Levi Strauss & Co (LEVI) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Levi Strauss and Company’s Fourth Quarter Full-Year 2004 Conference Call. All parties will be in a listen-only mode until the question-and-answer session at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or in part without written permission from the Company. I would now like to turn the call over the Jeff Beckman, Levi Strauss and Company’s Worldwide Communications Department.

Good morning and welcome to our conference call. I’m pleased to introduce the Levi Strauss and Company Management Team. With us here today are Phil Marineau, our President and CEO, Jim Fogarty, our Chief Financial Officer, Robert Hanson, President of the U.S. Levi’s Brand, Bobbie Silton, President of the U.S. Dockers® Brand, Scott LaPorta, President of the U.S. Levi Strauss SignatureTM brand, Paul Mason, President of our European Business, and John Anderson, President of our Asia Pacific Business.

This call is being recorded and replay will be available through March17 by calling 800/642-1687 in the United States of Canada. From outside these countries call 706/645-9291. For either number, please input the ID Code of 3992829 followed by the pound sign. This conference call also is being broadcast over the Internet, and a replay of the webcast will be available for 6 months 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 our management’s expectations are described in our Annual Report on Form 10-K, our Registration Statement, and our other filings with the Securities and Exchange Commission. Our actual results might differ materially from historical performance, current expectations, or these forward-looking statements because of the factors described in those filings or otherwise.

During the call, you will hear us talk about sell-through numbers or trends. When we talk about sell-through, we are referring to retail, over-the-counter dollar sales of our non-licensed products. We use sell-through data internally as an indicator of consumer demand of our products at retail. We compile sell-through data based on information we received from a group of our top U.S. retail accounts. Our sell-through methodology may change in the future based on changes in our customer base of channels of distribution. Sell-through 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 sell-through 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 SignatureTM business. Average weekly rate of sales measures are retailers’ weekly sale rate as a percentage of their average unit of inventory on-hand during that week.

Both sell-through and average weekly rate of sale data are intended to be illustrative only, and are not necessarily predictive of future volume, sales, or other operating results.

In view of SEC Regulation FD, we request and strongly encourage you to ask all your questions during the q-and-a portion of this call.

Now I’d like to turn the call over the Phil Marineau.

Good morning everyone. Thanks for joining us today.

I am pleased to share our 2004 financial results. It was a year when across all fronts we’ve made substantial progress against our goals. In 2004, we set out to operate a leaner, more competitive, and more profitable business, and that’s what we’ve delivered. Our full-year gross profit improved by double digits. The operating income of each region of business grew at strong double-digit rates. We generated a full-year net income compared to a net loss last year. And we stabilized our net sales for the year on a reported basis.

Our improved full-year results reflect the positive impact of the strategic actions that we began to implement during the second half of 2003 and continued throughout 2004. These actions include the closure of our owned and operated plants, taking fixed costs out of the business around the world, implementing and refining our new go-to-market processes, revamping and rationalizing our product lines, and growing our presence in the mass channel. We delivered a much stronger financial performance in 2004 even while taking the strategic actions that consolidated the top-line net revenue. Our decisions to rationalize our product lines and exit under-performing non-core businesses helped improve our profitability and the overall health of the business.

I really am pleased at what we accomplished in 2004. Consumer demand for the Levi’s Brand in the United States grew, and despite the full-year sales decline in Europe, our sales trends there are improving with the success of our emphasis on a premium positioning for the Levi’s Brand.

Asia Pacific continued to deliver strong double-digit revenue growth for the year driven in part by the success of the 501 and a more sophisticated line of products for women. And the Levi Strauss SignatureTM brand continues to grow around the world. This growth is incremental and research continues to show no significant cannibalization of the Levi’s Brand from Levi Strauss SignatureTM.

Our business transformation continues in 2005. We have several key priorities. First we will focus on growing the Levi’s and Levi Strauss Signature TM brands globally.

Second, we’re working to revitalize the Dockers brand. This includes stabilizing the business in the United States, while continuing to realize the level of profitability the brand generates for the Company.

And secondly, executing a new business model in Europe and Asia to decrease the complexity, leverage the strength of the U.S. brand on a global basis, and improve overall the financial performance of Dockers internationally.

Our third objective is to continue to relentlessly focus on cost savings and operational improvements in order to drive earnings and cash flow. And finally, we will invest even more in building the capabilities and skills of our people to ensure that the operational improvements that we’ve made are fully-embedded within the organization and become the way we do business moving forward.

So with that overview, let me turn it over now to Jim Fogarty to take you through the financial details for fiscal 2004.

Thank Phil, and good morning everyone.

At a consolidated level, year-end 2004 net revenues were $4.1 billion, approximately flat to last year’s $4.1. Revenue declined a modest $18 million reflecting stabilization on a reported basis and a 4 percent decrease on a constant-currency basis. Continuing strength in our Asian Pacific business and the continued rollout of the Levi Strauss Signature brand was offset by decreases in our Levi’s and Dockers brands in the U.S. and in Europe. While we experienced sell-in declines in our Levi’s and Dockers brands for the year, these declines were indicative of our strategy to drive a healthier base of business. I will speak to you in a moment about these strategies and the strong improvement in the regional operating profit these strategies drove.

Our consolidated gross profit for the year was $1.784 billion or 43.8 percent of net revenue compared to $1.574 billion or 38.5 percent of net revenue in 2003. Our gross profit dollars thus increased a very strong $210 million and the gross margin rate increased 530 basis points. The year-over-year increase in gross profit dollars reflected product line rationalization, improved dilution management, which is our markdowns and allowances we give to our customers, lower sourcing costs, and stronger foreign currencies. As we have indicated throughout the year, performance of our product at retail and management of dilution were key elements for gross margin rate success in 2004. We are pleased with our progress in these areas.

Our consolidated operating income for the year was $361 million or 8.9 percent of revenue compared to $313 million or 7.7 percent of revenue for the same period of 2003. Again, our gross profit improved $210 million, our SG&A decreased $54 million to $1.3 billion reflecting savings from restructuring initiatives as well as our general cost containment. Licensing income importantly increased $12 million, reflecting product rationalization initiatives, as well as growth in our existing and new categories.

To understand why operating improved only $48 million in the context of these improvements, it is important to note the following. Our operating income in 2003 included income from the net reversal of our liability for long-term incentive comp expense of $139 million, while 2004 reflected $45 million in long-term incentive comp expense. Our operating income in 2004 also reflected restructuring charges of $134 million compared to $89 million in 2003.

The 2004 restructuring charges reflected the actions we took to streamline our organization in the U.S. and in Europe as well as our decision to close manufacturing facilities in both Spain and Australia. I would also point out that our operating income in 2004 included income of $31 million related to our post-retirement medical plan compared to expense of $52 million in 2003 which numbers included curtailment gains of $27 million this year and $21 million last year. Thus, this year’s $77 million in lower expense, retiree medical expense, after we exclude those curtailment gains, primarily reflects the benefit of retiree medical caps put in place in the first quarter and reductions in our headcount generally.

Finally, operating income included depreciation and amortization of $63 million in 2004 and $64 million in 2003.

The bottom line for the year improved to net income of positive $30 million compared to a net loss of $349 million in 2003. This $379 million improvement reflected the increased operating income of $48 million, reduced non-operating other expense by $85 million, lower tax expense to the tune of $253 million, slightly offset by higher interest expense of $6 million.

Our non-operating other expense declined $85 million primarily reflecting a $58 million reduction in foreign exchange contract losses as we both tightened our hedging programs and experienced reduced FX [ph] volatility versus 2003. Additionally, 2003 reflected $39 million in expense associated with early extinguishment of debt.

Our tax expense was $65 million for the year compared with $318 million in 2003, which as you may recall included a $282 million valuation allowance which we recorded against our deferred tax assets last year.

On to further detail on revenues and operating profit, first, in our North America segment. Our North America 2004 revenues declined 6 percent to $2.426 billion. This decrease is primarily due to lower sales of our U.S. Levi’s brand, U.S. Dockers brand, somewhat offset by strength in our U.S. Signature brand and our Canadian and Mexican businesses. While we experienced sell-in declines in our Levi’s and Dockers brands, this was consistent with our strategy to focus the brands and drive a much healthier and more profitable base of business.

Our U.S. Levi’s brand declined $127 million or 9 percent primarily reflecting the licensing of certain businesses and reductions in off-price volumes. Our U.W. Dockers business declined $171 million or 21 percent reflecting the licensing and exiting of certain businesses, and reductions in off-price volumes as well as a generally declining casual pant category.

Our U.S. Signature business increased $119 million or 55 percent as the brand was introduced to Target in late 2003, ShopCo, Maier [ph] and Formida [ph] in mid-2004 and K-Mart in late 2004. Our North America’s operating income increased to $519 million or 21 percent of net sales from $402 million or 16 percent of net revenue in the prior year. This strong $117 million improvement reflected the healthier base of business, improved dilution management, and lower SG&A in those business units.

You will also note that we have now enhanced our segment disclosure in the 10-K. The details of our U.S. business units’ earnings, which are now included, reflect a solid job by our U.S. Presidents in executing these strategies.

On to Europe, our European 2004 revenues increased 5 percent to $1.542 billion representing a 6 percent decline on a constant-currency basis. For the year, 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 in Europe. We are focused on both improving our European profitability and on stabilizing our European Levi’s and Dockers businesses.

It is important to note that our European revenues improve on a comparative constant-currency basis throughout fiscal 2004, such that we ended in the fourth quarter about 3 percent on a constant-currency basis.

Operating income in Europe increased to $172 million, or 17 percent of sales. This also strong $59 million improvement in operating income is attributable to higher gross profit, lower SG&A expenses, and the favorable impact of foreign currency.

And finally ending with our Asia segment, our Asia Pacific 2004 revenues increased 19 percent to $604 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, and improved retail presentations. Our operating income in Asia increased to $125 million or 21 percent of sales from $93 million or 18 percent of sales in the prior year.

Thus, our consolidated regional income for our corporate expenses totaled $817 million or 20 percent of sales compared to $608 million or 15 percent of sales in the prior year. Other corporate expenses declined $66 million or 24 percent to $215 million primarily reflecting our restructuring initiatives and general cost containment. With regional operating income of $817 million in 2004, restructuring charges of $134 million, depreciation and amortization of $63 million, long-term incentives comp expense of $45 million, and those other corporate expenses of $215 million, our total consolidated operating income was $361 million.

And now for the balance sheet, our debt net of cash was $2.22 billion declining approximately $151 million from year-end 2003. Our inventory was $555 million at the end of 2004 reflecting a $125 million reduction from year-end 2003. Inventory turns improved from 3.3 turns at year-end ’03 to 3.8 turns at the end of 2004 reflecting reductions in excess and obsolete inventory, as well as reductions in our ownership of work-in-process and raw materials.

In assessing the health of our balance sheet, not only did our net debt decline approximately $150 million but we made progress in other key liabilities. Our retiree medical benefit obligation declined approximately $411 million to $333 million at the end of the year, primarily reflecting those modifications implemented in the first quarter. Our total tax liabilities declined $48 million to $125 million at the end of 2004. Our pension liability declined $33 million to $217 million at the end of 2004, and finally our restructuring liability declined $54 million to $42 million at the end of 2004.

And now for liquidity, sources of cash for us in 2005 in clued our earnings, improvements in our inventory turns, and our liquidity resources. Our principal uses of cash include payment for restructuring actions we have taken, cash taxes, and payments of interest on our debt. Estimates for all of these amounts are included in the 10-K so I won’t go through them in detail here. However, you will note that we have projected $116 million in payments on behalf of prior year tax liabilities to take place in fiscal ’05. This reflects our intention to move through our open tax years expeditiously.

As of February 11, 2005 we had available liquidity resources of approximately $412 million, consisting of approximately $131 million in liquid short-term investments and $281 million in net available borrowing capacity under our revolving credit facility. This liquidity declined from year end and reflected our decision to pay off and not re-borrow our approximately $60 million equipment financing in December 2004.

So recapping fiscal ’04 and stepping back, we are pleased with our accomplishments. In our first conference call of 2004, we laid out a number of areas of focus and we believe we have delivered as Phil said. We rationalized product lines and exited licensed non-core businesses, coupled with improved dilution control. We drove a strong 530 basis points in gross margin performance or improvements; we performed a detailed cost structure review, implemented cost-reduction initiatives positioning the Company with more competitive SG&A and EBITDA margins.

Cumulatively, our efforts to streamline the organization have resulted in a 28 percent decreases in worldwide headcount from approximately 12,300 employees at year-end 2003 to approximately 8,850 employees at the end of 2004.

We focused on working capital management and reduced our inventory investment by $125 million, with turns increasing from 3.3 to 3.8. We explored the sale of Dockers and from our position of strength declined to engage sub-par values. During the sale process, we amended our term-loan agreements substantially improving our financial flexibility. We accessed the credit markets in this past December of 2004, refinancing most of our nearest-term 2006 note maturity.

On the financial control front, we have built solid capabilities in our financial organization, and made major improvements in financial discipline and control. Our independent auditor did not advise us of any material weakness in our internal controls for operations following their audit of our 2004 financial statements. We have more work to do. We are continuing to make improvements on our controls processes, and are currently addressing 3 significant deficiencies that were identified by our auditors. We are pleased, though with the elimination if you will of that material weakness and with the substantial progress we are making in our control area.

Our earnings improved while we reduced our net debt and other key liabilities thereby reducing our financial leverage. As Phil indicated the basis de-leveraging, driving earnings and cash flow remains a key Company priority for the future. So from standpoint, mission accomplished and as I hand off this role I wish Phil, the Management Team, and Allison Doe much success. And with that, I’d like to turn it over to Robert Hanson, President of the U.S. Levi’s brand.

Thanks Jim, good morning everyone.

U.S. Levi’s brand performance in the fourth quarter and for the full year demonstrated that our core strategies are working. We are operating a more profitable business driven by a stronger mix of first-quality products that are performing better at retail.

As we expected, net sales were down in the fourth quarter. We finished the quarter at $372 million and the year at $1.3 billion, a reduction from the prior year of about $54 million or 13 percent for the quarter and $127 million or 9 percent for the full year. This anticipated decrease reflects the impact of the implementation of 3 strategies we previously discussed.

Number 1 was the licensing and exiting of non-core product categories which represented about $20 million of the decline for the quarter and $48 million for the year. The second was the reduction in sales of off-price, closeout, and club channels which represented about $12 million of the decline for the quarter and $57 million for the year. And the third strategy was our planned efforts to reduce both total and cut-to-order inventories. This along with the completion of our shift-to-contract manufacturing and some internal operational issues impacted our ability to service the increased fourth quarter demand for the Levi’s brand.

The service issues couples with one less week of sales in the fourth quarter of 2004 represents the balance of the decline. Despite the revenue decline, the strategies we implemented in 2004 are clearly turning our business around driving improved earnings, margins, and consumer demand versus 2003.

In 2004 we executed more a commercial and product mix, improving both our customers and our own gross margins by several percentage points. Our core department changed so our product assortments continued to perform well delivering modest growth in the channel and demonstrating that we now have more appealing fits, fabrics, and finishes.

On a full-year basis, despite missed sales we faced on the based on the service shortfalls, our retail sell-through on our top 8 customers was up 1 percent on a total basis versus the prior year. We are encouraged by the increase in consumer demand for our products at retail with most segments now growing.

So now let me review how Levi’s 5 core strategies are driving this performance. The first strategy, we have been and will remain sharply focused on increasing sales and profits in our core jeans businesses. Retail sell-through of products was also up 1 percent in the fourth quarter, a continuation of the positive trends we have been seeing in the past few quarters. Retail sales for our total men’s business was flat in the fourth quarter compared to last year despite the missed sales we faced by on the service shortfalls. And if you look within that men’s business, our focus to grow and innovate in the young men’s segment, essentially guys less than 25-years-old, we drove a 12 percent increase in the fourth quarter retail sales from products such as low-rise and loose boot-cuts and straight fits, vintage in tin finishes and work wear.

In women’s we continue to drive solid sell-through performance with misses and juniors retail sales up 7 percent and 1 percent respectively during the fourth quarter, driving share increase in both segments.

In boy’s retail sales in the fourth quarter, we were up 5 percent reflecting strength in both our core jeans and work wear programs. And we remain committed to core products innovation. We have launched new fits, like straights and skinnies, new vintage in tin finishing, as well as color and technical innovations this fall. And we are particularly encouraged by the strong early selling of our new straight and skinny fits in the women’s segments.

The second strategy, we have improved customer profits through more strategic retail promotional programs that has better aligned our brand initiatives with our customers marketing plan to drive increased volume. Customer profitability in 2004 was also improved by the 5 percent wholesale price reduction we took in 2003.

The third strategy, our new go-to-market process and new supply model have resulted in reduced inventories, improved gross margin, and greater customer responsiveness. We have reduced the time it takes in line development to shipment by about 25 percent to 40 percent depending on the consumer segment, which was the goal for these changes. However, given that our second-half service shortfalls, we have implemented plans to improve our core and quick-replenishment supplies, and we are now in a better supply position.

The fourth strategy is to drive demand by our "a style-for-every-story" advertising campaign. The campaign launched during the third quarter and is resonating well with our consumers. We believe this advertising has been effective in driving increase in consumer demand and sell-through.

TV now highlights our flagship original button-fly 501 jeans, the original 505 straight jeans, and our 569 loose straight jeans for young men. Print highlights are leading fits for men and women. The brand was also featured in one of the final episodes of NBC’s “Apprentice” during the fourth quarter, driving increased sales for our core products. In fact, sales at our own Levi’s stores increased 30 percent for the 3 weeks following the airing of the show compared to the same period in 2003. And “Advertising Age” magazine ranked the promotion among its 10 most recalled product placements in reality shows for 2004.

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 25 consecutive months now and have contributed increased operating income in 2004.

Our goal with this program is to demonstrate Levi’s as the leading resource for the best fitting and best styled jeans in the range for men and women in the market. Our top customers are happy with the improved retail sales this program is delivering.

Looking forward, our continued focus on these same strategies, emphasis on product innovation leadership, improved market responsiveness, and improving sell-through trends gives us confidence that we can build on our current successes in 2005.

With that, let me now turn it over to Bobbie Silton, President of the Dockers Brand in the United States.

Thanks Robert, good morning everyone. Dockers full-year earnings performance was in line with our expectations, with an improved first-quality sales percentage and strong gross margin performance. However, net sales were down 21 percent versus the prior year mainly driven by actions taken to reset the brands foundation for profitable growth in the future. These actions, which represent the majority of the decline are 14 percentage points and were driven by several strategic decisions made during our yearly planning process, as well as lower second-quality prices during 2004. As we discussed in prior quarters, the business has been up against several events in 2003 that were not repeated this year that were key drivers to the decline in revenue versus year ago.

The first significant event was the sell-off of excess inventory in 2003. That was not repeated this year due to improved forecasting and inventory management. The second event was our product rationalization efforts. We licensed our women’s tops business and exited under-performing businesses resulting in lower volume in revenues versus 2003.

We also strategically reduced our shorts and outlet clubs businesses. The majority of the remaining decline is due to wholesale price reductions, and as Robert noted our fourth quarter was a week shorter this year.

Finally, throughout 2004 our retail customers lowered their inventories of Dockers due to a shift in consumers demand away from core khakis to more style-driven items, as well as our customers’ improvements in their own inventory management. This drove under-performance in our men’s and women’s pants.

An additional factor that contributed to our 2004 performance was the distraction of the Dockers sales process that we undertook between May and October of 2004. Now that the sales process is behind us, we are putting our full and undivided resources of our organization against revitalizing the business in 2005.

Now let’s shift from our net sales to retail sell-through. The casual pant category had a tough year in 2004 and continues to face challenges. The decline in our sales in products that retail was in line with the overall category trend. Total men’s sell-through was down 6 percent in our top 12 accounts while women’s declined 13 percent due primarily to a consumer shift from core basic khakis and the licensing of our women’s tops business.

Inventory at retail was down more significantly and end of the year down approximately 12 percent versus prior year. Men’s tops continues to be a positive story for the brand with sell-through at our top 12 accounts up 10 percent for the year. The brand was also named top spender of the year by JC Penney driven by our improved product and retail performance. This success is a reflection of our new business model for the men’s tops business.

In addition to tops, we had several key product successes in 2004. The first was the pro-style product group featuring dress pants, khakis and tops with bundled performance innovation that serve our consumers needs. For this product group, we were able to deliver style plus performance to our consumers and higher average out-the-door prices for our customers.

An example of our focus on break-through innovation is the never-iron cotton khaki, which we launched in department stores in Q4 2004. The product features a significant technological breakthrough that delivers 100 percent cotton, iron-free product that looks like it’s from the dry cleaner right out of the dryer. The Dockers brand has the exclusive on this technology in the pants category in our channels through 2006. Product sell-through at retail is excellent and the never-iron khaki is commanding significantly higher average out-the-door prices.

In the women’s area, the metro pant and Capri were strong performers in 2004. The updated style and fit of the metro delivers a more current look for the Dockers brand and Is addressing a younger and additive consumer. As we move into spring ’05, we will bring more newness and style of the Dockers line, leading with the never-iron khaki. Our 2005 products have been well received by retailers, particularly in men’s premiums. We plan to support the product with a new advertising campaign that dials up the emotional connection and style factor with the brand. This campaign will be supported with additional spending versus 2004.

Now I’d like to turn the call over to Scott LaPorta, President of the Levi Strauss Signature Brand..

Thanks Bobbie. I am pleased to report today that the Levi Strauss Signature brand had a successful fourth quarter and fall season gaining additional market share in the value channel. During the fourth quarter Levi Strauss Signature revenues increased 38 percent to $88 million versus $64 million in the fourth quarter of 2003. And on a full-year basis revenues increased 55 percent to $336 million. This growth was driven by the addition of new accounts and increases in our men’s, young men’s and misses businesses.

Throughout the fourth quarter of 2004, our business at retail was robust as the average weekly rates of sale on our 5-pocket long-bottom jeans wear and fall holiday fashion programs exceeded our expectations. Additionally, our sale-throughs remained balanced across men’s, women’s, and kids’.

In late November we began shipping into 225 K-Mart stores and our holiday results were strong. So we are now selling in all 5 key-value channel retailers, Wal-Mart, Target, K-Mart, Maier, and ShopCo. Our marketing efforts during the quarter focused on completing a successful year with NASCAR as Levi Strauss Signature-sponsored driver and fan favorite Jimmy Johnson finished second in the standings with 8 first-place finishes. Leveraging this sponsorship, the Levi Strauss Signature Fit-Pit traveled the race circuit interacting with over 200,000 race fans. The Fit-Pit also made 10 retain visits at Wal-Mart and Maier Stores during the season, driving additional brand awareness.

During the quarter, Levi Strauss Signature Brand launched its first print advertising campaign targeted to women. Our “What’s a Signature Worth” campaign appeared in 33 women-focused magazines reaching 85 percent of value-channel shoppers. The campaign was extended on top websites, such as Yahoo, MSN, Family Circle, Parents, and iVillage.

Third our presence in publicity efforts kept the brand top of mind for consumers during the fall with coverage magazines such as “Lifetime”, “All You”, “Men’s Journal”, “Seventeen”, and “Redbook”, generating over 18 million impressions in fashion editorial coverage.

And fourth in November during the chase for the NASCAR/Nextel Cup, we partnered with Wal-Mart to activate an in-store NASCAR retail-tainment program in 1,200 doors driving awareness in purchase in those stores. These efforts have driven strong increases in our brand awareness with the value consumer.

Operationally during the fourth quarter of 2004, we supported the fall holiday season with strong sell rates, maintained the proper stock levels at retail, and we continue to be in good inventory position to support the upcoming spring season. And we look forward to 2005 as we are poised to further grow our brand with our retail partners.

And now over to Paul in Europe.

Thanks Scott, and good morning everyone, or perhaps I should say good afternoon from Brussels. To begin, here’s a top-line European overview. As discussed last time, our challenge for the full quarter was to stabilize top-line sales. In fact, fourth quarter sales as Jim had said came in 3 percent up. On a fully-year basis, the sales and constant currency are down 6 percent, but this was in line with our expectations. The clearly improving sales trend indicates our strategies are starting to work. In Q1 our sales were down 13 percent like-for-like. In Q2, they were down 8 percent; in Q3 down 4 percent, and as I’ve said Q4 shoed a 3 percent increase.

Profitability has improved 5 percentage points moving from 11 percent to 16 percent profit margin, driven largely by our cost-savings programs. During the quarter, we also purchased 7 stores from our Belgian franchisee in line with our strategy to strengthen our retail business in Europe. This move does not represent a change in strategy however. We sill believe the franchise model is right for Europe going forward.

So moving on to Levi’s in more detail, as I mentioned during last quarter’s call, we’ve suffered customer service issues throughout the year. Performance did improve during the fourth quarter, but was still below targeted levels. We have action plans in place to further improve service during 2005, but as we have noted before, corrective action does take time. Although year-on-year Levi sales were down, we finished the year positively with fourth quarter sales increasing by 2 percent on a constant-currency basis showing improving sales trends throughout the year.

The best- performing country was Italy where we have made a positive investment in advertising, increased our retail presence, and look good in our sales capability in all 4 actions that we intend to replicate across the whole of Europe in ’05.

During the fourth quarter, we made a strong investment in a Pan-European advertising campaign, the first time in 3 years that we’ve run a full TV campaign, which undoubtedly contributed to sales growth in quarter four. Also on a Pan-European basis, third-party consumer research show signs that our strategy is definitely beginning to work with consumers. For the first time in many years, the number of Levi’s jeans bought by men started to grow.

Critically at a Pan-European level, research indicates that we are increasing sales to our core consumer group of 11 to 24-year-old males for the first time since 1997. And this guilds upon the improving trend in sales to our separately targeted group of 25 to 34-year-old men that we have seen in the past 2 quarters.

The research also continues to withdraw in sales of jeans priced at above 85-year-olds supporting our strategy to reposition the Levi’s brand in the premium segment of the jeans market in Europe.

With regard to Dockers, we’ve seen a significant decrease in sales year-over-year due to weak retail replenishment due to resulting from soft consumer demand with poor customer service performance including lower order fulfillment rates also had a negative impact.

As we announced on December 6, we have a new strategy and business model for the Dockers brand in Europe. We will improve the brand’s financial performance by reducing the size of the organization, building efficiencies, and cutting costs. Simply put, we need to streamline and create a smaller, centrally-run organization here in Brussels, which means closing the Dockers office in Amsterdam. This will result in approximately 65 positions being made redundant, both in Amsterdam and in the field. Within the structure, we’ll build on the global strength of the brand and on its foundations of style and performance.

And turning finally to Levi Strauss Signature, the brand continues to perform above expectations in the launch markets of France, Germany, and the United Kingdom. The value channel in Europe continues to provide significant growth opportunities. For example, there is still clear growth in the number of jeans purchased by women in the value channel. Our primary focus remains on expanding penetration amongst the higher markets in France, Germany and the UK, although we plan to roll out the brand to other countries from late 2005 onwards.

So to summarize Europe’s performance, we feel positive about the progress we’ve made in 2004. We are beginning to stabilize the sales line, and our savings program together with streamline product lines and the return of the Levi’s brand to a more premium price positioning has driven a significant improvement in profit margin. We delivered quarter-by-quarter and market-by-market. We feel confident, therefore, that our approach of building a strong country organization that works with a full central team in Brussels to drive our strategies locally will work. We look forward to building on this platform in 2005.

And now I’ll hand you over to John Anderson in Singapore.

Net sales for Asia Pacific region for 2004 were $605 million. This was a rise of 19 percent above prior year on a reported basis and 12 percent on a constant-currency basis. This was also the third consecutive of double-digit revenue growth. Business in Asia Pacific also recorded its fifth consecutive year of double-digit growth in operating income up 38 percent over the prior year. Operating income as a percentage of division’s net sales rose to 21 percent in 2004 compared to 18 percent in 2003. These solid results were broad-based across the region with strong growth performance from Japan, Korea, Taiwan, South Africa, China, and Malaysia.

Some of the notable achievements by brand, and I’ll start with the Levi’s brand, were the Levi’s brand market leadership in all countries in both men’s and women’s in the super premium and the premium six. We continue to expand our Levi’s store franchise network, and we also launched women’s-only retail formats as well. Our growth in women’s continues. We also launched strong cost sets such as Red Loop, M3VP, Ladies’ Levi’s and 501 Extensions. We also opened up new distribution in sports stores.

For the Dockers brand, our revenue also grew over 2003. Two successful launches with Sweat Terminator and Defiance both technical performance innovations. We also introduced a digital lifestyle retail format. The culmination of these initiatives for the Dockers brand increased our brand equity stores. The Signature brand has established the business with a firm platform in both Japan and Australia, and we tested the rollout in Taiwan.

On summary, Asia Pacific enjoyed a solid year, good growth from all 3 brands, and good strong performance across the region.

Over to Phil.

Thank you John. So just to recap our 2004 results; 2004 was a year when across all fronts we made substantial progress against our objectives improving the profitability of the Company, stabilizing sales, and increasing our margins. We became more profitable in ways that reflected not only the fixed cost reductions we made, but also the initiatives that we’ve taken to consolidate sales and strengthen our core businesses. Our overall competitiveness has improved markedly.

So before we begin our q-and-a, I’d like to take a moment to thank Jim Fogarty for his many contributions during the past year. This will be Jim’s last conference call as the CFO of the Company. During his time here, he has helped us identify substantial cost savings, ones that we will continue to implement throughout 2005. He has also led the strengthening of our financial capabilities and reporting processes. So thanks to Jim.

Hans Pluk von Amstel [ph] our new CFO will be leading a stronger global finance team in many ways thanks to the work that Jim has done. Jim and Hans are working together now to ensure a seamless transition when Hans takes over the role of CFO on March 7. You will be hearing from Hans in April when we report our first quarter results.

Now, we’ll be happy to take questions.

(OPERATING INSTRUCTIONS). Cathy Brady [ph], Bank of America Securities.

Hi, can you comment on what you plan to do with the remaining 7 percent note? Will they be defeased [ph] with cash on the balance sheet thereby meeting the required refinancing condition under the credit agreement.

Hi Cathy, this is Jim. We have laid out in the 10-K -- I’ll just read a clip from the 10-K. “The maturity date of our senior secured term loan will be August 1, 2006 if we have not refinanced, repaid, or otherwise irrevocably set aside funds to repay the ’06 notes by May 1, ’06.” At this point, we have not met that condition, and I will also note that our revolver was amended to allow us to, if you will, prepay our ’08 notes ahead of our ’06 notes under certain conditions.

Okay, so it sounds like under that amendment you could potentially go out and tap the markets for purposes of taking out the ‘08s without necessarily meeting the refinancing condition under the ‘06s, is that right?

We’re not going to comment on any market alternatives, but at this point we have not met the refinancing condition.

Okay, thank you.

Fred Taylor [ph], Lord Abbott.

On the cash flow statement, and by the way thanks for providing that so quickly, the past 2 years, there’s been a lot of noise in terms of the working capital accounts. Would you expect working capital to be a source to funds or a use of funds? And the large numbers moving around there, would you expect that to kind of settle down in 2005?

Well, we’ve come out of 2004 with the inventory turning about 3.8 times which is up from 3.3 at he end of ’03, so now we would expect, we’ve gotten a lot more opportunity out of working capital than we expected to effectively move with volume over time. There’s some mix by business on how fast we turn, but basically we feel a lot better about where the turns are coming out of ’04.

Right and just sort of an accounting question, the non-current asset, non-tax asset how does that work from a cash flow and an accounting point of view going forward? Is that a shelter of future taxes?

We try to get it from an economic standpoint. Clearly if you look at the details on our tax assets in the financials we have a lot of temporary differences which will turn as we make payments so on things like retiree medical, we also have large Federal as well. So I think because from a Federal cash-tax standpoint on an ongoing basis, you should expect us not to have to actually pay much by way of cash taxes. As to our U.S. earnings, we will still be, of course, a tax-cash payer on behalf of our foreign earnings, which are substantial as well. So lots of the good news of tax assets is they, of course, shelter economically go forward. So that’s economically.

As far as the accounting, we currently have a $390 million valuation allowance against our gross deferred tax assets, and will continue to assess that valuation allowance over time. And it’s a complicated exercise, we tried to lay out how that works in the tax footnote. But we continue to assess it on bucket-by-bucket as to how much, from an accounting standpoint, how much of a valuation allowance is needed as the business strengthens in certain jurisdictions over time, you would have less requirement for valuation allowance.

Ron Straight [ph] Bank of America.

I was wondering if you could go over the reason you decided to exit the clubs.

The fact of the matter, if you looked at our total business composition there was too much first-quality Levi’s brand volume that we felt was more effectively sold through our core channels of distribution. And we were looking at the portfolio strategy. The bottom line is our strategy positions Levi as a brand premium to the average price going to the market, and a brand which is primarily sold through department store and chain store, as well as specialty and our own Levi store distribution in the United States.

We looked at that issue strategically and felt that it would be better for us to be using the off-price channels, not only the clubs, but also other authorized channels as a method to profitably distribute any net position inventory that we have and to manage that business on a more opportunistic basis going forward.

So that was a decision that we took, and it’s positively benefited both the profitable performance of the business in 2005 and helped us stabilize the businesses within our core channels of distribution.

So is that French for you know, we had inventory -- is that French for we’re more efficient with our inventory now and we don’t have to use the clubs to get our inventory levels down?

This is Phil. We certainly said in 2003 that we use the clubs to get rid of some excess inventory and we didn’t have anything like that in 2004. But this is more of a strategic choice than just how you mange excess inventory. It’s what Robert said, it’s going forward toward managing the Levi’s brand in the United States as a premium-priced brand relative to the average price out the door in the United States. The average out-the-door price of a pair of jeans still remains in the low-$20s. The average out-the-door price on Levi’s is $28 to $29 and actually increased this year in terms of what the consumer pays. We don’t want Levi’s to be competing at that low-$20 price point. Selling in the club channels on a regular basis with first-quality merchandise drives the average price out the door and it is against the strategic positioning of the brand in the United States.

So it’s more than just French for “closeout”.

Yes, and I think every brand recognizes that selling into the clubs is not healthy for the brand strength. And what you see a lot of companies do is -- it is profitable and they try to manage to an amount and manage within windows. But generally speaking it’s clearly not healthy to the rest of the brand strength.

Okay, we haven’t seen any for a while, we haven’t seen any type-one or engineered-type jeans product launches. We didn’t see a Super Bowl ad this year. I’m wondering if there’s a change in thinking with regards to emotional and advertising spending. Would that be up or down this year versus last year?

We are launching, we have launched engineered jeans in Korea. It’s done very well. It’s a very strong business in Italy, and it’s coming back in Germany. You haven’t seen engineer or type-one here in the United States, but across the world our goal is to be the innovation leader in jeans, and you will continue to see us play that role in 110 countries that we market the brand in.

I’ll let Robert talk about the A&P spending here in the United States and what our media spend is and what the marketing strategy is.

In the United States, from a product leadership standpoint our goal, as we’ve said over the past several calls was to essentially be the best at what we’re the best at, which is to have the category-leading range of 5-pocket jeans for men and women across the department store and chain channels of distribution as well as to, as Phil mentioned a moment ago, to operate in a more premium end of the market at price points that are clearly a premium to the category. We’ve done that. If you look at the product innovation that we brought as well as finishing, that’s why we’re driving the rate of sale results that we’ve been able to deliver into the market.

A couple of examples that I would provide to you is our customers would acknowledge and the sales results would indicate that we’ve got a category-leading range of finishes across all consumer segments because we have taken an aggressive stand on introducing vintage finishes, a tin-finish offer. We’ve also made an investment in some category-leading fits like straight and skinny fits in both men’s and women’s and those products are performing well.

In addition to that, in our own store, which again counts for 25 months consecutively now as well as in some of our more premium specialty and department stores we have a limited edition product offer which sells for price points around $65 to $85, and we also have a premium product line selling in stores like Barney’s as well as our own retail stores, which is competitive with the most premium segments in the market.

So we are clearly emphasizing product innovation, and you may not hear about things such as high plan or engineers because we are having our greatest success in leading in the 5-pocket jeans category.

Related to the marketing investments, what I covered in my comments, we have launched a really successful advertising campaign, “A Sale for Every Story” is resonating well with consumers across both genders as well as all socio-economic status and channel shoppers, and we’ve obviously started to see some materially increased results. Our share is up in women’s. We’ve got about a 75 percent recall in the campaign after about 8 months. And we’ll continue that strategy in both television and in print. And in addition to that, start to extend into more presence in publicity efforts like the successful “Apprentice” effort that we had in the fall of last year.

So last year, Levi’s worldwide advertising spending was increased into ’04 so those results include higher advertising spending on Levi’s and as we go into ’05 we have plans to continue to increase the advertising level on Levi’s worldwide.

Thank you.

Alexis Gold, CIBC World Markets.

Good morning, it’s Alexis Gold. Just a few questions; I want to focus on Dockers just for a minute. I think you mentioned earlier in comments that retailers lowered inventory levels to more style to the item. It sounds like just reading you K and some your comments that you are gong to launch some new products this year. Can you give us a sense for what retailers’ inventories look like now and if you’re comfortable with the orders that they’re placing now?

Yes, year-end the levels were about 12 percent below where they were the prior year. We feel that overall retailers have elected to manage their inventories more efficiently so we do see some upside opportunity in our men’s long-bottoms area given that our performance there has exceeded the inventory declines.

We do continue to believe in our style-plus performance platform of driving innovation, and we think that’s what will hopefully cure some of the malaise that’s in the market place. In addition to driving the Southwest performance platform, we’re going to emphasize style and we’re going to reinvigorate that with the consumers with a new advertising campaign, as I mentioned that we’ll be bringing out in 2005.

Additionally I know there was a lot of talk about this for the last year or so and it seems actually to have gotten a lot quieter than I thought it probably would. Have you seen in the first half of the year any impact of the quota eliminations?

No, not in terms of the casual pant category.

Overall we haven’t seen it out of the blocks anything substantially different than what we h ad been experiencing in 2004. WE have moved our production, total production as a percentage of sales more to the Asian market over the course of the last 2 years. We believe that the elimination of quotas in China and other countries will provide the opportunity over time for that to continue. But as we do that, we try and make sure that we balance what I would describe as service in savings that we have significant production at the lowest cost of goods possible. But also some production has short lines of supplies that allows us to better service the business and work our plans as we move forward. The effort is to strike that balance correctly.

And I would just add to Phil’s point is the 10-K includes information so you will see that from ’03 to ’04 Asia as a resource for the worldwide business increased from 27 percent of the sourcing to 32 percent, so it changed in the year. And of course, Asia remains an important sourcing venue. But I think the Company strategy is never to put all the eggs in any one particular country basket in any event.

And just to go back, you talked about premiums a little bit with the previous caller. But could you give us a sense of sell-through and reorders? My sense is that it’s actually been pretty positive, and I’m guessing that this could translate to additional traction in your traditional core products as you continue to focus on top line. Anything you could give us there?

Sure for the Levi’s brand in the United States, we have been focused on improving the penetration of the product that we see in excess of $35 in the States we have a segment, Silver-tab which is a department-store distributed brand of Levi’s and we’ve launched limited edition Red-tab offer, which is also sold within the department in multi-brand specialty stores and our own vertical stores.

And then we’ve continued to expand the penetration of our men’s and women’s premium Red-tab offers. Those are products that typically sell between $110 and $150 in the States. Like with the balance of the business, we’ve really focused on rationalizing out the non-productive products in 2004, and as a result what we have are 2 to 3 fits by price point that are selling very well. We’re doing fabric and finish development off of those fit locks. We’re doing feature embellishments off of those fit locks, and we’re starting to see expanding order base for them.

In terms of rates of sale, over the past several months the winners within those segments have been selling in the low-teen to high-teen sell-through rates, which is really solid performance for us during this part of year. And it’s leading to some very rapid innovation drop into our core businesses. When we see a winner, particularly destructed finish with grinding and customization repair that we can sell for $110 to $150 in our premium channels, we’ll immediately take a version of that idea and make sure that we’ve got a concept that we can flow through to our core channels of distribution at very sharp price points. And that strategy has gotten pretty embedded into the business unit, and now where it used to take us probably 3 seasons to make that kind of transition happen, we can do it within about 3 months.

So John and Paul, do you want to add anything about the premium tales in Europe and Asia?

Yes, I mean the key initiative we took in Europe was to take out the 580 series, which was a range of Red-tag product that sold in at around to the consumer at about 45 Euros. In Europe, you’ve got polarization of growth. Although the overall denim market is flat, you’ve got strong growth below 30 Euros and you’ve got strong growth above 85 Euros. And so taking out the 580 series allowed us to effectively exit the middle market. We reintroduced the 700 series that sells at around 65 Euros and that clearly has contributed to the improved performance in Europe and we feel that the strategy premiumization [ph] is right for Europe.

Well obviously for Asia, that’s been our strategy the last few years. It’s been successful double-digit growth. We continue to focus on super premium, premium and the early results as we start 2005 are once again reflecting a very solid start to the year. So we continue focusing in that area, and we continue to deliver against those plans.

So I would say just to summarize on a worldwide basis, the average out-the-door price of a pair of Levi’s that the consumer paid in 2004 continues to increase, has increased and we will continue to drive that increase in 2005.

That’s great, and just finally can you actually tell us what EBITDA was at year end for your Company?

We don’t disclose EBITDA. I think you have all the tools there to calculate it yourself.

Okay great, thanks very much.

Lee Oliver [ph], Citigroup.

Good morning, it’s Lee Oliver with Citigroup. Just one comment and then a couple of questions. I think it’s pretty clear the best return on investment that I’ve seen in the last year, and maybe in the last few years is the money that you spent on Alvrose [ph] and Marcel [ph]. It was such a great decision by the Board and the Company to bring them on board.

To my first question, licensing revenue, licensing income, we saw a huge jump in the number in the fourth quarter for obvious reasons. If I look through the K and I see a bunch of the continuing and license category and the sales that are flowing through that license number, can you comment maybe qualitatively on if we’ve reached the run rate as we sit here today or if that number will continue to grow through 2005, and maybe even where it will go in 2006 band beyond?

Just to frame it you clearly have, we have a strong licensing portfolio with the Dockers brand today, and you see the U.S. Levi’s brand grew fairly nicely in 2004. Maybe Robert could comment on the decision on licensing income over time.

Sure, clearly we’ve made a commitment to grow our license businesses so that we could obviously add products into the assortment beyond just our core jeans businesses. But we’re bringing on business partners that have an expertise that fits into the category. The reason that we saw that significant growth in the back half of ’04 was we did take the decision to license our girls’ businesses, our young boys’ businesses, infant, toddler, and 4-7, as well as both our men’s and women’s tops categories.

So you’re just seeing the beginning of the success of those licenses. I would expect the royalties to come as well as the revenues that would get generated from those licensing decisions alone to drive some nice growth through the next couple of years. But we also do plan to look at, in a very controlled manner, extending into additional categories that can complement our jeans. As you know, we have a limited number of our own stores, and in order to be able to wardrobe a consumer walking into those stores and increase the per transaction in those store, it obviously makes sense for us to look at expanding the license categories.

And I think that’s a fair comment internationally. We have over 700 license stores outside the United States and making sure that they have a full array of products above and beyond jeans is absolutely necessary for the success of those stores.

And I guess Phil on the back of that can you talk about maybe your strategy for China and India with respect to store growth, and how you plan on selling into those channels?

Sure John, why don’t you take that one?

Yep we launched into China about 3 years ago, and now it’s one of our fastest-growing businesses. Clearly, we see a huge amount of potential through there. The Olympics are coming on board; WTO, Expo coming through there. So we are focusing our resources there and incrementally spending more money through there over the next 2 years as we will continue to drive and open more stores. So for us China, great opportunity, and we also believe India will be the second leg to our growth in the Asia Pacific region. Foreign ownership has now opened up in India. So we are anticipating quite a strong expansion of shopping malls. And we are committed to be a part of that as well.

So clearly those 2 countries are front and center on our radar, and we think we’ll be a major component of that growth going forward in Asia.

And I would only add 2 other comments. One, in China one of the issues in China has been to be able to source, believe it or not, the product for China out of china. And we believe with the changes in tariffs and quotas in China, one of the benefits to us we’ll be able to find more manufacturers for Chinese market product that we can produce in China which will improve our profit model in China. We’ll use the franchise model to expand stores. We’re doing it on as close to a pay-as-you-go basis as you possibly can. But we are beginning next year to advertise in China on television for the first time, and that will we believe continue to boost sales. We’ve been a TV advertiser in India, and view that again as John says, another huge source of growth in the out years here.

And I guess turning to the advertising and promotion spending, big jump in Q4, obviously most of that was expected after the first 3 quarters of the year being somewhat depressed versus historical numbers. Are you seeing again qualitatively a return on that investment spend in Q1 and maybe your expectation in Q2 this year?

Well, overall we’ve seen what the advertising we have in the United States as well as Europe and Asia, really across the board a continuous improvement in our brand equity since we’ve gone to the various campaigns that we have around the world. We believe brand equity is a leading indicator of demand. We’re not going to give you any forward-looking statements about how it’s affected the first quarter because we can’t do that. But we feel highly confident in how well this advertising is working to drive brand equity, and as a result demand for the product.

But it’s certainly complex than that. You’ve got to get the right product at retail, the right assortment, so we have to solve the service issues that we spoke about in this call. And we have to make sure that we have the right assortment at retail, which really is what Robert referred to. If you don’t have the right fits and finishes at retail, and it’s still too much stonewashed 501, that advertising isn’t going to do you as much good as it should.

So that’s what we’re working to continue to correct as we move forward. And as I said, we will continue to focus on increasing the advertising spends against the Levi’s brand on a total worldwide basis.

And I would just add to that Lee that consistent with the 8-K that we put out, as you mentioned, we increased Q4 over Q4 advertising increased about $70 million. It’s important to think back to the first quarter of ’04 wherein we came out of Q4 ’03 with spending much less, $70 million less particular in Dockers and in U.S. Levi. You saw it come out with not great momentum in the first quarter, particularly in Dockers as we hadn’t spent appropriately. So I’m not gong to say what it’s going to mean for us in the first quarter of ’05, but certainly we look back at that history and we think about that.

Sure fair enough, so I guess my last question Jim correct me, or forgive me if I didn’t read enough into the K yet, but just CapEx and sort of your cash restructuring expectations for 2005?

Sure, we have, we’ve set out the numbers in the K, so CapEx about $51 million and cash restructuring $57 million.

Great, thanks a lot guys.

(OPERATING INSTRUCTIONS). Christine Aboni [ph], Credit Suisse First Boston.

I was hoping first just to adjust the gross margin. Obviously, you’ve made some significant improvement this year. You talked before about third quarter maybe being higher than a long-term rate in terms of gross margin. Could you give us a sense of Q4 if that is an indicative level of the ongoing business? And maybe a sense if there’s any more opportunity going forward? Thank you.

Well, we had a full-year margin that was about the same as the fourth quarter, so we’re seeing 43 or some odd percent margin for the year, and if you look at our competitors we’re fortunate we have strong international business, strong U.S. businesses. And if you look at that overall consolidated margin that’s fairly competitive gross margin in this space. So it feels pretty good that margin. We always did say when we putting forth our restructuring initiatives throughout the year, we said we would try and set up for more competitive SG&A spend into 2005 and so that’s what I would say about that.

But it’s a good solid margin base. The business model seemed pretty stable at those levels.

Okay, and the second could you talk a little bit about the service issues, and as you currently in the first quarter you have many of the issues been resolved. Maybe you could give us a sense of when that will come, and so you can get back to retail sell-through equaling your overall sales?

Well, I would just go back to 2004 and remind everyone that our number 1 objective is to improve the profitability of the Company, and that continues to be our objective in 2005. It is really important to de-leverage the Company in the use of cash that we generate through this profitability to do that. As we went into 2004, our goal was to reduce our inventory and improve our turns and we were not going to put ourselves in a position to over-inventory the business to chase sales. We were going to produce to what we had on-hand in terms of orders and what we could see on a reasonably short-term basis.

So as we went into this, the demand for Levi’s brand particularly was stronger than anticipated. At the same time, we were going through the transformation, finishing the transformation of moving from an owned and operated manufacturing base to contract manufacturing. And honestly even in the contract manufacturing from a cut-make, so a trim model to a full-package model. Within those transformations, there were some potholes that we experienced as we made that transformation.

And the third thing is that we had some process issues within the context of making these changes that we didn’t get right in the early part of 2004 that in mid-year we corrected. John Anderson, who is on the call not only has responsibility for the Asia Pacific region but worldwide sourcing. And so we believe we plugged in worldwide sourcing and the whole process of running the supply chain relative to demand correctly, and we’ve seen improvements in our service levels since we’ve done that, month in and month out. And as we go into the fourth quarter, we will continue to see improvements in the service levels. But as Paul said on the call the service level problems will not be corrected with a magic wand. They require month-to-month improvement. So even in the first quarter we’re seeing some issues, particularly in Europe that we are in the process of taking steps to correct.

We would certainly hope that as we go through 2005 we will see most of these service issues disappear. We h ad some evidence that what we’ve done to correct the problems is working on some of our core businesses and core lines, and it’s just a matter of keeping at it as we move forward.

Okay, and finally with respect to restructuring charges, I think you had in your 10-K, and I haven’t been through all of it, that in the third quarter you’d have a charge with respect to Europe I guess moving from Amsterdam to Brussels. Is that really the last of the charges that we should see? Or should we anticipate anything further?

What we’ve call out is that we’re gong to spend $57 million in cash on restructuring actions throughout ’05. But I think we’ve called out everything that we’ve decided through the end of the fourth quarter, and that was at the tail end of the comprehensive set of initiatives. There are going to be little things here and there over time perhaps but the big work is certainly behind the Company.

Again, our number 1 priority is to continue to improve the economic model of the Company and the profitability and our competitiveness within the worldwide apparel business. We will not lose focus on looking for opportunities to reduce overhead, reduce the cost of goods, and improve the cost structure of the Company. We’ve called out to you what we could see forward in terms of the cash charges that we will have in 2005.

Okay great, thank you very much.

Zefren [ph] Neisan [ph]; JP Morgan.

A few questions on your senior credit facility. First of all did your Company have to pay some kind of a termination fee when you cancelled the sale of Dockers?

Yes as we called down in the 10-K, it was a $5 million fee to the term loan lenders as we ultimately didn’t sell Dockers.

Okay, and if you don’t meet the refinancing condition on the term loan, is the acceleration of repayment is that automatic or is that at the discretion of the lenders?

It’s automatic.

And also you talked about the period during which the premium is applicable, but if you do not meet the conditions by March 31, 2006 what would that period be?

So if we don’t meet the refinancing condition, the term loan matures at par August 1, 2006.

Okay, so there is no premium then?

Okay great, and I guess that is pretty much it. Thank you.

Joe Zeleski [ph], Libertas Partners.

Just had a couple of quick questions on your sourcing, I guess following up some of the discussion you had said earlier. Can you quantify a little bit about how much of the gains or some of the benefit that you did get from sourcing itself, I guess moving from cut-and-sew tot total package? And if you could do so it would be great to provide a little detail as to which regions you use for which markets, i.e. where do you source for North America, Europe, and Asia and for Levi Dockers Signature?

Well I think, we don’t quantify, that’s more competitive information than I’m willing to provide. I think if you look at the gross margins of the Company and how they have improved. They’ve been driven by really 3 things; one is the premium strategy that we talked about in terms of making sure that we’re not low-balling the price of the Levi’s brand around the world; two would be the cost of goods improvements that we’ve made through moving to contract manufacturing as well as actions that we’ve taken to eliminate the unprofitable lines within the context of our business; and the last part is getting better control of what we call dilution in the difference between gross and nets through managing our closeouts on a more responsive basis. And again having an inventory strategy that doesn’t chase demand that we can’t see. So I think there’s every reason to believe that we can sustain these gross margins if we follow this strategy.

We have a contract manufacturing, we produce a large percentage of our jeans and to some degree Dockers in Asia because of low cost of goods. On the other hand, we also take product out of areas that are in the same hemisphere or the same region so that we can have short lines of supply and we try and balance that season-to-season depending on what we see the demand to be and how uncertain I guess we are relative to some of the what we believe are key sources of growth. If we see an opportunity to grow, we’ll probably take more contract manufacturing in that region so that we’ll have an opportunity without over-inventorying the business to chase some of those growth opportunities.

That’s the best I can do for you, give you the philosophical approach. But we’re not going to tell you how we produce.

And just to add some symmetrics to that, so self-manufacturing you’ll see from ’03 to ’04 reduced from 11 percent of the total need to 8 percent of the total need and just recall that we shut the Spanish plants and the Australian plant later in the year. So self-manufacturing continues to decline as a piece of the overall need here, so it’s become a Company that’s sales and marketing focused and sourcing.

And so in terms of self, that declines and the Spanish plants of course supported the European operation as they sit there in Spain. And then the other thing I would point out, on the package, the move on package you see, package has the mix grew from 3 percent of the overall to 65 percent, so cut-made trim has come down and package has grown. That’s really more about, you’ll see on our balance sheet raw and with inventory declines as we move towards a fully-packaged production, and we take the product as it’s completed and we no longer own the ray and the width investment.

Great, and would it be safe to say that the more premium products are produced regionally? And the Signature and so forth are produced in Asia, or vice versa?

That’s a fair generalization.

Okay great, thanks for your time.

Stephen Schwartz, CRT Capital Group.

Just a couple of follow-ups; first of all, on Signature can you give some sense of sort of what the same store sell-through was for equivalent period? I know you only had 7 months of Wal-Mart in there, but I guess what trends are you seeing on a kind of same-door basis let’s say?

Yes, I would probably continue to focus on the average weekly rates of sale. We’ve had just a couple of months where we’ve been in a comparable store basis, but the fixture counts have moved around. Sometimes they’ve gone up, sometimes they’ve gone down. So we sill have very little what I’ll call really pure comp stories, but where we do have the really pure comp stores the trends are positive and up versus the previous year as the awareness has gone up and the productivity and the fixtures has gone up.

And we continue to see Levi Strauss build share on a comparable basis within the mass channel.

Okay, and then in Europe can you give a little bit more color on the sort of final surge you saw on the constant-currency basis in the last quarter? Was it across all product lines? Was it concentrated in some countries but not in others? Anything to give us a sense of how that reversal started to get some traction?

Yes, I mean I referred to the fact that the strongest country that we saw growth was Italy. And the Italian growth was driven primarily by the new fits, fabrics, and finishes that we developed for 501. And as Phil noted earlier Levi’s-engineered jeans has had a particularly strong year in Italy and we feel that LEG has the potential for more traction across Europe. But that was driven specifically in Italy by investing ahead of the curve in terms of TV so a strong increase in TV spending, a marked increase in retail presence. We opened over 20 franchised Levi stores in Italy, which are performing well. And last but not least in Italy you have an age in sale structure, so you have a very professional sales force which we reinvested in last year.

So you have 3 key components of increased TV spend, increased retail owned, and Levi’s retail presence and increased sales capability. And they were the reasons I draw off the premiumization. So we sold more higher-priced jeans, which as I said earlier is one of the areas of real growth in the denim market in Europe. So I think those -- you’ve got to be cautious -- but I think those elements should be replicable across small countries in Europe.

Okay, that’s interesting. And then finally some cash flow issues, for the medical accruals and for the pension accruals, can you just give a sense of what the net cash effect would be above or below whatever you think you’ll expense in 2005? In other words, would the case usage -- I guess I’m trying to match the P&L to cash flow. Would the cash usage be above the expensing or would it be below that?

So we do lay out the cash requirements in the K, so just taking them one at a time; retiree medical as we call that, cash funding will be $36 million in 2005. And I think in my comments I called out that retiree medical net is income in the P&L of $31 million. So $31 million of income coming through the P&L, $36 million of cash going out. And just to connect that remember when the caps were put in place on retiree medical the bookkeeping goes such that the -- I call that a benefit, the benefit obligation declined by about $400 million, the core economic benefit obligation declined by $400 million. That decline at 400 basically gets hung up in the balance sheet in amortized income over time. So that’s what you’re seeing. That’s a big part of what you’re seeing.

You’re seeing $31 million of net income coming through the P&L on retiree medical and cash going out of $36 million, and that benefit, we’re not going to take that benefit all at once. It needs to amortize that income over time. So that’s retiree medical, and you know on pension there’s $19 million of cash requirement for pension, and don’t have it handy at the moment in terms of what the impact on the P&L was exactly, but it’s also in this 10-K and we can get back to you on that..

Okay, were those figures -- I apologize I haven’t really had time to pour through this 10-K --- were those figures for 2005 or 2004?

I’m sorry, I called out -- retiree medical is about the same number. It was $34 million for 2004, so that’s a good correction there. It’s $34 million relative to $31 -- it’s $31 million of income and $34 million of cash out the door in 2004 on retiree medical. And then on pension it is $39 million out the door in ’04, with $19 million to go out the door in ’05.

Okay, all right, thanks a lot.

Gary Albanese [ph], Raymond James.

Most of my questions have been answered. I just have a follow-up cash question as well. Could you tell me the cash component of the long-term incentive expense?

We have that also broken out on the balance sheet, and we can get that back to you as well. So we can get back to you, cut it’s in the 10-K. Effectively though, we have cash going out in February and basically July of ’05 in the neighborhood of $80 million to $100 million.

Okay great, thank you.

Dawn Maleski [ph], Oak Tree Capital Management.

My question relates a little bit to the issue of dilution that you mentioned. Is there anything that you can give us to help us quantify a little bit how you’ve improved going form gross sales to net sales? Maybe give us either the gross sales number for 2004 as well as for 2003, or the discount allowance and return number?

No, what we report is net sales. When we refer to dilution, it’s the sort of gross shipped price versus what we ultimately collect. But we do try to help you through understanding our margin, and one of the drivers is improvement in our dilution management. The sourcing cost is still laid out, and the improvement in the product mix as we rationalize product lines and tighten up the merchandising line. So we don’t quantify the individual pieces, but it’s, they’re al important factors to drive that 530 basis point margin improvement.

Okay and then directionally you expect that you’ve kind of reached all the improvements that you can get in ’04, and then ’05 will be roughly the same? Or do you see additional improvements in that area?

No, we’re not going to give any particular guidance other than we think we have a good solid model at the current margin levels and we’re always looking for improvement. But again, it’s a good solid business model at this level.

Okay, and then in your North American sales, can you give us outside of signature just kind of what your key department store accounts, can you talk to us a little bit about what has happened in terms of floor space? Are you getting increased floor space in any of those accounts, or can you talk to us a little bit about what’s happening there?

Sure, this is Robert. On the Levi’s brand in the United States, 2004 was the year where we started to see an increased investment in real estate behind the Levi’s brand in all consumer segments. If you look at both the department stores as well as our chain store customers, we saw especially in Q3 and Q4 incremental investments in fixtures behind our men’s and young men’s Red-tab business, particularly the young men’s Red-tab business.

We are clearly seeing growth in our women’s business and I think if you were to go out as I went with my team last week and compare our fixture count this year to our fixture count a year ago, you’d see a relatively nice increase in real estate investments on both the misses and the junior segments. The area where we have opportunity moving forward will be in boys’ where we had still seen retracting business in 2004. We’ve gotten very positive response to the product line selling through, holidays we’re hopeful we can see some real estate growth in that segment in 2005.

Okay, and clearly you’ve made significant gains in the last year I mean just cutting costs from the system. Can you give us some sort of comfort now that you’re getting a new CFO that the momentum is going to continue and the business culture at Levi isn’t going to revert back to what it was pre the turnaround?

I just want to take the opportunity, I’ve listened to a lot of calls and have seen a lot of numbers and I just want to take the opportunity, one thing I haven’t heard that I think is appropriate I think is the sort of classic “job well done Phil and management team.” I think that everybody here has -- these kinds of numbers jump don’t just happen, and there’s been a lot of work amongst a lot of folks that have driven these earnings. And it’s not just, it really isn’t just about the cost cutting aspect; it’s also the business models have improved fairly dramatically. I mean margin is about improvement in the business model, and the focus that all the brand Presidents in all the division and Phil has really tried to tighten up the merchandising lines. And it’s been a phenomenal success on the margin line. So 530 basis points is a wonderful accomplishment. So I just wanted to put that out there.

So just to try to provide some reassurance, 2004 was a financial success because of actions that we took in mid-2003. We did 3 thins; we went after $100 million in cost reductions at overhead line. Most of those were announced in October or November of last year.

The second thing we did is that we reorganized into these divisions so that we would have better control, particularly of dilution in the margin line than we’ve had before. The third thing we did was we changed the go-to-market processes to be more responsive. And we’ve put a plan together in the face of what we saw in 2003 to be much more focused on profitability and being competitive.

Jim and Alvarez and Marcel came in December of last year after many of those changes had been announced, and have been very instrumental in making us effectively execute those strategies and those changes, and then we went after with Alvarez and Marcel additional amounts of overhead and cost reduction as well as product line rationalizations and bringing better control in management of the business on a month-to-month basis, which they’ve done.

Hans, who is the new CFO has been an instrumental part of that. If you look at the dramatic improvement in profitability in the European business last year, one of the key drivers of that was Hans’ leadership. He knows the business well, particularly on the international side, and I have every reason to believe that he will learn the business very quickly on the U.S. side. And his goal will be to continue to build that focus on control and day-to-day management, month-to-month management of the business that Jim has helped bring to the business over the course of the last year.

So you won’t see any reversal in strategy. You won’t see any reversal in focus, and I will only reiterate as I have a number of times on this call, our first priority will be to increase the profitability and the competitiveness of the business as we focus on opportunities for growth in the future.

And I would just add to that, so if you look at the improvement in regional operating income, we saw $210 million of improvement in regional operating income; $60 million of that came out of Europe, and as Phil said that is, Hans has been reporting to me for the last year and changed the CFO of Europe, and you will not find a more disciplined cost guy in Hans as the new CFO. So I think the discipline around Hans will continue and the discipline around our business model and business metrics will continue as well.

Great, thank you very much.

Clark Worsky [ph], KDP Investment Advisors.

Just a couple of questions. You called out the short-term investments at $131 million. What’s the difference between that and the cash they show on the balance sheet? Is it cash held in subsidiaries?

Yes, and I was calling out numbers I believe as of February 11. So if you look at the detail as of the end of the year, it’s exactly your normal cash in the operation around the world, cash in transit. It’s again a large global so there’s cash of at points in time in the zone of about $50 million.

Okay, and I guess the last question was it seems like a big opportunity is to turn Dockers around. I’m just wondering if you could put more sort of flesh on what you guys intend to do there?

I would say the big opportunity is to continue to grow the Levi’s and the Levi Strauss Signature brand. We’re the leading jeans wear manufacturer with leading market shares everywhere in the world in virtually every country that we compete in. We believe in both the Levi’s and the Levi Strauss Signature concepts in a way that over time, particularly in the strategy that we’re following and with both the product innovation and the advertising that we’re bringing against the business that we can over time come back to those being what Levi Strauss Signature has been and Levi’s will be a growth business.

Dockers is an extraordinarily strong brand here in the United States, and we believe in the men’s pant business as a source of growth n the future. One of the things that has gotten in the way of men’s Dockers here in the United States is that the category has been very weak over the course of the last year. In the third quarter of last year which is the last data I’ve seen it was down 11 percent. Men’s Dockers has held each year, and in fact as we saw the last 2 months of the year increased share in the channels of distribution that it’s in. And we believe in the product line. Despite having put up the business for sale last year, we have a very strong product line into ’05 led by this never-iron pant, which is really a major innovation within the context of that category and has had double-digit sale-through at $50 retail in the department stores that it’s selling in.

The struggle for us will be a women’s business which has suffered over the course of the last year and is facing really strong, intense private-label competition. But we have strategies in place to improve that product line, improve its premium positioning within the context of that category.

Internationally our key goal in Dockers is to improve the profitability. We don’t believe that will be a huge source of growth going forward, but we do believe that there will be some growth opportunities if we manage the business correctly. And that may be in either a wholesale model or will we actually sell directly? Will we license the business like we do in Japan? Will we have a distributor like we do in Singapore? But we need to make sure it’s not a profit drain on the Company, and that’s our first priority on Dockers.

Okay, and the women’s is really a small piece of the business. It’s mostly men’s, right of the continuing piece that’s left?

Yes but it’s still sizable and it’s still profitable, and we believe that there is an opportunity for women’s Dockers in the United States and we have some evidence to suggest that. It’s just making sure that we have the right economic model to make that happen both with our retailers and internally.

It’s 17 percent of the Dockers business in 2004, so men’s is obviously the biggest event thee, making sure that men’s business is stable.

Okay, thanks.

Leo Schmidt [ph], Advent Capital Management.

A couple of questions here, and the first question has to do with your accounts payable and the cash outflow on this statement of cash flows for this quarter. It was a substantial number, and I guess my question is, is this a sustainable number if I go back to the balance sheet and I take a look at your accounts payable as a percentage of inventory, it’s around 50 percent. Can you sustain that, or is this just sort of a one-time issue? Could you give us some sense of what would happen going forward?

No I think the paper balance that you are seeing at the end of the year obviously by quarter, there are seasonal flows as we pay vendors for inventory infusion. But it’s a stable, base payable outstanding level at the end of the year that we would expect to continue.

And then looking again at the statement of cash flow, there is a long-term liability for $108 million. I was wondering if you could give us some detail on that. That was for this quarter but I guess for the year it was $140 million, long-term liabilities at the bottom of the cash from operations.

Yes, that would include our -- we can get back to you on the details on that Leo.

Okay, and then sort of a final question in looking at the business model you’ve done a great job of increasing your flexibility and improving margin, and I guess one of my concerns is looking at your improved service level, as you improve that, you’re obviously going to bring more inventory closer. Will that change your ability to manage margin? Is there any concern of that?

Well as I said our goal is not to substantially increase inventories. It’s to bring the contract manufacturing closer to increase our ability to have shorter lead times from the time we order the product to the time we receive it and distribute it to the retailer. It isn’t designed to increase inventories. It’s designed to shorten that lead time.

So by bringing your contract manufacturers to a higher cost area, will that slightly change margins? Or do you think you have enough flexibility to keep them at the current levels?

Well I think what we’ve tried to indicate to you is that we feel relatively comfortable with the economic model that you’re seeing.

And you look at 2004 50 percent of the business is coming out of South and Central America and 32 percent is coming out of Asia. So the margins delivered in ’04 reflect that current mix balance and it still suggests the sourcing organization and parts of the business continue to balance the service, the in-close versus far away with the costs. And so that will be a continuing balance act over time.

Much of this is execution on our part. All service is really dependent on how good a forecaster you are and the steps we’ve taken internally to improve forecasting around the world are beginning to have a positive impact. And then it’s being precise about being able to assort correctly in terms of various product mixes to the door or the store level, or in the case of Europe and Asia by the country, and then the door level. And that’s what we’re working on internally, and many of the changes that we started making the beginning of 2003 are designed to improve that operational capability and that precision.

I guess one of the thins, I’m maybe guessing here, but the scarcity factor that you have developed this year has kind of especially helped your premium brands, and I’m just concerned that you’re gong to lose some of that in the effort to helping service, which may hurt margins too.

I keep trying to reassure you that’s not going to happen. I don’t know how else to say it. We don’t want to find ourselves giving our number one priority as profitability and cash flow. We don’t want to find ourselves over-inventoried relative to demand.

In other words Leo, we’re not going to shoot for 100 percent service level. We’re going to shoot for the right service level balance so the right inventory investment is made relative to the opportunities.

Great, Jim you’ve done a great job by the way, thanks.

Thank you.

Karen Miller, Bear Stearns.

Good afternoon, could you please talk about the level of penetration in some of your key retailers, private label versus your own product? I’m referring particularly I recall in the Christmas season of ’03 one of your major retailers was featuring some of its own product to the detriment of yours. I’m wondering if that has subsided.

I would say that in general in the United States in chains and department stores, our number one competitor in both Levi’s and Dockers is the private-label brands of those retailers.

And have you seen any increase, or it’s stable?

I would say it depends by customer or by the retailer, and I think when they’ve seen the resurgence in terms of rate of sale, in terms of both Levi’s and Dockers, we’re able to adjust and push back the tide. But it’s one of the economic forces that we face is the desire to have the full margin associated with private-label brand.

Okay, but I’m not still clear by your answer whether it’s similar to previous years, or it’s intensified, or it’s stabilizing?

IN the casual pants arena, the share of private label has increased year-over-year, so private-label share is now at 22 percent and they gained about 4 percentage points.

And how about in the jeans?

In the jeans category you are seeing a share of the total business growing private label. The one thing I would say though is our customers as Phil said the success of our most re cent strategies and improved sell-through, clearly the discussion happening with them is how we can be their number one branded jeans resource, We invented the category in the case of Levi’s. It’s a really original definitive jean, and they have interest in ensuring that they have both a private-label strategy and a successful branded strategy. So the pressure is there, and clearly to some point the desire for the margin that a private-label business can generate will always be there. Our challenge is to execute or strategize really strongly and build the equity of the brand so that we are the number one branded jeans resource in their channel of distribution.

Is there a price point that you target in terms of differential between your product and the private label? Is that something that you try to manage, a particular target that you have in mind?

Yes there is, but we don’t tell you what that is. We know what the point of elasticity is.

And just to switch gears a little bit, your ad spending was as expected in your fourth quarter, is that indicative of what you expect to spend in ’05? Can we use that as a level of guidance?

We would say in general that you would see higher ad spending next year, but it won’t be on a total year basis reflective of what you saw in the fourth quarter.

Okay, thanks.

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

We thank you for spending the time with us today, and we look forward to talking to you when we announce our first quarter results.

Thank you. This does conclude today’s teleconference. You may now disconnect your lines at this time, and have a wonderful day.