-SALE INVESTMENTS Expenditures that relate to advertising and promotion initiatives at TOP-DOWN, BOTTOM-UP A specific concept for information and knowledge processing. In a first step, information and empowerment of management decisions the point of sale as well as to store fittings and furniture. is delegated from top to bottom. After going into more detail on the bottom level, the final information and decision are then transported PRICE POINTS Specific selling prices, normally using ‘psychological’ numbers, e.g. back to the top. a product price of US $ 99.99 instead of US $ 100. TREND SCOUTING Identification and commercialisation of future trends, particularly PROMOTION PARTNERSHIPS Partnerships with events, associations, leagues, clubs and individual athletes. In exchange for the services of promoting the company’s brands, the party is provided with products and/or cash and/or promotional materials. lifestyle trends. / V VERTICAL RETAILER A retail company that (vertically) controls the entire design, production and distribution processes of its products. 21 8 21 9 5 ADDITIONAL INFORMATION Declaration of Support DECLARATION OF SUPPORT adidas AG declares support, except in the case of political risk, that the below-mentioned companies are able to meet their contractual liabilities. This declaration replaces the declaration dated February 15, 2016, which is no longer valid. The declaration of support automatically ceases from the time that a company no longer is a subsidiary of adidas AG. adidas (China) Ltd., Shanghai, China adidas (Cyprus) Limited, Nicosia, Cyprus adidas (Ireland) Limited, Dublin, Ireland adidas (Malaysia) Sdn. Bhd., Petaling Jaya, adidas Industrial, S.A. de C.V., Mexico City, Mexico adidas Insurance & Risk Consultants GmbH, Herzogenaurach, Germany adidas Sverige AB, Solna, Sweden adidas Taiwan Limited, Taipei, Taiwan adidas Trgovina d.o.o., Ljubljana, Slovenia adidas Vietnam Company Limited, Malaysia adidas International B.V., Amsterdam, Ho Chi Minh City, Vietnam Amsterdam, Netherlands Great Britain adisport Corporation, San Juan, Puerto Rico Concept Sport, S.A., Panama City, Panama Global Merchandising, S.L., Madrid, Spain Hydra Ventures B.V., Amsterdam, Netherlands LLC ‘adidas, Ltd.’, Moscow, Russia PT adidas Indonesia, Jakarta, Indonesia Raelit S.A., Montevideo, Uruguay Reebok Argentina S.A., Buenos Aires, Argentina Reebok International Limited, London, Reebok International Ltd., Canton, Massachusetts, USA Reebok Produtos Esportivos Brasil Ltda., Jundiaí, Brazil Reebok-CCM Hockey AB, Solna, Sweden Reebok-CCM Hockey AS, Lillestrøm, Norway Reebok-CCM Hockey Oy, Espoo, Finland Reebok-CCM Hockey U.S., Inc., Montpelier, Vermont, USA Reebok Israel Ltd., Holon, Israel SC ‘adidas-Ukraine’, Kiev, Ukraine Spartanburg DC, Inc., Spartanburg, South Carolina, USA Sport Maska Inc., New Brunswick, Canada Sports Licensed Division of the adidas Group, LLC, Boston, Massachusetts, USA Stone Age Equipment, Inc., Redlands, California, USA Tafibal S.A., Montevideo, Uruguay Taylor Made Golf Co., Inc., Carlsbad, California, USA Taylor Made Golf Co., Ltd., Tokyo, Japan Taylor Made Golf Limited, Basingstoke, Great Britain Taylor Made Korea Ltd., Seoul, Korea Textronics, Inc., Wilmington, Delaware, USA Trafford Park DC Limited, London, Great Britain adidas (South Africa) (Pty) Ltd., Cape Town, Netherlands South Africa adidas (Suzhou) Co. Ltd., Suzhou, China adidas (Thailand) Co., Ltd., Bangkok, Thailand adidas (UK) Limited, Stockport, Great Britain adidas America, Inc., Portland, Oregon, USA adidas anticipation GmbH, Herzogenaurach, Germany adidas Argentina S.A., Buenos Aires, Argentina adidas Australia Pty Limited, Mulgrave, Australia adidas Austria GmbH, Klagenfurt, Austria adidas Baltics SIA, Riga, Latvia adidas Benelux B.V., Amsterdam, Netherlands adidas Budapest Kft., Budapest, Hungary adidas Bulgaria EAD, Sofia, Bulgaria adidas Business Services (Dalian) Limited, Dalian, China adidas Business Services Lda., Morea de Maia, Portugal adidas Canada Ltd., Woodbridge, Ontario, adidas International Finance B.V., Amsterdam, Netherlands adidas International Marketing B.V., Amsterdam, Netherlands adidas International Property Holding B.V., Amsterdam, Netherlands adidas International Re DAC, Dublin, Ireland adidas International Trading B.V., adidas International, Inc., Portland, Oregon, USA adidas Italy S.p.A, Monza, Italy adidas Japan K.K., Tokyo, Japan adidas Korea Ltd., Seoul, Korea adidas Latin America, S.A., Panama City, Panama adidas LLP, Almaty, Republic of Kazakhstan adidas Logistics (Tianjin) Co., Ltd., Tianjin, China adidas Morocco LLC, Casablanca, Morocco adidas New Zealand Limited, Auckland, Canada New Zealand adidas CDC Immobilieninvest GmbH, Herzogenaurach, Germany adidas Norge AS, Lillestrøm, Norway adidas North America, Inc., Portland, Oregon, adidas Chile Limitada, Santiago de Chile, Chile adidas Colombia Ltda., Bogotá, Colombia adidas CR s.r.o., Prague, Czech Republic adidas Croatia d.o.o., Zagreb, Croatia adidas Danmark A/S, Copenhagen, Denmark adidas de Mexico, S.A. de C.V., Mexico City, Mexico adidas do Brasil Ltda., São Paulo, Brazil adidas Emerging Markets FZE, Dubai, United Arab Emirates adidas Emerging Markets L.L.C, Dubai, USA adidas Perú S.A.C., Lima, Peru adidas Philippines Inc., Pasig City, Philippines adidas Poland Sp.z o.o., Warsaw, Poland adidas Portugal – Artigos de Desporto, S.A., Lisbon, Portugal adidas Romania S.R.L., Bucharest, Romania adidas Serbia d.o.o., Belgrade, Serbia adidas Services Limited, Hong Kong, China adidas Singapore Pte. Ltd., Singapore, Singapore adidas Slovakia s.r.o., Bratislava, United Arab Emirates Slovak Republic adidas España S.A.U, Zaragoza, Spain adidas France S.a.r.l., Landersheim, France adidas Hellas A.E., Athens, Greece adidas Hong Kong Limited, Hong Kong, China adidas Imports & Exports Ltd., Cairo, Egypt adidas India Marketing Private Limited, New Delhi, India adidas Sourcing Limited, Hong Kong, China adidas Spor Malzemeleri Satis ve Pazarlama A.S., Istanbul, Turkey adidas sport gmbh, Cham, Switzerland adidas Sporting Goods Ltd., Cairo, Egypt adidas Sports (China) Co. Ltd., Suzhou, China adidas Suomi Oy, Helsinki, Finland 21 9 FINANCIAL CALENDAR C A FIN L E 2 017 A N N D A CIA R L MARCH 8 FU LL YEAR 2016 R ESULTS Press conference in Herzogenaurach, Germany / Press release / Conference call and webcast / Publication of 2016 Annual Report MARCH 14 I NVE STOR DAY Press release / Management presentations and webcast MAY 4 FI RST QUARTER 2017 RESULTS Press release / Conference call and webcast / MAY 16 DIVIDEND PAYMENT (Subject to Annual General Meeting approval) AUGUST 3 9 Publication of First Quarter Report Publication of First Half Report FIRST HALF 201 7 RESULTS Press release / Conference call and webcast / MAY 11 AN NUAL GENER AL MEETING Fuerth (Bavaria), Germany / NOVEMBER NINE MONTHS 2017 RESULTS Press release / Conference call and webcast / Webcast Publication of Nine Months Report 2 20 FIN A N CIA L ADIDAS AG Adi-Dassler-Str. 1 91074 Herzogenaurach Germany TEL + 49 (0) 91 32 84 - 0 FAX + 49 (0) 91 32 84 - 22 41 WWW.ADIDAS-GROUP.COM Investor Relations TEL + 49 (0) 91 32 84 - 29 20 FAX + 49 (0) 91 32 84 - 31 27 INVESTOR.RELATIONS@ADIDAS–GROUP.COM WWW.ADIDAS–GROUP.COM ⁄ INVESTORS adidas is a member of DIRK (German Investor Relations Association). This report is also available in German. For further publications, please see our corporate website or download our Investor Relations and Media App from the App Store. To improve readability, registered trademarks as well as references to rounding differences are omitted in this Annual Report. Concept and Design Strichpunkt — Stuttgart ⁄ Berlin ADIDAS AG Adi-Dassler-Str. 1 91074 Herzogenaurach Germany ©2017 adidas AG