Levi Strauss & Co (LEVI) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome the Levi Strauss & Company fiscal year-end 2003 conference call. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or in part without written permission from the Company. I would now like to turn the call over to Linda Butler (ph) with Levi Strauss & Company's Worldwide Communications Department.

Thank you. Good afternoon and welcome to our conference call. I am pleased to introduce the Levi Strauss & Co. management team. With us here today are Phil Marineau, our President and CEO; Jim Fogarty, our Chief Financial Officer; Robert Hanson, President of the U.S. Levi's brand; Bobby Silton, President of the U.S. Dockers brand; Scott La Porta, President of the U.S. Levi Strauss Signature brand; and joining us from Singapore will be John Anderson, President of our Asia-Pacific business, who will also give us an update on our business in Europe, where he has been serving as interim president.

This call is being recorded and a replay will be available through March 31st by calling 800-642-1687 in the United States or Canada. From outside those countries, call 706-645-9291. For either number, please input the ID code of #154803. This conference call also is being broadcast over the Internet, and a replay of the webcast will be accessible at our website at www.levistrauss.com.

Before we begin, let me remind you that our discussion today may include forward-looking statements, including, in particular, statements about our plans, prospects, targets, and expectations. These statements are based on management's current data, assumptions, expectations, and projections about future events. These forward-looking statements are subject to risks and uncertainties. Those risks and uncertainties and other factors that could cause our actual results to differ materially from management's expectations are described in our annual report on Form 10-K, our registration statement, and our other filings with the Securities and Exchange Commission. Our actual results might differ materially from historical performance, current expectations, or these forward-looking statements because of the factors described in those filings or otherwise. In view of SEC regulation FD, we request and strongly encourage you to ask all of your questions during the Q&A portion of this call. Now I would like to turn the call over to Phil Marineau.

Thank you, Linda. Good afternoon, everyone. 2003 was a disappointing year. Our performance deteriorated as the year unfolded, particularly in the fourth quarter. For the year, sales declined almost 6 percent on a constant currency basis. Margins were squeezed and debt was up. Jim Fogarty will take you through all the numbers shortly. Let me start by giving you some context for our performance this year and what we're doing to improve it in 2004.

At the start of 2003, we expected to realize full year sales growth while maintaining strong margins. We had ended 2002 with good momentum, following two consecutive quarters of sales growth. We were preparing to launch a new brand for the mass channel and we were rolling out new products, including Levi's Type 1 jeans. In hindsight, our 2003 plans were not achievable. A number of negative external forces affected our business and they were compounded by our own missteps.

Externally, there were weak economies and soft retail conditions in many of our major markets. In the U.S. the men's apparel category was particularly weak, declining for the fifth year in a row. In Europe, severe market conditions and a stagnant retail environment in Germany, Italy, and the UK affected our business. Price deflation (ph) in the apparel industry was unrelenting. Consumers are demanding lower-priced products and retailers are trying to meet that demand. Out-the-door pricing, particularly in the United States, continued to decline in our major categories. Retailers in both the U.S. and Europe kept tight control of their inventories. The U.S. retailers were particularly cautious about an apparel market recovery. They kept (technical difficulty) less than we expected them to be during the fourth quarter, leading to the revised full-year guidance which we issued to you in mid-November.

Some of the steps we took to respond to these new pressures impacted our performance and our results. To be more competitive in the U.S., we did take wholesale price reductions and provided substantial incentives to drive sales and improve retailers' margins -- not to lower retail prices but to improve the retailers' margins. This put pressure on our own margins and revenues. We did sell slow-moving inventory at reduced prices in connection with product transitions and underperforming product lines. And not all our product were successful. In particular, Type 1 jeans in the U.S. underperformed. As we launched the Levi Strauss signature brand at Wal-Mart, our other retail customers were very cautious, concerned about possible cannibalization of the Levi's brand, and that affected sales. Yet we have not seen any significant cannibalization, and Scott La Porta will talk about that later.

In Europe, our business was very weak. Consumer preference has shifted to lower-priced products. Sales of 501 jeans declined. John Anderson, who has been serving as our interim president in Europe, will get into more details about our Europe business later on the call. I am pleased to say that we have hired a new president for Europe, Paul Mason. Paul is an outstanding executive with extensive retail industry experience and an exceptional track record of operational excellence. He led the development of strategies that fueled profitable growth for companies such as ASDA Wal-Mart in the UK and B&Q Kingfisher, a UK home improvement products company. Paul is a very seasoned general manager and he will be an outstanding partner in the continued transformation of our business.

We had some success in 2003. The launch of Levi Strauss Signature Brand for the mass channel has gone very well. The mass channel is the largest retail channel in the U.S. and sells more than 33 percent of all jeans. Entering this channel enables us to sell truly where people shop. We're seeing our consumer segmentation strategy take hold, with Signature product available at a lower price point for value-conscious consumers, and Levi's jeans meeting consumers' need at a wider range of price points, a much broader product line, and multiple channels of distribution. We've moved quickly to expand the distribution of the Signature brand; it's now available at Target stores in the U.S. It is in Canada, Japan, Australia, France, Germany, and the UK. Overall, I have been very pleased with the brand's performance, and Scott La Porta again will get into more detail about it.

We have also totally revamped our Levi's and Dockers products for men, women, and kids. We have two terrific lines of great-fitting and good-looking product in the market. Both Robert Hanson and Bobby Silton will discuss the performance of these brands and their product lines in greater detail. Also, a real bright spot this year has been our Asia Pacific Division. 2003 was their second consecutive year of sales growth. Their product lines, marketing programs, and presentation at retail have really come together and consumers are responding. John Anderson will tell you more about that on the call.

We have also taken and continue to take a number of actions to improve our competitiveness, reduce costs, take complexity out of our business, and make this a more responsive, market-driven organization. We have closed our remaining North American plants; we now outsource about 90 percent of our production worldwide. We have been restructuring our U.S. and European businesses and our worldwide supply chain, eliminating redundant work and leveraging our global scale. We are streamlining our go-to-market processes in both the U.S. and Europe to be faster and more responsive. We have made a great deal of progress in this area over the last few years, but we need to be even faster to market.

As most of you know, we obtained new financing this last fall, which has given us greater flexibility to implement these initiatives. And in December, we brought in Alvarez & Marsal to help us identify opportunities for cutting costs, growing revenue, increasing cash flow, and improving our performance. We're going through a rigorous analysis of all areas of the business with Alvarez & Marsal and Jim Fogerty will talk more about that effort.

Our fiscal 2004 year is underway. We expect sales for the first quarter to be approximately flat with the first quarter of 2003 on a constant currency basis, and up approximately 5 percent on a reported basis. In 2004, we are focused on four priorities. We have a realistic business plan in place that we are intent on achieving. Our goal is to generate higher profits and improve our sales trends. Secondly, we are continuing to implement the new go-to-market processes and new business model in the U.S., Europe, and across our worldwide supply chain. We need to ensure that these processes and organizations are fully operational and effective. We are starting to gain traction with this new model. We have a tighter linkage between merchandising and sales that is resulting in speedier response to problems, and importantly, quicker reaction to opportunities to increase sales.

Our third priority is to find additional cost savings and cash flow. Our work with Alvarez & Marsal will contribute greatly to this. Our final priority is to identify additional profitable growth opportunities to sell more than we have planned. We will be working very closely with our customers to find these opportunities, and as we look at the product lines that we have to offer and the marketing programs behind them, we believe that we can find opportunities of this nature. We have a lot of hard work ahead. We are taking it one month at a time and I think we will see some good progress this year. Now let me turn it over to Jim, who will walk you through the 2003 results.

Thanks, Phil, and good afternoon, everyone. First, we apologize for the call taking place at this late hour on the East Coast, but this was the timetable we were able to execute upon. As Phil indicated, 2003 was a tough year for Levi's. It was a tough year with regard to both weak operating results and financial reporting missteps. On the brighter side, we have sufficient liquidity in the business, and Phil and his management team are working collaboratively, together with Alvarez and Marsal, to drive important initiatives for the Company, which I will discuss later. In addition, we believe we are making solid steps forward in our financial reporting, which will hopefully become more apparent to you as you read our comprehensive, more disclosive (ph) and timely 10-K filing.

I will focus my remarks today on our full-year operating results. So now those operating results. At a consolidated level, 2003 net revenues were 4,091,000,000, compared to 4,146,000,000 in the prior year. Revenue declined 1 percent on a reported basis and declined 6 percent on a constant currency basis. Our weak revenues in the Americas and Europe were somewhat offset by the strong results we had in Asia Pacific. The Levi's and Dockers brands struggled in both the Americas and Europe, with that weakness somewhat offset by our rollout of Signature. As Phil mentioned, the key initiative for the future will be refocusing the core Levi's and Dockers merchandising assortments, which Robert and Bobby will speak to later.

Consolidated gross profit for the year was $1,574,000,000, or 38.5 percent of net revenues, compared to $1,690,000,000, or 40.8 percent of net revenues in the prior year. Gross profit dollars thus declined $116 million and gross margin rate declined 2.3 points. Our gross margin rate decline was due primarily to sales allowances and to wholesale price reductions taken in mid-2003 to be more competitive at retail, coupled with higher dilution associated with product which did not perform, primarily, as Phil mentioned, misfires with our youth focus. We expect our gross margin rate in 2004 will benefit from the closure of our final U.S. and Canadian manufacturing plants, somewhat offset by a full-year impact of the wholesale price reductions we took in mid-2003. Performance of our product at retail and management of our dilution will be key elements of our gross margin dollar and gross margin rate success.

Consolidated operating income for the year was 311 million, or 7.6 percent of revenue, compared to 253 million, or 6.1 percent of revenue in the prior year. Operating income thus increased 58 million and operating margin improved 1.5 points. It is important to note the following. First, operating income improvements were aided by both a reversal of long-term incentive plan liability of 139 million and a postretirement medical plan curtailment gain of 21 million. Excluding these items, operating income declined 102,000,000 to 151 million ,or 3.7 percent of net revenue.

Second, operating income includes restructuring charges net of reversals of $89 million, reflecting a recording of charges totaling $104 million associated with our final manufacturing plant closures in the U.S. and Canada, as well as the organizational changes in Europe and the U.S., somewhat offset by the reversal of $15 million in previously recorded restructuring charges. Third with respect operating income, the operating income includes restructuring-related expenses of $28 million, which are associated with our U.S. plant closures, but are not GAAP restructuring expenses. Fourth, operating income included depreciation and amortization of $64 million in 2003 and $71 million in 2002.

Consolidated interest expense for the year totaled $254 million, which compared to $186 million in the prior year, reflecting higher average debt levels coupled with a higher average interest rate. Tax expense for the year totaled $318 million, reflecting our recording of a valuation allowance of $282 million and other tax expense of $36 million. I will discuss the valuation allowance in a moment. Net loss for the year was $349 million, compared to net income of $7 million in the prior year, reflecting increased operating income, which was more than offset by the valuation allowance that we recorded, the restructuring charges we took, and the increases in interest expense I mentioned. So that is our consolidated results.

Before I delve into our results by segment, I want to explain a few important matters reflected in our financial reporting. First, our results reflect our reporting of that large valuation allowance of 282 million. As a quick deferred tax tutorial, and I am way oversimplifying, but a deferred tax asset falls into one of two main categories. First, it is an item for which we have taken a book tax expense, but we have not yet paid in cash, and thus can't deduct for tax purposes -- for example, postretirement medical benefits that we have expensed but we have not yet paid in cash. Or it can fall into another bucket, which is a carryforward of NOLs or other tax credits. In order for any of these items to have value in the future, we need to have taxable income to utilize them, so on to the issue.

In November, 2003, the Company issued revised financial guidance in which expectations were lowered for 2003. In January, 2004, we concluded that for purposes of valuing our deferred tax assets, we should take into account these recent developments, but assume no change from current performance levels. To this point, we have not assumed any improvements from the work being undertaken with Alvarez & Marsal. In short, we assumed flat business projections into the future and the $282 million valuation allowance was an outcome of that decision.

Second, our omnibus 10-K filing reflects restatements of our previously filed financial results. As an outgrowth of errors discovered in the 2001 financial statements associated with having taken a double deduction for losses related to various plant closures, we needed to reaudit 2001 and restate previously filed financials for the ten quarters and two fiscal years in the period Q1 2001 through Q2 2003. This tremendous effort has been completed and is reflected in our SEC filings today. As we lay out in our release, as a result of the restatement, opening 2001 equity was increased by $42 million. Earnings before tax for the period 2001 through Q2 2003 was reduced by $28 million. These net improvements to prior-period reporting totaled 14 million. When coupled with increases to tax expense in these periods, which totaled 109 million, the restatements produced a net reduction in our previously reported shareholders' equity of 95 million. The 109 million of incremental tax expense primarily reflects increases to the valuation allowance I discussed and tax effects of other adjustments and corrections, including the initial tax-related error that I discussed. The postmortem on these restatements is these restatements primarily reflect the tax items, adjustments to rent expense, and other mistakes in the timing of expense recognition associated with our taking a conservative approach to accruals, as opposed to more appropriately having utilized best estimates.

Thirdly, on the financial reporting front, while we believe our core controls are sound, we did receive a material weakness letter from our auditors. I have personally worked through such material weaknesses before, and my approach, our approach, is to recognize the weakness, develop a plan, and execute on the plan. As we reflect in our filings, we need to, number one, enhance through recruiting and training our skill sets in tax gap (ph) issues; and number 2, improve communication and integration between our controllership and tax functions of the Company. We have execution of this plan as a top priority.

Now into further detail on revenues and operating margin. First on the Americas segment. Our Americas 2003 revenues declined 3 percent to 2,606,000,000, compared to 2,693,000,000 in the year-ago period. The results reflected lower revenues in our U.S. Levi's and U.S. Dockers business, as we experienced lower unit volume coupled with the sales allowances and midyear wholesale price reductions. As Phil mentioned, with respect to U.S. Levi's and U.S. Dockers, we are refocusing our product assortments and our marketing initiatives to drive these businesses. We will reemphasize our focus on our core customer and product offering, our Levi's 501 jeans, as well as our Dockers original khaki, which Robert and Bobby will speak to later. The lower revenues from these core brands were somewhat offset by the launch of our Signature business. Our Signature business will grow further in '04 as we improve performance at retail and importantly have added Target to our distribution, and Scott will speak to that later. The Americas segment operating income decreased to 91 million, or 4 percent of net revenue, from $201 million, or 8 percent of net revenue, in the prior year. Operating profit thus declined $110 million, reflecting 3 percent lower revenue at lower gross margins due to the sales allowances and wholesale price reductions.

Next to our European segment. Our Europe 2003 revenues declined 4 percent to 1,054,000,000, compared to 1,093,000,000 in the year-ago period, which was an 18 percent decline on a constant currency basis. Our European business was impacted by a weak economic environment coupled with a glut of inventory in the market, due to actions we took to move closeout and slow-moving inventory and a heavier mix of lower-priced 580 jeans as opposed to our 501 genes. We have adjusted our approach to the European marketplace, which John will speak to later. Europe's segment operating income decreased to $84 (ph) million, or 8 percent of net revenue, from $173 million, or 16 percent of net revenue, in the prior year. Operating profit declined $89 million, reflecting 4 percent lower revenue and lower gross margins due to higher mix of less profitable 580 jeans and higher closeouts.

And finally to our Asia segment, our Asia-Pacific 2003 revenues increased 20 percent to 431 million, compared to 359 million in the year-ago period. This was an 11 percent increase on a constant currency basis. Our strength in Asia reflects the impact of new products and improved retail presentations. In particular, our business in Japan, which is approximately half of the segment, was propelled by new products, as well as the opening of additional franchise retail locations. John will speak to the Asia-Pacific marketplace later. Asia-Pacific segment operating income increased to 86 million, or 20 percent of net revenue, from 66 million, or 18 percent of net revenue, in the prior year. Thus, operating profit increased 20 million, reflecting this increase in revenue of 20 percent.

When we put it together, our consolidated operating income before corporate expenses totaled $261 million, or 6 percent of our net revenue, which compared to $440 million, or 11 percent of our net revenue, in the prior year. Our 2003 corporate expense was income of $49 million, reflecting leadership share income of $139 million, retiree medical plan curtailment of $21 million, or curtailment gain of $21 million, and other corporate expenses of $110 million. This compared to 2002 corporate expense, which was $187 million, reflecting leadership share expense of $70 million and other corporate expense of 117 million. Thus, excluding retiree medical curtailment and the leadership share impact, our core corporate expense declined year-over-year by $7 million. After we include these corporate expenses, our total consolidated operating income was 311 million, compared to 253 million in the prior year.

And now for the balance sheet. Our debts, net of cash, increased to 2,113,000,000, a $362 million increase from 1,751,000,000 in the year-ago period. This reflected the IRS tax payment that was made in Q1, 2003 of $110 million. It reflected payments to employees for incentive plans in Q1 2003 of approximately 100 million, and an inventory build of approximately 82 million. The inventory build reflects a 14 percent increase associated with slower turns and the impact of currency on our European inventory. Our average inventory turns deteriorated from approximately 3.9 turns at the end of fiscal '02 to approximately 3.3 turns at the end of fiscal '03, reflecting inventory build associated with the Signature rollout and slower turns from Levi's and Dockers in the Americas, Europe, and Asia. As I will discuss later, working capital focus, and in particular inventory focus, will be one of the key initiatives for 2004.

Now as to going forward, we will not be issuing formal guidance today, but rather in our 10-K filings, we have given you a sense of the current state of our business and of our liquidity requirements for 2004. We are expecting revenues in Q1 '04 to increase approximately 5 percent on a reported basis and be approximately flat on a constant currency basis versus the same period in 2003. Considering our performance over the last year, wherein on a constant currency basis, Q1 was down 11 percent, Q2 was down 4 percent, Q3 was up 3 percent, primarily reflecting the fixture fill of Signature, and Q4 was down 8 percent, with a full year down 6 percent. We are thus cautiously optimistic to be flat in Q1 2004. Our expected Q1 '04 revenue results reflect year-over-year improvement in Asia-Pacific and the continued rollout of our Signature brand. While our anticipated U.S. Levi's and European results reflect declines from last year, those results do reflect improvement versus recent trends we experienced in those businesses during 2003.

Now our liquidity. Our liquidity resources the end of Q1 '04 were $366 million, reflecting availability under our credit facility of 269 million and excess cash of 97 million. Sources of cash for us in 2004 include our earnings, improvements in our inventory turns, and our liquidity resources. Uses of cash include interest on our debt, payments associated with restructuring actions we have taken, pension funding, retiree medical funding, and capital expenditures which are currently planned at $40 million for 2004. In sum, as we called out in our 10-K, we believe we will have sufficient liquidity in 2004 to operate our business and to meet our cash requirements. We also believe we will maintain compliance with all of our covenants throughout 2004.

Finally, we are going through an intensive process with Phil and his management team and our initiatives include, number one, a productline rationalization review, with an eye toward pruning our merchandising assortments of underperformers and licensing out in areas where we do not find core competency or our ROI, return on investment, is not up to par. This rationalization process is also a key enabler for both our SG&A reduction and our working capital improvement processes. So our second project is a detailed SG&A cost center review. External in, one can observe that this Company does not benchmark well on SG&A as a percent of revenue. We are going through a process throughout the Company to review every cost center in the Company at both the corporate and brand level, with an eye toward a lean and efficient end-stage (ph) organization. The third project, working capital, we are seeking to drive quicker inventory turns into the organization through an accelerated exit from cut, make, trim, wherein we maintain raw material and WIP inventory ownership, and moving fast toward full package production. Second, rationalizing the product lines. Third, improving our planning processes, and fourth, faster go-to-market timetables, as Phil mentioned, will all drive quicker inventory turns in the organization.

Our fourth project is a business plan review, wherein we will execute an in-depth review of the Company's volume plans, margin plans, sourcing strategies, and advertising and promotion plans. This process is going quite well. We are working well with Phil and the management team, and we will be reporting together to the Levi's Board on our collaborative, collective conclusions and recommendations in mid-April, 2003. We expect to communicate all of this to you -- all of our action plans thereafter. Thus, with sufficient liquidity, the first quarter's improved revenue performance, and the initiatives we are driving together, cautious optimism is beginning to settle in. Having said that, the marketplace remains challenging and we have a lot of work to do. I would like to now turn the call over to Robert Hanson to highlight our initiatives within our U.S. Levi's business.

Thanks, Jim. Hello, everyone. As Phil and Jim have mentioned, we really expected 2003 to be a year of growth for the Levi's brand based on upgraded and new product initiatives, volume looks (ph) from more effective wholesale pricing strategies, and pretty solid end to 2002. However, the year was quite disappointing based on many factors. In addition to that market factors that both Phil and Jim have mentioned, and frankly, despite some successful selling of our upgraded core products, especially the jeans products, some key product marketing and operational weaknesses led to our weak 2003 performance.

If we look product, we were successful in our work to upgrade our core jeans offer, but our fashion innovations and our tops programs really did not work. If you look at this especially, our primary innovation, Levi's Type 1 jeans, did not create strong demand in the United States. Similarly, our first-half marketing for Levi's Type 1 genes did not create significant demand for our jeans products beyond Type 1. It just did not create significant demand.

Operationally, our long go-to-market cycle time prevented us from exiting the weaker fashion programs that Phil mentioned quickly and profitability; so we had a bit of a hangover there in those businesses. Our customers were also relatively conservative in their inventory investment with Levi's, due both to the weak economy as well, as Phil mentioned, their caution about the launch of the Signature brand in the mass channel. As a result of that, we really didn't see the sales increases we should have seen, even though we have provided significant margin improvement for our customers.

Though it was a disappointing year, our core continuing strategies did show some signs of success, and these are the strategies that we will be carrying into 2004. In looking at those, if we start with product, we did see increases in our core genes sell-through despite the lower inventory strategies of our customers. As Phil has mentioned in past calls, we have upgraded 100 percent of our jeans' fit, fabric, and finish offer. This led to back half sell-through increases in 2003 ranging from between 10 and 40 percent in our young men's and all of our women's business segments, and it also showed some signs of stabilizing our core men's jeans business. Our back half marketing was more broadly appealing and helped to drive the sales results that I just mentioned. Our key customer relationships have improved based on our improved product offering, a slightly more responsive go-to-market and our work to improve their margins. Critically, and very important for us, they did not see their Levi's business cannibalized by the launch of the Signature brand. They expected it to be cannibalized. They planned their inventories as such, and as a result, we didn't see the expected sales lift that we should have in the back half of the year.

As we turn to 2004, we believe we have corrected the fashion, marketing and operational mistakes that we faced in 2003 and are encouraged by the solid start that both Phil and Jim have mentioned already in the call.

This year, my team and I are going to focus on five strategic priorities. The first is we will be driving a sharp focus on increasing the sales and profits of our core jeans business. Secondly, we will be implementing a strategic retail or promotional plan. Thirdly, we will work to create broadly appealing and demand-driving marketing programs. Fourthly, we will work to aggressively help our customers make it easier to find and buy Levi's jeans in their doors. And finally, we will work to improve our operational controls, our market responsiveness, and profitability. All of that will be accomplished by implementing a shorter go-to-market cycle, a more streamlined and cost-effective organization, where the team will work more effectively together.

If I dig into the first priority, that must remain being focused on developing, selling, and marketing the best portfolio of jeans in the marketplace. And we will do that by focusing the organization really on selling (indiscernible) across all segments, both our premium sub brands, like Premium Red Tab jeans, Silver Tab, as well as our core Red Tab jeans business. As Jim mentioned, by eliminating the fashion products that didn't work from our portfolio and were not extremely profitable for us, we are even more focused on selling both market-leading and highly commercial jeans assortments by customer, and importantly, down to the door on the fixture level.

Our performance from late '03 to now gives us that cautious optimism that Jim mentioned that this will work. If we look at it slightly more deeply, in men's, we have been experiencing some positive sales trends with our original 501 jeans product, and our young men's low-rise, loose, boot cut, and work (indiscernible) programs are all working as well. In women's, we have been driving double-digit sell-through increases in our low-rise, stretch, boot cut, and flare programs. These are all core programs for us, and are a part of that strategy, the first area of focus I mentioned earlier. We will also continue to test and roll out new innovations like our successful new 559 relaxed straight fit with stain defender. Importantly, these new innovations we're testing and piloting in some of our key customers as well as our own stores before we roll them out broadly.

To keep this razor sharp focus on our profitable jeans business, as Jim has mentioned, we have decided to license our remaining girls and the boys 4 to 7 (ph) businesses, as well as our men's and women's tops businesses. These are not core competencies for the Company and we feel we can more successfully grow the profit of those businesses by working with licensees. Again, this will enable us to drive even more focus on our core jeans business while also creating a foundation for future growth in license categories.

Our second priority has been to implement a strategic customer promotional plan that ensures that the Levi's brand is more effectively and more profitably promoted during peak selling periods. It has been very well-received by our customers as we have introduced it in January. Our third focus area is on creating and executing a broadly appealing and demand-driving marketing program. This is perhaps the weakest area of our performance in 2003, and so we are focusing on it quite aggressively. In broadcast media, the campaign that we will be running will feature our original 501 jean product as well as our 569 loose straight jean. And in print media, we will be communicating our market-leading range of fits and styles. The campaign really is intended to remind our loyal consumers why they love Levi's and it's their favorite jean, but also to communicate to new users that we have a style for them. This work will launch in April, but it expands quite aggressively in our peak back half selling period.

Our fourth priority is to make it easier to find Levi's and buy Levi's jeans at retail. In our own stores, we have been able to drive comp store sales increases 16 of the last 17 months by clearly displaying this Levi's market-leading range of fit, fabric, and finishes. It is important for us to leverage this success straight into our wholesale customers, so we will be implementing this display system along with improved packaging with all of our top customers prior to the back-to-school selling season this year.

Finally, we will fully execute our new 7.5 month go-to-market cycle. We will also have the capability to quick respond in 5- and 3-month cycles, as well as our new Levi's brand business unit structure. The shorter go-to-market cycle will help us be more market responsive by having design, merchandising, marketing, retail, selling and planning all integrated into a single operating unit. We will have tighter operational control of the business. We will also be able to better assortment plan, again, down to the customer level and, importantly, all the way down to the door and to the fixture level.

So we feel like we have the right strategies to maintain Levi's significant share lead in the men's segment, as well as to drive share growth in the women's segment. So wrapping up here, by focusing on our core jeans business, by driving improved promotional marketing and display programs, by shortening the go-to-market cycle and implementing a more integrative and cost-efficient operational structure, we are, as Jim mentioned, cautiously optimistic about our prospects in 2004. With that, I would like to turn it over to Bobbi Silton, the president of the Dockers brand in the United States.

Overall, as Jim pointed out, our net sales declined in 2003. Phil also reviewed many of the environmental issues that impacted our business, such as price deflation, the increased strength of private-label category decline, and a conservative approach to inventory by our retailers. In addition to these challenges, for Holiday 2003, we reduced our TV rate significantly. This was based on the fact that we had very strong equity scores with consumers and believed we could sustain our business despite the media cut. Instead, we experienced a significant decline in sales during a key holiday time period.

Despite these challenges in 2003, we were able to keep consumer takeaway flat and maintain market share. And in fact, in the chain stores, we were able to actually grow our share by 2 percentage points in the men's area. In addition, the Dockers brand continues to be the dominant leader in men's pants, earning the category's strongest consumer equity scores by bringing consumer relevant innovation to the marketplace.

Now what I would like to do is talk about what we are going to do to strengthen our business in 2004 in this challenging marketplace. This year, we are going to continue to deliver consumer relevant innovation and we will refocus our marketing effort. We followed up on our successful launch of the Go Khaki with stain defender in fall 2002 with the spring 2003 introduction of individual-fit waistbands on our largest volume product, the original khakis. This technology is a proprietary technology that is only with Dockers in casual pants in the U.S., and what it allows us to do is take a product like 100 percent cotton waistband, and it allows it to stretch at least one inch to give consumers superior comfort. This will continue to be an important program for us as we go into 2004.

Another product innovation that we introduced in late 2003 was the ProStyle pants, which is a dress casual pant that offers consumers a number of performance benefits, such as wrinkle defiance, stretch comfort fabric, color bond to maintain color after multiple washes, stain offender, as well as an invisible stretch waistband. We are setting a new standard in the category by bundling multiple performance innovations in one product. ProStyles will also allow our retailers to command a higher average unit selling price in order to fight the deflation that we have discussed is going on in that category. We are increasing our production for this product based on retail orders and have exceeded our expectations and expect ProStyle to be a core program for 2004.

During 2004, Dockers will also be focusing on giving consumers an integrated offering of tops, bottoms and accessories. It's what we're calling wardrobe solutions. This is driven by our consumers' desire to buy more than just pants and our desire to grow beyond pants and win more of the consumer's closet. This new approach also allows our licensees to take full advantage of the power of the Dockers brand.

Let me turn to our women's range. This represents about 22 percent of our business, and we introduced also performance innovation to women's in 2003. We launched the Go Khaki with stain defender and the Metro pant with the individual-fit waistband. In 2003, we also decided to license our women's tops business to Kellwood and will deliver a product for a fall '04 launch as we rationalize our line. We believe that this move is the best way to quickly build our women's tops business and improve the long-term health and growth of our entire women's business. In addition to the women's tops license, the Dockers brand has a robust portfolio of licensees. In 2003, we added Dockers Home to our collection of licensed products, which included our successful launch of bedding with American Pacific. We also launched our licensed kids' business in fall 2003 with Haddad, who is recognized as one of the apparel industry's top-branded youthwear companies.

On the marketing front in 2004, we expect our TV levels to drive renewed interest in our brand and the category as we launch a new campaign this month. In 2004, we will also grow our men's shirts business. We will expand Dockers Home with our licensees, and will also introducing new core pants strategy in our women's business that is focused on fit. We are going to have a modest national campaign that supports this launch.

In conclusion, we expect the challenging year ahead of us to continue due to marketplace conditions, but we also believe that the Dockers brand will remain the leader as we continue to bring consumer relevant innovation to the marketplace. We will also deliver marketing that focuses on innovation and drives interest in the brand and the category. And finally, we will establish our wardrobe solutions strategy that creates a platform for future growth. Now I would like to turn the call over to Scott La Porta, President of the Levi Strauss Signature brand.

Good afternoon. I am excited to report today that Signature is off to a strong start. We successfully launched into 3000 Wal-Mart stores for back-to-school in 2003 in all consumer segments, as Signature is designed for the entire family, as reflected by our balanced sell-through to the consumer across men's, women's, and kids. Throughout the fall, after back-to-school, our average weekly rates of sale improved steadily, as awareness increased with the consumer and we achieved best-in-category positioning. And that is without cannibalizing our Red Tab Levi's product. We know this because we monitor sales closely by store in the marketplace. That means the Signature volume was incremental business for our Company.

Marketing efforts in 2003 focused primarily on in-store point-of-sale and supporting signage. Secondly, we used Internet efforts anchored on levistrausssignature.com, and third, some presence in publicity efforts to drive awareness and purchase. Most importantly, our product is resonating with the consumer. For instance, our young men's loose-fit jeans made D&R's (ph) Top 10 hottest fashion items for 20-something guys this past fall. From a product strategy standpoint, we leverage our Company's expertise and then use finishing and styling details to create the Signature look, as we bring Ellis and Co. (ph) quality craftsmanship with trend-right style to the value conscious consumer.

Moving to pricing, we have established a tiered, wholesale and SRP pricing strategy that differentiates core from trend core. You might have noticed that this differentiated pricing strategy was implemented for the holiday season, as Wal-Mart reset their retail price just below $20 for our core men's regular fit and relaxed fit jeans, and our misses relaxed fit jeans. I can tell you that the volume lift funded the cost of the price reductions on those three core products for us, and we still do not see any cannibalization of the Red Tab product. Speaking of the holiday season, we launched our second account, Target, as we shipped men's and young men's product in November for an early on-floor. And then we shipped Missy, juniors, and kids in early December for a late December on-floor. Most importantly, our average weekly rates of sale continued accelerating.

Moving into 2004, during the first quarter, we have been focusing on driving awareness of Signature against mass channel consumers through grass-roots vehicles like our recently-announced sponsorship of Jimmy Johnson, a rising NASCAR star and fan favorite. Secondly, we are sharpening our point-of-sale execution in collaboration with our retail partners so that consumers can more easily find our product. Third, we are closely studying our launch performance so that we can refine and grow our line profitably for our retail partners and ourselves.

In conclusion, we firmly believe that we have launched a differentiated brand that drives incremental volume and profits for the Company and this strategy has tremendous growth potential. Now I will turn it over to John Anderson, President of Asia-Pacific.

Good afternoon, everybody. First of all, I would like to talk to you about Europe. As both Phil and Jim mentioned, 2003 a very difficult year, further exacerbated by the economic and retail environment. What I would like to focus on, though, is what we did to start to turn this business around. Jim mentioned that we had issues with our core 501 products. When you (ph) produce new, cheaper products, it turned out not to be incremental in terms of volume. Therefore, we shifted our focus in the back half of the half of the year to concentrate more on profit than on volume.

At the same time, we made significant changes to the leadership team we had in Europe. We have introduced a new VP of Finance, new VP of Sales, and I stepped into the organization in an interim role in September. You have heard from Phil that Paul Mason will starting, in fact this week, to take on the full-time leadership of the European business. So we put a new leadership team in place. We started to focus on profit rather than volume.

Just as importantly, we moved to a new business model. We started to focus more on a market-by-market approach rather than the very centralized approach we had had in the last two years. At the same time, we did some serious restructuring to the organization and right-sized the organization to reflect the smaller business size we are today. We have gone back to rebuild the basic blocks of developing better product, move faster, and a lower cost. We have implemented a new brand architecture, focusing on the premium and superpremium segment of the market, the areas where the brand is the strongest, the areas where the retailers expect us to be. The results of these changes that we moved very quickly on in the back half of 2003 was for the last three months, we have started to stabilize the business. So while 2003 was difficult, we certainly put a lot of initiatives in place to start to improve the business.

So let's talk about the impact of that as we look at 2004. That momentum I talked about in 2003 has continued through the first quarter of 2004, and in fact, the results are ahead of our expectations. Just recently, we have also introduced the Signature brand into Europe and we are launching into the UK, France, and Germany. Those products went on the shelf end of January, early February. Early days, but the results are encouraging. For the Levi's brand, we've gone back to the roots of what we are all about with our 501 products, and we have come out with a fully-integrated television campaign supporting 501. This started on air two weeks ago. It's the first time we have advertised 501 since the late '90s.

We are now focusing more on profitable distribution. That means the productivity of existing accounts, opening up more relevant new accounts, and closing unprofitable doors. As I mentioned, our plan architecture has now been changed to focus more on the premium and superpremium segments for both men and women. The retail format we have in our franchise stores is the same format we've had for the last three years, and we're now going to move to an upgraded retail format. We will finalize that in the next two months and will start to roll that out towards the second half of the year. At the same time, we have focused more on our COGS reduction through more flexible sourcing, starting to move more of our sourcing towards Asia; and we're also looking to reduce our costs through a more efficient go-to-market process and get our go-to-market time down from 12 months to the 7.5 months that Robert talked about. We are continuing the implementation of this market-by-market business model, and basically what that is all about is getting closer to our customers and closer to our consumers, looking at profitability country by country, account by account, door by door. Phil mentioned, as I just did, that Paul Mason, the new President, will start today.

In summary, we have four clear strategies that we are focusing on in Europe. These we started in the back half of last year and will continue through this year. It's all about getting control -- build the basics back into the business. We're focusing on equity, not just on volume, but on having great products that consumers aspire to, good distribution, all wrapped up with world-class communication. Our go-to-market process has got to be quicker, cheaper, and more flexible. And as I stated, we have a market by market business model.

Our strategies are working. They have only been in place for the last six months, but we are encouraged by the business results. We believe we now have the right strategies; we just have to stay committed and focused on executing them. So while Europe was difficult last year, early results this year are encouraging. We have the right strategies. We now have the right people. We now have the right leader in place. So we feel as though we can deliver on our commitments in 2004.

So let's now have a look at the Asia-Pacific division. 2003 was another very strong year -- 20 percent revenue growth versus prior year, the second consecutive year of double-digit revenue growth. A lot of this is being driven by we have a very strong, experienced management team that's been in place over the last three years. We have locals running the business; they know the business; they know their market; so we are getting the benefit of a stable, experienced management team. Their strong results are also driven by focus on product innovation. Levi's Engineered, Type 1 jeans, regular jeans, which is a premium jean offering for men and women, and our broad range of tops have all been very successful for us. We have continued our emphasis on women's by constantly bringing out new fits and finishes. We have a successful OLS franchise model. We have over 285 stores in Asia, and we continue to roll those out. The other source of our growth in 2003 was through licensing of accessories, bags, wallets, and footwear, so we can offer a total product concept -- lifestyle concept at retail.

Just as importantly, while Japan is a strong driver of our business, their results were more broad-spread than just Japan. We have 14 countries in Asia, and all of those contributed despite the economic challenges I am sure you're all aware of and the significant impact of SARS we had during the year. In Asia, our brand is number one in both men's and women's in all countries. We have continued to focus on lowering our COGS and lowering our costs in terms of moving to better, faster, cheaper sourcing and constantly focusing on the bottom line. In Q4 in Asia-Pacific, we successfully launched the Signature brand in Japan and Australia. So in Asia we now have a brand portfolio which includes Levi's, Dockers, and Signature brands.

Looking into 2004, once again a very strong start through the fourth quarter and we continue to experience double-digit growth, again, over prior year in revenue. While we have also made a decision this year to capitalize on the APD proven track record of growing small businesses and the decentralized affiliate model we have, additional countries will be added to the Asia-Pacific region in 2004. These will include Turkey, South Africa, Middle East, Brazil, and Latin America. This will do two things. It will allow us in Europe to be more focused on our bigger markets, and it will also allow these potential markets for the future to get some attention from the Asian team. I hasten to add the this will be incremental growth on top of the continued growth we have through our Asian-Pacific countries.

We will continue in 2004 in Asia-Pacific to focus on product innovation, particularly in women's, and the superpremium segment for men's and women's. We will be advertising 501, as Europe is doing, and we will also be advertising our women's product. We will continue to growth of our (indiscernible) channel, increasing that to over 300 doors. Our future megamarkets, the markets of India and China, potentially the two biggest countries in the world, continue to experience strong growth, so we're setting the base for the long-term future. Our overall strategies will remain focused on profitable growth. That has been the success in the past and that what we will ensure happens in the future. Asia-Pacific is also off to a good start for 2004 and we feel positive and encouraged about delivering on our commitments also in Asia-Pacific. So with that, I will handed over to Phil.

Thank you, John. So that is the report on our 10-K and fourth quarter and our outlook for 2004. We will be happy to answer any questions at this time.

Thank you. (OPERATOR INSTRUCTIONS) Amaranth Advisors.

It's Robin Russell from Amaranth Advisors. Two questions. First question -- and I apologize; we did not get too much time to go through the 10-K, but first question is, the U.S. sales number I guess was 2.6 billion in 2003. How much of that was the Signature brand?

We don't disclose the details within the Americas segment. We do, though, if you look in the forepart of the document, earlier on in the document, you will see a general frameup of how much each of the brands represents worldwide.

So then generally what does the Signature brand in '03 contribute?

About 200 million.

About 200 million. So then my next question was -- what I was trying to do is, particularly on the U.S. side, is understand how much of the decline in gross profit margin was from just lower margin Signature versus sales allowance, but since it was only about 200 million, it seems like it's the latter.

In the U.S., the gross margin was affected by two things. One, a wholesale price reduction on both the Levi's and Dockers brands, which was aimed at achieving a natural gross margin for our retailer which is competitive within - and what they are looking for relative to the categories that we are in. And then the second was higher what we call returns on allowances -- budgets, driven by the product transitions of the product line overhauls, as well as some of the product that did not sell in the marketplace. Those are the two driving forces in the margin. And as we look forward, we believe we have hit the right wholesale price targets now within the context of the categories that we compete, and while there are always pressures for returns on allowances from retailers, we believe the new process that we have and the new focus on a core assortment will reduce that as well.

Okay. And then with regard to the inventory number at year-end, it was 680 million versus 598 million last year. The $82 million increase, obviously, I know you had to build inventories to gear up for the rollout of the Signature, but how much of that was Signature versus some of the other issues that --?

We don't disclose that detail. But suffice it to say that the Signature turns were much lower than our average turns because we had inventory on hand to fund, if you will, the rollout of Signature. So we expect that to correct for us over the 2004 year.

So by the end of 2004, you would expect that to be sort of normalized?

We expect that to normalize and we frankly expect to, through our initiatives, get the turn up (ph) generally up higher than it is at the end of '03.

And then just a last question. You mentioned your liquidity and I think you through out a $90 million or other cash number. And when I quickly looked at the cash number in the balance sheet, it was over 200 million. What is the difference there?

The cash number -- the total liquidity resources that we have is $366 million, and that includes $96 million of what we call excess cash. So the cash number you would look at on our balance sheet would include both cash that is in the operations; and when we look at our total liquidity resources, we just focus on the cash that we can touch at any instant -- in other words, the excess cash in an overnight investment account in the business.

Okay, and has that cash balance changed significantly from the November year-end to today?

That excess cash balance has not changed significantly.

Okay, thank you.

Banc of America Securities.

Kathy Brady (ph) from Banc of America Securities. Jim, I wanted to see if you could comment on where you are in the Alvarez and Marsal analysis. Specifically, are there any key positives or negatives to the business plan (indiscernible)?

What we're going to do on that is we have a set of processes that we are underway with Phil and the team here, and we're going to report into the Board mid-April on those outcomes. But there's lots of good opportunity here as we work through SG&A, working capital initiatives, productline rationalization, that we are all very focused on getting at together. But we're not going to give you an interim report card on that. We owe the report card into the Board first and then we would be able to report it out externally.

Okay. And I think you had commented that you'd be reporting to the Board in April and then to follow with the street, so I take it that we would hear from you sometime in April?

So we would report it to the Board in mid-April and sometime then mid- to late-April we would communicate externally.

Great. And then also looking at the sales at JC Penney's, as highlighted in the 10-K, it appears that the sales there were down slightly. Can you comment, was that due to them holding back the purchases on cannibalization or was it a loss of share due to Arizona and other private labels?

In general, what we saw last year in JC Penney was a substantial reduction in inventory, which affected our sales. In the fourth quarter of last year, we lost share to the private-label brands on Levi's and Dockers, because they were aggressively priced and promoted more heavily than the Levi's and Dockers brand. Over the course of the year, that was not the case, but in the fourth quarter it was. Over the course of the year, there was an inventory reduction on JC Penney's part.

And you found in the fourth quarter they were promoting more than -- ?

I can't hear you. I'm sorry.

And in the fourth quarter, you found that they were promoting more of their own private-label?

Yes.

Thirdly, I don't know if you can comment on any rumors that were circulating in some trade mags regarding the sale of Dockers?

On that rumor, as a company, we always looking opportunities for divestiture. There is nothing in particular in place today, but we always look at opportunities for divestiture relative to the right values, and we would over time look at acquisition opportunities as well.

Okay, so you have not retained anyone to help you with that at this time?

No, we have not.

J.P. Morgan.

Carla Casella from J.P. Morgan. Calling on -- you're probably still working through some of this, but I'm curious if you could give us an idea of where you're sourcing product from currently, now that you have closed most of the manufacturing -- meaning how much is coming from Asia versus India, Latin America, any other key countries. And then also where you think that plan could go over the next two years?

We haven't called out by country, but as Phil mentioned, we are looking externally to be sourcing about 90 percent of our needs in 2004 externally versus internal manufacturing. I would point you to Page 10 in the 10-K where we break down the amount of package production we're sourcing today and the amount of self-manufacture we have left in the business. And we report how that changed from 2002 to 2003, and you'll see in our discussion there that go-forward into 2004, now with the closure of our U.S. manufacturing plants, the self-manufacture component will drop further and we will also increase substantially our utilization of package manufacturing.

How much flexibility do you have to choose from where exactly you are getting product? I'm curious because of the quota changes were expecting maybe at the end of this year at the earliest.

I think we have a very nimble global sourcing group that is -- we have capacity around the world that we are able to tap and move our volumes around the world. So I think we, like other large apparel companies, will be there for those opportunities.

One other thing -- on licensing, can you quantify how much of the sales in 2003 was product that will be licensed in 2004? I guess the sales will transition from a total sales dollars to a license revenue?

This is Robert Hanson. I will respond on Levi's. It is an insignificant amount of our total sales. The businesses that we are licensing are actually the businesses that Jim referenced in his product range rationalization -- our men's and women's tops businesses, which were collectively less than 1.5 million units for us on our total turnover; and our growth businesses, which frankly, we are just in the couple hundred thousand units. The biggest business that we are looking at licensing is frankly the boys’ 4 to 7 business. That business is less than around a $15 million business for us at this point in time. The thing we see with these licensing decisions, frankly, is to reduce complexity and dramatically improve the profit potential of those businesses in the long-term.

On the kids' side, we are going to be working with Haddad in New York, the licensee that Bobbi mentioned in her comments. And we are in the process of currently looking for a men's top licensee. All of our customers have indicated that with the right partner, they think we can dramatically grow those businesses because we will be working with experts in those categories.

Then on the Dockers side, licensing of the women's tops business is a very small percentage of our business; it was also a low margin business. So exiting that business should not have any substantial impact to the bottom line.

Okay, great. One last question. I didn't get all the way through the 10-K. Did you mention how much you were going to need to spend on pension in '04?

Yes, we do call that out in the liquidity section of the document. We called out on pension a funding of about $20 million to our underfunded pension plan, so it's $20 million in 2004.

Great, thank you.

Imperial Capital.

This is Mary Gilbert calling from Imperial Capital. Could you talk about the logistics for all of the business and also for Signature, where are you in being able to fulfill on a timely basis? I guess this is the whole go-to-market? Where are you in that process? And were there some issues with that in '03 that we could have some improvement this year that could add to profitability?

We fixture-filled all the Wal-Mart and Target stores without a hitch. And in general, over the course of the last three years, our ability to replenish product reliably and completely fill orders has improved dramatically. As we have moved over the course of this first quarter to a worldwide supply chain and changed our go-to-market processes, we have had a couple of hiccups in that process in the first quarter that we are in the process of fixing. But in general, our goal is to be in the 90 percent replenishment range and to be able to fill orders completely and on time. Our track record has been good on that. We've had a couple of missteps as we've gone through this major change in the first quarter, but we're fixing it rapidly.

Okay. And is there going to be a cost in the first quarter associated with that?

No. We have planned all our -- what I would call returns in allowances that gross to net reductions appropriately and there is no major charge associated with having a couple of supply chain hiccups.

Okay. And also, with regard to the working capital opportunities, I sort of got the impression that there was an opportunity to reduce inventories. And then if you take into consideration the rollout in Wal-Mart and in Europe, after offsetting that, do you expect working capital to be a source of cash in 2004?

If you look at our inventory turns, they are low 3s. And we think as we move towards a fully-packaged operation, we have a good inventory turn and a good possibility to improve our inventory turns. On Wal-Mart and the rollout of Signature, much of the inventory again was already in place at the end of 2003. It was actually -- those were slower turning -- the Signature business was slower turning at the end of '03. So I think as we said earlier, by the end of '04, the Signature business will have been rolled out and that will also be turning faster for us.

That, coupled with a rest of the businesses beginning to turn faster as we, again, get out of manufacturing, get out of as well, we have this other aspect of our procurement which is in a cut, make, trim status, wherein we still have raw material and WIP ownership. We are seeking to get out -- as we call it in the 10-K -- to get out of that operation by the end of the second quarter of this year, and that also frees up the capital dollars we have tied up in that raw and WIP inventory. So those few things, as well as better planning, we expect to increase our inventory velocity by the end of '04 and take care of the new business, Signature.

How much do you have tied up right now on that cut made?

If you look the face of the balance sheet, worldwide, there is about 90 million and some small -- a portion of that is associated with pieces we can get out in of the Americas. In Europe, we still have manufacturing plant where we would still have broad WID ownership. But some proportion of that $90 million would get freed up as we leave the cut, make, trim operation.

What percent of that?

I would say approximately half of that is currently tied up in cut made trim in the Americas.

Okay. And what percent -- because I haven't gone through the 10-K -- it just came out -- but what percent are you doing on a full package basis right now?

What we have called out in the 10-K is that today -- in '03, we are -- bear with me a moment -- today, worldwide we have 36 percent of our business is on a fully-packaged basis, 11 percent self-manufacture and 53 percent is in this cut, make, trim status. So again, that is for '03. In '04, self-manufacture we expect to drop further as we have now gotten out of our U.S. and Canadian manufacturing plants, and we expect cut, make, trim to drop as we exit cut, make, trim as well in the Americas. And finally we expect packaged to increase substantially through those two items -- again, reduction in self-manufacture and reduction of cut, make, trim.

So the 53 percent cut, make, trim is worldwide?

We have about 18 other people on the line. Eileen Van Ness (ph) can answer your questions about that. I don't know if this is -- under the SEC, whether we can still do this, but we can get that question answered for you, and it will be in the 10-K when you see it.

On page 10 of the 10-K.

Credit Suisse First Boston.

My first questions is with respect to gross margin. I was hoping you could give us a sense of what you have invested in terms of wholesale price reductions. Does that stabilize as we get to the second half of the year, i.e., are we still cycling the investments that you have made in the second half of last year? Should we still anticipate that in the first half of 2004?

Yes, we took those price decreases on Levi's in June and Dockers a little earlier than that, but you will be cycling them in the first half of the year in the U.S.

Secondly, you talked a little bit about the first quarter and you talked about sales. Could you give us a sense of if you're sell-through at retail if you think that ultimately equals what you are seeing from a sales standpoint, i.e, what you're selling out into the retailers is what the flowthrough at this juncture and that you feel comfortable with that.

In general, we are not building inventory at retail at all. Retail is relatively flat and actually coming down, in the case of Levi Strauss Signature, and it's probably down on Levi's and flat on Dockers. We are seeing on Levi's since really the third week in December, slowly but surely improvement in sell-through. Dockers, we have struggled a little. It has paralleled that issue with private-label that we've talked about, but we went back on the air and on radio in February, and when we did, we have seen our men's core pants business start to increase versus a year ago in terms of sell-through. So it was down through the end of January and the beginning of February, and now has started to pick up. And we've seen our sell-through on Levi Strauss Signature continue to improve since December.

So your sales rate you think is somewhat indicative of your actual sell-through at retail?

Yes.

You talked a little bit about the uses for 2004, mentioned the pension and the CAPEX. I was hoping you can give us a sense of the restructuring charges and then, to the extent -- just what we should assume timing standpoint of tax payments in 2004?

We call out all of those liquidity uses on page 39 of the 10-K -- cash restructuring payments in 2004, some of which have -- or a lot of which have already gone out in the first quarter, total 140 million. And the funding for tax payments is planned at 30 million for foreign taxes.

Foreign taxes, okay. So it does not assume any tax payment in 2004 above and beyond regular taxes?

That's correct.

And from the standpoint of if you can make any comments as you laid out the sources and uses -- you said that it is sufficient liquidity. From a free cash flow standpoint, do you see the Company being free cash flow positive or negative in 2004?

We see the Company being free cash flow positive. I'm not going to get into what those numbers are, but we see the Company being free cash flow positive.

Okay. And finally if you can comment on seasonality in the business and what we should anticipate in terms of -- obviously, there are some working capital benefits here as you make some of the significant changes you have talked about, but from a timing standpoint, could you give us a sense of what those investments are in the first half of 2004?

The seasonality of the business is basically anywhere between 55 and 60 percent of the sales in the back half of our year, reflecting the sales trends in the core men's jeans and casual pants business. So if you watch our inventory build historically, it has always peaked in June as we go and are able to service for the back half of the year. And it has a tendency to be at its low point at the end of our fiscal year, because we have hopefully just sold all of those garments that we sold them in June.

Fair enough. Thank you very much.

Bear Stearns.

This is Karen Miller. Can you hear me now? Sorry about that. Just a couple questions.

Could you give us your name and where you're from?

Karen Miller, Bear Stearns. The fact that you have mentioned that you're not seeing any cannibalization, has this encouraged JC Penney's and some of your regular 501 customers to increase their orders? And have you seen them more liberal in terms of their orders?

We are actually in discussions right now with all of our top customers on their inventory positions on all of our core fits. It is particularly critical for us as we build the right inventories to sales balance in our core high-volume products like the 501 that you mentioned, our 505 straight fits, and our 550 relaxed fits. We have seen in the first part of the year under inventory investments in those core products, and we're going customer by customer frankly down to the SKU level to look at where we need to invest more inventory to realize the sales. We've made some good progress. I would say there is still quite a bit of work to be done for the balance of the year, and this'll be an area of main focus for us, as Jim mentioned in his comments, to make sure that we optimize all the potential on the year.

If you say you are in discussions now, would we expect to see then some of these sales more skewed toward the back half of the year, second half of the year? Or would there be a longer lead time than that?

Our intention is to try to capitalize on the knowledge that we've gained by doing the SKU analysis as quickly as possible, and then to set the right inventory to sales strategy for the balance of the year. Again, we're doing this customer by customer and it would be too early to comment on the results of that effort. It's certainly something we can discuss in future calls.

Great, and if I can switch gears a little bit, you have had a lot of restating of past years. I wonder if you could give us what you EBITDA figures are historically and for 2003 as well.

I think we don't report those measures, but you can calculate that information from the 10-K. And as I went through my script, I gave you some of the pieces. Depreciation and amortization was 64 million in 2003. Again, operating income is on the face of the P&L, and your knowledge of restructuring charges is on the face of the P&L as well.

Okay, thank you.

CIBC.

It's Alexis Gold. Just a couple questions. I know you were talking about cannibalization or the lack of cannibalization. I'm just going through the numbers and trying to -- maybe you could put some context around this for me. If I look at about 130 million Signature sales in Q4, use the 200 million you talked about, and it looks like you talked about it as 6 percent in the K; it looks like that's about a 12 percent decline if you assume the majority of that comes from domestic sales in 2003; 20 percent in Q4 and about 12 percent for the year. And then if I also look at just your revenue breakdown, it looks like 47 percent of your total revenues came from the top 10 customers last year, and now it looks like about 38 percent excluding Wal-Mart.

Could you just put a little color around that, just in terms of trying to get a sense of whether or not -- where the cannibalization may or may not be coming from?

Just real quickly on financial data, if you look at page 3 of the 10-K, we were fumbling for it earlier, it tells you the actual breakout by brand by region. So you'll see there that Signature was 8 percent of the Americas, 1 percent of Asia-Pacific, and net 6 percent of the worldwide business. Dockers was 24 percent of the worldwide business, and Levi's was 70 percent of the worldwide business, so that you have that factual framework.

When we say there is no cannibalization, we actually measure consumer sell-through store by store when we say that. If you look at our overall financial results, what you have to take into account is -- so we're measuring sell-through cannibalization, not how our business has been affected at the sell-in (ph) line. We had last year three things that affected us at the top line in addition to whatever issues we had with consumer demand. One was we took a wholesale price reduction in June on Levi's, so that automatically is going to reduce our revenue even on the same units. Number two, we dealt with a class of trade in terms of the change in the department stores that were very cautious in terms of inventory, particularly in the men's arena, given how much problems they had coming out of holidays the year before. So they were generally cautious and committed to reducing inventory. Thirdly, they were cautious about us because whether they saw cannibalization or not, they were uncertain and they took a very conservative position in how they bought Levi's as they went through -- even up until the beginning of the holiday season. So there is going to be a balance in terms of what you're seeing on our topline revenue in terms of sell-in versus what we really experience in terms of cannibalization and sell-through.

Okay, thank you. Additionally, just in terms of -- you talked about consumers shifting to lower-priced products, and I think that was true across the category. You've seen it discussed in a few different places. How do you expect that to affect Wal-Mart pricing this year and what about Target as well?

We always say -- I say this -- we don't dictate retail pricing. So that is number one that I always have to put in as a caveat here. What we're seeing is, I think we are seeing to some degree a convergence in the marketplace between chains, department stores, and mass channel of growth in the under $25 price point. We are trying to sell Levi Strauss Signature from $20 to $23 and Levi's from $27 to $29 ideally. And we believe we have the two price points covered relative to where the sweet spot in the marketplace is.

The good news is that we have not experienced any pressure on our retailers that sell Levi's to sell Levi's outside that range of 27 to $29.99 -- not that they don't sometimes do it, but they understand the value of the premium price brand in their mix, and Levi Strauss Signature is the premium price brand in the mix of the mass channel. So our hope and plan is to stay within the range of those price points, and that we believe within the competitive mix of jeanswear pricing that that will put us, given the premium people will pay for our brands, at the sweet spot of the marketplace.

Great, and I know you have talked a little bit about gross margin, but to go back to it for a minute. You were talking about gross margin improvement. Looking at cotton costs and shipping costs are higher than last year with lower margin Signature business, just trying to get a sense for where that margin improvement is all coming from -- the restructuring?

I think you're going to see gross margin improvement from continued reduction in the cost of goods, and that reduction in the cost of goods is going to come from a full movement in the U.S. away from self-manufacturing, as well as cost reduction initiatives that have been generated by moving to full package and a worldwide sourcing model. And that is the primary source of the cost reductions as we move forward at that gross margin line.

What we had called out was that our gross margin rate in '04 will benefit one, from the closure of the plants, the U.S. and Canadian plants, and it will be offset by the full-year impact of the wholesale price reductions we took in mid-'03. And then the real crux of the matter is going to be the performance of the product at retail and our ability to manage dilution in terms of what the ultimate result on our gross margin rate is going to be.

Thanks. And I know you said you aren't going to talk about EBITDA, but could you tell us what EBITDA was for your covenant calculation?

No, we were in compliance on our covenant calculation, but we have not reported -- we don't report EBITDA as a Company.

Just finally, you talked a little bit about the fashion lines in terms of Wal-Mart. My understanding is that the fashion line at Wal-Mart was also cancelled. Was that replaced with other products?

I think that's a misunderstanding. Our fashion line -- or I refer to it as our trend core product has not been canceled with Wal-Mart. As a matter of fact, it's performing very well. So we price our core products -- core men's and women's products are right around $20 and our trend core product is anywhere from 22 to $24, and across the board, both price points are performing well because we've got the right price value equation down now. And so no, we are in fact expanding both core and trend core at Wal-Mart and Target.

Great, thank you.

CRT Capital Group.

Ethan Schwartz. A couple of things. First, I want to make sure I understand the reversals correctly for the long-term incentive program and the annual incentive comp. Did you basically accrue zero for those this year and really reverse 139 million for the long-term incentive?

Basically, the way to think about it is we came into the year with 139 million of liability for the long-term incentive plan, and we came out of the year with a liability of zero. So throughout the year, the net impact was a reversal of that 139 million.

Okay. Am I right that that plan is not in existence any longer? In other words, no more of that going forward?

As we disclosed in the financials, that plan is effectively -- the impact on the plan was effectively via the calculation of leadership share value added. That revised calculation based on the final earnings for the year caused the program not to have payout value relative to those original 2000 grants.

Okay. And then you gave the page in the 10-K in which you spell out the cash payments you expect for pension and for postretirement health next year. What are the accruals that you expect in the P&L for those items?

Yes, it's approximately -- on pension, it's approximately the same; and on retiree medical, I think as I called out earlier, we have income with respect to retiree medical via the curtailment gain that I mentioned earlier. And that same curtailment gain recurs in 2004.

Okay. What was the dollar quantity of the curtailment gain again and where is it located in the P&L?

Approximately 21 million.

And that is located in --?

That would be generally speaking in the corporate expenses. When you look at our segment detail, it would be in the corporate expenses line.

All right. That's my questions for tonight. Thanks very much.

Harris Nesbitt.

Emil Scafino (ph). Could you help me out with the strategy that's going on? You put on a very comprehensive presentation tonight, with various product lines, talking about (technical difficulty) plans are and --

We are having trouble hearing you.

You have put on a very comprehensive presentation with the various product lines, describing what the plans are and management describing what the plans are. But it's very difficult to discern what is different from what we have heard for the past year or two years or so on. We hear go-to-market being streamlined, we hear understanding the customer better, and we've heard all that before. Could you possibly for me outline the overarching theme of what you've determined so far?

Sure, I will try and describe to you what's new and what has changed. Our first fundamental strategy has been to innovate and lead from the core, and that is to really strengthen the Levi's and the Dockers product mix and become the innovation leader within the categories. Over the course of the last 15 months, we have overhauled our product lines around the world. In the midst of that product line, we had the majority of the products have been a success -- Go Khaki, the basic core assortment of the Levi's brand. What didn't work and what we have called out to you is that the fashion element of it, the leading-edge element, the Type 1, did not work as we had expected it to and it didn't lead in terms of consumers reappraising the brand as a result of it.

So we are walking away from a more leading-edge approach to introducing new products and to be really introducing what we would call fit, finish and fabric innovation, but within a core assortment and in a core approach, and a marketing approach that backs it up that goes back to fundamentally talking to everyone within the consistent Levi's voice. And that means going back for the first time to 501 jeans, both in Europe, Asia and the United States as one of our advertised original points of view. We believe we can do that. 501 is relevant because we're seeing it fits within the context of the marketplace going back to where 501 is much more relevant than it was two or three years ago. So that would be number one.

We have corrected the mistakes that we've made. We have fully reflected the product line that we have out there in terms of the right core assortment and feel very confident, particularly on the Levi's brand, because Dockers was a little ahead of it in innovation, that we really have the product mix right and we feel the same about Signature. Signature drafts off our knowledge of the jeanswear categories on Levi's and we believe across men, women's, and kids we have the right fits and the right assortment relative to the value-conscious consumer. That is number one.

Number two -- and in Europe what we've done is do what John says, is that we were trying to compete with this 580 series in jeans -- this is one of our mistakes -- at too low a price point within the context of the jeanswear category. And 501, let's say, sells for $80 to $100. We are going to introduce a line of jeans that comes in about $70 that substitutes for that 580. So we're correcting the mistakes, going back to a more premium and superpremium assortment than had we been in Europe and again focusing on 501. That's one.

Two, from a customer standpoint, our ultimate goal has been to drive the retail presentation of our brand so that Levi's are easy to buy, easy to find, and a desirable consumer shopping experience. That is hard to do in some of the chains and department stores that we sell in. To get there, we've had to become a better reliable supplier, we have had to fix the margins. We have had to plan more collaboratively with them and learn how to sort by door, but do it by segment against men's and women's. We started out with a core men's approach to the business. And so this has been a transformation that we've talked about repeatedly, and this last step that we took really gets us to the most competitive levels in the marketplace. We started out four years ago with a 15-month go-to-market cycle. We're down to a 7.5 month, and on the women's we are going to be able to release on a monthly or a bimonthly basis. That was unheard of within the world of Levi's a couple of years ago.

Three, we need to sell where people shop. Where we sell our brands had historically been places who are (ph) losing share of the jeanswear category. The introduction into the big box retailers with Levi Strauss Signature successfully, without significant cannibalization, continues to be one of our core strategies. Four, operational excellence. We have gone over the course of the last four years from a self-manufacturing and a focused self-manufacturing to finally a full contract, and hopefully in the middle of this year, full package operation. That is a big change, if you combine that with a worldwide sourcing approach, which we have never had, but which we've been working to (technical difficulty) with the go-to-market cycle I have talked about, it completes this transformation of operational excellence.

And then finally, with the addition of Alvarez & Marsal, the way they look at the business in terms of SG&A, they way they look at the business in terms of working capital management, line rationalization, this is going to bring another added financial discipline to the organization, which is really designed to drive improved cash flow and really deal with the pricing pressures that we feel in the marketplace and enhance our margins by really having low-cost (ph) cost control. So it isn't much different than what we've been doing. It's correcting the mistakes that we discovered, but the strategies as we have examined them continue to be the right ones. We just have to continue to execute them in a very, very difficult market.

So is it reasonable to expect that the Company going forward will be smaller and perhaps growing at a slower rate, but more profitable? Is that the objective?

If you look at our sales trends over the last five years, and they are in the 10-K, you will see a dramatic slowdown in the rate of decline. Over the course of a last three years, on a reported basis, we have hung in at about 4 to $4.2 billion. So we have stabilized within this range, relatively speaking. Our goal is to improve our current profitability off of that range and eventually get to the point where we can grow the business again. So the goal this year is to improve the sales trends that you have seen over the course of the last year, while improving profitability, and we believe that the brands are strong enough that now that we have the product mix right, and we believe when you see the back half of the year, really excellent marketing, there is an opportunity -- we are not calling that out until 2004, but long-term, the opportunity to regain share and grow in the women's business.

Okay. And finally, do you have any data that gives you any comfort as to what your market share as far as jeans in the Americas are concerned -- especially during the fourth quarter? Do you think you lost share? It sounds like you have had some competition from private brands.

We know we lost share in the fourth quarter, Levi's to private label. Over the course of the last few years in the men's category where we are at, we've had a relatively stable share. But in the fourth quarter of last year, we lost share to really lower-priced private-label brands. And to be honest one of our -- we were not on the air with Levi's advertising nor were we really on the air with Dockers advertising. That's why our plan this year is a really full commitment back to meaningful, positive and significant amounts of advertising to differentiate ourselves in this private-label world.

Okay, thank you.

(OPERATOR INSTRUCTIONS) City Group.

My questions have been answered, thanks.

Scotia Capital.

This is Kelly Garrity (ph). I was wondering if you can just -- I'm looking big picture here in terms of your relationships with your retailers and where you are at this point. I know you said that you're in discussions with them, but I have been out to JC Penney and some of your other retailers on the core product and size assortment isn't there. Inventory levels are definitely very, very lean. And I am just wondering what is going to be the driver to improving this year. Now that you have floor space that has yielded to others, how do you gain shelf space without offering new product?

I think if you just come back to the point that Phil made earlier in the call and reflect upon what has led to the state that we face right now, he said consistently that the retailers acted cautiously as they corrected their inventory strategies in 2003, but also took a wait-and-see attitude about what, if any, cannibalization the Levi's Red Tab jeans business would face with the launch of Signature. We have been through that for six months now with our core customers. Frankly, we have had very direct conversations at all levels of management about the divestment of their inventory behind the Levi's Red Tab jeans business. I would be quoting customers who basically said that they've lost some significant business on the Levi's Red Tab jeans brand from October of last year through to as recently as January. And this started late last year and really culminated in our efforts to work with them in January -- we have gone customer by customer, we have analyzed segment by segment, again, down to the SKU level.

I think we're aligned in terms of the investments that are required to get the inventories back in line. And frankly, for the first time in several seasons, I think that the dialogue has been so straightforward that there has been an acknowledgment on both sides about the fact that we need to plan and forecast more effectively to make sure we are covered for the back half of the year. I think if you were to speak to any of our core customers, they would reflect the same comments. There's opportunity out there. Now it's a matter of just going out and grabbing it product by product and SKU by SKU.

So you are confident then for fiscal '04 that you will be able to gain shelf space?

We have the shelf space. It's a matter of making sure that that shelf space is optimally utilized. And as you've mentioned, you have been out at retail and so have we, quite consistently, and we're disappointed in the stockouts that we have been facing. Those are not service-driven stockouts; for all intents and purposes they're basically forecasting and planning driven stockouts. And we're in the process of improving that dramatically with our customers right now.

Okay. So mainly, it might be less products if you are doing a SKU rationalization -- there will be less products but more size assortment within those products that you keep?

I would say it's back to the same points that Phil made. We are clearly focused on driving a good, solid -- in the Levi's brand, a solid core and trend core assortment. It does not lack innovation. There is some significant product innovations that I've mentioned, again, on the men's side of the business and finishes that we're putting it in both authentic vintage finishes as well as workwear finishes, the introductions of boot cuts as well as the 559 loose-straight fit that I mentioned with (indiscernible) products. Those are examples of innovation.

In women's, we have a lot of innovation in stretch, boot cut and flare products. What we are doing, though, is eliminating the products that were unsuccessful, that were truly fringe fashion products. That's helping us get our inventory into a very clean position. There are products that have been successfully selling from the sales trends. Those are the products that I mentioned were driving 10 to 40 percent year-on-year sales increases out the door of our customers. Now what we need to do is get the inventory to match the sales strategies and we will be on a nice balance trajectory with our customers.

Okay, great. My next question was related to the SG&A. And it was mentioned on previously in remarks that the Company has not been as strong at benchmarking the SG&A margin. I was wondering if you can flesh out what the problems are with that and how you are attacking that issue?

I guess what I would say is we're working all of us together on a process to look at the organization again by cost center and try to create -- not have the nice to have spend but to be really focused and lean in how we approach our SG&A spending. And we're moving through that process and again, you can see the benchmarking yourself externally. And we are ferociously looking at the cost structure together and again will be reporting into the Board mid-April on our conclusions and will be back to you thereafter.

But if you look the transformation that we have gone through, from being a self-manufacturer to a contract manufacturer, when you get to the point of being fully a contract manufacturer, there is overhead associated with that that will continue to be removed and is one of the key sources of SG&A reduction. You don't need the kind of overhead that you had before to support your own self-manufacturing. The second thing is that we see the opportunity in the corporate SG&A as the other key area to do it. The businesses, as we have gone over the course of the last four years, have pretty much skinnied themselves down as we've gone through the process of improving our operational and go-to-market practices. So it at the corporate level, and as we go to this worldwide contract supply chain approach, we will see SG&A opportunities.

So reasonably then can we expect that you are even going to improve margins over historical levels, like going back down towards maybe 31 percent, so we could even expect to carve off 200 basis points? Is that reasonable?

Again, what we called out on margin was we have the anniversarying of wholesale price reductions to the bad. Then we have to the good the closure of U.S. plants and the Canadian plants. We have what Phil mentioned, the administrative support associated with being a manufacturer. And put all that together, the other key aspect to gross margin is the dilution performance, if you will, which is tied up with what we do, the core product performance and our ability to manage dilution pressures with the retailers. So all of those things, we're not calling any particular gross margin target, but we are mindful of all of those pieces and driving to get to the best answer possible.

All right, thank you.

Avenue Capital Group.

It's Jason Seller (ph). I was hoping you could comment on the decision to discontinue the ERP program, what led to that decision and what the perceived benefit or detriment might be.

The reason that we canceled that was in the short term, given the performance of the business in the short term, it was just to reduce our cost. We need a new enterprise system in Asia Pacific and we're working to find an alternative to SAP or maybe SAP in Asia Pacific. Beyond that, we have put on hold doing any other ERP work in the Americas. We have an ERP system in Europe that is working fine, and in the Americas for cost pressure reasons we have just put it on hold and we are going to use the systems that we have now. As we go through this Alvarez & Marsal work, as we come out of 2004 and see what the prospects of the business are, we will reevaluate ERP solutions and what our choices are for the Americas and beyond that.

A couple things. How is that going to affect your supply chain management, one? And two, how much was spent on this rollout that is now being walked away from?

An ideally long-term and ERP solution enhances your ability to source on a worldwide basis. We believe we have the opportunity to do that to a large degree with the systems that we have now. We will get that work done over the course of the next 18 months in then we will be in a position to see whether there is more information technology that will facilitate that. In the short-term, the cost savings associated with not investing this outweighed the benefits of it.

And on the investment side, as we called out the financials, we expect to record the first quarter of 2004 asset write-downs in the range of 35 to 45 million associated with the ERP project.

Okay, and on another aspect of the business, you mentioned some pricing levels that are not really in line with what I've been seeing in the channels, in the mass channel. I have seen anywhere from 15 to $18 on the Signature line. Are you moving pricing back up or am I just working with a bad sample?

What you are probably seeing is a product or two that is just a closeout. It's like business in the chain stores, whenever you get to end of seasons and your fixtures still have a little bit of the products sitting on it from the previous season, the retailers will mark it down and move it out so we can bring the new product in. So that is all you are probably seeing. If you're talking about core product in men's and women's at those prices, that's what it is.

So we should expect to see product back out there in the $22 range?

It is out the right now if you look at our men's regular fit and relaxed fit is at $19.68 at retail, and the core misses product is there is well. The trend core products are there anywhere from $22 to $24. What you are seeing in addition to that is a few products that are end of season, markdown close out.

Which products are those specifically? Is there a particular line or fashion fit that is being more promotional than the others, or is it across the board?

It's not promotional. It's a closeout of product that is not carry over to the next season, and it was a specific finish -- one product was a specific finish on men's and there was one on women's as well.

Okay, thank you.

W.L. Ross & Company.

Pamela Wilson. You mentioned that your auditors had given you a material weakness letter. And I wonder if you could tell us a little bit more about that and whether or not you really have the systems in place that allow you to identify the areas where you have profitable lines and not profitable lines?

In the 10-K, we basically call out what the auditors told us and then what we are intending to do about it, but there's a factor -- our core controls are strong. We have particular areas -- number one, we need more tax gap skill set in the Company. That's the first call out the auditors made to us. The second call out they made to us is we need to do a better job communicating between our controllership and tax functions. In other words, a lot of this revolving around in particular the tax error that was the catalyst for the restatement itself. And so we are very focused as a very high priority to do those two things -- to number one, recruit and train to develop further our tax gap skill sets; and then number two, we're very focused on communicating better between our controllership and our tax functions. And I think as I said earlier, it is all about just having a plan and executing upon it to move beyond that material weakness.

We do have the capability of clearly understanding the profitability by product code and by SKU, by line, however you want to do it, by customer, around the areas of the world, and that skill is only being enhanced by the work that we've done with Alvarez & Marsal.

Okay, so the material weakness letter is really limited to the tax area?

That's correct. In particular -- not the tax area, in particular, the level of tax gap skill set we have in the Company. And number two, the communication that we have between our controllership and tax functions. And we're working on both of those items as a top priority -- but it is limited to those things.

Salomon Brothers.

Jeff Cobelars (ph). You mentioned how first quarter '04 sales are flat in constant currency. And you mentioned, Robert, about sell-through of Levi core was doing better. Can you elaborate about that, how that's performing the first quarter, and what you're talking about, does that include the Signature product?

It doesn't include Signature when Robert talks about that, and he will tell you.

The numbers that I mentioned on the young men's and women's businesses are holding steady from about July of last year on the young men's business and about September of last year on the women's segments. We have seen the core products -- frankly, the top three to four volume drivers in these segments driving those sell-through increases on year-on-year basis of between 10 and 40 percent. That trend has continued through the first quarter of 2004. The areas that we are really analyzing the most thoroughly, frankly, is the area that Phil mentioned, which is our core men's business. It's our original 501 product, our 505 straight fit and our 550 relaxed fit, which make up the majority of our men's over-25 products and are the foundation of our core jeans business.

What we have seen there is a nice recovery trend on the business. Some of that is related to the fact that as we worked customer by customer getting back into the right inventory sales strategy, we are gaining benefit of that. And I'll quote -- again, one of our customers said to me directly that they shot themselves in the foot by divesting inventory in what is a replenishment-driven business. If they had actually kept the stock-to-sales ratios in balance, then they would have been more successful and we would have been more successful from October of last year. So we hope to continue to see that trend. It is work that we do on a monthly basis with our key customers and we will continue to do so for the balance of the year.

So it's -- point-of-sale, is that positive in the fourth quarter and today, continuing today?

Again, the trends are positive, and what Phil mentioned earlier in the conference call is what (ph) you're seeing in terms of our sales to the customer is actually a more negative trend versus the sell-through trends because they have been divesting of the inventory, again, because of their overall strategies and their caution towards Signature. As we've really seen sell-through outpace sell-in, we are getting some benefit from that as we are working customer by customer.

And what percentage of the jeans sales in the U.S. are core, would you say?

Of the Levi's jeans business, it is about 95 percent of our total business at this point in time. But I want to qualify the language, because it is really the jeans business -- it's five pocket jeans, non five pocket jeans, our workwear and the utility categories -- we would call those both core and trend core. And frankly, we run an assortment balance which is about 65 to 70 percent core replenishment and the balance in the more innovative products that are in a shorter life cycle of somewhere between 6 and 12 months. Those products would all qualify to be future core volume drivers for us and be put on replenishments if they hit our fertile rates. And it is that balance that we're trying to really optimize through 2004 and eliminate the less successful fashion offerings that, frankly, performed quite well in urban America but did not do commercially well across the United States.

Fine. Jim, I think you mentioned that the $140 million of restructuring accrual that you will be paying out in cash in '04, did you say that that was all paid in the first quarter?

Not all of it, but there would have been a large chunk of that that would have been paid out in the first quarter. Most of it will be paid out by the first -- I'd say by the first half, 70 percent of that is paid out.

70 percent paid out by the first half? Okay. So given what you have already paid out, are you past your working capital peak usage for this year?

As Phil mentioned, second quarter we would have inventory builds at the end of second quarter.

Okay. And then can you give us any guidance about the industry standards for full package sourcing versus cut, make, trim sourcing? What is the difference in -- any industry standards about what the difference is in cost?

I think most people want to be full packaged across the board and be nimble across the board in apparel today. So we're trying to take the historical manufacturing organizations, and it has been sort of an ongoing process for the Company over the last number of years, leaving manufacturing and now ultimately as we have left manufacturing, also leaving this hybrid cut, make, trim operation and going to fully packaged production. And we're striving to get there by the end of the second quarter this year in the U.S.

If you could say, for example, that self-manufacturing is a base of 100, cut, make, trim is whatever percentage of that and package is a lower percentage of that? (multiple speakers)

If you're getting at the cost, cut, make, trim and full packaged are not very dissimilar from a cost per unit standpoint. Those two together, as Phil calls them collectively, contract -- contract is of course typically much cheaper than internal manufacturing. And thus between cut, make, trim and being fully packaged, the difference there is the working capital that we have to invest to be in cut, make, trim and the simplification of being fully packaged. So going from cut, make, trim to fully packaged is more about simplification and getting out of the working capital investment. Getting out of plants is the big cost save.

Can you quantify if there was any loss on Type 1 in '03 that won't recur in '04? Cash flow loss, roughly?

We don't have that number here. There will be a savings associated with not being in Type 1 jeans that we built into our 2004 plan, but we don't have a number that we would quote. We know what it is, but that's one of the things we don't talk about.

Thanks very much.

Delaware Investment.

This is (indiscernible) from Delaware investment. I was wondering, can you tell me a little bit about your definition for cash flow? Because it looks like if a minimum of like about --

We are losing you now.

I'm sorry. Like your definition of free cash flow. Because just looking at your interest, CAPEX, the postretirement benefits and your restructuring, you're looking at north of $5 million a year for this year (multiple speakers). And given what you are guiding towards, without being specific, it looks like you have a pretty decent hole to fill there.

That's a good question because people have different definitions. Free cash flow, as I would define it, is our earnings before our interest, tax, deprec and amort, less our CAPEX and our working capital needs. In other words, what's available to the capital base. That's what I was referring to when I said we were free cash flow positive.

Okay, great. Thanks.

Credit Suisse Asset Management.

This is Darren Richmond (ph). Just a point of clarification. I was wondering if you can help to understand what excess cash means.

Of our total, again, total cash, parts of the cash would be for instance in our retail stores, in our international operations, just cash that's necessary at any point in time to operate the business. And what we look at from a liquidity resources standpoint is the excess cash that is in the business; in other words, the excess cash that is in our treasury coffers here in the U.S., that is in overnight investments. And that just happens to be the way we define our liquidity resources -- again, availability under our credit lines plus excess cash. Operator, what I would like to do now is take two more calls and then cut it off.

Certainly. KDP Investment Advisors.

Just on that cash question, should we assume sort of 100 million as a good run rate that you always have to have in those other entities?

No, I think it's more like you would assume in the neighborhood of $60 million, thereabouts.

Okay.

The 100 that we are all referring to is the excess cash. In other words, excess cash and then the operating cash is more in the $60 million zone. So we had $150 million of total cash at that point in time, if you will.

Okay. The other question I had was on the plant closings, restructurings, what have you. All other things being equal, how much do you expect to save from that, not counting any sort of things that move against you during the year?

We haven't quantified that, but we certainly -- when we talked about our gross margin rate earlier, that in conjunction -- that is a benefit certainly to our gross margin rate in 2004, offset by the anniversarying of the wholesale price reductions we took mid last year.

Have you quantified what the balance of the wholesale price reduction hit is in '04?

We have not quantified that in our reporting.

And then any update on the tax investigation, what have you? You are showing $143 million for the long-term tax liability. Is that your estimate for where that whole thing shakes out?

That liability doesn't per se have anything to do with the investigation. That is just -- we have open tax years, like any company. Our open tax years, I think, are '95 through '99, and so the liability that we have is a provisioning we have made relative to ultimately settling with the IRS on those years, in addition then settling -- you have to provide for your tax exposure right through the balance sheet date (ph). So the number you would see would be all of our collective tax exposure through the end of 2003.

Any update on when you think you might resolve the outstanding issues at the IRS?

We are working -- we don't have a timetable per se, but we are working hard to resolve all of that matter and our other legal matters.

Okay. And did I understand correctly that the only cash taxes you expect in '04 was $30 million?

That's correct.

First Albany Capital.

Yes, just briefly, as I look at your -- trying to nail you down a little bit here. You have a $250 million interest expense number. If you look at the larger -- the bulk of the pieces of your restructuring, your CAPEX, your benefit, etc., as a previous caller indicated, you are roughly in the $520 million range. I'm glad you clarified free cash flow, but it is possible that you could cover all of these costs from cash from operations or not?

What we said, just to be real specific about it, with all the sources that we have in front of us, which is the earnings, the working capital opportunities, and all the uses that are in front of us, and the liquidity resources that we have, we believe we have sufficient liquidity for the year and we also are going to be in -- we believe we will be in covenant compliance throughout the year.

But absent tapping your credit facilities, through earnings and working capital benefits could you get there?

That is certainly our goal. You are trying to pin me down on a precise number, but (multiple speakers)

Let me state it to you this way. If I look at your operating income as reported of $310 million, and you have depreciation and amortization there of 64 million. Obviously -- I mean, no one wants to talk on this call about EBITDA, but let's just face it -- you are reporting $375 million in EBITDA roughly. If I back out the accrual reversal of 138 and the 21 million for the medical reversal, that is really telling me you are earned on an operating basis $215 million in EBITDA.

The one thing you didn't take into account -- keep in mind there are restructuring charges in the operating income.

Understood, but you basically need to double the level of profitability to cover your outflows, and this is before you take any action with relation to your presentation in April.

Yes, but again, we have shut plants, we have plans in place relative to the heavy dilution we experienced relative to product issues in 2003. So I am not going to answer the question other than to say we have initiatives and actions that make us comfortable that we are going to have ample or sufficient liquidity to get us through the year, and we will be in covenant compliance through the year. Again, remember, covenant compliance is a fixed charge coverage ratio of one time is our covenant. And so with all of that, that is where we are. We feel -- again, we are cautiously optimistic about what is in front of us here and, generally speaking, feeling good coming out of this first quarter.

At this time, I would like to turn the floor back over to the presenters for any closing remarks.

We thank you for your attention, and I know it's late on the East Coast, so we appreciate people have hung in there with us. We did this at an abnormal time because we did issue the 10-K and thought was important for you to hear from us about this 10-K and the report on 2003 and where we are in this whole process. And we look forward to talking to you again when we report the first quarter of 2004. Thanks.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful evening.