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`Under Armour's (UA) CEO Kevin Plank on Q2 2015 Results Earnings Call Transcript | Seeking Alpha
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`Seeking Alpha“
`
`Under Armour's (UA) CEO Kevin Plank on Q2 2015
`Results Earnings Call Transcript
`
`Under Armour lnc. (NYSELJA)
`
`Q2 2015 Earnings Conference Call
`
`July 23, 2015 0830 AM ET
`
`Executives
`
`Torn Shaw Director, IR
`
`Kevin Plank Chairman & CEO
`
`Brad Dickerson C00 8. CFO
`
`Analysts
`
`Erinn Murphy Piper Jaffray
`
`Camilo Lyon Canaccord Genuity
`
`Scott Krasik Buckingham Research
`
`Omar Saad Evercore lS|
`
`Randy Konik
`
`Jefferies
`
`Operator
`
`Good day ladies and gentlemen and welcome to the Under Armour Second Quarter Earnings Webcast and Conference
`Call. At this time, all participants are in a listen only mode. Later, there we will conduct a question and answer session
`and instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference call is being
`recorded.
`
`I would now like to turn the conference over to Tom Shaw, Director of Investor Relations. Please go ahead sir.
`
`Tom Shaw
`
`Thanks and good morning to everyone joining us in today's second quarter conference call. During the course of this
`call, we'll be making projections or other forward looking statements regarding future events orthe future financial
`performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could
`cause actual events or results to differ materially. These risks and uncertainties are described in our press release and
`in the Risk Factors section of our filings with the SEC. The company assumes no obligation to update fonrvard looking
`statements to reflect events or circumstances after the date on which the statement is made orto reflect the
`occurrence of unanticipated events.
`
`In addition. as required by Regulation G, we need to make you aware that during the call we will reference certain non
`GAAP financial information specifically currency neutral net revenue growth, We provide a reconciliation of this non
`GAAP financial information in our earnings release a oopy of which is available on our Web site at www.uabiz.com.
`
`Joining us on today's call will be Kevin Plank, Chairman and CEO; followed by Brad Dickerson, our Chief Operating
`Officer and CFO. who will discuss the company's financial performance for the second quarter and provide an update
`to our 2015 outlook. After the prepared remarks, Kevin and Brad will be available for a Q&A session that will end at
`approximately 9:30 AM. Finally, a replay of this teleconference will be available at our Web site at approximately 11:00
`AM Eastern Time today.
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`Under Armour's (UA) CEO Kevin Plank on Q2 2015 Results Earnings Call Transcript | Seeking Alpha
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`I'll now turn it over to Kevin Plank.
`
`Kevin Plank
`
`I am calling in from Munich Germany where later today we're opening
`Thank you Tom and good morning to everyone.
`our newest international office from which we'll serve the markets in Germany, Austria and Switzerland. This is my last
`stop of a weeklong trip that has taken me to multiple cities including Glasgow, Copenhagen and now Munich. As we
`continue to grow our global footprint these trips continue to provide deeper insight into the markets and how consumers
`are thinking about our brand.
`
`My visit to Copenhagen reconfirmed and enhanced excitement around our recent Endomando acquisition and a huge
`opportunity that connected fitness provides UA with global consumers. With today's ribbon cutting in Munich, we will
`now have 17 regional offices outside the United states which are positioning the brand closer to local consumer and
`driving incredible execution we have seen in the past year, including 93% international net revenue growth just this past
`quarter. That strong growth outside the United States hetp drive total net revenues for the quarter up 29%, the 2‘lst
`consecutive quarter of 20 plus percent net revenue growth.
`
`In addition, total apparel net revenues grew by 23%, marking the 23rd consecutive quarter of 20 plus percent net
`revenue growth. We have traditionally referred to this as our scoreboard but based on my visit the St. Andrews earlier
`this week, maybe we should refer to it as a leader board. Either way, we continue to shoot consistently great numbers.
`As we prepare to enter our 20th year in the business of sports, we have learned a lot of valuable lessons, some of
`them have been learned through business, but just as many probably, have been learned through sports.
`
`Over the past year, three Under Armour athletes have transcended their sports and become known by just their first
`names, Stephan, Misty and Jordan. These three athletes have combined to teach us one incredibly valuable lesson
`that we need to think bigger, For Stephan Curry, Misty Copeland and Jordan Speith, being a great basketball player,
`principal Ballerina and PGA Golfer was rooted in their ability to see beyond to be prepared to not just be great but to
`be extraordinary, to plan and practice but also know when to take the risk. Our lessons out of this are incredibly
`relevant to this moment in time for the Under Armour brand.
`
`First, our athlete success pushes us to see beyond just maximizing the revenue opportunities in any given quarter.
`forces us to think clearly about what we need to do better and how we need to organize to be more than just an
`American sports brand to go from changing the way athletes dress to changing the way athletes live. Second, this
`intense brand key provides us with abundant opportunities to invest in businesses like basketball, women's and golf
`that will not only grow our share within those large categories but will also positively impact all of our business across
`both categories and geographies. So my two main topics today are how do we invest to capitalize on that momentum
`and how do we organize to think bigger about the opportunities in front of us today.
`
`It
`
`Thinking bigger is part of what drives the world's greatest athletes to outperform on the highest stage and it's hard to
`think of three individuals who have done more of that recently and Stephan, Misty and Jordan. And the best part is it
`just like UA they too arejust getting started.
`
`Stephan Curry, NBA League MVP World Champion recently voted best male athlete and best NBA player at the
`ESPYs and most importantly new father of a baby girl who one day might give her big sisters [rallies] and competition
`for the spotlight, a pretty good stretch for a great young man and tremendously rewarding for Under Armourto be part
`of his on court success. We're taking stepping on a tour of China and other markets in Asia starting late next month
`and frankly we believe he's just beginning to touch upon his potential both in the U.S. and other key basketball markets
`across the globe.
`
`Misty Copeland trailblazer, Prima Ballerina athlete named last month as the first female African American principle
`dancer with the American Ballet Theater, again tremendous pride on our behalf to be involved early in Misty’s meteoric
`rise by helping introduce her to an audience beyond the ballet world with last year's I Wiil What I Want campaign,
`
`Jordan Speith, when we signed him more than 2.5 years ago we told you to watch out forthis young man as we had a
`strong feeling he was going to turn into a huge asset for our golf business. It's amazing to all of us that in such a short
`time his has gone from being one of the names counted as the future of golf to being the story of golf, not just now but
`we believe well into the future. And while I'd be remised to not at least mention the great performances by other UA
`athletes this quarter not this year Andy Murray, Carry Price, Brice Harper, Todd Frazierthe Cincinnati Reds who last
`week won the Home Run Derby in front of his home crowd at the great American Ball Park.
`
`The recent accomplishments of Stephan, Misty and Jordan are somewhat overwhelming and heavily impactful. Their
`achievements these past few weeks represent a moment in time for the UnderArmour brand one that forces us to
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`reassess our opportunities and look deeper to understand what all the success means for us. There is of course the
`immediate benefit to our brand. This brand heat is driving huge amounts of incremental traffic to our ecommerce
`platform across the globe with our basketball traffic up more than 300% year over year while our social channels we
`added more followers on lnstagram during the recent NBA finals than we did in all of 2014.
`
`The Curry One Shoe was a great success with our ecommerce site as we continue to gain share in key footwear
`categories with our wholesale partners. Our women's business continues to grow strongly in key areas like caprice,
`shorts, sports bra and running footwear while our ecommerce golf business was exceptional growing about 60% year
`over year. But there is a bigger takeaway for our company and all of this, we've learned from these athletes not only
`about the preparation it takes the great but the added ievel of commitment it takes to be truly special. All three of
`these athletes started as clear underdogs, they were able to put themselves in a position where their skills and focus
`enable them to transcender sport. All of them have proven as Jordan Spieth stated following his masters victory when
`asked why he chose UnderArmour. That being aggressive, young and fearless can be a deadly combination.
`
`Our athlete's ability to see what was needed to be excellent forces us to think bigger. It requires we except there are
`moments in time where we need to acceterate to take advantage of the new opportunities our brand momentum
`creates. We understand our short term benefit this unprecedented momentum but we're focused on the long term. To
`us this moment provides a great chance to build a more meaningful connection with our consumer through the power
`of these transcended athletes. And that connection can be deeper and more powerful for our brand than any short term
`spike in our revenues or our earnings. Without question the brand equity we’re creating right now will benefit our
`business more significantly over the long term than it will simply just this year.
`
`Specifically in a large category like basketball we've had incredible success forthe Curry One footwear including some
`very hot selling limited releases. But that brand heat evidenced by the lines outside our brand house stores on release
`day gives us great confidence in the brand we're building with Stephen Curry and our strategy in bringing new product
`to market. It has motivated our footwear team and has given confidence to our retail partners about our expanding
`presence in the basketball category amongst the others particularly in the mall.
`
`We recently debuted a new shop and shop concept with Champs Sports called the ARMOURY which highlights not
`only the basketball category but a broader mix of product and innovation that the athletes have been historically unable
`to find from our brand in the mall. This is great evidence of the confidence we have in our product and the continued
`success we're seeing across our offerings with our key retail partners.
`
`And like basketball that same foundation and confidence is building in our Golf and women's businesses. We're stili
`developing a wide consumer audience in these three categories here in the U.S. and the opportunity for us in
`intemational market is abundant.
`
`The second element of thinking bigger lies in how we organize our business. And in this case thinking bigger means
`thinking smaller. Thinking in a way that enables us to be more surgical with how we reach our consumer and the
`experiences we provide them. To look at our end use consumer more discretely and with more disciplined, As the
`breadth of our product mix continues to expand we’re moving to a sports category focused organizational structure that
`will enable us to maintain our focus on the knees of that end use consumer. We recognized that a UA run consumer
`has different needs than UA basketball consumer. And we're now in a great position to harness the overall strength of
`our brand and innovation pipeline to ensure we're exceeding expectations for all of our consumers.
`
`To help drive this initiative we've recently brought on Terdema Ussery who for the past 18 years has served as
`President of the NBA's Dallas Mavericks and has prior industry experience in athletic footwear and apparel. We can
`speak to this in more depth at our Investor Day meeting at September but we want to be clear today about our intent.
`This category focus will provide the structure to help us sell more shirts and shoes. This structure has proven successful
`for us in Golf with the combination of great product; a great asset and a great team helped us double revenues in the
`past two years. This increased category will help us drive our core business, a critical component in our long term
`growth story.
`
`The last piece I want to cover today is our evolution from a brand that started by just making compression tees to one
`now focused on perfecting shirts and shoes as well as creating authentic and relevant sports and fitness experiences
`every time and everywhere our consumer interacts with our brand. We can do so because of the strength of our
`Connected Fitness platform, but we continue to add more than 100,000 unique registered users of a p|atfon'n every
`single day. We remained in the early stages of incumbent potential of what the world's largest digital health and fitness
`community with now over 140 million athletes can do to help us build consumer engagement and drive healthier
`lifestyles.
`
`We're growing our community at more than 30% year over year and so far in 2015 these users have voluntarily logged
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`over 1 billion workouts and more than 5 billion [foods] have been logged in to our apps. This level and detail of data
`will empower us to provide actionable insights back to our community that will help them lead a healthier lifestyle and
`we believe the brand equity that can provide us is immeasurable.
`
`Ultimately the more people exercise the more athletic footwear and apparel they will buy. Again we will provide deeper
`detail on our Connected Fitness opportunities in September at our Investor Day but we’re extremely pleased with the
`growth of our community and the type of insight we can bring to our consumers lives.
`
`So just before i hand it back to Brad i want to reiterate our commitment to grow. We have delivered 21 consecutive
`quarters of 20 plus percent revenue growth. We are growing in key areas like footwear, women’s and international and
`doing so while investing in new opportunities like Connected Fitness which we believe will be critical to our continued
`growth. And most importantly we have a capacity to adapt to change course and accelerate investments when the
`opportunity calls for it and to think bigger about what the Under Armour brand can eventually be. There is so many
`great things going on in Under Armour today which are difficult to fully articulate in a one hour conference call.
`
`I look forward to seeing all of you at our Investor Day in September at our Headquarters in Baltimore to further
`showcase the brand that we are building. We remain aggressive. young and fearless and I am excited to provide more
`color on how we're thinking and organizing to become the next great global brand.
`
`And with that, let me turn it overto Brad.
`
`Brad Dickerson
`
`I would now like spend some time discussing our second quarter results followed by our updated outlook
`Thanks Kevin.
`for 2015. Our net revenues for the second quarter of 2015 increased 29% to 784 million. On a currency neutral basis,
`net revenues increased 31% for the period.
`
`Within our product categories we grew apparel net revenues 23% to 515 million compared to 420 million in the prior
`year’s quarter. Many of the same growth drivers that drove our first quarter apparel business continued during the
`second quarter including our new Armour Base Layer, updated training products and expanded golf and hunting lines.
`Second quarter footwear net revenues increased 40% to 154 million from 110 million in the prior year. We continue to
`gain significant traction across multiple footwear categories most notably within the larger markets of running and
`basketball. SpeedForrn remains the key growth story for our brand where we introduced this innovation across a wider
`range of styles and categories this year. And as Kevin mentioned. we capitalized on the incredible success of Stephan
`Curry in basketball but new color wave quickly selling house during his MVP and championship run with the Warriors.
`
`Our accessories net revenues during the second quarter increased 39% to 83 million from 60 million last year, primarily
`driven by strong consumer demand for our line of bags. Our global direct to consumer net revenues increased 33% for
`the quarter, representing approximately 32% of net revenues. We continue to be encouraged with our recent brand
`house openings including the first full quarter of results for our Chicago and Mall of America stores as well as the new
`second quarter openings in Indianapolis and Orlando. From a global standpoint we ended the second quarter with 160
`owned stores including the 139 factory house stores and 21 brand house stores.
`
`Our ecommerce business had a standout quarter and we are seeing the return on our investment in mobile
`optimization across our expanding list of global sites. While ongoing focus on mobile is key we are also able to drive
`strong traffic gains through more effective email communications as well as by leveraging the incredible success of our
`athletes during the period.
`
`Looking at our regions, North American net revenues increased 22% to 681 million in the second quarter compared to
`558 million in the prior year's quarter. On a currency neutral basis, North America net revenues increased 23% based
`primarily on the drivers I highlighted forthe overall company. International net revenues increased 93% to 89 million in
`the second quarter representing 11% of total net revenues. On a currency neutral basis, international net revenues
`increased to 112% for the period. in the EMEA region, we continue to focus on the three core markets of the UK,
`Germany and France, while also developing distributor agreements in the region including the Middle East.
`
`In Asia Pacific, our partner store expansion and ecommerce growth in China remain key stories and we also benefited
`from the rollout of our distributor agreements in Southeast Asia. And in Latin America we are seeing balanced growth
`throughout the region following our market entry into many of these countries during 2014.
`
`Moving on to margins, second quarter gross margins contracted 80 basis point to 48.4% compared to 49.2% in the
`prior year's period. The following factors were the primary drivers during the quarter; first, as we previously outlined the
`continued strength of the U.S. dollar negatively impacted gross margins by approximately 60 basis points in the second
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`quarter versus the prior year; second, we incurred higher airfreight expense in the second quarter, primarily due to our
`efforts to normalize products flow from the West Coast port disruption and better service the back to school selling
`season which negatively impacted gross margins by approximately 50 basis points. Partially offsetting this margin
`pressure better margins in our factory house business combined with our higher margin Connected Fitness revenues
`benefited gross margins by approximately 20 basis points in the second quarter.
`
`Selling general administrative expenses as a percentage of net revenues deleveraged 80 basis points to 44.3% in the
`second quarter of 2015 from 43.5% in the prior year's period. As a reminder, starting last quarter in an effort to
`simplifying and streamline our conversation we consolidated our SG&A detail into two primary buckets, marketing and
`other SG&A. SG&A details for the second quarter are as follows; marketing cost decreased to 11.4% of net revenues
`for the quarterfrom 11.6% in the prior year period with modest leverage driven primarily by the strong net revenues
`during the second quarter.
`
`Our SG&A cost increased 32.9% of net revenues for the quarter from 31.9% in the prior year driven primarily by our
`Connected Fitness acquisitions and investments in our Brand House strategy. Operating income for the second quarter
`decreased 8% to 32 million compared to 35 in the prior year period. Interest and other expense in the second quarter
`increased to 4 million compared with the 1 million in the prior period primarily reflecting increased interest expense
`associated with the financing of our Connected Fitness acquisitions. Our second quarter tax rate of 46.7% was
`favorable to the 47.5% rate last year primarily due to certain tax planning strategies.
`
`Our second quarter net income decreased 17% to 15 million compared to 18 million in the prior year period. Our
`diluted earnings per share decreased to $0.07 from $0.08 in the prior year's period. On the balance sheet total cash
`and cash equivalents for the quarter decreased 43% to 171 million compared with 300 million at June 30, 2014.
`Inventory forthe quarter increased 26% to 837 million compared to 662 million at June 30, 2014. Total debt increased
`to 716 million as compared to 197 million at June 30, 2014 primarily reflecting the financing of our Connected Fitness
`acquisitions.
`
`Looking at our cash flows, our investment in capital expenditures was 91 million for the second quarter compared to 29
`million in the prior year's period driven primarily our investments in our SAP platform and our global retail strategy.
`
`Now moving on to our updated 2015 guidance. Based on current visibility we expect 2015 net revenues of
`approximately 3.84 billion representing growth of 25% and 2015 operating income in the range of 405 million to 408
`million, representing growth of 14% to 15%. We have long stated that we would be opportunistic with our investment
`levels if and when the right situations present themselves. in a period where we have seen unprecedented suocess
`from our athletes on a global stage we believe we have a unique opportunity to position ourselves more aggressively in
`key long term growth categories such as basketball and golf which we believe can create brand hallows across the
`Under Armour portfolio. As a result we expect to spend more than originally planned in marketing throughout the
`remainder of the year and this is the primary reason we're raising our full year net revenues guidance while maintaining
`the upper end of our previous operating income guidance. We believe this will better position our brand in delivering
`long term sustainable growth.
`
`As a reminder our operating income guidance includes the dilutive impact of the Connected Fitness acquisitions
`consisting of one time transaction cost in the first quarter, operating losses from these businesses and non cash
`amortization charges of the intangible assets generated from the acquisitions. Below operating results we continue to
`expect a full year effective tax rate of approximately 41% compared to 39.2% in the prior year, primarily given the
`strengthening of the US. dollar which continues to negatively impact our international profitability.
`
`Now I would also like to provide some additional color on several items, starting with revenues. We expect the growth
`rate in footwear to continue outpacing the growth rates for the overall business during the second half of the year.
`International growth is expected to ease from the growth rate achieved in the first half of 2015 as we begin the cycle
`for our entry into Latin America as well as new distributor partnerships launched during the second half of 2014. From
`a cadence standpoint we expect relatively consistent net revenue growth rates during the third quarter and fourth
`quarters.
`
`Now looking at growth margins. We continue to expect our full year growth margin to be roughly in line with last years
`49% rate. During the third quarter we continue to expect an approximate 50 basis points contraction primarily due to
`the negative impact of a stronger US. dollar.
`In SG&A we expect the combined impact of higher planned marketing
`spend I previously discussed and ongoing other SG&A expense pressure wiil result in similar year over year growth rate
`in the third quarter as experienced during the first half of the year.
`
`Finally a quick look at our planned capital expenditures. We continue to plan 2015 capital expenditures in the range of
`330 million to 340 million; consistent with our prior guidance approximately 140 miilion of this total is allocated across
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`three large areas to support long term growth including our new domestic distribution center, the expansion of our
`corporate headquarters in Baitimore and a new and expanded SAP platform. We've also accelerated our investments
`in key areas that will drive revenue growth and putting the rollouts of our global retail strategy and new ecommerce
`sites.
`
`We would now like to open the call for your questions. We ask that you limit your questions to two per person so we
`can get to as many of you as possible. Operator?
`
`Question and Answer Session
`
`Operator
`
`Thank you. [Operator Instructions]. And our first question comes from Erinn Murphy of Piper Jaffray. Your line is now
`open.
`
`Erinn Murphy
`
`I guess I was curious if you could talk a little bit more Kevin about the Connected Fitness fees. In the were book space
`broadlyjust continues to expand whether it's Fitbit or whether it's Nike you guys already have the largest platform
`globally. And how do you think about it maintaining that leadership position, driving engagement. And then what are
`those key metrics that you are focused on,
`is it unique user, is it a log out, or logged workout just how to think about
`kind of how you are thinking about this bigger picture?
`
`Kevin Plank
`
`I remember how I felt when I had this
`So, first of all we see this as a just a massive wide space and for me personally,
`idea for a T shirt or more importantly a piece of equipment to be worn underneath athletes uniforms or equipment, that
`in the past it always just been a short sleeve cotton t shirt or long sleeve
`or a long sleeve cotton t shirt depending on
`the weather. And it just felt like how come no one has done this before and for me personally is when we look at this
`opportunity to begin with it felt as if there's massive wide space in that no one
`no one in the world is measuring sort
`of an athlete's performance.
`
`And you start to see these things coming around whether its wearables and biometric measurement session we
`I
`dabbled in that all the way back to 2008. But we quickly came to realize the value for us was not going to be in
`think the equipment side of it but the value for us is going to be in the community. And we feel like we've really locked
`that up. The fact that consumers had no barometer for their health today is a mistake and it frankly that's where we
`see this massive opportunity. We feel that we're the best ones to take advantage of it, really because the acquisitions
`that we've made in the last two years. The sheer size and scale of the community that we've made, it marks us as the
`clear leader by a factor of as much as four, three or at least two times, now having more than 140 million unique
`registered users.
`
`As I mentioned in my script, adding more than a 100,000 users are downloading one of our four apps today.
`MapMyFitness, Endomondo, MyFitnessPal or Under Armour Record.
`
`And again from the stats of our {red} office, well I want to drive them home, so I think it's incredible. We logged more
`than 1 billion workouts for log into one of our four apps over the last
`just since beginning of the year. When the 5
`billion different foods have been logged as well. In giving scale MyFitnessPal which is the largest of the four apps that
`we have and as we continue to merge them, that voice will continue to oorne out as we articulated, but this is the
`world's largest database in the history of mankind of food.
`
`I mean just think about it for a second that we logged more than 5 billion foods that we know in over 80 countries,
`what people are eating and what they're putting in their body. So we now believe we got the ability to be relevant
`across all of our platforms and we're going to work and merge them in the consistent products that read to the daily
`dashboard, I mean ultimately that's where we are heading.
`
`If I can look on my cell phone and I
`We think that the consumer needs the dashboard which just says how am I doing.
`can figure out my bank balance, my stock price, so the weather in the given city, the fact that I've no measure of
`[biometric] for my health except we're going to see a doctor, it'll be 12 months to 18 months or 24 months we think is
`really a crime. So, we are identifying that issue for key plays that the consumers should be measuring themselves, the
`app really to measure themselves.
`
`Sleep, how much did I sleep last night, fitness, did I exercise or not and if so to what degree, daily activity which is
`typically like the steps, like how much am I moving around and then fourth and probably most importantly what am I
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`putting in my body, my nutrition. And we've thought a lot about this and I think one thing I really want to get across is
`sort of the way that we're thinking about to finding success. And we do believe that there needs to be a daily
`dashboard and so we'll
`you'll continue to see that articulate itself through the Under Armour Record platform and we
`got few many things coming for that, particularly we'iI showcase for you at Investor Day, but if you ask us to sum it
`up, we are looking for an engaged user community that relies on Under Armour and the Connected Fitness eco system
`we are building to help them measure these four central areas of sleep, fitness, daily activity and nutrition.
`
`And more importantly we want to empower people, this isn't just about knowing that I took 8.000 steps yesterday but
`because I took 8,000 steps how did that make me feel. And more importantly how did that work with how I slept or
`what I exercise or what I ate that next day. And we think that having that information is going to allow them to make
`better decisions to live healthier and enriched life,
`I mean affecting I think ultimately obviously fitness the way that
`work but we think there is the outlook for us to affect global health and that gets us so excited.
`
`And by doing this of course, we believe that Real Time is a company that focuses on selling shirts and shoes, we
`believe that we're going to create engagement with consumer to give them a reason to interact with our brand multiple
`times and I think all those things lead to this energy that you're feeling from us and frankly the resources that we've
`expanded over last couple of years position ourselves I think really uniquely and unlike any other brand, especially in
`our space but frankly anyone who's looking at biometric measurement for the athlete or for any end consumer.
`
`So, as I said this is going to be a big part of our focus that we'll have at our Investor Day in September and I
`encou