Levi Strauss & Co (LEVI) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's first quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded and may not be reproduced in whole or in part without written permission from the Company. I would now like to turn the call over to Jeff Beckman, with Levi Strauss & Company's Worldwide Communications Department.

Good morning and welcome to our conference call. I am pleased to introduce the Levi Strauss & Company management team. With us here today are Phil Marineau, our President and CEO, Hans Ploos van Amstel, our Chief Financial Officer, Bobbie Silton, President of the U.S. Dockers brand, Scott LaPorta, President of the U.S. Levi Strauss Signature brand, Paul Mason, President of our European business, and John Anderson, President of our Asia-Pacific business.

This call is being recorded and a replay will be available through April 26 by calling 800-642-1687 in the United States or Canada. From outside these countries call 706-645-9291. For it either number please input the ID code of 5207381 followed by the pound.

This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for six months on our website at www.LeviStrauss.com. Before we begin that remind you that our discussion today may include forward-looking statements, including in particular statements about our plans, prospects, targets and expectations. These statements are based on management's current data, assumptions, expectations and projections about future events.

These forward-looking statements are subject to risks and uncertainties. Those risks and uncertainties and other factors that could cause our actual results to differ materially from management expectations are described in our annual report on Form 10-K, our registration statements and other filings with the Securities and Exchange Commission. Our actual results might differ materially from our 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 nonlicensed products. We use sell-through data internally as an indicator of consumer demand for our products at retail. We compile sell-through data based on information 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 or 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 sale-through and could obtain different -- obtain data or compute it differently from us.

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

In view of SEC regulation FD we request and strongly encourage you to ask all of your questions during the Q&A portion of this call. Now I would like to turn the call over to Phil Marineau.

Good morning everyone. Thanks for joining us today. As you know, we just finished a debt refinancing in March which allowed us to retire our 2008 bonds and push the maturity of that debt 2012 and 2013. This refinancing work included an investor roadshow where we met and discussed our business with many of you.

In the Roadshow presentation we outlined our five priorities for 2005. Today I will talk about our Q1 business performance within the context of these priorities. We also said that during the refinancing that Q1 would be positive, and I am pleased to report that this was the case.

So priority number one is to deliver the 2005 financial plan. In Q1 we are off to a good start. Some of the improvement is due to onetime benefits and timing issues that Hans will highlight for you. Nonetheless, the Company turned in a solid first quarter performance. Net sales increased on a recorded and constant currency basis. Gross profit improved again by a double-digit percentage. We continue to produce a healthy gross margin. The operating income of each of our regions grew at double-digit rates, and we delivered a much stronger net income this quarter.

We are continuing to see the benefits of upgrading and streamlining product lines worldwide and creating a leaner and more competitive business model.

Priority number two is to grow Levi's, the brand, the Levi's business around the world. We're making good progress on this front. The European business continued its upward sales trends from last year on the strength of the Levi brand's repositioning to the premium segment. And once again our Asia business delivered strong double-digit sales growth, driven by its growing volume of premium and super premium Levi's products.

In the United States the Levi's topline sales were down as a result of the product streamlining that we did last year; however, sales of the core Levi's products grew slightly in quarter one. So overall we are seeing a Levi's brand on a worldwide basis in the first quarter that is growing.

Priority number three is to grow the Levi Strauss Signature brand presence in the mass channel and around the world. The Levi Strauss Signature brand continued to deliver incremental sales for the Company during the quarter. We are building on the momentum of several new customers in the United States, which we launched into during the second half of 2004. We expect to expand our presence in U.S. Kmart stores, as well as into new retailers in Europe, and launch into Taiwan later this year.

Priority number four is to revitalize our Dockers business. In the first quarter the U.S. Dockers business grew in part because of new products such as never iron cotton khaki. Yesterday we launched a new TV advertising campaign to support the Dockers business. As we said in our 10-K and during the roadshow, 83% of the Dockers business in the U.S. is in men's products, or actually worldwide is in men's products.

We're strengthening the Dockers man's line, especially the core bottoms business. And we feel positive about the men's products as we head into the critical back-to-school season. We are making good progress renewing the Dockers brand, but we still have more work to do particularly in the women's business.

The fifth priority is to focus on cost structure and operational efficiency, since the national improvements I mentioned earlier were driven by ongoing work to take fixed costs out of the business worldwide, as well as improve the way we go to market and revamp our product ranges. We remain intensely focused on finding cost savings opportunities and operational improvements.

While I am pleased that we delivered a solid Q1 performance, I remain cautious. We are seeing a changing and certainly uncertain retail environment in the U.S., Europe and Asia. This includes notably retail consolidation, and as a result uneven retail sales performance across different retailers. And it is driving cautiousness on the part of our retail customers in terms of how they buy and how much they are willing to really invest in inventory at retail at this particular point in time.

This sense of uncertainty is also exacerbated by the impact of energy prices and interest rates on consumer demand. So we continue to take a very cautious and conservative approach to managing our business because we think the balance of the year will be challenging. We are encouraged by our first quarter results. We are committed to achieving the objectives that I outlined for you as we go forward. And now I will turn it over to Hans who will give you more details on the first quarter.

Good morning everyone. I am very pleased to be here this morning to share our first quarter 2005 results as the new CFO of Levi Strauss & Company. First, I would like to quickly introduce myself. I am Hans Ploos van Amstel. I am from Holland and I very excited to be the CFO of a Company with such (indiscernible). I joined Levi Strauss two years ago as the leader of the finance function in Europe. Before that I was at Procter & Gamble for 14 years where my last position was CFO of the European division.

Now let's talk our financial results. First quarter net sales of $1 billion were 5% above the first quarter of last year, or a plus 2.4% increase on a constant currency basis. Our net sales in the first quarter were helped by lower sales allowances in North America and the earlier delivery of spring products in Europe this year as a result of a change in our spring/summer selling calendar to meet customer requirements. Excluding these items, we believe our net sales are about stable compared to the same period last year.

Net income for the first quarter of 2005 was 47 million compared to a 2.4 million loss in the first quarter of last year. The improvement was due primarily to higher operating income, partially offset by the 23 million cost for refinancing most of the 2006 bonds in December and 53 million higher tax expenses resulting from higher income.

As I mentioned, the key driver to the improved net income was a strong 123 million increase in operating income, from 61 million in 2004 to 184 million for the first quarter this year. This was the result of improved gross margin in combination with lower restructuring charges.

Specifically, the increase in operating income was driven by four key factors. First, we delivered a strong improvement in gross profit. Gross profit was 487 million, or 48.4% of net sales compared to 408 million or 42.4% of net sales in the first quarter of last year. This represents an increase of 78 million behind a 6 percentage point improvement in gross margin. The higher gross margin resulted from improvements in our product assortment profitability, lower sourcing cost from shift in production, and the impact of a stronger euro and yen.

It is important to note that our first quarter gross profit included lower sales returns and allowances in the U.S. Levi's and Dockers brands. As we said during the bond refinancing and during the 2004 year-end conference call, we believe that a gross margin in the mid 40 range is more realistic.

Second, our operating income benefited from 5 million in additional licensing income. As you may recall, licensing noncore segments of the U.S. Levi's business was one of our strategic actions last year. This is fueling the increased licensing income.

Third, our SG&A expenses were 309 million, or 30.7% of net sales, representing an increase of 19 million or 0.6% of net sales versus the first quarter of 2004. The increase is due to 14 million in higher advertising and promotion spending, an increase in litigation reserves, and stronger foreign currencies. The increase in advertising and promotion expenses mainly reflected higher media spending in Europe and Asia.

If you look at our organization and distribution expenses, which includes stocking, IT, distribution and other administrative expenses, our costs went down, reflecting our continuing focus on lowering the cost structure of the Company. And finally, operating income benefited from a 51 million reduction in restructuring charges versus the first quarter of 2004. Restructuring charges in quarter one last year were 54 million and included a $43 million cost associated with the suspension of the enterprise resource planning system in addition to charges for U.S. organizational changes and North American plant closures.

The 3 million restructuring expenses for the first quarter of 2005 was for additional costs related to the U.S. and European organizational changes that began last year.

Before ending handing the call over to our business unit Presidents, I would like to take the opportunity to quickly comment on the key highlights of our regional financial performance. First, our North American business. Net sales were down 1.2% from a reported and constant currency basis versus the first quarter of 2004. However, excluding the impact of Levi's and Dockers products that were licensed or discontinued, our net sales would be slightly above the first quarter of last year, reflecting modest growth in our core business.

Total North America operating income increased 18% to $121 million. A key factor behind the improvement is the increased gross margin coming from our product rationalization efforts. Europe's net sales increased 10% to 296 million, or a plus 4% improvement on a constant currency basis. As mentioned before, Europe's sales benefited from the earlier spring deliveries.

First quarter operating income was 91 million or 62% above the same period last year, even with the region's higher advertising investments to support the brand repositioning. The increased operating income comes from improved gross profits, organization and distribution savings, plus the benefit of a stronger euro. The gross profit improvement was driven by the Levi's brand's repositioning to the premium segment of the market, product rationalization, and sourcing savings.

Our Asia business continues to perform well. Net sales increased to almost $56 million, 18% above the first quarter of 2004, or 14% up on a constant currency basis. Asia operating income increased by 43% to $42 million in the first quarter of 2005. This improvement was primarily attributable to the unit sales growth, a better and more premium product mix, sourcing savings and more favorable currencies.

And now an overview of our liquidity and most recent refinancing activities. In March 2005 we issued 380 million of unsecured floating-rate notes and EUR150 million of fixed-rate unsecured notes through a private placement. The floating notes mature in 2012 and bear an interest at LIBOR which was 4.75% per annum. The euro denominated notes mature in 2013 and carry a coupon of 8.625 per annum. We used all of the proceeds for this offering to refinance our entire outstanding dollar and euro denominated 11.625% senior notes due 2008 through a tender offer and a subsequent redemption.

On the heels of recent positive ratings actions by Moody's and Standard and Poor's, the new senior unsecured notes were issued at significantly better interest rates and successfully extended our debt maturity profile.

On the liquidity side, sources of cash in 2005 include our earnings and refinancing activities. Our principal uses of cash include interest payments, cash taxes, payments for restructuring actions we have taken, the costs associated with the refinancing actions previously mentioned, as well as seasonal investments in networking capital. In addition in the first quarter of this year we also used cash for payments of our employee annual and long-term incentive plan. These amounts are included in the 10-Q, so I won't go through them here.

As of April 3, 2005 we had available liquidity of $377 million, consisting of 300 million under our calis (ph) facility and 77 million in liquid short-term investments. We believe we have sufficient liquidity over the next 12 months to operate our business and to meet our cash requirements.

We also continued to maintain compliance with our financial covenants. And now for the balance sheet. As of the end of Q1 our net debt was 2.1 billion versus 63 million before the first quarter of 2004, was up 92 million versus year end. The key reason for the net debt increase is that our first quarter 2005 cash uses include, as I mentioned earlier, a relatively high proportion of our annual interest payments and the fact the incentive compensation payments were made during the first quarter.

Accounts Receivable were 39 days or 1 day better than the first quarter of 2004, reflecting improvements in Europe and Asia. Our inventory was 609 million, or 3 million below last year. Inventory turns were 3.5, which is consistent with our plan.

In summary, we feel that our business was stable in the first quarter of 2005, and we feel good about the strong improvement in operating income. We remain cautious, however, as we head into the balance of the year. As I mentioned, we do not expect our unusually strong margin performance, which included some onetime benefits to be sustained over the balance of this fiscal year. In addition, we recognize that the retail environment continues to be very uncertain and challenging around the world.

Now I will turn the call over to Phil who will discuss the quarter one results for the U.S. Levi's business.

Robert Hanson, who is the President of the U.S. Levi's business is representing us at an important customer meeting today. So I am going to fill in for him on the U.S. Levi's brand.

The U.S. Levi's brand performance in the first quarter was consistent with our strategies and our plan. The net sales were down in the first quarter compared to the same quarter last year. We finished at $280 million, a reduction from the prior year of about $15 million or 5%. This was expected given the strategic actions which we implemented last year and which we discussed with you previously.

To summarize the impact of these strategies on sales for the first quarter of 2005, number one, we licensed and exited non-core product categories, which represented about $17 million of the decline for the quarter. Secondly, we reduced sales to warehouse, club and closeout channels, which represented another 4.6 million of the decline for the quarter. And thirdly, first quality sales of our continuing businesses were up more than 2% in the quarter, even though we faced a difficult retail environment with inconsistent performance among our retail customers. Despite the overall first quarter revenue decline the strategies we implemented delivered an operating income of $70 million, an improvement of $9 million or 15%.

Now I will briefly review how Levi's five core strategies are driving performance. Our first strategy is to remain sharply focused on increasing sales and profits in the core jeans business. We recognize that for our group of customers this is a period of significant change and consolidation. Some customers are delivering solid performance while others are facing significant difficulties.

This change in retail environment is one of the great challenges we face as we execute our strategy this year and focus on growing the Levi's brand. We see similar challenges for the Dockers brand. Our overall sell-through at our top eight customers was down. sell-through being how we measure consumer demand, was down 1% for the first quarter versus the first quarter of 2004. However, excluding the kids and men's tops businesses, which are now licensed, our retail sell-throughs were up versus Q1 last year in all our categories, a continuation of the positive trend which started last fall.

Now let me talk about these strategies. Our managed business experienced a sell-through decline of 2% this quarter compared to last year, but again that you're comparing against what we had in men's tops business. Our continued focus in growing and innovating the young men's segment continues to pay off and as young men's experienced an increase of 6% from the prior quarter.

Demand for products such as a work wear, low rides and boot cut fits with premium finishes continued to driving these increases. In women's we continue to drive solid sell-through performance with misses and juniors retail sales up 13% and 8%, respectively during this quarter compared to the same quarter last year.

And in our boy's 8 to 20 retail sales were up 7% versus the same period last year, again reflecting strength in both our core jeans and the new finishes in work wear programs. We feel very confident about our assortment and our product line for the back-to-school and holiday periods, and look forward to seeing how these assortments will perform. But as I said earlier, we're still very cautious about the retail environment.

Second, we have improved customer profits through more strategic retail programs that have better aligned with our retail -- our retail initiatives with our customers' marketing plans. This better alignment we're hopeful will continue to drive increased volume and increased sell-through.

And thirdly, our new go to market process and new supply chain model have resulted in improved gross margin and greater customer responsiveness. Since the beginning of 2004 we have continued to reduce the time it takes from initial line development to shipment of about 25 to 40%, depending on the consumer segment.

Fourth, we're focusing on driving demand via our Style for Every Story advertising campaign. This campaign, which was launched last year, continues to work well for us, driving consumer awareness and demand for our core jeans (indiscernible) product assortments. Our research shows that this campaign has generated the highest ad awareness for the U.S. Levi's brand in over five years, and it is highly correlated to rates of sale with relevancy measures far exceeding industry norms.

During the quarter one of 2005 our spending has focused solely on print media. But during the back-to-school and holiday seasons, we will be continuing our mix of both print and national television media. And we will have new advertising versions of the Style for Every Story campaign.

Fifth, we're making it easier to find and buy a pair of Levi's at retail stores. We launched a new merchandising approach an our top eight customers' stores for the back-to-school season last year. And we're continuing to invest in the expansion of this merchandising program with other key retail partners and across all our consumer segments. The program is based on our owned and operated Levi's stores in the United States which have achieved a comp store sales increase for 27 consecutive months.

Looking forward, we're committed to focusing on these same five strategies. We believe our increased market responsiveness and improving sell-through trends will provide stability in 2005 and fuel growth as we go forward despite some really uncertain and difficult retail conditions.

Now I will turn it over to Bobbie Silton who will talk about the Q1 performance for the Dockers brand.

Good morning everyone. Dockers first quarter net sales increased 4% compared to Q1 last year. There are some puts and takes in this 4% increase. Some onetime items helped drive the increase this quarter and were partially offset by product rationalization and issues in our women's business. So let me explain the positives and the negatives in our performance in the context of our three key strategic priorities for 2005.

Our first priority is to ignite the men's business. As Phil mentioned, 83% of our business is in men's, and our improved men's product assortment is having a positive impact. Our overall men's business experienced increased sales in both pants and tops.

Tier 1 sales of men's premium pants nearly doubled compared to the same period last year due to the successful introduction of our essential dress pants and our exclusive never iron cotton khaki featuring technology that produces a dry clean look right out of the dryer. We have significantly increased production on both of these products as a result of their success at retail.

During the quarter sales of men's classic pants increased with a newly launched broken in khaki, as well as the pro style khaki, both delivering strong results. Sales of men's tops also increased.

In Q1 net sales also benefited from a shift in timing of warehouse club sales that won't be repeated. Some of our sales in this channel planned for Q4 of 2004 did not ship until the first quarter, and some sales planned for Q2 also shipped during Q1. As we have discussed in prior quarterly announcements, the Dockers brand undertook product rationalization initiatives, which included licensing our women's tops business and exiting underperforming businesses. Strategic actions partially offset our net sales increase in the quarter. We expect that this will be the last quarter where we see a material impact from these actions in our year-over-year quarterly comparisons.

Our second priority is to reinvent the women's business. This business continues to be impacted by our consumer shift away from traditional core khaki products to more fashion style driven products. As a result, we're currently working to renew our women's business through a new business model. In the meantime, we responded to this trend for '05 by infusing more stylish products into our women's offering. Additionally, in line with these marketplace trends, we will exit our largest core khaki program in '05 as we revamp our product assortment with what we believe are more market right women's products.

Now let's shift from our net sales to retail sell-through. While we do see market trends improving in men's casual pants, category softness continues. Based on our retail sell-through data, men's Dockers pans declined 4% in Q1 -- 4.5% in Q1; however, we're still trending ahead of the category. During the quarter Dockers benefited from after Christmas gift card redemptions resulting in stronger over-the-counter results in January and February.

In addition, as a result of our customers' focus on inventory turns and productivity, we believe we exited the holiday season with a much healthier mix of inventory at retail than a year earlier. We believe our men's pant assortment is competitive, and we're hopeful that the opportunities for the category going forward.

Men's tops continue to be a positive story for the brand during Q1 with a 14% increase in sell-through at our top 12 accounts. In our women's business the sell-through at retail declined 18.5% during the quarter. However, the sell-through rate began to improve in January and February when we set the retail floors with new spring product and introduced promotional pricing on our Go khaki pants that we will exit later this year.

Although this performance reflects a slight improvement, we expect the balance of the year to be challenging for our women's business due to the marketplace conditions and the possibility of further retailer consolidation. This environment reinforces our decision to reinvent our women's business to a new business model.

Our third strategic priority is to relaunch the brand with consumers. During Q2 we will launch a new advertising campaign that dials up the style factor for the brand and engages the consumer at a more emotional level. Our Dress To Live television advertising, which launched on April 11, features both men and women's product together in one campaign. In addition, the April issue of FHM Magazine also featured an exclusive eight page Dockers editorial with the entire cast of the Apprentice dressed head to toe in Dockers clothing to showcase the brand's stylish wardrobe solutions for men and women.

Lastly, we will also look to support our men's shirts business with a dedicated print campaign in Q2. Now I would like to turn the call over to Scott LaPorta, President of Levi Strauss Signature brand.

I am pleased to report today that as the premium brand for the value shopper in the mass channel we continued to be pleased with our progress in bringing great product to the consumer. This product led to Levi Strauss Signature having a successful first quarter and holiday season, gaining additional market share in the value channel.

During the first quarter, Levi Strauss Signature generated net sales of $87 million compared to 86 million in the prior year. Excluding the Target fixture fill in Q1 2004, first quality comp customer sell-in to Wal-Mart and Target was up 3% in the quarter. Throughout the first quarter of 2005 our business at retail was strong. The average weekly rates of sale on our core product across all consumer segments exceeded expectations, building brand equity in our core fits.

Five pocket jeans wear with Levi Strauss Signature's channel leading fabric and finishing has led the way in December, while seasonal product offerings such as misses Capri began delivering high average weekly rates of sales and strong unit sales per average door later in the quarter. In kids the carpenter pants and skater jeans continued to do well with boys, while the girl's flair and scooter experienced double-digit average weekly rates of sale and high unit sales per door.

Operationally during the first quarter of 2005 we successfully launched into 225 Kmart stores and experienced sales above expectations. This has enabled us to partner with Kmart to expand our brand for back-to-school.

Our marketing efforts during the quarter focused on leveraging our relationship with NASCAR superstar Jimmy Johnson. The Levi Strauss Signature brand was Jimmy's titled sponsor for the Race of Champions in Paris, France this past December. Based upon his experience in Paris, the brand created a one-hour behind the scenes documentary entitled "Jimmy Johnson, Common Threads". This was aired seven times on the Speed Channel since its December Premier.

Second, continuation of our From Our Family to Yours advertising campaign in traditional women's lifestyle and service publications, as well as online sites like MSN, Google and American Greetings supported the heavy holiday shopping period. Third, holiday PR outreach generated over 400 placements in local news and radio outlets and delivered more than 10 million impressions, as Levi Strauss Signature was billed as the gift to give the entire family without blowing your budget.

And finally our presence and publicity efforts started off the year right with editorial coverage in Lady's Home Journal, All You, and Looking Good Now. Levi Strauss Signature was also included on the Today Show with Shop Etc. editor, Charla Cross (ph), who discussed fashion trends in denim and highlighted Levi Strauss Signature as the mass channel must-have jeans. These efforts continue to drive our brand awareness with the value consumer.

Looking ahead into the second quarter we expect our spring seasonal styles to deliver strong results as the product hits more stores. And we look forward to further growing the brand with our retail partners. And now over to Paul.

To begin with here is a topline European overview. Sales in constant currency are up 4.5% year-on-year in the first quarter of 2005, building on our fourth quarter sales increase of 3% last year in the fourth quarter. Although we are pleased with this continued improvement, we have not yet stabilized our business in all markets. As Hans has already mentioned, we delivered some Levi spring summer product early this year to meet our customers' needs which helped Q1 net sales.

Operating margin improved by 10 percentage points, moving from a 21% to a 31% profit margin, reflecting the impact of higher average selling prices resulting from the Levi's brand repositioning, savings from product sourcing, and further reduction of overhead costs. At the same time, we have also invested more in advertising and promotion than the equivalent period last year to further support our Levi's brand repositioning.

During the quarter we experienced some quality issues, however, and we again suffered some service level disruption. Generally we have seen a softening in consumer demand towards the end of the quarter after a positive January sales period in most European countries.

So moving on to Levi's in more detail, as I mentioned we have continued experiencing some Christmas service issues. Performance did improve during the quarter, but we're still below targeted levels. We have action plans in place to further improve service during the year, but as we have noted in the past corrective action does take time.

Year-on-year Levi's sales were up 9% in constant currency, with strong improvements over 2004 in Italy, Germany, Greece, and the northern countries. Advertising expense increased year-on-year to support the repositioning of the brand. And our new pan European advertising campaign is currently on air supported by an outdoor campaign as we continue to rebuild brand equity.

At a pan European level research indicates that the jeans segment is continuing to expand. The research again shows growth in sales of jeans priced at EUR85 and above, which has resulted in over the counter sales in this segment of the jeans market growing back 25% for men and 32% for women in the past 12 months. These numbers continue to support therefore our strategy to reposition the Levi's brand in the premium segment of the European jeans market.

With regard to Dockers we are implementing the new strategy and business model we announced last year. And our tighter more focused product bench has been generally well-received by our key accounts. Although we achieved our first quarter revenue plans, sales are more than 20% down versus last year. Our key focus, as you know, remains to substantially improve the brand's profitability, and we are on track to deliver against this subjective.

In keeping with the Levi's brand service levels made further improvement, and we are determined to make this happen. We are obviously working to ensure that there will be no disruption to the business when we transition the brand organization from its parent Amsterdam location to our European center in Brussels during the summer.

And turning to Levi Strauss Signature, for spring/summer 2005 we continue to focus on the launch models (ph) to France, Germany and the UK, with an expansion into other countries from late 2005. We have seen a year on year decline in Levi Strauss Signature sales this quarter, which primarily reflects the impact of fixture sales for the launch of the brand during the first quarter of last year.

The value channel in Europe continues to provide significant growth opportunities, particularly in women's jeans. Consumer research shows that the value of the jean segment at prices below the EUR30 has grown by 69% since '99, which again demonstrates the logic for Levi Strauss Signature in Europe.

So to summarize Europe's performance, we feel positive about the continued progress we have made in the first quarter, but we do recognize that we still need to focus on stabilizing topline sales in each and every European market individually. We also believe that rebuilding strong country organizations is having the desired impact on our business performance. Our savings and efficiency programs, together with the return of the Levi's brand to a more premium positioning, continue to drive improvement in profit margin. So with that I will now hand you over to John Anderson in Singapore.

The strong relates delivered by the Asia-Pacific division continued the positive momentum of the previous four years. Net sales grew by plus 18% over prior year, or 14% in constant currency.

Operating income grew by plus 43% over prior year quarter. Performance continues to improve across the region with China, Hong Kong, Malaysia, Turkey, South Africa and our Latin American licensees as the standout performance. The Levi's brand performance was particularly strong, and both the Dockers and Levi Strauss Signature brand met expectations.

Major initiatives that drove the business and improved our -- and resulted in our improved results were the launch of the 501 television campaign in Japan in late February, the continued strong performance of our ladies' Levi's product range across the region, robust performance at retail through the Chinese New Year celebrations, good sell-through of our super premium priced products driven by our extreme finishes in 501 jeans, and our super premium Red Tab product lines, and continued solid performance of our original Levi's store framework.

Once again we are off to a good start this year. The positive results, broad based across the entire Pacific region, point to a solid start to 2005. Back to you, Phil.

Just you to briefly summarize, we continued to build on our last year's improved financial performance in the first quarter of this year. We certainly now have a stronger, more profitable core business. And we believe we have the best product assortment that we have had in many years. We're highly competitive again. The challenge for us is to focus on the five priorities that I spoke about and navigate through a difficult consolidating and changing retail landscape. We remain confident that we will continue to improve the Company's profitability this year, while making progress on those key priorities. We will be happy to take any of your questions now.

(OPERATOR INSTRUCTIONS). CIBC World Markets Corp.

Just a couple of questions. You're talking a little bit about the tough retail environment and things being a bit softer it sounds like for the rest of the year. When you look out to the rest of the year it sounds like you're still talking about gross margins being in the mid 40% area. Do you still think you will be -- I know you haven't given guidance, but do you still think you'll be up on a year-on-year basis? Are your trend at least kind of flat to last year, maybe not as strong as they were this quarter?

I think the guidance we have given is is that if you plan on us having mid 40 margins, that is a reasonable place -- that is a reasonable assumption to make about the Company going forward.

What about topline, is it fair to say on a full year basis at least flat to last year?

I think if you look at our priorities, we're trying to -- what we said is grow the Levi's business worldwide, flatten out that Docker's business and grow Levi Strauss Signature. So yes, I think a fair assumption is trying to have flat topline sales is a reasonable assumption.

That's great. Just additionally, can you talk a little bit just about some of the management transitions? I know you newly have a new -- or a new CFO at least in the U.S., your management changes at Dockers, some structural changes in Europe, are the management transitions going pretty smoothly, especially with A&M's departure?

Absolutely. Hans has been on board now since right after the debt refinancing. But he was here shadowing Jim through the last quarter, so Hans is still into his on-boarding program, but doing an excellent job, and I think on top of all the issues from both a business planning but also a control standpoint. I feel very good about what the strength of our financial organization at this point.

We announced Bobbie Silton will take a sabbatical come June 1. We are out in the marketplace looking for her placement. I would say it is safe to say that the initial response to a job as good as this one has been excellent, and we believe there are a number of excellent candidates out there. And in the meantime she is still running the business and with my support and focusing on delivering against the priorities that she spoke about in the call.

We have continued to make progress in the European business, as Paul suggests, in moving back to a more affiliate-like structure with country managers having P&L responsibilities. We believe that is a structure that really reflects the opportunity to brand on a pan European basis but to market locally, which is important because each of these markets had different dynamics and different retailers. So we feel the progress that we're making is where we expect it to be. There are a lot of moving parts to this. And as Paul said, there are some still things that aren't performing or aren't operating the way we would like them to be, and we have remedies and people focused on those remedies in place. So we're reasonably confident about the progress that we're making in the European division.

So these management transitions are, I think, under control. A&M, other then Jim Fogarty, really left a long time ago, last April. So basically a year ago most of the A&M work was done, so we have just really replaced the CFO. Thinking that A&M has been here for the last year would be a mistake.

Just to go back to your cost for a second. Could you give us a since for your higher shipping costs, whether or not you're seeing -- I know that across the board with higher gas prices shipping costs seem to be higher at most of the consumer-based companies.

We're losing you here. I don't know if you are --.

I'm sorry. Can you hear me now?

Yes.

I was just asking about shipping costs. Are you seeing higher shipping costs, and is that already build into your gross margin estimates?

Across of shipping are built into our gross margin estimates, as you would suspect when we have higher -- for gas prices and certainly see some pressure on your transportation costs. But we believe that those are built into our cost of goods and distribution costs so that the gross margin still should be in line with what we talked about.

Just finally, I know you filed an 8-K in February and there were some detail about it in today's 10-Q, but it looks like you had made some changes to your long-term compensation plans. Can you walk us through what some of those changes are and whether or not we should expect higher expenses this year?

I don't know what kind of guidance -- I have to go back and ask somebody what kind of guidance to give. All we have done is implement a three-year, long-term compensation program that because we're a private company we can't do stock options, but rewards people on hitting certain targets over a three-year period of time that reflect an increase in profitability, as well as having a growth element to it.

So you can -- if we hit the three-year profit targets and grow at certain rates, you can earn more money. And it is the cash program. And I don't think you should over the long term expect a substantial -- it is really consistent with what we've spent in the last year in terms of long-term compensation. So that is what I would say. And it is self-funding. So if the business hits the targets, it has paid for the compensation program.

Banc of America Securities.

A couple of things. Taking a look at inventory, inventory days and AR days, can you just go over that with us real quick, why they were up?

Yes, the reason -- and I think you're referring mainly versus the close of last year that our inventory went up. That reflects mainly the seasonality of our business and reflects that we have rebuilt some inventory for our service levels.

Our accounts receivables are not going up on a performance basis because of the mix of the international business, which on average have a higher accounts receivable base, the mix might change. But on a true performance basis, accounts receivable and days continues to come down. So that is on accounts receivable. And on inventory as I said, the main reason is the seasonality of our business with some rebuilding for service levels.

How about on the year-over-year basis?

Year-over-year basis, inventory is basically flat. It is 3 million down. And the terms are about stable, and as I highlighted in the call, are in line with our expectations. And accounts receivable continues to come down. So it is the same thing. We have a higher mix sometimes of the international business and those are different payment terms than our U.S. domestic business.

And certainly this quarter the results are nothing but stellar. But I wanted to ask about any possibility of sales sort of moving out of the forthcoming quarter and into the quarter that just got reported. Is there any -- is that possible?

What we tried to indicate business by business that there was some movement in Europe and in Dockers and in U.S. Levi's. There were positive timing effects on the first quarter, so we tried to basically communicate that to you that the first quarter results, while very strong, has some things that are a result of timing that won't -- that will reflect itself as we move into the second quarter.

And I think, as I said, that a gross margin in the mid 40 range, that is more realistic. So we need to be careful by indeed extrapolating on quarter one.

Got you. Now I know that you -- having been on calls with you guys for a very long time, you're always cautious.

As we should be.

But having said that, the results have been pretty good despite that caution. Is there any -- should we interpret your cautiousness today any differently then your cautiousness in the past?

In the U.S. -- our largest customer retail customer in Germany, KarstadtQuelle, is closing half their stores this year. We are seeing the consolidation of Federated and May. We are seeing the Mervyn's purchased by Cerberus. We are seeing the Sears and Kmart consolidation. This just, I think, makes us naturally nervous is the way I would put this.

And I think you're seeing, if you look at retail sales in the United States, they are highly inconsistent, and they seem to vary month-to-month. And I think what it does is make retailers very conservative in how they buy. And we have seen more and more -- we don't see as much price competition as we used to, but we see more and more people wanting us to hold the inventory and chase the demand. And so we're making some bets on some things that we think in our assortments are the right bets. But that degree of where is the business going to be and at what month is going to be in is what makes us very, when I say cautious, what makes us cautious in our approach to the business.

So when we were on the roadshow what I said was is that our first priority above and beyond everything else is to continue to improve the profitability of the business. We remain committed to that. With the debt we have, that allows us as time goes on to deliver the business and to meet our cash requirements. So we won't chase the top line at the expense of the bottom line as we go through this year.

That said, we believe that we have the best assortment of product worldwide that we've had in many, many years. We know as evidenced by our own sales in our own stores that that assortment really sells well. If we can get it in sufficient quantities to the retail floor and our major customers, we believe that we will accomplish our objective of growing the Levi's business worldwide. We will stabilize the Dockers business and we will continue to grow Levi Strauss Signature business. But the uncertainty is that retail, the nature of the retail environment and the categories we are in. I hope that helps.

Thanks. I appreciate it. Have a good day.

JP Morgan.

It is Carla Casella. The Mexican litigation charge, how much of that was in SG&A this quarter?

Do you want to know what the charge was?

Right.

No, we are not -- that's -- we're not --.

We're not disclosing that.

We're not disclosing that.

Okay. When do you expect to have it finalized where actually the payment will take place? I know right now it is just a reserve.

We don't expect to pay. We are in appeals court in Mexico.

Okay. And then on the long-term incentive comp, given the change in the plans should we expect that number to remain down year-over-year as it was in first quarter in the coming quarters as well?

We're not giving -- as we said this plan is self-funding from a total bottom line performance point of view. And that number will move given the performance of the Company, so it is hard to give any forward-looking statements from a performance measure system like outfit (ph) program.

Okay. And the restructuring charge that you took this quarter with a lot lower than we thought. And I saw that expect still 57 million of total restructuring payments this year. Have you given any guidance as to how much in additional charges that means? Should we just assume that means that any thing over the current reserve balance is additional charge that will run through the P&L?

No, we have no major restructuring activities in the first quarter. We have completed most of it during last year. This included the plant closure and in the last few years the write-off. If you exclude that write-off we had over the first quarter of last year when the enterprise (indiscernible) system then that number was around 10 versus 3 in this quarter. We're still having a (indiscernible) in the 10-Q from guidance on the restructuring, but that is I think well-documented in the 10-Q.

And then lastly, you mentioned that Signature in Europe had a tough comparison to some shipping last year. Are there any unusual shippings that occurred during second quarter last year in U.S. or in Europe or in Asia that will make comparisons difficult in the coming quarter?

I don't think -- we're not talking about the second quarter, we're talking about the first quarter here. I can't give you any guidance on the second quarter.

No, I mean the second quarter last year though I think your Target shipping -- if you can clarify, was Target shipping last year mostly during third quarter or was that second quarter?

We launched into Target in the first quarter of 2004. In my comments at the beginning when I excluded the Target fixture fill in giving you the comp sell-in for the first quarter.

So there weren't any significant sell-ins last year during second quarter?

Not in the U.S. And in the European business I don't remember, Paul, where we were in terms of shipping OSS last year in Europe?

It is phased in because obviously we are launching Carrefour initially in France and then through Wal-Mart in Germany and Astral in the UK. So it was mostly in the first quarter but there was obviously some movement into the start of the second quarter. But the majority of the fixture fill was in quarter one.

CSFB.

Christina Aboni (ph) with Credit Suisse First Boston. Just one clarification question. I believe, Hans, you said that the top line would have been stable without some of the onetime items that you discussed. Did you mean on a reported basis or a constant currency basis?

I mean on a constant currency basis. We believe that if you look that our business is about stable. I think that is why we are also giving the caution is to the look at the nature of this business the way peak seasons fall or some of the shipping dates, it is very -- you need to be cautious interpreting just one quarter. And we feel that the underlying business trend as we speak today is stable to modestly growing. And that's on a constant currency basis.

In total.

In total. Okay. That's very helpful. And with respect to you talked a lot about moving and shifting to premium pricing in the European market. Maybe you could just give us some insight. Is that -- just how the entire market is going, why has that been so successful?

Paul, you want to answer that?

Yes, certainly. It isn't the entire market, inasmuch as we drove this ourselves. We took out the 580 series last year, which was retailing very much below EUR65, which is really where the premium market starts to kick in in Europe.

So we took out the 580 series and we launched Levi's Blue, which sits above Red Tab, and therefore we have very much taken Levi's back to its roots as a premium priced jeans brands in Europe. We are investing in fit, fabric and finish, and therefore the price value equation warrants the price that it is retailed at in the market.

The market in Europe is in slow growth in men's, slightly stronger growth in women's. And that growth is fueled -- it is very much a polarized market structure both in men's and women's. There is growth below EUR30 and there is growth above EUR65. So we are deliberately moving Levi's back to its heartland premium priced position. And obviously we launched Levi Strauss Signature, so therefore we believe we are well-positioned relative to the growth dynamics in the European marketplace.

Great. That's helpful. And finally, just looking at your cash flow statement, just when I look at the increase, or I should say the decrease in salary, wages and employee benefits, I presume that has both long-term as well as short-term compensation in there? Is that how to think about that negative $67 million on the cash flow statement?

But that also reflected the payment of vacation, accrued salaries, right, the 67 million negative?

Right. So I was just wondering --.

That reflects due to the payment of AIP and outfit (ph) in the first quarter.

Okay, is there something (multiple speakers)?

AIP is your annual incentive program target and then the long term. A year ago we neither had an annual incentive payment nor a long-term payment, given the numbers that we had. And so you're comparing against a payment on both versus a period a year ago where you get another payment.

Right. Is there any way you could break that out long-term versus AIP?

We don't do that.

Okay, that's fine. But it has both. Okay, thank you very much.

That's the combined amount.

Bear Stearns & Co.

This is Karen Miller. If we could circle back to the improved gross margin in the first quarter, other than the timing of shipments, is there anything else that impacted the first quarter gross margin that was onetime that we haven't discussed yet?

What we said is that we believe a margin in the mid 40s is more realistic to assume. That indicates that we believe that we have some benefits in the first quarter which were a little bit above what we expect. And those include sometimes the benefits from inventory valuation or some savings which are more skewed towards the quarter. But we're not maybe giving more guidance than we believe that it is a very healthy margin and we're going to stay at this --.

I would say though what we said was there is three things. One, there is timing of some shipments. There is, two, -- and there is some positive mix associated with that because they are European and they are higher prices. The second is that there is less closeout expense that is this quarter, but that is timing as opposed to a permanent change. And then there is the inventory revaluation which affects the mix, which is positive (indiscernible). Those are the three things that give you the -- drive us to provide you this guidance that 48 is probably not sustainable as we move forward.

If we could just change focus just a little bit. Could you discus your sourcing mix on Asia versus Central America for -- and Latin America for this quarter, and then what you expect for the rest of the year? It is my understanding that it is a little bit more expensive to source in Central and Latin America.

I think in the roadshow -- I know in the Roadshow -- we told you that we still do about 50% of our sourcing in Latin America. And we do about 30 some odd percent in Asia, and the balance through the rest of the world. That is a fair characterization of our ongoing sourcing strategy, and balancing the need to have lower cost of goods with short lines of supplies so that we can have a responsive go to market process and be able to meet fluctuations in demand.

That basic strategy over time will see more product go to Asia and a little less out of Latin America, or maybe a little less out of local areas around Europe. But in the short term that is a fair characterization of our strategy. And it is in the 10-K, I think, on page 9.

And short term, are you talking this year or next or what is your short-term --?

We're talking about the near term in this year.

Citigroup.

It is Lee Oliver (ph). Good afternoon and most my questions have answered. I guess just in terms of Asia, I saw that the business was performing very well and you guys mentioned that Asia -- I'm sorry -- Japan was up about 4%, but some of the other large countries in Asia, Australia, Indonesia, Philippines, were down. Can you give us a sense of really where the strength came from? I heard, John, you listed a few countries that had done really well. But how about just the magnitude of the business in China and Turkey and some of the Latin American countries?

Yes. Business in China is growing very fast, but it is still a very small business for us. We have only been in China for three years. So getting good, strong double-digit growth, but in terms of the entire division the contribution is still quite low. Divisions that are driving very strong growth for us continue to be Taiwan, the other countries I mentioned, South Africa, Turkey, Malaysia, Hong Kong and our Latin American licensees.

Philippines and Australia are both very mature businesses. We've got some retail issues going on there, some restructuring. They were not major contributors to our business. It is these new emerging countries that giving us the good, strong double-digit growth. So we feel pretty comfortable that growth is going to come from the Indian's, the China's in the future. That is where we're focusing our resources. We think single digit growth out of Japan in this economic situation is good. And with we have got a situation we think we can maintain there. And as I said, we will drive the growth through these new emerging countries.

Right. With 14% constant currency growth in Japan, only up 4, it looked like there was a bit of a disconnect there.

I think it is showing that we are getting good growth out of these new emerging countries.

Sure. Hans, with respect to CapEx, I know your budget for the year is 50, 52 million and you only spend a couple of million in the first quarter. With the amount of money that you expect to expend over the last three quarters of the year, where exactly is that going?

The key investments -- we only spend around 5 in the first quarter -- but the key balance of the year would be our investments in systems.

Systems investments. And when will you expect those improvements to be rolled out -- would actually be implemented?

(multiple speakers). You mean the capital?

Not necessarily the spending, but the benefits from the spending?

No, I think you have to -- you know, we're installing an SAP system in our Asia-Pacific region as we speak. And the first countries that we are sort of implementing this is in the Australian, New Zealand affiliate. We're basically upright on June 1 in those affiliates. And then we are -- correct me if I'm wrong John -- in South Africa and Japan after that.

That's right.

So we're doing this again to make sure that we are on budget and on-time in SAP, that we don't have any major surprises in SAP. So we are sort of going through a stage gated process where we get one country right, learn from that, and then take it to another couple of countries. And that will take us over a couple of years.

I don't think you'll see the benefits of that until you get some economies of scale, until you get some real scale associated with that. So that is in subsequent years. But it is a very important project because we need a new enterprise system in Asia. And it will provide the learnings about what we do next in the balance of the world after we do Asia-Pacific. So looking for substantial benefit associated with this in this year is probably not in the cards.

And I guess thirdly, just a generic question. When you guys enumerate the reasons for different parts of your business to improve or deteriorate, be it gross profit margin or SG&A, and you put the four or five reasons for that change in the financials, do you typically write it in a sense that it goes for most attributable or highest dollar amount down to the lowest impact?

Yes.

Okay, that is fair. Thanks very much.

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

Again, thanks for joining us today. We remain focused on improving the profitability of the Company and driving the growth of the Levi's brand and Levi Strauss Signature brands around the world. And we look forward to reporting our results to you in subsequent quarters.

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