Levi Strauss & Co (LEVI) 2005 Q2 法說會逐字稿

Welcome to the Levi Strauss & Company second-quarter 2005 earnings 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 rebroadcast in whole or in part without written permission from the company. I would now like to turn the call over to Mr. Jeff Beckman with Levi Strauss & Company's worldwide communications department.

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; John Goodman President of the U.S. Dockers brand; Scott LaPorta President of the U.S. Levi Strauss Signature brand; Robert Hanson President of the U.S. Levi’s brand; Paul Mason President of the European business and John Anderson President of our Asia-Pacific business.

This call is being recorded and a replay will be available through July 26 by calling 800-642-1687 in the United States or Canada. From outside these countries call 706-645-9291. For either number please input the ID code of 7163530 followed by the #. 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 let me remind you that our discussion today may include forward-looking statements including in particular statements about our plans, prospects, targets and expectations. These statements are based on management's current data, assumptions, expectations and projections about future events. These forward-looking statements are subject to risks and uncertainties. Those risks and uncertainties and other factors that could cause our actual results to differ materially from management's expectations are described in our annual report on form 10-K, our registration statements and our 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 for retail sales trends. When we talk about sell-through and retail sales 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 for our products at retail. We compile sell-through data based on information that we've 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 sell-through and could obtain data are computed differently from us. We also use average weekly rate of sales as a performance measure for our Levi Strauss Signature business. Average weekly rate of sale measures, a retailer's weekly sales rate as a percentage of their average unit inventory on hand during that week. Both 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 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. Thank you for joining us today. When we spoke to you last quarter we reported a strong start to the year. But at that time we also noted that the top line that we experienced in Q1 was strong in part because of sales timing that would eventually negatively impact our top line results in quarter two. Despite these timing effects and a real mixed Q2 retail environment, we did deliver a solid quarter. Our results either met or exceeded our expectations on all financial measures. We really are right where we expected to be at the midpoint of the year.

Today I will talk about our business performance within the context of the five key priorities that we are focused on in 2005. Our first priority is to deliver our financial plan. A good Q2 combined with a strong Q1 performance puts us in a very good position going into the back half of the year. Now Hans will give you the details of our financial performance but the highlights are our reported net sales for the quarter were down slightly, the top line is stable at midyear. Our gross profit improved for the 6th consecutive quarter and we continue to produce a strong gross margin. Our operating income for the company is up substantially and once again we delivered strong net income results.

Our number one priority is to continue to focus on delivering improved profitability. That over everything else is our paramount objective in 2005. Our number two priority is to grow the Levi’s business around the world. This is certainly a critical priority for the company. We have made progress this quarter but frankly we are not there yet. Retail sales of continuing core U.S. Levi’s products grew again this quarter. Our long bottom's business which is crucial to our success were particularly strong and Robert Hanson will brief you on that. There is strong evidence on the Levi’s brand in the U.S. that the upgrading of our product ranges is building consumer demand.

In Europe we experienced a very difficult retail environment that continues to this day. We see signs that repositioning the Levi’s brand in the premium and superpremium segments is the right strategic move to revitalize this business. We are focused on continuing to execute this strategy but it is going to take a while to get our business growing again in Europe.

And once again the Levi’s business in Asia-Pacific delivered very strong double-digit sales growth this quarter across many, many countries outside of Europe and North America. Again this was led by growth in the premium and superpremium segments for the Levi’s products.

Our third priority is to grow Levi Strauss Signature in the mass channel around the world. Levi Strauss Signature brand continues to produce great incremental sales to the company and has helped us maintain our dollar share in the jeanswear market along with Levi’s in the United States. In the United States Levi Strauss Signature did grow on a comp store basis and it has added additional retail stores. In Europe the brand grew at double-digit rates. In Asia Pacific sales comparisons were down due to fixture fill during quarter two last year, but we expect to expand our presence of Levi Strauss Signature in this region as we go through the year.

Our number four priority is to revitalize the Dockers business. As you might imagine following the sale process that we executed last year of the Dockers brand, we expect this revitalization process to take a while. We have every confidence that we can renew this brand and have high hopes for it as we move forward.

As I said last quarter 83% of the U.S. Dockers business is in men's products. We have a terrific men's productline going into the back-to-school season in spring '06 especially on our core bottoms business. We did relatively well in men's core bottoms this quarter and continue to feel positive about the men's products as we head into the fall season in Spring '06.

We still have much work to do on the women's business. We've lowered our expectations for that as we said in the first-quarter conference call for the balance of the year and expect to have renewed plans to revitalize the women's segment as we move into '06.

We are excited about the addition of John Goodman as the new President of the U.S. Dockers brand. John brings tremendous experience as a leader merchant and retailer to the Dockers business, and I know he is eager and excited to capitalize on the tremendous opportunity to (technical difficulty)

I apologize; there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

Hello? We were cut off I guess some sort of technical difficulty but we were talking, had just finished talking about the Dockers brand and where we were in terms of our priority of revitalizing that. Our fifth priority is to focus on cost structure and operational efficiency. We remain very disciplined on containing costs and I think our success in this area is demonstrated in the financial performance in the improvements that we have made throughout our P&L. We continue to focus on additional opportunities to take costs out of our business worldwide and becoming more efficient in how we go to market.

I am pleased with our performance so far this year. We remain focused on the five priorities that I just spoke about and believe we are really well-positioned for the remainder of the year. With that let me turn it over to Hans and we will highlight the financial results and then we will move into each line of business. Thank you.

Good morning, everyone. Overall we delivered a solid quarter; second-quarter net sales of the 944 million or 1.6% below Q2 of last year, or down 4.4% on a constant currency basis. The decrease was driven primarily by expected lower sales in our U.S. Levi’s, U.S. Dockers and European business offset somewhat by stronger Asia-Pacific and U.S. Levi Strauss Signature sales growth.

Net sales compared to last year trended up each month throughout the quarter and we finished with strong results in May. Positive momentum we believe heading into the third quarter. Our year-to-date net sales are up 1% on a reported basis and down 1% in constant currency indicating in my view, that our business is stable. Our year-to-date results are better indicators of how we're delivering against the full year. In line with our conference call last quarter when we noted that our strong Q1 was partly the result of changes in our spring/summer selling calendar in Europe.

Net income for the second quarter of 2005 was 27 million compared to 6 million in the second quarter of last year. The improvement was due primarily to strong operating performance during the quarter with significantly higher operating income and lower restructuring charges partly offset by the 43 million costs for refinancing the 2008 loans. Net income for the first six months of 74 million compared to 3 million in the same period of 2004.

The key driver of the improved net income for the quarter was an 84% or 66 million increase in operating income to 145 million for the second quarter of this year. This was the result of improved gross profit, increased royalties from our licensing activities and lower restructuring charges. This brought our year-to-date operating income to 329 million for 2005, a 136% improvement.

I will now explain the key drivers of our second-quarter operating income. First, we continued to deliver strong gross profit, gross profit was 437 million or 46% of net sales compared to 43% of net sales in the second quarter of last year, an approximately 25 million increase. The higher gross margin resulted from increased sales of higher margin products in Asia and the impact of shifting to a more premium product mix in Europe, lower sales allowances in the U.S. and lower sourcing costs from outsourced production.

We said during the first quarter conference call that we believe a gross margin in the mid 40 range is more realistic going forward. We still believe this is an appropriate range for the year; therefore we expect margins in the second half to be slightly below the first half. Second, our SG&A expenses were 302 million or 32% of sales representing a decrease of 3 million versus the second quarter of 2004. The reduction is due primarily to a decrease in the organization and distribution expense and annual incentive compensation expense.

In the second quarter we continued to drive strong organization and distribution savings, identifying new saving opportunities. Excluding exchange rate we saved $21 million in organization and distribution expense in the second quarter. At the same time our strong operating profits allowed us to invest more in advertising and promotion. Our year-to-date advertising and promotion expense is up 17% in constant currency. We are going to increase advertising and promotional spending in the back half of the year as we continue to invest in building our brands.

In addition we reversed the first quarter litigation reserve in Q2 after a favorable appeal court ruling on a lawsuit in Mexico. Finally, operating income benefited from a more than 20 million reduction in restructuring charges versus the second quarter of last year. Restructuring charges in Q2 last year were 26 million and included charges for the closure of two plants in Spain and layoffs in the U.S. The 5 million restructuring expense for the second quarter of this year was for additional costs related to the U.S. and European organization changes that begun last year.

Before handing the call over to the business unit presidents I would like to take the opportunity to quickly comment the key financial highlights of our North America and international business. First, our North American business. Net sales were down 5% versus the second quarter of 2004. However, excluding the impact of Levi’s and Dockers products that were licensed or discontinued after Q2 of last year our net sales would be slightly above the second quarter of last year reflecting modest growth in our core business. Total North American operating income for the second quarter decreased 7% to 105 million due to the region's lower sales. Year-to-date net North American operating income is 5% up to 227 million.

In our international business Europe's net sales decreased 7% to 234 million or 14% decrease on a constant currency basis compared to the second quarter of last year. As we mentioned last quarter Europe's sales were impacted by earlier spring deliveries that benefited Q1 at the expense of this quarter. Europe also is experiencing a very challenging retail environment. Net sales year-to-date are up 9 million or 2% which translates to a minus 4% in constant currency. Europe's second-quarter operating income increased by 34% to 50 million. This improvement was primarily attributable to sales of higher priced products as a result of the Levi’s then premium repositioning combined with lower costs resulting from ongoing cost saving efforts. Europe's year-to-date operating income improved 51% to 140 million confirming that we are running a leaner, more profitable business in Europe.

Our Asia-Pacific business continues to perform well. Net sales increased to 191 million, 17% above the second quarter of last year or 12% up in constant currency. Year-to-date net sales are up 18% on a reported basis and 13% in constant currency. Asia operating income increased by 24% to 45 million in the second quarter of 2005. This improvement was primarily attributable to volume growth, better more premium product mix, sourcing savings and more favorable currencies. Year-to-date operating income for Asia increased 32% to 87 million.

Now let's talk cash. Sources of cash in 2005 included our earnings and refinance activities. Our principal uses of cash included the costs associated with our refinancing actions, interest and incentive payments, cash taxes, payment for restructuring actions we have taken as well as seasonal investments in net working capital. Our inventory at the end of the second quarter was 651 million or 96 million above the year and last year. As you may recall we finished 2004 with low inventories that resulted in lower customer service levels and we believe some lost sales opportunities last year. During Q2 we invested in increasing our inventory in order to deliver higher service levels and to meet consumer demand for the back half of the year. Now that we have improved our service levels we are working to optimize sales with lower inventory levels.

As a result uses of cash our net debt was 2.1 billion, this is 84 million above year end 2004 level. We have made solid progress on closing our open U.S. tax years. During Q2 we closed 1986 to 1989. As we noted in the 10-Q settlement discussions on the 1990 to 1999 tax years are ongoing. We currently estimate that resolving the 1990 to 1999 all the cycles will result in an estimated cash outlay of $100 million. Our cash flow projections reflect our efforts to reach agreements with the IRS with regard to the years during the next six months. Closing the open years will be a significant accomplishment for the Company.

In summary we feel good about our performance for the quarter and year-to-date. We have delivered a solid net income with substantial improvement in operating income. Our year-to-date net sales factoring in the sales timing shifts between the first two quarters are stable, in line with what we said the last quarter. I would like to reemphasize that we expect gross margin for the year to be in the mid-40s which means slightly lower gross margin in the second half.

The solid profit improvement has allowed us to increase our investment in advertising and promotion support to strengthen the business. Our strong financial results give us the cash resources to close the open tax years. Finally our refinancing actions this year have improved our interest rates and extended our debt maturity profile. We obviously remain cautious given the ongoing uncertainty in various retail markets around the world. However on balance we believe we are in a solid financial position heading into Q3.

Now I would like to turn over to Robert Hanson who will discuss the second-quarter results for the U.S. Levi’s business.

Good morning, everyone. The U.S. Levi’s brand performance in the first half of the year is consistent with our expectations and in our view confirms our core strategies are on track. As we expected net sales were down in Q2 and for the first six months of the year. We finished the second quarter at 244 million and the first half at 524 million. This is a reduction from the prior year of about (indiscernible) million, or 5% for the quarter and 28 million or 5% for the first half. We anticipated this decrease that reflects the impact of implementing strategies we previously discussed, including the licensing and exiting of noncore product categories which represented about 12.5 million decrease for the quarter and a 30 million decrease for the first half.

For our comparable businesses which exclude the products we discontinued last year our year-to-date sales are slightly up at 1.2 million over the same period last year. Despite the planned first half revenue decline, the strategies we implemented are delivering improved profitability both internally and for our customers and are driving increased consumer's demand. Let me now briefly review Levi’s five core strategies and how they are driving this performance.

The first strategy, we have been and will remain sharply focused on increasing sales and profits in our core jeans business. While retail sell-through including again the license and discontinued business segments mentioned previously was down about 1% for the first half of the year; the comparable business was up 2% across all categories men's, women's and boy's. This is a continuation of a positive trend started this fall.

Although our total men's business experienced a 2% sell-through decline over the first half of the year this is driven primarily by a weak and late shorts season. Our key long bottom's business is still mentioned as demonstrating consistent growth. Our continued focus on growing and innovating the young men's business drove a 6% increase for this segment.

Our women's products continue to demonstrate retail sell-through gains delivering about a 12% increase for the first half of the year and in boy's retail sales were also up 12% for the first half. Because spring seasonal products such as shorts, skirts and crops have such a significant impact on our retail sell-through performance during the first half of the year, we want to share our long bottom sales trends to provide a better understanding of the health of our core business.

The Q2 sell-through results for our long bottom's businesses, comparable businesses, demonstrate a gain across all consumer segments. In long bottom's men's is up 5%, boy's is up 19% and women's is up 17%. This positive trend shows our commitment to core product innovations, innovations such as new fits like straights and skinnies, new vintage and tint finishing as well as color and technical innovations and these are being embraced by our consumers. However, we do remain somewhat cautious regarding our future opportunities due to the fact that selling continues to lag and continues to lag sell-through. Our customers continue to reduce their inventories to focus on improving cash flows, inventory turn and gross margin return on investments.

Second, we continue to deliver improved customer profits through more strategic retail promotional programs. Since last year we worked hard to better align our brand initiatives with our customers marketing plans to drive increased volume.

Third, our new go-to-market process and new supply model has resulted in greater customer responsiveness and a slightly improved gross margin for the first half of the year. This has become somewhat weakened by higher seasonal discounting and a higher product innovation cost in our new products this quarter. Our inventory levels have increased in both quarter and the first half in part to improve customer service performance for the second half of the year in face of the strengthening consumer demand. But we do intend to manage inventories down through the balance of the year.

Fourth, we remain focused on driving demand by our Style for Every Story advertising campaign; this campaign continues to work well for us and driving consumer awareness and demand for Levi’s jeans. During the first half of 2005 our spending was focused primarily on print media but beginning this month we will be significantly increasing our spending and shifting our mix to both print and national television media including premiering three new ads.

Levi’s jeans appears in several major U.S. motion pictures this summer. Our Levi’s (indiscernible) superlow boot cut for women is featured in a popular movie, Sisterhood of the Traveling Pants supported by a fully integrated customer marketing program with Sears. For the seventies skateboarding film awards a dog pound highlights Levi's young men's jeans and we will also be featured in the Dukes of Hazard and Bewitched. Our goal is to complement our main advertising efforts with publicity based marketing such as these great films to make Levi’s jeans more prominent in popular culture.

Fifth, we are making it easier to find and buy Levi’s jeans at retail. After implementing new visual marketing materials in our top retail stores last year we are continuing to expand this program which is based on product presentations in our owned and operated Levi’s stores. These stores using this merchandising model have achieved comp store sales increases now for 31 consecutive months. Despite the unpredictable economies, fluctuating consumer confidence and the potential distractions resulting from recent retailer consolidations, the increasing consumer demand for Levi’s jeans supports our belief in these core strategies to deliver our objectives. As Phil said, our goal is to position the brand for future growth. We remain committed to these core strategies as they are working and moving us towards this goal.

Now let me turn it over to John Goodman, President of the Dockers brand.

Good morning. I want to begin by saying I'm very pleased to be here today in my new role as President of the U.S. Dockers brand. I took this job because I think Dockers brand is one of the great brands in apparel; I look forward to the opportunity to be part of revitalizing this business.

Now let's review our Dockers Q2 results. Net sales decreased 11% compared to Q2 last year. We anticipated this decline given the continued weakness in the women's business which we expect to turn around in 2006 and as we discussed last quarter the impacts of the timing of some sales that benefited our Q1 but had an impact on Q2. As a result of these timing issues it is more indicative of our performance to look at our year-to-date sales results which are minus 4 compared to the same period last year. I will describe some of the specific puts and takes of our Q2 performance within the context of three strategic priorities for the Dockers brand this year that were discussed last quarter.

First, we are focused on igniting the men's business. As Phil said 83% of our business is in men's products and our men's business performed relatively well this quarter, especially in the pant category. Our revitalized Dockers premium pant assortment performed particularly well due to the success of our exclusive never iron cotton kaki, that gives you a dry clean look right out of the dryer. In addition the premium essential dress pant has been another best-selling product from our updated assortment.

Sell in of men's classic pants increased for the quarter. The newly launched Plus 12, the lead product from our simple luxury initiative for fall '05 has been well-received by our retailers and the broken and khaki as well as the prostyle khaki continue to be solid performers. Although the overall men's casual pants category continues to be challenging in Q2 sell-through for the men's Dockers business is outperforming the category. We have had a positive reaction from our retail customers to the fall and holiday men's pants assortments, and as a result we continue to be optimistic about the future opportunities for the category and our men's business.

Now let's look at men's tops. Following strong in sell performance throughout 2004 in the first quarter of the year our men's tops sales were disappointing this quarter. The decline was a result of shifts in some key retailers shirts merchandising and forfeiture strategies during the second quarter as well as weaker than expected sell-through during Q1 which impacted our shirt sales during Q2. As we move into the fall season we expect our tops selling performance to improve for the balance through the balance of the year.

Q2 retail sell-through of men's tops were impacted by the poor performance of long sleeve woven shirts, resulting from oversaturation of the category as well as a shift in demand to knit shirts. But our year-to-date sell-through is still higher than the same period last year.

Our second priority is to reinvent the women's business. Clearly this is an area of business that requires much work. I believe this is a major opportunity for the Dockers brand and I am excited about building this underdeveloped part of the business. In Q2 our women's business continued to be affected by the consumer shift to more fashion and style driven products. As we told you last quarter the Dockers brand is responding with a new women's model that we believe will be more responsive to the marketplace and deliver more style relevant products that will impact performance beyond 2005.

In the meantime we have seen optimistic signs in the more stylish products that we have brought to market so far this year. For example, the Metric (ph) Capri has been successful this season, tripling its retail sales from the same period last year and becoming our highest volume women's product in Q2. As a result of these market trends we are revamping our entire women's assortment to offer more style relevant products. This includes upgrading our core khaki offerings to be more trend right, and exiting our largest women's core khaki program this year.

Sell-through at retail for our women's business declined 20% this quarter. We said at the end of Q1 that we expect the balance of the year to be challenging for our women's business and that has certainly been the case for Q2. March was a very difficult month; however as we have introduced more relevant products the trend for April and May and into June is moving in the right direction.

Our third strategic priority is to relaunch the brand with consumers. On April 11th, we launched our new Dockers Dress to Live advertising campaign which has been well-received by customers according to our own tracking survey. The campaign, which is intended to engage consumers at a more emotional level than previous campaigns and features both men's and women's products together for the first time, dials up the style factor for the brand consistent with our upgraded product strategy. As we head into Q3 we are increasing our A&P support for the Dockers brand.

In conclusion year-to-date our business is on plan with our expectations. Importantly we are focused on key initiatives and believe this will allow us to revitalize the Dockers business. Now I would like to turn the call over to Scott LaPorta, President of the Levi Strauss Signature brand.

The Levi Strauss Signature brand had a successful second quarter and spring season gaining additional market share in the value channels as the premium apparel brand. During the second quarter Levi Strauss Signature generated net sales of $76 million compared to 74 million in the prior year. This overall 3% increase was driven by growth of 12% in first quality products offset by 6% lower closeout sales.

The 12% increase in first quality sales were driven by comparable customer sales growth at Wal-Mart and Target. Combined with the sales from our new accounts launched in the second half of 2004. For the entire first half of 2005 our total net sales grew by 2% from the prior year to $163 million. First quality sales increased by 6% driven by strong growth in our misses, men's and young men's segments net of a 40% reduction in closeout sales, a good development.

Throughout the second quarter of 2005 our business at retail was strong. The average weekly rates of sale in our core products across all consumer segments continued to exceed expectations building brand equity in our core fits. In addition to strong core long bottom product performance in the second quarter, our trend core fashion long bottoms sold well especially in young men's and misses.

In regards to alternative lengths our spring performance was led by the Missy Capri and girl's scooter. Our marketing efforts during the quarter focused on the following four items; first, the continuation From Our Family to Yours advertising campaign in traditional women's lifestyle publications such as Better Homes and Gardens, Good Housekeeping, Real Simple and Latina. The campaign also featured top-ranked NASCAR driver Jimmy Johnson in men's publications such as NASCAR Scene, Sporting News, This Old House and Family Handyman.

Secondly, our spring public relations outreach generated over 200 placements in local news and radio outlets and delivered more than 5 million impressions with a targeted Mother's Day media tour. Fashion editorial coverage generated 22 million impressions and included coverage in Essence, First for Women, Ladies Home Journal and Parent's Magazine.

Third, Levi Strauss Signature products were added to the apparel section of Kmart.com and our infant and toddler products were made available on Target.com during the second quarter. Near the end of the second quarter we launched the new and improved Levi Strauss Signature Fit Pit for 2005. It is an interactive exhibit that will travel to more than 50 retail locations, NASCAR races and State Fairs from May through November of this year. At the Fit Pit shoppers can get fitted for the perfect pair of Levi Strauss Signature jeans by going through the Intellifit System, an award-winning technology that uses low frequency radio waves to measure a participant's body and prints out a recommended size and style. Shoppers can either go to a local value retailer or immediately purchase the product over the Internet while at the Fit Pit. These efforts continue to drive our brand awareness with the value consumer.

Moving to the operation sides of the business during the second quarter of 2005 we continued to drive for excellence through joint planning with our retailers by fixture which drove leading fill rates. Additionally we prepared to expand from 200 to 1000 Kmart stores for back-to-school. Looking ahead to the third quarter we are really excited about the back-to-school period as we will be bringing new category leading products to market providing the a value consumer fit, fabric and finish combinations never available before in the channel at a great price.

And as Phil mentioned previously the growing Levi Strauss Signature business continues delivering incremental revenues and profits for the Company. Now over to Paul, President of Europe.

Let's start with the top line European overview. In last quarter's conference call we mentioned the softening in consumer demand that we saw toward the end of the first quarter. As Phil and Hans have already noted this was clearly confirmed in the second quarter. In the current declining retail environment in Europe Q2 sales were down 7% on a year, on year reported basis and 4 to 8% (ph) in constant currency. We simply didn't enjoy the planned strengthening of our replenishment business on the back of early spring/summer deliveries for the Levi's brand in quarter one.

However, operating income improved by 34% over the same period last year with an improvement in operating margin of 6.5 percentage points moving from a falling 0.8% to a 21.3% profit margin. This increase reflects the impact of higher average selling prices resulting from the Levi’s brand repositioning, continued savings from product sourcing and a further reduction of overhead costs. As in the first quarter we continued to invest more in advertising and promotion in the second quarter than over the same period last year to continue to support this Levi’s brand repositioning.

At the same time we are pleased with the progress we have made in the second quarter in both service and quality levels and it is our goal to sustain this improvement going into the fall/winter season. Again it is a sluggish retail climate and declining economic growth estimates for the euro zone in 2005; we recognize that for the balance of the year excellent operational execution will be required to drive further improvement in profitability.

So moving onto Levi’s in more detail, as I mentioned soft consumer demand resulted in lower-than-expected replenishment orders in the second quarter. Year-on-year Levi’s sales were down 39% in constant currency. Positive sales growth in markets like Italy, the Benelux and Greece was not sufficient to offset declines in major markets such as the UK, Germany, France and Spain, although as we have said sales in these countries were impacted by earlier deliveries in quarter one. But importantly and in a tough retail market we are holding market share illustrating that our strategies are beginning to work.

Gross margins continue to benefit from the brand repositioning initiated in fall 2004 as well as from ongoing savings from product sourcing and lower markdown allowances driven by tighter inventory control. The increased year on year advertising investment was primarily through an outdoor campaign linked to our pan-European advertising campaign.

Research on the pan-European level indicates that growth in the men's jeans segment is now stabilized. And although the women's jeans segment continues to grow this growth is in distribution channels not available to us, namely the vertically integrated specialty stores. On the other hand research continues to show growth in sales of jeans priced at EUR85 and above in the distribution channels where Levi’s are sold. Thus supporting our strategy to reposition the Levi’s brand in this premium segment of the jeans market.

With regard to Dockers, despite the poor economic backlog we continue to deliver against our plans inline with the new strategy and business model we announced last year. Net sales in the second quarter were down 98% versus last year, but as I mentioned last time this is in line with our expectations. As I have also said before our key priority is to substantially improve the brand's profitability and six months into the year we believe that we are on track to deliver against this objective. In keeping with the Levi’s brand service levels for the Dockers brand have improved although not yet to the desired levels and therefore we will remain focused on driving further improvement.

We will be transitioning the Dockers brand organization from the stand-alone Amsterdam office to our Brussels headquarters over the next two months, and we are confident that we will accomplish this move without disruption to the business. Our Dockers actions are the right ones and encouragingly European retailer sentiment is moving positive on Dockers.

Finally, turning to Levi Strauss Signature. As we have said before our focus for spring/summer 2005 continues to be on the launch markets of France, Germany and the UK but we are now investigating expansion into other countries later this year. Second quarter sales were up 14% on constant currency driven by encouraging sell-through performance in our key accounts. The value channel in Europe provides ongoing growth opportunities as it has continued to grow faster than the tall jeans segment so we are confident we are on the right track.

So to summarize, Europe's second quarter performance we feel positive about; positive about the profit delivery in both the second quarter and the first half of this year. But we recognize that in view of the macroeconomic environment it will take more time than anticipated to stabilize top line sales in each and every market. And so now I will hand it over to John Anderson.

The strong growth moment continues across the Asia-Pacific division. We are now entering our fifth year of consistent revenue growth and our sixth year of consistent profit growth. For the second quarter of 2005 our net sales grew by plus 17% over the prior year quarter and operating income grew by 24% over the prior year quarter. As for the previous quarter the strong performance is broad based with noble achievements from China, Hong Kong, India, Taiwan, Korea, Malaysia, Turkey, South Africa and our Latin America licensees. Japan, our largest business, also grew. All three brands contributed to the results; the Levi’s brand which represents 90% of our total Asia-Pacific business, growth for growth (ph) and continues to perform very well for both men's and women's.

Looking at some of the major initiatives that drove the growth the continued strong results in Japan driven by the 501's Stay True TV campaign which took place in February. We also had a very successful 501 month in May across all of our APD countries featuring a successful in-store campaign supporting new 501 finishes.

In Korea we had a TV campaign featuring Levi’s engineered jeans that ran from mid February through mid April. The launch of the square cut range of jeans in both men's and women's leveraged from our European business also had a very encouraging start. Our Levi Strauss Signature Brand we opened our first stand-alone store in Japan and we're working toward a test launch in India later this year. And for our Dockers brand the advertising of our Five Degree pant performed well at retail. All three brands are performing to expectations.

We have built up the strong Q1 results and continued strong revenue and profit growth in Q2. Over to Phil.

Thank you, guys. We will be happy to take everybody's questions. Operator, if you want to move into that, please.

(OPERATOR INSTRUCTIONS) Alexis Gold with CIBC World Markets.

Just a few questions. You talked a little bit about your good position for the back half of the year; can you talk about the recent strength you have seen in June same-store sales and give us any indication if you are seeing that carry into July at your core customers?

It is a little early in July. We had a good June, consistent with the retail trends in the United States; we had a good June in the United States consistent with those trends.

We saw in the Q that it looks like Bob Haas is actually retiring. Can you give us a sense for what the change is there and who might actually take his place?

I think if you read the full thing it would say that Bob continues to remain Chairman of the Board, a nonexecutive Chairman of the Board. This is just a change in his employment status. He is moving from being an employee of the company to retiree. There is no other change. He will continue to be board member and chair of the board.

Just let me talk a little bit about your working capital. I know you talked about seasonality in the inventory but it looks like your account payables, accrued salaries continue to be cash burn, can you give us a sense for when we might start to see that turn -- do you expect to see that turn in the second half as well?

As we have said we have built the inventory level up to get us in a good position for the sales in the second half and we are obviously working to get more efficient working capital. But the first priority for us was coming off (indiscernible) last year is to rebuild our service levels and we have very good control processes around the inventory to support the sales in the second half. That was our first priority.

I'm just looking at the fact that cash from operations has been pretty significant negative or use of cash for the first six months of the year despite the fact that your EBITDA has been so strong. And it looks like it is more than just the inventory. It looks like payables and accrued salaries, wages; employee benefits continue to be a pretty significant use of cash. So when we look at all the pieces should we expect that to really reverse in the second half because that is a pretty significant swing versus last year?

Some of the cash things you have seen have been timing that have been between the first half and the second half so from that perspective some of the elements you will see a benefit. The payables is also driven behind our new supply chain model, we are moving to more control ready-to-wear which has a different impact on the payables with our suppliers. When we look at the second half we are making improvements in two areas but there is also as I said some timing shifts between the first half and the second half in some of the payments.

The other thing we saw in the Q was just the reversal of the Comexma decision, and I don't think you actually had broken out what the charge was in the first quarter, but can you give us a sense for the magnitude of that reversal?

We haven't given the absolute number and we are not giving that number out. I think it is just as the Q says we won on an appeal and our attorneys and advisers believe that we will continue to win on further appeals so we were just totally reversed that charge.

You talked about gross margin in the mid-40s; I know you haven't given official guidance but I know last quarter you did talk about being comfortable with the revenue flat year on year. Do you still feel comfortable with that and when you talk about gross margin in the mid 40's, is that for the full year or that is for the remaining two quarters?

That is for the remaining two quarters.

And you're comfortable with revenue flat year on year?

Yes.

Fred Taylor, Lord Abbett.

I think you answered part of it with the previous questions but on some of the cash burn, not just the working capital accounts but the longer term below the long-debt post-retirement, medical, pension liability long-term, do those that have been coming down since '03 do they flatten out or is there a kind of an amortization process almost like amortizing a term loan that will continue for the next couple of years?

That will continue to decline down in line with the amortization that rules all these elements, so that will continue to give us benefits in the future.

Right, it is about if you add those three up, it is about 800 million. About how much per year would you expect it to amortize or pay out?

We're not giving any specific guidance on these elements.

Is the trend that we have been in the last two years probably the same that will continue?

We're not giving specific guidance on these two elements.

Amil Schiaffino with Harris & Nesbitt.

I was wondering if you could discuss actually the dynamics behind the gross profit margin a little bit in more detail. You have said for a number of quarters in the calls that the margin is high and not sustainable and yet it has either increased or actually essentially hung in there seemingly surprising you to some extent. What has happened that you didn't foresee and why should we really expect it to go to the little bit lower to the mid-40s% range?

I think there are a couple of things that continue to allow us to have these strong margins. One, just across the board we are executing what we would call a premiumnization (ph) strategy, whether we are Levi Strauss Signature or Levi's or Dockers, we are introducing more premium price products within the relative price points that we're talking about. It is particularly true on Levi's with our super premium and premium strategy outside the United States, but it holds true across every category. What we see is this mix of product continues to be stronger than we have anticipated. So the point that you make could be true. We are selling a disproportionately high amount of premium and super premium products. And we just are uncertain about how sustainable that mix is, number one.

Number two, we have remarkably clean inventory at retail. We continue to have lower closeouts as a percentage of sales in total, and the cost of the closeouts and the returns and allowances continues to be managed out. We forecast going forward, and we provide the cautionary note relative to these margins that there are quarters when this won't be possible. You never get everything right. You get a tough retail environment, something happens in the percentage of returns and allowances or closeouts is higher than we see.

The third is that we continue to enjoy the benefits of cost of good savings associated with our move from owned and operated to contract manufacturing, and I think the benefits associated with that will dwindle as time goes on. So those three things. That is why we provide that cautionary note. And being able to hold these premium and super premium price points with a lower percentage of returns and allowances and closeouts isn't always sustainable quarter-to-quarter. That said, we're not telling you we are going down into the low 40s. We're just providing caution relative to the extremely high level of gross margin.

Thank you. That's helpful. Could you comment on what is discussed in the industry as the denim glut? There are Wall Street people and industry people in the media quoted talking about a denim glut at retail, and yet there is some confusion. Can you give us your perspective on it?

I think that there was some concern earlier in the year relative to the denim, given the low -- particularly in the United States -- in the low retail sales in March and April. I think to some degree that has been mitigated by the results at retail in May and June across the board, and I think if you went into the industry today you'd see a little less concern about that denim glut, given the May and June sell-throughs that have occurred in the industry.

That said, this is not a problem that we face. Our inventories, if anything we have concern that we have too little inventory at retail in the United States given some of our customers desire to improve their turns and live with less retail -- I mean less inventory. This is a tough business because we have to be in stock by waist and length, and our concern is that sometimes there is not enough product out there complete by size. So we have been working hard to make sure that it's there. We are not sitting on either a significant amount of inventory in our own warehouses that is not first qualitative good inventory that we expect to sell nor are we sitting on it on retail. I don't know if Robert wants to add anything here in the United States.

I think the only other thing to consider is when you look at the business segments between women's and men's, the women's business segment has been growing in the market since the late '90s. Whereas the men's segment has really only been growing over the past two years. So while I think that there has been a lot of talk about the glut as you mentioned, you have to really look at it by segment and then also by price point. There is a very crowded market at the very premium and $100 plus market in the United States in the women's segment but the rest of the market is significantly less crowded.

Okay, thank you. My last question has to do with Europe and specifically the UK. You discussed it in the context largely of the retail environment there, but I was wondering if you feel that there are executional improvements that you could make to help yourself there? I have noticed there has been quite a few management changes in the UK at the top level.

Actually it is not just the UK, we have been monitoring changes in a number of our businesses across Europe. As we have moved to a market by market structure that is all about finding the right balance between local accountability and ownership and central support, so we have made some major organizational changes in Europe. And I would like to think they are part of the reason why we have got an improving financial performance. On the sales line you're absolutely right; our operational execution is not good enough which is why I said that in the balance of the year our focus is upon excellent operational execution. And we have made some changes in the UK which you refer to and we have got an excellent general manager who is joining us from Adidas. Tim (indiscernible), he joins us on the first of September and we're looking forward to having him on board.

But we do also have a new sales director and a new finance head in the UK and we expect -- we are very pleased with all three of these people and we expect them to enhance our performance there but again, they are not arriving with magic wands. We have some step by step work to do to improve our operational performance in a few countries in Europe.

Great, thank you very much.

Christina Aboni, CSFB.

My first question is just a follow-up on the inventory front. Do you have a target for the year in terms of where inventory should fall or how much inventory should increase given that you are somewhat under inventoried at the end of 2004?

As we said we have been, we have had very solid financial performance this year and in spite of that wall, so rebuilding our inventory levels to meet the service levels. I just want to reiterate that we ended last year on a very low level which as we believe has hurt the sales life, so we believe that rebuilding that inventory is the right thing for the business. We planned for it and we're working against that. We obviously want to get like anybody, continuously improving and get more efficient at working capital and inventory. Obviously having targets, but we're not giving any guidance on the targets we're working against to get more efficient at working capital.

My second question is with respect to retail consolidation. Could you give us any sense as we are closer to the Federated, May merger coming to fruition. What your thoughts are there and maybe you can give us a sense of your overall exposure to Federated and May?

Across the board our May Co. business is very strong on both Levi’s and Dockers. The sell-through performance at retail is terrific. We continue to improve and re-establish a strong working relationship with Federated. We have seen the Levi’s brand and the Dockers brand exceed Federated's plan for both brands through the first six months of this year, which I think hopefully underscores for them the relative importance of these brands within the context of the apparel sector and the consumers that they are serving.

I think the key thing is for Federated is to use our May Co. results to demonstrate the power of the brand but also to make sure that we do what Federated needs which provides them a relatively premium and a semi-exclusive assortment on Dockers and Levi’s. That allows them to have a product offering that meets the consumers that shop in their stores. And if you look at the never iron pan on Dockers I think we're doing that in the premium assortment we are putting there. I would say the same thing on Levi’s.

If you are in New York I would urge you to go to Herald Square and see the new Levi’s display in Harold Square and the premium mix of products in there and the sell-through on that product has been phenomenal right out of the gate. So we feel that Federated and May will continue to be one of our biggest customers, one that we have to provide an assortment that really meets the consumers that shop in their stores; a relatively premium price and not get into the price wars of some other retail chains and if we do, we will continue to have an opportunity to grow with both accounts.

That is helpful, but have you ever disclosed how much business you do with them?

I don't think we have in any of the Q's. But they would be in combination certainly in the top five accounts that we have within the United States. Again, if you remember the Road show if you look at department stores in total across the whole mix of the company, it is a relatively small percentage of the total company sales.

That is helpful. Just in terms of the new long-term compensation plan should we expect that any change in terms of the overall payout structure just so we have something to model in our overall cash flow statements?

No, I think -- you want to answer that, Hans?

I think we have disclosed the new program into the 10-Q and that is what we are disclosing on that new program.

What we are paying people for is profit growth and growth rates on a consistent basis over time. The new program just bridges the three-year program with the two-year program but it insists on people don't get paid unless we continue to improve the EBITDA profitability of the company and that is an internal measurement that we use, not a GAAP measure.

Sure. Understood. And then just finally on the gross margin I just wanted to clarify, you are saying mid-40s for the full year or for the second half?

(multiple speakers) for the full year.

For the full year, I just wanted to be clear on that. Okay, thank you very much.

Carla Casella, J.P. Morgan.

I think you mentioned that Kmart you were going to go from 200 to 1000 doors for back-to-school. I am wondering if that sell in occurred at any of that in the second quarter or if that will all be third quarter?

That will all happen in the third quarter.

Okay, great. Can you just remind us, I don't have the 10-Q yet but the amounts of the 7% notes that remains outstanding?

The 2006 notes?

Yes.

What we're doing on the 2006 notes I think that is consistent with what we said before is when they came, yes, we will pay them back at the maturity.

Okay.

When we tender the bonds, all but that 78 came back and obviously will all of the remaining commitments when those bonds mature.

Okay. The fact that those remain outstanding that means the bank line is accelerated; have you announced any intent there when you're going to refinance the bank facility?

We will use it to pay off that including the balance of the 2006 bonds or for the purposes that are consistent with our (indiscernible) agreements and ventures and other agreements.

Okay, so they will be refinanced in the middle of next year, summer of next year?

We don't know.

Okay.

We're not giving you a prediction of when we will refinance those.

Okay. That is all I had, thank you.

Ronald Phillips, Bank of America Securities.

You did a great job; I certainly appreciate it. We talked about the inventory issues ad nauseum. Moody's, what are these guys thinking? Have you met with them recently?

After this week of the earnings release Hans and Miguel our treasurer will go out and meet with Moody's and Standard & Poor's as well as our lenders in New York and update them on the current state of affairs in the business trends. We haven't had a meeting with them recently but we will in the next week.

That makes sense. The results look very strong from the bottom line perspective and you just indicated that your number one priority. We also know that looking in various of the comp agreements there are discussions of new equity offerings and what it would do, the floaters are callable, the last bond deal we talked about potential IPO. Looks like it might be a good time to do that right now. Is this something that is still on your radar screen? To what degree can you talk to us about that?

We have no plans to announce anything at this particular point in time. Our number one goal as we said is to improve the profitability of the Company and use that improvement in profitability to pay down our debt. And continue to improve the capital structure of the company. As we go forward we are going to look at other options above and beyond that, but we have no plans to announce anything at this point and I think it remains to be seen what our choices will be.

So just to make this clear if I can, is doing an equity offering one of the things that you would consider as a possibility in the future but not necessarily today? Would you consider that as a potential way to deleverage the company?

Yes.

Thank you very much. Also are you interested, is there anything on the divestiture front at all or acquisition front? There was a Wall Street Journal article talking about and we know that these things can kind of get carried away -- but there was a (indiscernible) article talking about consolidation in this space and I just thought it would be relevant to try to figure out if you are looking at that at all?

Number one, we are not -- we went through the process of trying to sell Dockers. We did not get the price that we were looking for.

Right. So you're going to clean that one up.

We are going to clean that up and there is nothing else within that. I mean we only have three core brands and (multiple speakers) committed to those three core brands.

So we can scratch off the divestiture side. Anything look interesting to you at all?

We're not in the market to buy businesses. We're in the market to use cash to pay down debt, so there's nothing on the acquisition front. Our priorities are to get that Levi’s business and Levi Strauss Signature business growing again, get Dockers stabilized and hopefully in the next couple of years get that growing again. We believe we have the opportunity to do that. And then in terms of the company is not for sale, the shareholders are committed to owning the company, moving forward and that is not within their radar screen either is a sale of the company.

That was my next question. The 2005 EBITDA targets for the management incentive plan; can you talk about that because that could give us an idea what you're expecting to do, right?

We don't give EBITDA as a disclosure form, given GAAP. Needless to say what I would assure you is that they are substantially higher than what we achieved last year. And they will be. For management to earn the long-term incentives as well as their annual bonus it requires continued improvement in the profitability of the company.

Okay. Carla just talked about some structural things that are going on with regard to Kmart that could increase your sales, is there anything in the retail consolidation that has happened over the past twelve months that would take a bite out of your sales? Is there a number you can give us if that is the case?

We can't quantify it, but we see particularly with the financial buyers that are in the marketplace to some degree, a real focus on living with less inventory and improving their turns. What we have seen and experienced on both Levi’s and Dockers in the U.S. particularly among the new owners of these businesses, is trying to sell more with less inventory and that we have experienced on the top line. If you go into the Levi’s business or the Dockers business and look at the sell-through versus the sell in, the sell-through rates, the consumer takeaway is across the board somewhat higher than the sell in and that is a reflection of the account consolidation that has occurred and a focus on bringing greater financial discipline to managing their working capital.

That makes it incumbent upon us to do what we have been focused on for the last three years -- continue to really improve our ability to replenish quickly and service the business quickly so that we are able to not lose sales in the process of this. And we feel reasonably confident both about the inventory position we have going into the back half of the year, the service levels that we are providing now, our forecasting abilities and our abilities to chase sales as we see opportunities out there.

Finally, on the Bob Haas front to follow up on Alexis' question that is something that is not operational in nature, it is you and Bob kind of running things still, right?

Yes, I mean Bob acts as the nonexecutive Chairman of the Board and provides the traditional leadership of the Board, functions that a Chairman does and that has been that way since I been here and will continue going forward.

Jeff Kobolarz (ph) with Citigroup Asset Management.

Can you comment about the outlook for orders for back-to-school in the U.S. and Europe?

What if I told you they were great?

Tell me that.

I think reflecting the comments that each division president had is our back-to-school prospects both on Levi’s, Dockers and Signature in the U.S. are, we are encouraged by I guess is what I would say. Both in terms of the number of fixtures that we have on the floor, the retailer's commitment to our brands and the sell-through that we have seen over the last 12 weeks on our products.

In Europe, I would say to draft on Paul's comments we feel good about the assortment that we have sold in and the retailer's response to it. The problem that we see in Europe is that they (indiscernible) what we call the at once business or the replenishment business is weak, reflecting what we see as a pretty weak retail environment generally across Europe that started in late winter, early spring and has not changed. I mean you just don't see given the European economies right now a very strong retail economy. I don't know if Paul wants to add to that or not.

No, that is a good summary.

So we feel good about the assortment we have. We feel good about the commitment that we have gotten for what you call back-to-school here, but we also remain very cautious about that retail environment in Europe. We are a little more optimistic about what we see in the United States because retail has bounced back in May and June here.

So you just mention that you have your fixtures on the floor were in good shape. Do you have a greater number of fixtures would you say this year versus last year?

Yes, across the board in the United States in all three brands.

Even excluding Signature?

Including Signature. (multiple speakers) Yes, on Levi's and Dockers, on all three brands.

That is good. You have talked in the past about the cannibalization potential that you have been just monitoring of the Levi’s brand, can you just update if there is any, to what extent there is any?

Again because so many people were concerned for us about this, I continued to report it religiously by quarter. So we have seen no -- what we do is we measure Levi’s sales around mass channel doors and look at the trends versus what we are selling in these mass channel doors and we look at it on a five-mile and a seven-mile radius. We see no cannibalization of any consequence between Levi Strauss Signature and the Levi’s brands. And I think if you asked our chain and department store customers they would say they haven't seen it either.

Okay. You have also have commented in the past on your market share or how you have done within JCPenney and can you comment at all? Are you maintaining your market share within the JCPenney sales?

I will just comment on market shale in total in the markets on the Levi's brand in the states. Our market share on our core price segments in the chains have actually been increasing on both men's and women's. In the total market it has been stable on the men's side of the business as the market is growing and we're growing with it. And on the women's side of the business we have been outpacing the market and actually increasing share as we have said over the past several quarters in the women's side of the business. So overall we're doing well in the chains with a growing share on our core price segments, stable in men's and (indiscernible) in the total market on our women's share in the states.

There is a quote in your press release that says that given your good first half do you intend to invest in building your brands through additional marketing promotional activities during the second half of the year. Can you elaborate on that?

I think in each division president's presentation we are have a strong second half on the Levi’s brands in the U.S., slightly higher than what we did last year. But pushed more into our third quarter than the fourth quarter to get a jump on the back-to-school business.

If you look at Dockers we have actually raised the spending in the second half versus a year ago. On the strength of what we saw this quarter in terms of the dress to live campaign and so we are investing more money against the Dockers brand. Last year because we were trying to maximize profitability we underspent that business relative to what we think it require so there is an increase in Dockers.

Levi Strauss Signature is up proportionate with the A&P, the sales ratio remains about the same but as the business grows we invest more. And in the European business we are slightly up, flat versus a year ago in terms of the investment. And Asia-Pacific I would say is about the same. We are seeing a modest increases on most brands; relatively speaking a higher increase on Dockers and we believe that the marketing campaigns that we have now around the world are effective not only in building brand equity and emotional attachment to the brands but also it can drive purchase intend. It is one of the things that distinguishes us relative to our competitors is the A&P support that our economic allows us, economic model allows us to bring to bear.

So A&P being up 21% in the first half of this year it sound like it will be up even more in the second half then?

Yes.

Okay. And a Style for Every Story, is that going to continue? It still has plenty of life left in it, that theme?

Yes, on the Levi's brands in the states A Style for Every Story campaign as I mentioned is working really well for us. We have seen purchase intend measures grow among younger consumers, younger male consumers in the state. We have got a really high purchase intend on the older male segments and it continues to be strong on the campaign side, really good cut through on both men's and women's. And we think it is one of the reasons which is why we are seeing growth in our core long bottom's business. Again as I mentioned denims is up 5%, it was up 19 in women's, up 17, and we would attribute the majority of that increase to significantly improved product and the success of the advertising campaign along with better aligned retail promotional strategies with our customers.

Ethan Swartz (ph) with CRT Capital.

Thanks, actually all my questions have been asked.

At this time there are no further questions. Are there any closing remarks?

Thanks for joining us on the call today. We have made good progress relative to our objectives. We are optimistic about the balance of the year and particularly our ability to continue to improve the profitability of the business. And to execute against the remaining priorities that we spoke about today. We look forward to talking to you again at the end of the third quarter and hopefully we will have solid results to report to you then. Thanks.

This concludes today's Levi Strauss & Company's second-quarter 2005 earnings conference call. You may now disconnect.