Levi Strauss & Co (LEVI) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. third quarter 2004 conference call. (OPERATOR INSTRUCTIONS) 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 Jeff Beckman of Levi Strauss & Co.'s worldwide communications department.

Good morning, welcome to our conference call. I'm 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 US Levi's brand; Bobbi Silten, President of the US Dockers brand; Scott LaPorta, President of the US Levi Strauss Signature brand; Paul Mason, President of our European business; and John Anderson, President of our Asia-Pacific business.

This call is being recorded and a replay will be available through November 12 by calling 800-642-1687 in the United States or Canada. From outside these countries, call 706-645-9291. For either number, please input the ID code 1050518 followed by the #.

This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible on 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 Statements, and other filings with the Securities and Exchange Commission. Our actual results might differ materially from historical performance, current projections, and these forward-looking statements because of factors described in those filings or otherwise.

During the call you will hear us talk about sellthrough numbers or trends. When we talk about sellthrough, we are referring to retail over-the-counter sales of our non-licensed products. We use sellthrough data internally as an indicator of consumer demand for our retail products. We compile sellthrough data based on information we receive from a group of 7 key US retail accounts. Sellthrough dollars do not include taxes and may not be consistently calculated from retailer to retailer, including, for example, the treatment of markdowns, coupons and discounts. Other companies may discuss sellthrough and could obtain data or compute it differently from us.

We also use average weekly rate of sale as a performance measure for our Levi Strauss Signature business. Average weekly rate of sale measures a retailer's weekly sales rate as a percentage of their average unit inventory on hand during that week. Both sellthrough and average weekly rate of sale data are intended to be illustrative only and are not necessarily predictive of future volumes, sales, or other operating results.

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.

Thanks Jeff. Good morning everyone. Thank you for joining us today.

Our third-quarter results show that we're accomplishing what we set out to do this year. Our goal was to operate a leaner, healthier, more competitive and more profitable business. And that's what we're doing. I'm pleased with the progress that we're making.

In the third quarter our gross profit improved, the operating income of each of our regions grew at strong double-digit rates, and net income is again up for the Company this quarter. We've delivered these improved results on planned lower sales this quarter as we anticipated the impact of comparing Q3 results this year against the sizable launch of the Levi Strauss Signature brand during the same quarter last year. Robert Hanson and Bobbi Silten will also discuss some other strategic choices and we have made in this quarter both on US Levi's and Dockers to improve the overall profitability of the businesses, and these choices impacted the top line on both Levi's and Dockers.

Our year-to-date and quarter-to-date results indicate that the actions that we began to implement last year and have continued throughout this year are improving our business performance. These initiatives include the closure of owned and operated manufacturing facilities, taking costs out of the businesses around the world, operationalizing new go-to-market processes, revamping and rationalizing our product ranges, and growing our presence in the mass channel. The initiatives are driving increased profitability and a much healthier bottom-line this year. Jim Fogarty will walk you through the specifics of our financial results for the quarter and illustrate these points in a few minutes.

I'm encouraged by the results so far this year. Retail demand for Levi's in the United States continues to improve and now grow. We continue to grow share in the mass channel on Levi Strauss Signature. Our sales trends are improving in Europe with greater emphasis on our premium positioning. Asia-Pacific once again delivered outstanding double-digit revenue growth, driven in part by the success of the 501 and a more sophisticated line of products for women. And besides growing in United States, Levi Strauss Signature continues to grow around the world.

So overall for the first nine months, things have gone well and in accordance with the priorities we laid out for the business this year. Now let me turn it over to Jim who will take you through the financial details for the third quarter.

Thanks Phil and good morning everyone.

At a consolidated level our third-quarter 2004 net revenues were 995 million compared to 1 billion 84 in the prior year. Revenue decreased 89 million, an 8 percent decrease on a reported basis and a 10 percent decrease on a constant currency basis. Continuing strength in our Asia-Pacific business was offset by the effect of our prior year's US Signature fixture fill at Wal-Marts and decreases in our Levi's and Dockers brands in the quarter.

While we experience sell-in declines in our Levi's and Dockers brands this quarter, these declines were indicative of our strategy to drive a healthier base of business. I will speak to you in the moment about these strategies and the strong improvements in regional operating profit the strategies drove.

Consolidated gross profit for the quarter was 456 million or 45.9 percent of net revenue compared to 397 million or 36.7 percent of net revenue in the same period of 2003. Gross profit dollars thus increased 59 million and the gross margin rate increased 920 basis points. Our year-to-date gross margin rate was 43.8 percent. The gross margin improvement during this quarter resulted from the unusually favorable mix of more profitable core products, as well as our product rationalization efforts. The year-over-year increase in gross profit dollars reflected improved solution management, and that is markdowns and allowances which we give to our customers in the US; lower sourcing costs, as well as stronger foreign currencies.

As we have previously indicated, performance of our product at retail and management of our dilution are key elements for gross margin rate success in 2004. We continue to be encouraged by our progress in these areas.

Now to our operating income. Our consolidated operating income for the quarter was 129 million or 12.9 percent of revenue compared to 191 million or 17.6 percent of revenue in the same period of 2003. While operating income declined 62 million, it is very important to note the following.

First, our operating income in the third quarter of 2003 included income from the reversal of our liability for long-term incentive comp of 129 million. Our operating income in the third quarter 2004 reflected restructuring charges of 28 million compared to only 3 million in the third quarter of 2003. The third quarter 2004 restructuring charges were associated with our exit of two Spanish manufacturing facilities, our plan to exit our Australian plant, our staff reductions in North America, and additional displacements in our European operations.

Operating income in the third quarter of 2004 included retiree medical income of $7 million compared to third quarter 2003 retiree medical expense of $2 million. These respective amounts included curtailment gains of 3 million this year and 12 million last year. Thus, this year's $18 million in lower expense, once you exclude those curtailment gains, reflects the benefit of the retiree medical caps which were put in place late last year and into the first quarter of this year, as well as the reductions that have taken place in our headcount.

Finally, our operating income included depreciation and amortization of 15 million in the third quarter of 2004 and 17 million in the third quarter of 2003.

The bottom-line for the quarter improved to net income of 47 million compared to a net loss of 4 million for the same period in 2003. This $51 million improvement reflected increased gross profit of 59 million, lower SG&A expense of 43 million, lower tax expense of 118 million, somewhat offset by increased restructuring charges of 26 million, as well as the effect of that prior year's long-term incentive comp reversal of 129 million.

SG&A decreased 43 million to 300 million, reflecting cost containment, lower advertising, as well as lower retiring medical expense.

Our tax expense was 18 million for the quarter compared to 136 million for the same period in 2003, which as you may recall included a $223 million valuation allowance which we recorded against our deferred tax assets. Our third quarter tax expense reflects our latest financial forecast for 2004, which incorporates the previously mentioned restructuring initiatives. The new estimated annual effective tax rate is 35.9 percent. The effective tax rate for the nine months ended August 29, 2004 is 25.3 percent, and differs from the annual rate mainly due to losses for the full year in certain foreign jurisdictions for which no tax benefit can be recognized, as well as certain period costs.

Now I wanted to spend a moment on our open tax issues. You will recall that in the second quarter we received -- and we disclosed this in the second quarter -- we received a revenue agent's report for the open tax years 1990 to 1994. In the third quarter, today's filing, we mention that we filed a protest which would move the case to the appellate division. And that's where the open years sit today.

Relative to our balance sheet, we are adequately reserved for this and all open issues, again on our balance sheet. And as you can see from our next 12 months cash requirements, our intent is to move forward and resolve these open issues and open years expeditiously, as witnessed by the provisions of cash requirements over the next 12 months.

So before I go into further detail on revenues and operating margins, I wanted to set some context. As we told you in the last quarter's call, our revenue would decline this quarter, primarily reflecting our prior year's fixture fill of Signature product at Wal-Mart, as well as the impact of our product rationalization efforts. With that context, onto our North America segment.

Our North America third-quarter 2004 revenues declined 15 percent to 631 million. This decrease is primarily due to lower sales of our US Levi's brand, our US Dockers brands and our US Signature brand, somewhat offset by strength in our Canadian and Mexican businesses.

While we experienced sell-in declines in our US Levi's and Dockers brands in the quarter, this was consistent with our strategy to focus our brands and drive a much healthier and more profitable base of business. Our US Levi's brand declined 37 million or 10 percent, primarily reflecting the licensing of certain businesses, reductions in off-price volumes, as well as our inability to supply our increasing demand. Our US Dockers business declined 29 million or 15 percent, reflecting the licensing and exiting of certain businesses, as well as reductions in our off-price volumes. Our US Signature business declined 53 million or 38 percent. However, excluding the prior year's $65 million of fixture fill, our US Signature business grew $12 million in the quarter.

Our North America's operating income increased to 164 million or 26 percent of net sales from 103 million or only 14 percent of net sales in the prior year. This strong $61 million improvement reflected a healthier base of business, improved dilution management, as well as lower SG&A.

And on to Europe. Our European third-quarter revenues increased 3 percent a 238 million, representing of 4 percent decline on a constant currency basis. Our European business was negatively impacted by weaker demand for our core replenishment product and order fulfillment issues, somewhat offset by the introduction of the Signature brand. We are focused on both improving our European probability and on stabilizing our European Levi's and Dockers businesses.

Our operating income in Europe increased to 44 million or 18 percent of sales. This $23 million improvement in operating income is attributable to higher gross profit, lower SG&A expenses, as well as favorable currency impacts.

And finally, ending with our Asia segment, our Asia-Pacific third-quarter revenues increased 18 percent to 126 million, representing a 12 percent increase on a constant currency basis. Our strength in Asia reflects very strong growth in certain markets, the impact of new products, fits, and finishes, as well as improved retail presentations.

Our operating income in Asia increased 22 million or 17 percent of sales from 13 million or 12 percent of sales. Thus, consolidated regional operating income before corporate expenses totaled 230 million or 23 percent of sales compared to 137 million or 13 percent of sales in the prior year.

Our third-quarter 2004 total corporate expense was 101 million, which included 28 million in restructuring charges, 11 million in long-term incentive comp expense, and 62 million in other corporate expenses. Contrasting to third quarter 2003, our total corporate -- we had total corporate income of 53 million, which included 129 million in long-term incentive comp reversal partially offset by 3 million in restructuring charges and 73 million in other corporate expenses. Thus, if we just focus on other corporate expenses, other corporate expenses declined 11 million in the quarter as a result of our cost containment initiatives.

Now for the balance sheet. Our debt net of cash was approximately 2 billion, reflecting a decline of approximately 100 million from the end of 2003. Our inventory was 539 million at the end of the third quarter, reflecting a $140 million reduction from year-end. Inventory turns improved from 3.3 at year-end to 4.9 at the end of the third quarter, reflecting reductions in excess and obsolete inventory, as well as short supplies that we are current fleet currently addressing.

In assessing the health of our balance sheet, not only did our net debt decline by that approximate $100 million from year-end, but we made progress in other key liabilities. Our retiree medical benefit obligation declined approximately 400 million -- 400 -- to 345 million at the end of the quarter, primarily reflecting modifications which were implemented in the first quarter. Our total tax liability declined 15 million from year-end to 158 million at the end of the quarter. Our pension liability declined 20 million from year-end to 231 million at the end of the quarter. And finally, our restructuring liability declined 29 million from year-end to 68 million at the end of the quarter.

Now for our liquidity. Sources of cash for us in 2004 include our earnings, improvement in our inventory turns, and our liquidity resources. Our principal uses of cash include payments for restructuring actions we have taken, cash taxes, and payments of interest on our debts. Estimates for these amounts are included in the 10-Q and I won't go through them here.

As of October 10, 2004, we had available liquidity resources of approximately 562 million, consisting of approximately 317 million in liquid short-term investments and 245 million in net available borrowing capacity under our revolving credit facility. We continue to believe we will have sufficient liquidity over the next 12 months to operate our business and to meet our cash requirements. And we also believe we will continue to maintain compliance with all of our covenants. To this point the amendments of our term loan which we completed during the quarter greatly improves our covenant flexibility.

Now for an update on the LS&CO-Alvarez & Marsal joint work plan. As we reported on our last call, we believe that the culmination of actions that LS&CO and A&M have jointly identified will deliver SG&A as a percent of revenue and operating margins that will be more competitive in 2005. We further indicated that we will provide additional info on specific initiatives as they unfold throughout the balance of the year.

In this light, this quarter we announced our intention to close our own manufacturing facility in Adelaide, Australia, commence European headcount reductions which will result in the displacement of approximately 125 employees, reached agreement with our Spanish employee representatives and union to close two plants. As a subsequent event to the quarter we also announced in today's filing our intention to freeze our US defined benefit plan. And finally, we continue to benefit from our ongoing product rationalization efforts. Thus cumulatively, our efforts to streamline the organization, which were begun last year and have continued into this year, have resulted in a 23 percent decrease in our worldwide headcount from approximately 12,300 employees at year-end 2003 to approximately 9500 employees at the end of the third quarter.

Now for a brief update on the Dockers transaction. As we previously reported, we retained Citigroup to assist us in our exploration of the sale of the worldwide Dockers business. We also noted that we received consent from our senior secured term loan and asset-backed revolving credit lenders which will enable us to sell this business. We won't have comment today on that other than to say that our process continues. We also won't comment on the details of our Dockers or our non-Dockers earning power other than to provide the brand level revenue information that we typically make available.

So with that I would like to turn it over to Robert Hanson, President of the US Levi's brand.

Thanks Jim. Good morning.

US Levi's brand performance in the third quarter demonstrated that our core strategies are working. We are operating a more profitable business and it is driven by a stronger mix of first-quality products that are performing better at retail.

As with Q2, net sales were down in Q3. We finished the quarter at 330 million, a reduction of about $37 million or 10 percent. We expected this decrease. It reflected the impact of the implementation of three strategies we discussed last quarter.

Number one was the licensing and exiting of product categories which represented about $18 million of the decline. Second was reductions in off-price and closeout merchandise which represented about $12 million of the decline. And the third strategy, representing the remaining portion of the decline, is our shift to contract manufacturing and our planned efforts to reduce inventories, which along with internal operational issues impacted our ability to service the increased Q3 demands for Levi's jeans. Without these limitations we believe we would have seen revenue from our core product lines increase in the quarter.

Despite the revenue decline, we have implemented the strategies we committed to, and they are driving improved earnings versus prior year. Our core department and chain store product assortments are performing well, demonstrating success in fit, fabric and finish. We are executing a more commercial and profitable product mix, improving both our and our customers' gross margins by several percentage points in each consumer segment. We are encouraged by the increase in consumer demand for our products, with all segments now posting positive comps in retail sales in our core retail channels versus prior year.

Let me now review how Levi's 5 core strategies are driving this performance. Number one, we are sharply focused on increasing sales and profits in our jeans business. For example, retail sales in our largest segments, men's and young men's, were up 1 percent in the third quarter, a continuation of the trend we saw last quarter and an improvement over prior years. In young men's, we posted a 12 percent increase in retail sales with our work wear program driving more than a 50 percent increase. In women's we continue to drive solid sellthrough performance with misses and juniors retail sales up 21 percent and 6 percent respectively due to strong product performance and our low rise, stretch, boot cut and flair programs shares now up in both juniors and misses. In boys 8 to 20 both our core jeans and work wear programs posted positive back-to-school comps. And we remained committed to core product innovation. We recently launched new fits such as the straight and skinny fits, new vintage and tinted finishes, as well as color and technical innovations in our core jeans products.

Number two, we are improving customer profit through more a strategic promotional program. Customer profitability also has been improved by a 5 percent wholesale price reduction we took in June 2003.

Number three, our new go-to-market process and new supply model have resulted in reduced inventories, improved gross margins, and greater customer responsiveness. However, implementation of these changes has limited our ability to service the increasing customer demand during the quarter. We are currently implementing plans to improve our replenishment supply and expect to be in a good position as we head into our fiscal 2005.

Number four is to drive demand via our "A Style For Every Story" advertising campaign. The TV campaign launched during the quarter and is resonating well with consumers. We believe this advertising has been effective in driving sellthrough increases. We have increased our media investments versus prior year in both Q3 and Q4 and are introducing a third TV commercial in November. TV will now highlight our flagship original Button Fly 501 Jeans, the original 505 Straight Jeans, and our 569 Loose Straight Jeans. Print highlights are leading fits in both men's and women's. The Levi's brand will also be featured in one final exciting episode of NBC's "The Apprentice" during the fourth quarter.

Our fifth and final strategy is to make it easy to find and buy Levi's jeans at retail. This priority was implemented in our top 8 customers' stores for the back-to-school season. The program is based on our owned and operated Levi's stores which have achieved comp store sales increases for 22 consecutive months and will contribute increased operating income in 2004. You can see this program in our Levi's stores, as well as in most men's and women's departments in our key customers.

With that let me turn it over to Bobbi Silten, President of the Dockers brand in the US.

Thanks Robert. Good morning everyone. As you heard Robert discuss in his overview of the Levi's brand, the Dockers brand also implemented several similar strategic actions that reduced revenue, but increased overall brand health and profitability. In the third quarter, Dockers brand performance was in line with expectations with improved first quality sales percentage and strong gross margin performance. However, brand revenue was down 15 percent versus the prior year.

The majority of this decline or 12 percentage points was driven by several factors -- the reduction of second quality sales and events from last year that did not occur again in the third quarter of this year; the balance, or 3 percentage points, was due to lower first quality sales, somewhat offset by lower customer allowances.

As we discussed last quarter, the business has been up against several events from 2003 that were not repeated this year that were key drivers to the decline in revenue versus a year ago. The first significant event was the sell-off of excess inventory in August 2003 that was not repeated this year due to improved forecasting and inventory management. The second event was our product rationalization effort. We have licensed our women's tops business and are exiting under-performing businesses, resulting in lower volume in revenues versus 2003. In addition, annualizing wholesale price reductions taken late in 2003 continue to impact our revenues for the quarter this year.

Now let's shift from revenue to retail sellthrough. As we mentioned last quarter, we anticipated that sellthrough rates would decline for the third quarter. The majority of the decline we experienced was due to the fact that we sold through most of our spring/summer seasonals early in the season, leaving very little seasonal inventory to drive retail sales in late summer.

Looking specifically by product segment, our over-the-counter pants sales for both men's and women's were flat to last year on a dollar basis. This performance was better than expected, given that we were up against heavy clearance volume from prior year. Men's tops continued to be a positive story for the brand with over-the-counter sales up 7 percent for the third quarter. Men's and women's shorts, as well as capris, had strong sellthroughs early in the season, which left little inventory later in the season. This resulted in double-digit sellthrough declines versus last year in Q3, but delivered healthy margins at retail for our spring/summer seasonals.

Now turning our focus to fall '04, we continue to feature the proStyle as our big men's initiatives for the season. The products under the proStyle umbrella feature pants, tops, and licensing products with bundled performance innovations that serve our consumers' needs. Advertising for proStyle is back on national television as of September with notable sports presence, particularly in the NFL.

Also for fall we are excited about several new proprietary product innovations that we are launching in the season and we believe will strengthen our position as the innovation leader in the category. In particular, we think our new Never Iron Cotton Khaki represents a significant technological breakthrough that will deliver a truly iron-free product that offers a dry clean right out of the dryer. The Dockers brand has a one year exclusive on this technology in the pant category.

We also have early selling on another breakthrough technology. In woven shirts we have launched a new technology that drastically minimizes perspiration stains through a technology that dries moisture 6 to 8 times faster than untreated fabric. We have branded this performance benefit as Perspiration Guard and had an exclusive launch of the technology for fall '04. Consumer press coverage of this product has been extremely positive and early sales at retail appear promising.

In the women's area our fall '04 focus is on our new Metro pant that features individual fit waistband and stain defender in a stretch fabrication. The updated fit for the Metro tested number one in our consumer fit test and early selling for this pant is strong. This product is featured in our fall national print campaign for Dockers for women.

As we move through fall we continue to drive business forward. We're working internally and with our customers to ensure that fall '04 and spring '05 are well-executed and we're confident that we can do so. Now I'd like to turn the call over the Scott LaPorta, President of the Levi Strauss Signature brand.

Thanks Bobbi. I'm pleased to report today that Levi Strauss Signature had a successful third quarter and back-to-school season, gaining additional market share in the value channel. In addition to operating at 3000 Wal-Mart stores and 1300 Target stores, we successfully launched into the Meyer, ShopKo and Pamida chains in all consumer segments. We launched the sale of Levi Strauss Signature product on Wal-Mart.com and Target.com. And third, we expanded our men's business at Target with the addition of a men's denim destination back wall strategy.

During the third quarter, Levi Strauss Signature generated $88 million in revenues versus 140 million in the third quarter of 2003. Please note that approximately one-half of last year's revenues were related to the launch of the brand and into all 3000 Wal-Mart stores and the initial fixture fill.

Throughout the third quarter of 2004, our average weekly rate of sales on the summer and back-to-school fashion program exceeded our expectation. And sellthrough on our five pocket long bottom jeanswear remains solid. Additionally, our sellthrough remains balanced across men's, women's and kids.

From a product standpoint, these back-to-school results were led by strong average weekly rates of sale on our flare, low rise flare, and low rise boot fashion basic programs in girls and juniors, while our missy fashion long bottoms and jackets were strong performance, capturing incremental share. In men's our core program's retail sellthrough remains solid and we were chasing demand in our young men's and boy's fashion programs.

Our marketing efforts during the third quarter focused on our NASCAR and Jimmie Johnson sponsorship in the Levi Strauss Signature Fit Pit which brought our brand to NASCAR fans at the Michigan, Daytona, Chicago, Indianapolis, and Napa Infineon raceways, reaching over 1 million fans during the quarter.

Presence and publicity efforts also continued to drive awareness and purchase as Levi Strauss Signature was promoted by Elizabeth Hasselbeck, host of "The View" and fashion expert. Elizabeth highlighted our products on her show, "The Look For Less", "Fox and Friends" and in a media tour as she provided back-to-school shopping advice for value consumers.

Third, we launched a focused print media campaign in magazines such as "Latina", "Budget Living", "Lifetime" and "Glamour" as well as in a dozen racing-themed magazines. And forth, as covered in The Wall Street Journal we have launched an innovative online marketing campaign, which included a Levi Strauss Signature branded car and track in EA Sports new videogame, "NASCAR Thunder".

All of these efforts have driven our brand awareness during the period with the value consumer up to approximately 30 percent.

As I mentioned, we completed our launches into Meyer, ShopKo and Pamida stores and our early results are promising. Our men's core fixture, which features our regular fit and relaxed fit jeans, is performing solidly, while in women's and junior's our missy boot cut and junior's low rise boot cut are selling very well. In kid's, the boy's and girl's product enjoyed a good back-to-school season for these new retailers.

Operationally during the third quarter of 2004 we have rebuilt our continuing core inventory to support the fall holiday season so that we maintain the proper in stock levels at retail. These activities have put us in good positions to sup[port the fall holiday business across the board.

During back-to-school we shipped on time in girl's, junior's and misses' and had optional in-stocks at retail. In boy's and young men's we were a few weeks late setting the floor in a couple of products due to tight production capacity in our Latin American source base. In our expanding men's business we managed our inventory smartly to ensure in stock levels at all of our accounts.

Looking forward to the fourth quarter and the fall holiday season, we're excited to be launching into our newest customer, Kmart. We begin shipping this month to approximately 225 stores in all consumer segments for a November holiday launch.

Thank you, and now over to Paul Mason for a report on Europe.

Thanks Scott and good morning everybody. First I'd like to give you a general overview.

We're continuing to make solid progress against our European action plan. As was the case in the second quarter, our results in constant currency are in line with our expectations, but the challenge ahead is to stabilize topline sales. We anticipated the sales decline, however, because we know it is going to take time to reverse long-term sales trends. Third quarter sales are therefore where we projected they would be, although on a year-to-date basis sales in constant currency are down 9 percent.

Turning to the Levi's brand, Europe has also been impacted by both internal or organizational and external or contractor service issues, as both Jim and Robert have touched upon. We are dealing with these issues and the situation has begun to improve. But as I said in last quarter's call, we don't expect to see significant improvement until well into the fourth quarter.

On a positive note, the sales decline in the Levi's brand versus last year slowed in the third quarter to approximately 6 percent on a constant currency basis. Sales performance across Europe has been mixed, with Italy and the UK delivering the best results. Overall sales in the jeans segment of the apparel market continues to substantiate our repositioning of the brand as most men's and women's volumes are increasing in the price range of EUR85 and above.

Our new pan-European advertising campaign for fall is currently on air. It began in September and runs into the fourth quarter, continuing our focus on the 501 jean (indiscernible).

Moving on to the Levi Strauss Signature brand, the brand continues to perform above expectations in the three launch markets of France, Germany and the UK. Due to successful back-to-school programs in key retailers, third quarter sales more than doubled those in the second quarter. And analyzing the market, Europe continues to see increasing sales year-on-year in the value channel, which clearly provides us with growth opportunities.

Regarding costs, we continue to make good progress on cost savings. Our gross margin increased by 7 percent in the third quarter versus the same period last year. These results reflect the impact of our supply chain savings programs in combination with the repositioning of the Levi's brand.

In Spain we reached an agreement with unions and employee representatives, and the plant closures were authorized by the central government according to the procedures required in Spain. As a result, both plants ended production on September 30th.

During implementation of all of these initiatives operating income continues to improve versus last year. Throughout the fourth quarter, therefore, we will continue to focus on our four European strategies of control, equity, go-to-market and market-by-market.

During the third quarter we met a critical milestone in the move to a market-by-market business model. We began a pilot project in Spain to ensure the most effective implementation of the market-by-market model. The Spanish business is now run by a general manager, with all functions other than finance and IT reporting directly to her. This model is allowing us to build a strong country organization that works with a (indiscernible) team to drive our strategies locally. Piloting the model in one market gives us the ability to make any necessary changes prior to rolling out implementation in the other countries.

So with that I will hand you over to John Anderson.

Good morning. The positive momentum experience in the first half of the year for the Asia-Pacific region has continued through the third quarter. Our revenue for the third quarter is ahead of our internal plan, and as Jim mentioned earlier on 18 percent of prior year. Our profit is also double-digit ahead of both plan and prior year.

Looking at each individual brand performance, for the Levi's brand we continue upgrading our original Levi's stores, focusing on the high traffic location, featuring dedicated women's areas and also focusing our success areas. At the same time we also continue to focus on retail in our non-original Levi's stores. The success of our ladies Levi's concepts, targeted at more sophisticated usage occasions, continues to prove successful. This is jeans developed for nighttime uses such as going to nightclubs. Our 501 continues to sellthrough following on from the Q1 and Q2 advertising campaign. Our Type 1 and LEJ product concepts remain relevant in our northern regions of Korea and China.

For Levi Strauss Signature's brand performance continues to meet our expectations. Recently we have launched new women's fits in both Australia and Japan, and the test in Taiwan continues. The brand is now sold in three countries -- Australia, Japan and Taiwan. Currently we're focusing on new concepts for both young men and young women and also moving into new categories such as youth wear for 2005.

For our Dockers brand, our business momentum continues to be positive, notably in Pakistan, Taiwan, Malaysia and the Philippines. Our Sweat Terminator concept in both tops and bottoms continues to perform well at retail. The current test of interactive kiosks in our Dockers-only store in Kuala Lumpur whereby people can experiment with matching tops to bottoms has been successful. And we're now commencing to roll that out further into Malaysia and into Taiwan and the Philippines.

In summary, our business continues to perform well of our internal plan and last year. All three plans are delivering and performance is broad-based across the region.

Now I will pass it on to Phil Marineau.

Thanks John. So just to recap for the quarter, we've improved our profitability, our gross profit, our operating income, our net income and our cash flow. That's what we plan to do. Our men's core pants business has strengthened around the world throughout the year. During the fourth quarter we will continue to build on these improvements. Like many of you, we are mindful of the recent weakness in US retail sales, but we remain cautiously optimistic about our performance for the balance of the year.

So let's open it up to questions.

(OPERATOR INSTRUCTIONS) Banc of America Securities.

We're having trouble hearing you.

Macro stuff first. When we look at the retail sales data like you just mentioned, and the government's PCE spending data -- we see decreases in momentum. Can you talk to us about something that is less transparent, which is selling prices?

You know what? I think I will let Robert and Bobbi give you at Levi's and Dockers what we're seeing in terms of retail selling prices. I think overall the news is good for us. We have been reasonably strong in selling at the targeted price range we're interested in.

On the Levi's brands we've actually seen price stability in the marketplace. Our customers, like we have been, have been focusing on selling the Levi's brand for the right price and improving their operating margins. So we have see prices stabilize -- actually grow slightly in both our men's and our women's segments. Our women's segments were up about 10 cents in the quarter and the men's segment was up about 16 cents in the quarter.

What we see, the Levi's brand sells typically best at a premium somewhere between 5 and $9 to the average price in the category. It is because we added value that we're putting in the fit, fabric and finishing. Our customers have aligned around that strategy. And we're actually seen price stability. And as I mentioned, at the same time we are driving growth 1 percent up in men's and anywhere between 21 and 6 percent up by segment in the women's category.

And then on the Dockers side, for the Dockers brand we are seeing price stability in the marketplace. Overall where we are seeing prices decrease are in the private-label arena. But overall for Dockers we are seeing stability versus last year.

And the LSS, we can just tell you what the price range is on LSS. And we're holding it -- our retailers are holding it in a pretty disciplined fashion.

Thank you. On the Kmart front, can you talk to us about some of the things you considered in terms of limiting risk and going into that particular retail channel, things that were important to you?

What was important to us is to expand our distribution into the Kmart stores, obviously. And we wanted to do it in a controlled manner and have a strong execution for the holiday season, and then expand from there throughout next year. So that was the game plan that we worked with the Kmart apparel executives.

Thanks a lot. And more on the financial side. Obviously the margins were extremely impressive. Is there an FX impact that we can sort of quantify? On the gross margin side, for instance, you almost did a 46 percent gross margin. Is there a way to separate that out?

For the quarter, it's about $10 million favorable FX quarter-over-quarter. The one thing I will say on margin, and we were careful in the release and in the conversation today. Yes, the gross margin rate is 45.9 for the quarter. Our year-to-date gross margin rate is 43.8. And we did call out that the quarter was particularly benefited by an unusually favorable mix of core profitable products. So what we're trying to indicate there is it's not going to be as strong as 45.9 every quarter. But it is improved.

The advertising spend, I thought we are expecting a little bit more. Is that something we should expect sort of kicking up going forward?

It started kicking up in the third, and there's a lot more spend coming in the fourth as well. As Robert indicated, we have a strong style for every story campaign well underway. Signature is spending in print and Bobbi is on-air as well.

Let me give you the comparison. A year ago we weren't spending on Signature. This year we are. A year ago in the fourth quarter we virtually had no advertising on Levi's. We really have a substantial budget this year. Last year on Dockers we had no advertising and we have a substantial budget this year. We have no advertising in Europe a year ago; we have a substantial budget for it this year. So as we go into the fourth quarter our A&P spending is really going to be ratcheted up versus what we spent a year ago and we believe against very strong marketing programs that we've tested and are proven to be effective.

Jim, the cash flow in the quarter was negative. But if you had stripped out a big increase in the trade receivables it would have been a very strong cash flow quarter. Can you walk us -- can you explain to us the increase in the AR? It was like 108 million.

It's a seasonal business, so we're shipping in for back-to-school in the quarter. And so I would look at more cumulatively, as we said, the net debt is down 100 million from the end of last year. And we've funded a lot of obligations during that period, cash restructuring, etc. I think the other -- just to make the seasonal point, if you look at our DSOs, our DSOs are in very good shape at the end of the quarter. It's really just a function of the flow over the revenues at the end of the third quarter.

Thank you. Just so we understand more clearly on the open tax years, I think if you take a look page 68 you call out the 164 million. Is that the number that we should be thinking about in terms of what you have booked in terms of your expectations and funding?

(multiple speakers) have on the balance sheet, we have a very clear tax accrual on the balance sheet. Then, as you say, the next 12 months requirements of 164 million. There's of course not direct correlation. The balance sheet has recognized all tax expense through that period. The forward 12 months cash requirements would be both settling and resolving open issues that are on the balance sheet at the beginning of the period, as well as sort of ongoing tax requirements during the forward period.

So just to be clear, on the balance sheet you'll see we have a long-term tax liability of 40.4 million at the end of the third quarter. And we have a short-term or current tax liability of 118 million. That 118 million we expect to -- obviously because it's current, we expect to pay that over the next 12 months. So the 118 is a component of the 164 million of forward 12 months cash requirements. The other piece would be the ongoing cash expense of the businesses. Cash tax expense of the businesses.

Could you give us an update on the employee lawsuit? We haven't heard about that in a while.

We have an update -- we have it described in the Q, and there's no new news there. It is the same basic update as we had at the end of the second quarter.

Will there be any significant amounts of cash coming from your closed and owned operations that you did during the quarter?

When you say cash coming from, you mean through the disposals of --?

Yes.

There's going to be small amounts of money. We continue to reflect those as we get those proceeds I think in the neighborhood of -- this year we delivered in the neighborhood of $10 million or something of that ilk in terms of property disposal subsequent to closing plants.

Finally, when folks have questions in terms of IR, who should they contact now?

We're utilizing Allison Malkin of ICR, is the point of contact. And she will coordinate with me, Phil and the finance team and make sure you guys all get the answers you need.

Could you possibly give her number for the folks on the call?

It's on the release. It's on the head of the release. I can read it to you. It's Allison Malkin, 203-682-8200.

Thanks guys.

CIBC World Markets.

Alexis Gold This is Alexis Gold. Just a couple of questions. Just following up on the advertising question, it looks to me last year through the first 9 months advertising expenses was 225 and it's 175 this year. Should we expect at least for the full-year in an absolute dollars basis advertising to be up year-on-year?

We're not giving projections, but I think generally speaking we have a run rate we've spent for 9 months. And I think as Phil indicated, we expect the run rate spent for the fourth quarter to be higher than the spend for last year. And you can think about it that way. We will be increasing the spend rate into the fourth quarter.

Additionally, just trying to get a sense. CapEx is obviously substantially lower this year, which would we certainly expect with the plant closures. But could we get the breakdown for D&A and also get a sense for if we should expect D&A to be sort of more in line with CapEx going forward? And if that sort of $12 million area on going basis is probably the right number to think about for CapEx?

We call out the D&A. The D&A is 15 million for the third quarter 2004 -- that's the D&A -- versus 17 million in the third quarter 2003. And then relative to capital expenditures, we call out on our cash requirement section that we expect to spend in the neighborhood of 46 million, I think. Yes, 46 million over the next 12 months. And we would have spend over the last 12 months about -- or this year we would have spent 25 million. So we're expecting to increase the spend rate on CapEx from about 25 to 46 into '05, primarily reflecting we also disclosed that we would be rolling out SAP and ERP solution for the Asia division. So that's what the increase in the CapEx spend is.

I guess I'm just trying -- do you actually break out depreciation from amortization?

There is no amortization (multiple speakers)

That is what I thought.

It's all depreciation.

Additionally, I believe a search for a new CFO had started. I wanted to find out whether or not we could confirm that. And if so, should we expect to see an announcement in the near-term as you complete the cost initiatives and restructuring and all the events of the last year?

I'm not sure I know that question was other than to say we are in the process of seeking a CFO to replace Jim. Jim will be with us until next year. And we have a search internally and externally, internal candidates and external candidates that we are in the process of going through. And we promise as soon as we have some news about that we will give it to you.

Great. Thanks very much.

Lazard.

It is Mark Hoffman with Lazard Freres. You guys have done a terrific job this year paring down your inventory levels. I'm trying to decipher from your comments if you did too good a job and where you expect inventory levels to go in the future.

I think, first of all, just again, we talked about this the second quarter. We did have a goal to really substantially reduce our inventory and improve our turns. I think you can see we've accomplished when you look at the results in the Q.

To do that we made sure that we produced product at levels and inventory at levels to the order file that we had from our retail customers. And we have beaten that order file at retail, and as a result have been chasing some demand.

Our problems have been compounded by making sure that as we really lowered our inventory and have been conservative and gotten great control of the economic model of the Company, we've had some issues in terms of linking supply and demand from a contract manufacturing standpoint. We made some changes mid-year in terms of how we do things and how we organize to do things. And as we've gone through the last 90 days we've really improve the situation. But we still had some problems, as called out on the Levi's brand in the US and as called out by Paul Mason in Europe.

We expect to have most of those problems behind us by the end of the year, particularly in the US. We think in Europe we need to finish this country-by-country approach to management before we think we are really going to have a good fulfillment process down in Europe. But we don't expect it to be a huge problem going forward.

That in turn, I think, will allow us to have much better supply and fulfillment issues. I think you'll see us carry more inventory next year because this is below the plan that we had set for ourselves this year. But our goal going forward is always to be very conservative in the amount of inventory that we carry. And it will be pretty consistent with what we believe the order file is from retailers and then some subjective point of view that we have about what the trending demand is.

The other thing I would add to that is, as Phil said there's chasing going on to the demand level on top of the order file. But there's also good improvements that have occurred and the brands have in particular done a great job around management of excess and obsolete inventory and managing our ownership of "bad inventory" down as well. The move toward a full package and controlled ready to wear has allowed the brands to move forward on moving raw and whip (ph) ownership to our vendor base and taking that capital investment off the balance sheet. And then I think just tactically, the forecasting process continues to improve. So while there's a piece where we've gone too far and are chasing demand, there's also the other pieces where it's been good work that has allowed the Company to get more efficient in the inventory management.

Thank you.

Fieldstone Capital.

This is Kelly Garrity Boucher (ph) from Fieldstone. I have a couple of questions. The first one, I just wanted to get a sense of what the product mix is looking like these days in terms of the breakdown between men's and women's. I know that back in '02 you experienced great success with the super low rise jeans in the junior's category and it was an extremely profitable line for the Company but represented an extremely small percentage of overall sales. I'm wondering what you have been doing. We keep hearing positive results of sellthrough at retail, but how has your overall market share in women's and junior's improved in the past couple of years?

Is this just US you want to talk about?

I guess overall I would be interested in as well. But I think it just seems to be that US is a little bit behind. And maybe on I'm interpreting that wrong; that the mix is much more skewed toward the men's product category.

Historically Levi's has been a men's product and one of our emphasis is to improve our business in women's. And we will let each of the divisions give you their story on women's, beginning with Robert on the US.

The mix on the Levi's brand in the US now is about 30 percent of our total business is in the women's segments and 70 percent in men's and boy's. That is a nice improvement over where we've been in the past, where the highest we've ever really had the business run is hovering around the 20 percent range.

Our highest selling -- our most successfully performing customers, I should say, have actually improved their mix to be closer to around 45 percent women's, 55 percent men's. And what I can say of our own Levi's stores, which again have been running comp increases for 22 consecutive months, the mix there is around 48 percent women's and 52 percent men's.

And our strategy is clearly to execute our business by consumer segment, by customer, by door, by fixture. And so we have dedicated a merchandising, design and product management staff specifically on the women's businesses. And we have dedicated teams for misses' and special sizes, as well as for the junior's businesses. And we've been able to grow our share by a couple of points in both juniors and the misses' segments over the past several quarters.

The mix of men's to ladies is not too dissimilar from what Robert is talking about in the US. I think the big opportunity in Europe is that the women's jeans market is stronger today in terms of growth than the men's jeans market. I would tell you the top 7 countries in Europe in which we read the panel data, then 4 out of the 7 are in decline in total; 4 out of the 7 are in decline in men's; and yet 5 out of the 7 are in growth in ladies. So this is a huge opportunity for us.

In terms of market share, therefore, we're not winning share, because we are basically today holding flat in the market that's more buoyant in ladies and men's. But we've launched this year a range square top block products which are now and showing increased participation in terms of the trade penetration. And we're hopeful that going forward we can improve our market share in women's. It's a big opportunity in Europe.

In Asia-Pacific our splits 70-30 or so. Once again, as Robert said, in our stores, though, it's about 50-50 in the original Levi's stores. It's growing quickly. We are number one in the women's market share in every country in Asia. So we lead in women's and we lead in men's. The women's market is bigger than the men's market in Asia. So we also see that as a strong growth opportunity going forward. And I mentioned in my debrief that we've launched this ladies Levi's concept which is targeting to different usage occasions. So we see quite a bit of growth and a lot of potential still for us in the women's business.

It's worth talking about the Signature business in the US in men's versus women's as well.

In the Signature business about 40 percent of our business is in men's, and about 30 percent in women's, and 30 percent in kid's. So we're pretty balanced and have a strong representation in the women's and junior's and girl's marketplace.

Does that help you?

That's terrific. I appreciate it. Another question I had is it seems that you're leading several initiatives abroad. Specifically I've been reading that you've meaningfully expanded the product line in India. Is this indicative of what's to come in other markets? Should we anticipate higher licensing revenue going forward?

Let me talk about India. It's not licensing business; it's a business that we own and operate ourselves. Once again, in India a lot of the product expansion is taking place in the women's area. And I'm sure you're aware culturally that's an emerging trend as Asian youth start to get more comfortable wearing jeans, the women is the area where, as the women become more confident in their ability express themselves, we see opportunity to grow that women's area as well. So India is not licensed; we run the business ourselves. A lot of the expansion is happening in women's. And our business is enjoying very strong double-digit growth there.

I think the point that is embedded in here is that we are doing more licensing, both with certain core products. So some of the revenue declines we've experienced in this quarter are a result of categories that we've gotten out of doing ourselves and that we're licensing, which will produce licensing income in the future. And the model that we have followed is Dockers where we've been very successful licensing the Dockers brand. If you go outside -- inside, but particularly outside the United States, we're licensing more accessories and more complementary products to our Levi's jeans product line for particular emphasis in the original Levi's stores, which we franchise around the world. So yes, you should expect in subsequent years greater licensing income coming out of the Company.

Thanks very much.

CRT Capital Group.

Ethan Schwartz from CRT. A lot of my questions have been answered already, but back on sales in the US. First with Signature, can you give us a sense of how Signature did year-over-year in existing retail channels? What I'm getting at is I guess I'm trying to strip out the launches in '04 and trying to get at what the organic Wal-Mart chains and other changes were.

The only customer where we had a year-over-year comparison was at Wal-Mart, and it was for the month of August. And during the month of August we sold through the cash register slightly more units than we did last year on about 40 percent less inventory on the retailer floor. So we refined the business model substantially and had great productivity.

When do you think -- obviously you're going to -- at some point the greater sellthrough is going to flow up to the top line. When do you think you'll start to see some year-over-year positive comps in the US market?

We're not going to be predicting. But I think what we tried to do in the 10-Q, in our MD&A we tried to call out the license categories and make sure -- and also call out specifically where we had reductions in off-price volumes taking place in businesses. So I think if you -- just within the quarter, I think if you looked at the US Levi's brand, as Robert said, there's core growth inside that brand once you strip all of that out. Asia continues to grow. Europe we're moving towards growth. Signature of course is a new brand and continuing to grow. And Dockers is moving towards growth. So we've tried to give you the historical info and will continue to do it that way in our 10-Q so you can get a sense of the core business. But we're not going to sort of call forward when that's going to happen overall. But clearly we're heading there.

On taxes you gave some good information. Moving beyond the next 12 months give us some sense of what tax posture will be. In other words, once you get through the next 12 does that clean out most of those disputed tax obligations and then you resume becoming sort of a cash taxpayer? Any guidance there?

If you just look at the face of the balance sheet, the long-term tax liability is now 40 million. So we've moved -- we have 118 that's in current. So once we move through the next 12 months to 118, that is our intention to move through that set of dollars. And then we only have 40 left long-term.

So by definition, over the next 12 months, we intend to clean up a lot of the -- as much of the open years and issues as we can. We're trying to work expeditiously and collaboratively with the IRS to move through those issues.

And then obviously, we have a lot, if you look at our tax, you will notice we have a lot of tax assets in the business that will provided -- depending on Dockers sales will provide some shelter there clearly as well. If Dockers weren't sold, it would shelter the ongoing earnings of the business. And so we of course will do our best to utilize those assets effectively.

But in the long run I think you see in the effective range, it is starting -- there's still a lot of noise in the effective rate. But we're starting to move towards some more normalcy in the effective rate. So over the next 12 months I would expect that continue to move towards a more normal level of tax expense.

Our posture, our general posture, Company with the leader of our tax department, Paul Smith, our posture is simply to pay our fair share; not paying more than we're supposed to, nor less than we're supposed to, but pay our fair share to the taxing authorities.

On the restructuring reserves, what's the end of the quarter cash expenditures still required to settle any outstanding restructuring reserves? Are there more cash consuming reserves that are on the way or cash consuming restructuring charges that are on the way?

We continue to move through the -- what we had said is we would continue to announce initiatives as they unfold for us. And in terms of our cash restructuring, our balance sheet currently has 67 million in restructuring reserves. And our forward 12 months -- over the next 12 months we have cash requirements of 97 million. So call it $100 million of cash restructuring payments to be made over the next 12 months.

Then I just want to go back to what you said earlier about the gross margin. Obviously it was fantastic this quarter. Why wouldn't you -- what would have been unique about this quarter that would make this a quarter in which you would sell more of the higher-margin or higher-priced (technical difficulty)? Why shouldn't that be a normalized number or pattern going forward?

One of the businesses that drove some of it was -- the way we called it out is we had an unusually favorable mix of more profitable core products. And the US Levi's business in particular experienced that, so maybe Robert can make a quick comment there.

The reason the gross margins were as strong as they were is primarily because the mix of the products was so much based on our core replenishment products which are the most profitable products in the overall mix. When you look at what our plans are moving forward -- the growth of the women's segment, which I talked about earlier, as well as the growth in the young men's segment -- the products that are driving the growth in those categories are products with significant greater investment in new make and fit, as well as an aggressive investment in fabric and finish. Those products naturally are lower margin. And frankly, our customers are more demanding of the margin that they expect from those product segments. So as we get into a more normalized mix of product moving forward and we are driving growth, which is our goal across all segments, we can expect the gross margins to just balance out a bit.

So if I understand you correctly, you're suggesting that would be on a growing revenue basis? In other words, it's not so much that the core products would decline somehow, but rather you would be adding new products to the mix that are --?

Even the mix historically that was experienced in the third quarter was sort of more than typical. And the mix can change a lot quarter in quarter out. So we wanted to make sure that we didn't leave you with the thought that 45.9 is a repeatable event, a 45.9 percent margin. And that's why we call out the 43.8. That's what we delivered over a 9 month period, and so your mind should be more in that vicinity as opposed to up in the 45.9 vicinity.

Thanks very much. Great quarter.

J.P. Morgan.

It is Carla Casella from J.P. Morgan. A couple of follow-up questions. One about the Kmart launch. How does that assortment compare to the original assortment that went it -- the stuff that went it at Wal-Mart?

And Kmart we will be launching into all consumer segments, all six. And we will have a balanced assortment between our core basic programs, as well as our trend core programs. So we will have opening price point at all business at $19.95, and we will also have trend core product in there at $22.95, $23.95, and the kids business it will be $15, $16 product. So a similar assortment that we have from a pricing standpoint as we had at Wal-Mart and Target. However, on the trend core items there is an opportunity for our retailers to differentiate themselves. They see the entire line, but it's up to them on which ones they pick. So similar, but there is an opportunity for them to differentiate.

Where you stand with Myer in terms of timing?

We are fully launched into all Myer doors, again in all consumer segments. We were there for back-to-school and are continuing to replenish it as it sells through. And the sellthroughs are doing nicely for us, and so they are set up for a good holiday season with us as well.

So during this quarter were there any launches included in the Signature numbers? Or was the Myer and Target all in the second and first quarter?

Yes, in the third quarter we launched into ShopKo, Meyer and Pamida.

And then, we have been hearing from a number of other players of new and enhanced jean lines from players like Calvin Klein, Izod. I'm wondering if you're seeing any impact of those at retail in your core business.

We've never heard of those brands. Robert, go-ahead.

Clearly in the US, one of the likatives (ph) worldwide, one of the fastest-growing segments is the premium jeans segments, which are generally in the US priced about US$65. There are a lot of players that are attempting to compete in that category. We have had a few segments of our business -- Levi's (indiscernible) clothing range, as well as Levi's Premium Red Tabs, better distributed in premium department and specialty stores in the US. That business has been stable in sales for us. We've been working to improve the profitability on that segment as well. And we will focus on growing that segment to compete with the brands that you mentioned, as well as the brands that are already effectively competing in that segment of business moving forward.

One of the things I always try to remind people is if you look at the business in the US, that the average price of jeans out the door in the US, including all those brands and all those price points, is about $21.50. I may be off a few cents in some direction. Where the volume is at, and where the business is really done, both at the revenue line as well as the unit line, is at the price point.

Levi's Red Tab is the premium brand within the context of that competitive set. Our regularly price in general is about $29.99 and the promotional price is $27. Levi Strauss Signature sells at $19.95 and $22. Even when you mention these brands -- not that we consider them incidental competition, but remember where the competitive battle is really going on in the price point that it is going on at.

Are you seeing any increase in competition at the moderates? I know Izod (indiscernible) launches is more moderate. They are the low-20s out the door, I think.

Not in jeans. We haven't seen them in jeans to the best of our knowledge. In Europe, have we seen Izod? Asia? No. Izod would not be on our -- it's not that it's not on the radar, but it's in the corner someplace.

Just secondly, you talked about some very strong sellthrough numbers both in women's retail, as well as men's and young men's. I'm wondering what -- are you seeing inventory adjustments at retail? Or when will we see that translating into your sales -- correspond to your sales growth numbers?

What we keep trying to say here is that our focus as a company has been and will continue to be improving our economic model, the profitability and the cash flow of the business. The results that are so strong in terms of profitability this year are the result of actions that we took to make sure that we've strengthened profitability. And that is licensing businesses one time, getting rid of closeouts or reducing the number of SKUs that turn into large amounts of closeout.

So we will as we go forward have continued to have someone time events that we will compare against, actions that we've taken to improve that gross margin and the profitability of the Company. So we are reluctant to predict to you when you will see on a sell-in basis or the top line what the revenue trend will be. We feel very comfortable with our consumer retail trends on the business that we intend to be in going forward and that we intend to really manufacture. We see it in the US, we see it in Asia, and we see the kind of improvement that we are expecting in Europe and expect that improvement to continue as we go forward.

So we just can't try and reconcile for you the sellthrough trends that we see in retail or to what the -- a prediction about what the top line trend will be here.

I guess what I'm trying to get more is a sense of the inventory at retail, and if you are -- the sellthrough being stronger than what the sell-in looks like, does that mean they are reducing inventory? Or is it just as you said, it is certain items (multiple speakers)

What we're saying to you is it is certain onetime items that we are comparing against. We would say our inventory at retail is equal to or perhaps less than a year ago, but it is not a significant issue relative to the performance of the business, either the top line or bottom-line in this quarter, or we expect it to be in the fourth quarter.

One way you can spend a little time on it, if you're in the US Levi's brand, if you're in the 10-Q on page 38, we've tried to break out -- so the Levi's brand for the quarter was down $36.6 million. And tabularly we've broken it out for you. Licensed businesses were 17.7 of that, and thus the "continuing categories" were down 18.9 million in the quarter. Then we separately in the conversation in the MD&A call out that of that round numbers 19 million, 12 million was driven simply by our doing less sales into the off-price channel. So now we're down to 7 million. And I think as Robert indicated, there were tight supply constraints in the business. So when you consider relative to that 7 million decline the tight supply constraints, because we do that as a saliva (ph) test -- where is the sellthrough? If we're experiencing good sellthrough, is it inside the core sell-in number? That's the question you are asking. And so we've triaged that ourselves here. And we do think the core sellthrough that is occurring out of retail is showing up ultimately in the sell-in of the business. It's just being masked by all of these non-recurring items, which are all about cleaning up the health of the business. The revenue -- cleaning up that revenue base and driving, as you can see from the consolidated regional operating income, much stronger operating income in those regions than we had last year.

Just one question on the employee incentive plan, that you mentioned some changes in the 10-Q, like the new matching gift formula. Is there any idea of magnitude anticipated impact on that next year or whether it's even positive versus negative in terms of SG&A spending?

We haven't called out any specifics, but we have a -- if you look at the end of the quarter on the face of the balance sheet we have a pension liability, a long term pension liability of 231 million. That's our under-funded position we have in our pension plan. And you'll see in our cash requirements we fund into that under-funding over time.

And in terms of the freeze, what the freeze a-- and it is two things. It's a freeze and it's a reinvestment in the Company's 401. So we have gone from defined benefit and reinvesting defined contribution plan, in the 401(k) plan.

The net results of -- what the freeze does is it stops additional expenses from accruing into the future, generally speaking -- I'm speaking at a very high level -- stops additional expenses from accruing on service into the future. And we take that expense savings and reinvest a part of it in our defined contribution 401(k) plan. And the net result is it gives us a more stable understanding of how much our P&L will be impacted over time, because it's a known 401(k) contribution. And it also is a net savings for us out into the future. We're just not calling out of specifics of that.

But is one of the many actions that we lifted out for you that we're trying to take to get SG&A and operating margins more competitive next year.

Just one last question. Asia, the businesses has been very strong there. As I understand it, it's a higher end mix of product as well. I'm wondering if there's a -- some of the reason why the operating margins in that business is lower on a percentage than the US margin?

Ask that question one more time?

I'm wondering why the operating margin in Asia is lower than in the US given that I thought it was a higher end product mix.

The operating margin in Asia -- now, the Asia business is all-in -- all of the corporate spend, etc. So John delivered in the third quarter 17 percent of Asia revenues in operating income. North America was 26 percent of revenues in the quarter, but there also -- the corporate spending -- so we look at the corporate spending pieces, there's more of that that's dedicated to driving the US business, I guess is the way I would say that versus the Asia business.

So if you burden them all, you would see ultimately the Asia gross margins are much stronger than the gross margins in North America. And you're right, though, at the end of the day the way we present operating income in North America looks stronger. But again, there's corporate spending. There's another 100 million of corporate expense, a lot of which drives the global business. But a lot of it drives in particular the North American business.

That's all. Thank you.

Goldman Sachs.

Karen Eldrich (ph). Can you give us with regards to licensing initiative that you have, can you give us a rough annual revenue number and how much of the business will now be shifted into licensing?

We gave you those numbers for the third quarter. So you have those for the US Levi's business and the US Dockers business. In tabular form we called out that for the third quarter we did $8 million in business this year in licensed categories versus having done -- in particular licensed categories versus 26 last year. So there's 26 million of third quarter '03 revenues that are going away in the Levi's brand and converting to a licensed formula. And then similarly, in the Dockers brand there was a few million dollars in the prior year in the third quarter '03 that's going away.

So we're not giving any specific numbers in total for licensed categories. But we have certainly called out the pieces of the business that have been licensed. I think we've called out in US Levi's, we've called out the tops; we've called out the kid's businesses as having been licensed except for the 8 to 20 boy's; and in Dockers we've called out their pieces as well.

Who has been some of the recipients of these licenses?

On the Levi's business all of the kids licenses have gone to Hadad and on the tops side of the business, the men's tops business is with Li & Fung and the women's tops businesses with Jerry Lee (ph).

And then on the Dockers side it was really -- the primary license was women's tops and that went to Kellwood.

Final question, getting back to the employee lawsuit. I believe on Friday there was a filing that contained actual testimony from the IRS. What have they talked to you about on this issue, and what concerns do you have for penalties from the IRS?

Basically we're not going to comment on the case in particular, other than again, as I had laid out, we told you in the second quarter that we had received a revenue agent's report for years '90 to '94. We told you in today's filing that we would file a protest with the appeals division. So the case is moving forward with the appeals division. And again, we believe relative to our balance sheet we are adequately reserved for this. This issue, the open years, and all open issues we've adequately reserved on our balance sheet. And we're providing the cash requirements because it's in our interest. And we believe in our conversation the taxing authorities always want to move forward expeditiously. We have liquidity we want to move forward expeditiously and get fair resolution on all of these open issues over the next number of months.

Thank you.

Libertas Partners.

Joe Zalewski with Libertas Partners. Just a quick question on sourcing. Clearly you've seen this increase in your gross margin. Part of it I'm sure is due to, as you mentioned in your press release, sourcing. Can you quantify possibly how much of that gross margin increase did come from your outsourcing efforts?

We are not quantifying individual pieces like that. But certainly it, along with the dilution management, have been important drivers of the margin rate that we're enjoying this year, 9 months, the 43 we talked about.

And you had previously mentioned that you were seeking to increase your overall outsourcing from 70 to 90 percent. Can you comment on how far along you are on that process and if you're sourcing from Asia, Latin America, or a combination?

Just in terms of -- sorry, the first conversation is how much do we continue to manufacture versus source. With the announcements we've made now on Adelaide, Australia and the two Spanish plants, we're down to, I think, 5 plants left in the world. So it's -- 90/10 is -- we are probably there right now in terms of the go forward needs of the business. So we're sourcing. We've become a sourcing marketing company versus a manufacturing company based on those numbers.

In terms of where your sourcing, can you give a little color as to whether you're (multiple speakers)

Obviously we source still predominantly most of our sourcing is coming out of the Americas region, talking more about Mexico or the Caribbean; sourcing more out of Asia, as you can understand. But we're developing a capability of close in sourcing to give us flexibility for the trend core products. And we will continue to explore Asia for the long leadtime products.

Thank you.

Salomon Brothers Asset Management.

Jeff Cavalares (ph). A question about -- Robert, you mentioned some sellthrough numbers for US Levi's, and you mentioned them in pieces. And I may have missed it if you said what total US Levi's sales costs, men's and women's and kids, what that sellthrough number was. And for what period are you quoting these numbers?

The numbers that I quoted were for the third quarter. And if you look at the brand's performance in total, it was basically stable to slightly up.

As I mentioned in the past several calls, our largest business segment is our core men's 25 plus jeans segment. The total men's segment for the first time in quite some time was actually up 1 percent in the third quarter. And when you combine that with the success that we're having in young men's at 12 percent, misses' at 21 percent to juniors at 6 percent, the total business is up a couple of percentage points. And we have worked hard to get the core businesses in terms of fit, fabric and finish to the level of commercial success that those numbers would indicate that they are having, and expect those results to continue in future quarters.

Can you talk about any trend in square footage allocated to Levi in the US at J.C. Penney, Sears, Federated, May?

As I mentioned in the past, one of the challenges we've faced as product lines were less commercial and our economics were less viable to the customer, we had lost quite a lot of square footage. Over the past two quarters, as we've gotten the economics more compelling for our customers, as I mentioned, we took a 5 percent price reduction in June of last year and have improved our customer margins several percentage points. They've been engaging, along with the fact that the product range is much more commercial.

I do know that customer by customer we've been targeting specific fixtures to grow the business. And for the first time in the back half of this year we've actually started to see an increase in the square footage allocated to Levi's. I don't have a specific figure for you.

I would only urge if you haven't been to retail for back-to-school or the holiday season, particularly in men's, where it still is 70 percent of the business, the retail presentation in those customers May, Kohls, Penney's, Sears, and Mervyn's, hasn't looked this good from a retail presentation standpoint in seven years. So we believe we've really made progress through our strategies -- first the product, then the margin -- and then learning from our own store experience and translating that into a much better buying experience for the consumer at retail. It's worth taking a look at if you haven't seen it.

The one comment I can give you, in terms of expanded fixture points (ph), just validating Phil's point, is if you go to our top eight customers, they've really started to articulate a strategy of growing the Levi's businesses there -- primary branded statement (ph) on the jeans floors across particularly our men's and young men's segments, but also increasingly in misses. I think if you went out and looked at the presentation Phil referenced, you'd actually see a growth in fixture points in several of those customers dedicated to those segments.

That's great news. Can you comment, you've talked in the past about cannibalization from Signature in key -- just update us on what that looks like.

We continue to see no cannibalization across channels at this point. Virtually all of the retail sales of Levi Strauss Signature have not come from Levi's (indiscernible) incremental to the business.

Also, can you comment about what the mix is in the third quarter of your core replenishment product versus non-core product in denim?

We don't get into that providing that detail, other then to talk -- we told you qualitatively that was an unusually strong mix of core, and that that margin rate shouldn't be expected on an ongoing basis.

The only thing I would say that we haven't said here that is worth mentioning, and I think it's a phenomena around the world -- we're beginning to see the revitalization of our 501 business around the world. That contributes to higher margins. It sells at a higher price point than the regular product, and it certainly sells at a great price point outside the United States, but even in the United States, it's a higher price point product. I think it's indicative of some market trends, but I also think it's a reflection of both the presentation, the product finishing that we've done, and now the marketing that we're doing against 501.

Fair enough. So you're saying the gross margin of the core replenishment product, it should be stable going forward, just on core replenishment gross margin, the core replenishment sales. Is that --

We don't expect any margin deterioration on our core replenishment product.

Lastly, can you just comment about quotas expiring in January '05 -- what your thoughts are about that, how you will deal with that? Is it a benefit to you? What are the risks?

Clearly, we're prepared if there is going to be any shift towards China, but a lot of the commentary is about the anticipated surge, and what the reaction is going to be on a political point of view here in the US. All we can say is that we are prepared for any shift that comes out of China, and if the shift does not take place, we're also covered for that as well. So we're covering our bases for both trends that may occur, and I think that's the only prudent way we can be. We just don't know yet what the political reaction will be to the anticipated increase of production coming out of China.

You have to remember, one of the advantages that we have is that we sell in 70 countries around the world, and we've been making products in Asia for our own Asia business, which is now substantial, for years. So we have a base of Asian production that really is well balanced between China, all the way down to India. And it gives us -- and between that and our contractors in Latin America, South America the Caribbean, it gives us the flexibility to adjust to what the actual situation is.

Congrats on the good numbers. Thanks.

Trilogy Capital.

My name is Roy O'Fear (ph). My question is about your ERP system you're going to set up in Asia. How is it different than the project that you scuttled in December?

The project that we called out in the first quarter that we were indefinitely suspending was a global rollout of SAP and an ERP solutions which was the SAP solution. What we are now talking about is a controlled rollout of the SAP solution in our Asia-Pacific region; not global, just Asia-Pacific region. And that's what we are currently underway with into next year.

Will you recoup any of the losses that you took with --?

There's actually disclosure in the 10-Q around that. And I think in the neighborhood -- it's very early on in the 10-Q. And I believe in the neighborhood -- the call out was in the neighborhood of 5 million or so of the original value that was written down we think is leverageable into the Asia SAP project. And there's disclosure in the 10-Q around if we hadn't written off the 5 million what would the incremental depreciation have been in the business. It is actually page 7 of the 10-Q. There's conversation -- approximately 4 to 5 million is what we call out.

Considering the fact that the worldwide rollout was not a success, what makes you feel that this smaller rollout will be?

Just to interject, it wasn't that it wasn't a success; it haven't really commenced; it was in the prep stages. We at the time didn't have the -- we thought it was prudent relative to our liquidity position, just our covenants, our liquidity position, and the current status of the Company late last year and all of the other work that needed to be attended to to put it on indefinite suspension while we worked on plans together to drive the operating income that you're now seeing here in the numbers.

So I think it's really important to understand, we did do this for economic reasons given the financial position that we were in, and again the our focus on strengthening the economics of the Company, which we've done. The work that we did, though, to prepare for the worldwide SAP rollout, it was to be phased from Asia-Pacific to begin with. It actually has value relative to where we are today. And in fact we were in the process of installing SAP in our Australian/New Zealand division, and then we halted it. But we will begin again in Australia and New Zealand. That work that was done -- we will begin from there. And we believe actually the work that we did for a worldwide rollout only served to prepare us to do Asia-Pacific. And then once we get Asia-Pacific, we will figure out where we're at and what the next step in terms of an ERP solution is for the Company.

So this could be the beginning of a new worldwide rollout, albeit more slowly and region-by-region?

A much more -- yes.

Second question is about inventory levels, which I noticed has gone up about 20 million from last quarter. Is that correct?

Yes and that is all seasonal.

Right, and that was predicted in your last conference call. How much higher do we predict that that's going to go into Q4?

We're not predicting, but it certainly won't be higher than it was at the end of 2003.

I think if you took a look back at a history there is a seasonal buildup of inventories and receivables that ends as we go into the end of the fiscal year. You take out 203 -- take 203 as just a bad dream -- and look at a history of the Company in terms of quarter-to-quarter, that's a reasonable approximation of how inventories ebb and flow in the Company.

How have the trends been with some of the more important lines, like 501, which you reported was stabilizing, and 505?

What we're trying to say, what Robert is trying to say is that we're seeing on our core men's business, for guys over 25 years old, that business for the first time really begin to stabilize and show even some modest growth. And in the -- we're certainly growing in Asia business. And we're seeing that business in Europe, the trends begin to improve, but still remain negative versus a year ago. And that's our core goal, is to get that turned around as we go into 2005.

In the last call you guys spoke about transitioning some production from Asia to Latin America in order to get shorter time turnaround for quick replenishment. Earlier on this call you spoke about transitioning more to Asia. I was a little confused about that. I wanted to know if you could clarify a little bit.

You're right. We did transition some of the product from Asia closer to the US for two reasons. One, as you mentioned earlier on, we're really chasing some demand, so we had short-term leave time capacity available here in Mexico. And also it depends on the type of year. If there's more trend core product, we will tend to manufacture that closer to the US because of the leadtimes. So it reflects on our sourcing capability depending what the season is, and quite frankly depending on the demand of the mix of our products. I think you should feel good, though, we have the capability to do both, and we will flex that depending on what our inventory needs are.

How much of the buy (ph) moved towards the trend core product or away from the trend core product for the holiday season in the spring season?

They tend to be the two peak seasons. I think you would probably see a 5 to 10 percent movement.

So 5 to 10 percent towards trend core product or away from it?

Towards trend core.

I think you better be careful of trying to quantify this, because again we're not going to give you the day-to-day management of the business and the numerics associated with that.

What we're trying to say to you is we've gone through a massive transition from a self manufacturing to a contracting manufacturing organization. In that transition we've had tremendous contributions just lowering the cost of goods. We've taken those lower cost of goods and invested them in retail margins, product upgrades, etc., so that we're in the position that we're in today.

Now we're going through the transition and the learning curve associated with the advantages that we have; the ability to source across 70 countries on a global basis and balance speed and cost between Asia and Latin America. There have been some hiccups in that as we have gone through this year, particularly as we have tried to live with the really low inventories and deal with some of the other issues that we have talked about.

Going forward, the opportunity for us, as well as the challenge, is to balance speed and cost between Asia and Latin America, and the production sourcing of the Levi's brand and Levi Strauss Signature brand on a worldwide basis, and similarly on the Dockers brand. That's how you ought to really be interpreting this. Getting into the numerics between trend, core, etc. will lead you down a very frustrating path. You won't be able to see that.

I think you have done an excellent job with all of those initiatives over the last year. What I'm trying to get my arms around is how much of those changes are going to start to hit the bottom line in this quarter, the next quarter and then the following years?

You are starting to see it in the bottom line. We're not trying to give you a 46 margin go forward basis, but you're seeing us return to that 43 margin level. And what we're trying to say to you, what we've said to you is view that as a reasonable approximation of the margin going forward as we try and balance these initiatives.

The thing I would add, as Phil says it's balancing speed and cost. And of course, as cost reduces in the Asia region, if quota is eliminated considering the surge question. But as it becomes more cost competitive in Asia, that will go into the flex formula as John speaks to it. And we continued to balance the speed and cost. So that swings us toward wanting to bring certain type of product out of Asia, swing there and vice versa.

Right, but there's a limit to what you can do on quick replenishment in Asia.

Absolutely.

That's why I'm just trying to get a sense of what's going to be core and what's going to be non-core. It also gives me a sense of what the retailer's commitment is to the whole brand. I really think you guys have done a great job in that and I appreciate the color you gave me. My only question left is on the marketing spend distribution been the Dockers brand and the rest of the brand, and that's going into holiday.

We don't break out those numbers. What I would tell you is that we were dark in the fourth quarter of last year. We have a significant schedule of television and print advertising in the fourth quarter on Dockers this year, including time on the NFL, which we view as really important for the target that we're talking to on the core men's pants business. And the Levi's business will be at levels that we get back to what we would consider historically competitive levels here in the United States. And you will hear our voice. We will have a substantial share of voice in the jeanswear category in the fourth quarter.

So you will continue to support Dockers, even going into the contemplated (multiple speakers)

Absolutely. (multiple speakers) the goal is to support Dockers and then come back with very effective, strong marketing in the fourth quarter.

Excellent, keep up the good work, gentlemen.

Harris Nesbitt.

Amos Gasino (ph) from Harris Nesbitt. I have a question about the go-to-market process that Phil Hanson (ph) mentioned in citing the reason for the improvement of the Levi's business in the US. Could you flesh that out a little bit for us, perhaps by giving specific examples, one specific example, of what that improvement in the go-to-market process? And in addressing this, can you also contrast it with previous attempts at improving the go-to-market process, because we've been hearing for years that that has been a component of recovery? Now it seems to be gaining traction. So can you give a specific example, contrast it with previous attempts and why this is more successful? And finally, as the last part of that question, is there any improvement in your ability to meet the customer demand and not leave any sales on the table?

We've been talking about this for several quarters. I would actually say that we've been making consistent improvements over time. We had leadtimes about 2 years ago that were about 14 months ahead of the market. We've improved that to 10.5 months from market. And our shortest leadtimes now are operating at around 7 to 7.5 months from market, which is for a business of our size across the brand category leading for sure.

The specific example I will give is we've talked a lot about the need to grow the women's business. Clearly in the women's segments, which are much more market responsive and much more demanding, you have to have the ability to essentially respond to the market's demand quickly and be able to flip your inventory based on the mix that the consumer's demanding.

We have moved our women's businesses to be at the shortest leadtimes. Our longest selling process on the women's side is now 7 months from start of concept development to start ship. Our customers have been really encouraged by our ability to make that progress. That is why I think you're seeing the growth on Levi's, for example, of 21 percent in misses' and 6 percent in junior's.

We are moving forward to try to get to the process of having a 90 day order to start ship cycle. That is our goal. That's the next step as we work to improve the go-to-market process. But what I would say, you know, we've demonstrated as -- I think as a company we've been talking about this for 5 years. I think the biggest success have begun about 2 years ago with that reduction from 14.5 months to about 7 months now in our shortest leadtimes cycles with an effort and a clear focus in the faster move in segments like women's and young men's to get to that 90-day order to start ship cycle time.

We, as a very specific example, have been able to take orders for a couple of hundred thousand unit programs from specific top customers in the women's and young men's segments because we've been able to react to top sellers after a couple of weeks of selling, and the customers have wanted to increase their order commitment. We have not been able to do that in the past as a company and we can now.

Thank you. I appreciate all of that. And I understand that the women's business demands a faster response time, and I see that you're delivering a faster response time. I'm just wondering if there's one example of how you have achieved that, the days reduction that you're showing. And the reason I'm asking is simply so that I can understand better what's contributing to your success, and therefore how sustainable that is; can I be comfortable that that is going to last. I don't know. Are fewer people involved in the decision-making process? Is it a headcount issue; fewer people with their fingers in the pie? I'm just wondering if there's any specificity that you can supply to that so that I can understand the process.

Over last few quarters we've talked about the restructuring of the organization to be focused on consumer segments, within brands on consumer segments, and then being able to execute by consumer segment, by customer, by door, and by fixture. So we've got dedicated teams now in merchandising, design, sales and product management, as well as our demand planning area that are focused on optimizing each individual consumer segment.

So in the past what you had is a multi-functional organization focused on a particular segment of the product line. What you now have are consumer segment dedicated organizations really looking at driving the results of their individual specific consumer segments. As a result of that, the decision-making process is much more streamlined. You've got people who are focused on reading the results and the market performance of a specific business segments, and really going after how to optimize the business.

It's important, because the structure now actually interfaces directly into our customer base, the way in which their structured. A specific example, we have again now junior's and misses' dedicated merchandising, design, product management, demand planning and sales staff that can go after optimizing that business segment by customer in its market cycle. We're selling in the way that the customer buys. The women's segments tends to operate out of New York. It is a showroom-based selling model where competitors are in market monthly. We're just beginning to finalize the capability to execute in that manner. And all of that is driving the results that I talked about earlier.

Just to explain it in another way, the creation of the business units that Robert mentioned that the Company created last year, it's really a big deal. So a particular example, all of the brands were in one sales organization; now they've got a sales organization that is dedicated to Levi's in the US Levi's business unit working with the US Levi's merchants, designers, and ultimately now the folks that do the sourcing. So they're able to as a team work through it, and they can go faster as opposed to when everybody was broken up functionally. It's such a big deal, as Robert mentioned.

I appreciate the answer and I appreciate all the time you're taking to explain the business. Thanks a lot. It's helpful.

Thank you everybody. We look forward to talking to you at the end of the fourth quarter, and as we complete our fiscal 2004, and are focused on continuing to progress in terms of becoming healthier and more profitable. Thanks.

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